On the way into work this morning I read a story of how a healthy local bank here in Chicago (actually upscale Lake Forest) was “actively evaluating whether to seek between $80 million and $240 million from the U.S. Treasury Department’s bailout program.”
Why? According to the Chicago Tribune story the CEO of this bank suggested that with the magic of leverage this program could provide $2 billion worth of capital to perhaps make acquisitions.
If you weren’t paying attention, soon after the bailout bill was passed the Treasury decided to switch gears and directly fund banks instead of simply buying troubled assets to loosen up credit.
Treasury Secretary Henry M. Paulson, Jr said in announcing this program, “Our purpose is to increase confidence in our banks and increase the confidence of our banks, so that they will deploy, not hoard, their capital. And we expect them to do so… This increased lending will benefit the U.S. economy and the American people.”
Paulson concluded, “They will increase their capital base so that they can provide the lending necessary to support the U.S. economy as we work through this difficult period.”
Or maybe they will use it pick up bargains. It is hard to believe that people who would question whether to give a dollar to a homeless person for fear of what he might spend it on would give basically a blank check to institutions who drove themselves into insolvency. Yes, many of the banks particpating are healthy and not part of the problem but that is the point. They will use the capital infusion from Treasury any way they see fit. To expect anything else is naive. So basically the Treasury loans out $250 billion in the hope those banks will increase lending.
One of our loyal readers sent a note to me this morning stating, “[the] taxpayer money being doled out by Treasury in order to encourage lending is being used instead to buy weaker competitors, buy back shares, or other things having nothing to do with lending. Treasury is sponsoring, in effect, a program to allow the large institutions to swallow smaller (pesky) rivals.”
While true it should not be surprising. And how short sighted by Treasury that they would allow it. Remember that one of the reasons a bailout was necessary is because institutions had become so large that a failure would lead to a larger contagion. They were “too big to fail.” Or as we found out some were too big to fail while others where basically SOL. At CME Group’s Global leadership conference in September, former Fed Chairman Paul Volcker said, “I worry about this tendency for these few financial [institutions] to get bigger and bigger. I think that is a somewhat troublesome tendency.”
