In “Bailout: The Sequel,” the Bush Administration decided two weeks ago that the only way to convince banks and Wall Street to start lending again was to give U.S. banks a big hunk of the $700 billion in taxpayer money that Congress approved not even one month ago.
Unlike the original plan, under which the government would buy up “troubled assets” (a.k.a. “collateral debt obligations” and other byzantine Wall Street schemes with little connection to real world assets), the new strategy calls for public money to be showered on healthy banks so they will start to lend again, and, presumably, jump start the economy.
One problem: the banks aren’t lending. There’s been no significant decrease in mortgage or credit card interest rates. On October 9, a column in the Wall Street Journal noted that the banks had absorbed over $1.5 trillion in cash from the Fed, twice the estimated amount of bad mortgages, but seemed to preferred to hoard the funds rather than lend it out.
Then last Friday, PNC Financial spent $5 billion to buy National City Bank, a firm that’s been on the endangered list for months. The New York Times’ astute columnist Joe Nocera gave voice to the growing suspicion that “we’ve been sold a bill of goods.” Instead of using the money to reboot the economy, the banks are going to use it to do what they have done in the past: buy other banks. (Meanwhile, once it recovers, America’s financial marketplace will consist of a handful of big banks that have even less reason to compete with each other.) Or maybe boost their reserves. Or buy back their own stock. Etc.
When the British government bailed out its banks, it made sure it also got corporate voting rights in exchange. That gave the Brits the ability to order their banks to institute the necessary policies – even sack recalcitrant corporate executives and bring in people who would get the job done. But the Bush Administration couldn’t bring itself to demand voting rights from the U.S. banks it was bailing out. So, a few trillion dollars later, we’re still at the mercy of the same folks who caused this debacle.