Bailout? Some banks say, ‘No thanks’

The better use of the money would be to assist sellers that are “underwater”. Pay off the difference to the banks, the banks get their payoff and the sellers aren’t in debt up to their eyeballs or have their credit ruined.

I will hazard a guess that we will learn absolutely nothing during this financial crisis.

We will simply learn that we can be ’saved’.

We will learn that we don’t have to change our own personal behavior, that we don’t have to change our institutional behavior, and that we don’t have to change our public policy.

It is not just banks that suffer when moral hazard is allowed to exist. We all do.

As I tried to indicate — not very effectively I am afraid — when bad banks stay in business via subsidization from good banks, we reward bad banking behavior.

But bad behavior should have real-world consequences. Every parent knows this instinctively. Otherwise we learn to behave badly. And later, somewhere, sometime, real life will let us know, often very painfully.

Currently we don’t, in effect, ALLOW good behavior, good policy, and good ‘learning’ to spread throughout the banking system.

Takeovers of bad banks by good banks is a naturally-occurring, self-correcting mechanism, within our mixed public-private capitalistic system. It allows the ‘best-of-the-best’ banks to rise to the top. This thereby ensures that our banking practices improve over time and that best practices naturally propagate through the system.

The successful banks will install their own control systems and their own risk-aversion strategies. The failed strategies of the failed banks will be allowed to die, even as the assets and operations of the bad banks are taken over and consolidated into those of the ‘good’ banks.

If we don’t allow some semblance of normal market mechanisms to operate then we are asking for more trouble. I believe that the FED and Treasury were indeed trying to allow this mechanism to manifest itself when they let Lehman Brothers fail.

But that was a clumsy attempt. This can still be done, but IMO in a more sophisticated manner. For a while though, the FED and the Treasury will have cold feet about letting the ‘market’ function as it would without their interference.

So IMO we need to facilitate and promote solutions and behavior that work against those same ‘bad’ policies that first got us into this mess.

If we don’t, we will repeat the same mistakes. We will suffer again, and needlessly so.

Along with the ’saving’ that is being done (which is important) a way must also be found to encourage the normal feedbacks in the system to operate.

BTW, this also should be allowed to happen in the public sphere. One of the first things we learned after FDR was unable to survive his fourth term, was that perhaps there should be term limits for elected presidents. We now also should consider whether FED chairmen should be limited to serving for no more than a single decade.

What’s with the “Force them to lend”? or “No intention to increase lending.”

I am under the impression that one of the (many) critical pieces of this thing falling apart was the lending of money to people not capable of paying it back.

I am under the impression also that another piece is banks over leveraging. (i.e. lending more money they they really had to lend.)

While we are at it, I am under the impression that one of the major reasons consumer have slowed down is that they are already too far in debt. (To be able to afford the debt service.)

Now, I just don’t get why there is such a call to “increase” lending.

Oh, right, so we can re-inflate the housing bubble and go back to houses no one can actually afford. And then we can return to selling all that new found equity to the bank so we can go buy cheap made Chinese junk we don’t need.

Chip MacDonald said:

“If a lot of banks get TARP money, the banks that don’t have TARP may have lower capital ratios compared to their peers and regulators and lenders do look closely at peer comparisons”.

So what? Seems like a lame reason to me to ask for TARP money. Or even to provide TARP money.

In one sense regulators should indeed look at comparisons. They should look at who got TARP money and how much, and who did not.

Don’t you think a good regulator is going to SUBTRACT rather than INCLUDE the TARP contribution when calculating and then comparing capital ratios between banks?

I agree with Paul, the writer, in this case. Where are the initiatives for better banking? How is the system going to be improved this way?

Is the government going to provide Banking 101 classes to those executives at the TARP-fed institutions? Who is a better banker? The government or those well-run institutions that Paul mentions? Who is better placed to be the ‘teacher’?

Look at the conservative financial institutions that are, admirably, still making money. Doesn’t that tell you something?

In a normal marketplace, with its ups and downs, these stronger banks are the ones that would acquire their weaker brethren.

And why might THAT be better than to give out TARP willy-nilly to every supplicant that comes begging?

Because, then, the operators of the better-run institutions might at least have a chance to TRAIN those wayward managers who ran their companies into the ground. Society would be better off to have better-operated banks going forward.

But NO, that won’t happen. As usual with socialist solutions, we penalize success and reward failure.

So that now, we will not see the good and patient managers at places like Cullen/Frost Bankers, First Citizens BancShares, UMB Financial, and Hudson City Bancorp, among others, acquire the weaker ones.

Instead, the profits of those who followed successful strategies, will now, via taxation, be used to keep their competitors in business.

What’s the point of running a good operation? Why not always run on the high-risk road and if you fall, have the TARP folks bail you out.

Travelers CEO Jay Fishman had it right:

“‘Private market solutions’ should be sought for [those] facing a capital crunch.”

“Chubb vice chairman and COO John J. Degnan [was also right when he] wrote that Paulson needs to ‘consider the anti-competitive impact of bail-outs’ in the insurance industry.”

And, I would add, in the banking sector.

This is moral hazard run amok.

If the government does not have a plan that enables and facilitates the takeover of the failures by the successes, then what kind of system are we living in?

Sure, by all means, provide bridge-financing to make sure the customers of the failed banks are not hurt. And facilitate the takeovers and consolidation that is BEGGING to happen.

But keep literally everyone in business? When the system throughout still has many of the same people in charge who made many of the mistakes?

At what cost?

What lunacy!

ROBBERY!!! Why not let the greedy & the ignorant fall? They caused all these mess, let them go down with these mess. This will pull all of us down further. It is a pity that the diligent & non-greedy ones – the ones who did not victimized ignorant preys nor were not stupid, ignorant & greedy enough to be victimized – are affected too.

It’s all about greed & ignorance & addiction to easy money and the rat race to all those false hopes to live the American Dream, now turned into nightmare!

Welcome to social-capitalism… We need to think out of the box. Capitalism is an old system that doesn’t work well in 21st century.

Sorry to second-post, but another thought occurred to me; this issue causes great angst to us kapitalists.

Basically, we are becoming France or Japan, who both have very large government sectors. They are >60% government / <40% corporate, whereas we are ~40% government / ~60% corporate, but we are definitely heading in their direction. In 1980, we were probably only 20% government (all federal, state, and local spending as a % of the overall national economy).

Given that we’re already headed in this direction, why not just admit it and set up a new bank to facilitate lending; we could call it the “Second National Bank”. By investing only $100 billion of equity from the Treasury, the SNB could lend up to $1 trillion and still keep a very healthy level of 10% equity to debt, much better than many banks right now. And, given that the taxpayers own it, we could force it to lend, whereas many banks are not lending now, even after taking our money as investments. BTW, the Fed has about a $1 trillion balance sheet.

Radical idea no ?

Shame on goverment, shame on banks begging for bail outs. This is not free-market, this is not capitalism, this is not the spirit of America. Shame on you bastards!

It should be kept to a minimum.

It should only be in the form of a minority investment in preferred stock.

The preferred stock dividend should be 10% (not 5%).

The new preferred shareholders (us) should have a board seat with voting and use it aggressively to root out corruption.

I’m with John on one point this was NOT capitalism gone wrong, this was Socialism gone wrong, and adding more Socialism will not make it right. Started with Jimmy carter, received its teeth with Bill Clinton, and the ballon went bust in 2007.
John is a little kinder than myself, stating free markets have been hijacked, I believe crime has happened and we should be looking at prosecuting whoever was involved, all the way to the top.

It astonishes me that our dogmatic free-market friends are so oblivious to the facts at hand. Free markets are wonderful for maintaining the status quo, and as long as everybody plays fair.

When market players start to cheat, free markets have no defense. If this were not so, why would we consistently ask the government to criminalize fraud? If markets had perfect checks and balances able to compensate for cheating, fraud would not justify government intervention, would it?

Markets are a powerful tool, but “free markets” are an ideal, and, like most ideals, not suited to the conditions under which real markets operate. Markets have limitations, and the sooner we abandon dogma and deal with reality, the sooner markets will regain their health on a practical level.

There needs to be a separation between church and economics, especially if you want to call economics any kind of science, or even a valid academic pursuit. Even Adam Smith knew, and wrote, that markets require governance, advice that modern amateur economists don’t seem to get.

The entire TARP monies were approved unconstitutionally!
What both major parties have done is to allow a cover up of the corruption and insider trading that lead to inflated housing prices, sold mortgages at inflated prices to people who could not pay, and we bail them all out, leaving those citizens and banks who were responsible paying for the crimes. While the criminals walk away. This is nothing more than a crime, where 8 trillion dollars has been taken out of the US economy tax free, and to add salt to the wound we the taxpayer is saddle with a quarter of a million dollars to our individual tax burden.
What is needed is criminal prosecution of those big insiders of both Wall Street and our Government who allowed this meltdown to happen. Without due justice we will never be able to have Confidence in our markets restored, here at home and in the global economy.

I could just chew tin foil every time I hear or see the term “bailout”. Even when a bank doesn’t want it, my blood begins to boil.
What I find so annoying about the situation is that despite the fact that 90% of us did not support the bill, it was rammed down our throats for our own good. Fine.
Yet everyday I seem to hear another snippet about this or that bank…
a) Taking the money to sustain itself and “ride it out for a couple of years”. No intention to increase lending.
b)Using the money to acquire other banks. No intention to increase lending.
c) Don’t take the money, but use its availability as a marketing ploy and a prop to advance its outward projection of strength and sustainability. And again, no intention to increase lending.

There will always be winners and losers no matter what actions the govt takes or does not take. Free Market just does the best job at sorting things out fairly and rationally, as opposed to govt arbitrarily making up rules and choosing winners. I’d do what it takes to prop up the paper market so that businesses can keep operating (under market T&Cs). But otherwise I’d let the markets work themselves out. There certainly seem to be other financial institutions who are poised to fill voids remaining after the poorly run outfits fail.

I can only conclude that the failing institutions were led by greed or incompetance. I am guessing the former. Simple thought experiments could have proved that the housing industry would fail–and I am an amateur in finance. The greedy do not deserve to be bailed out. The rest of us do not deserve to pay for it.

First, Bush, McCain and the Wall Street guys bail out their buddies with the Banker Bonus Bailout, allowing them to skate with gravy, and then they talk about this great foreclosure prevention program in the works where prople will pay in full, just over a longer time.

The credit crisis is sifting the wheat from the tares. Cullen Frost appears to be wheat. I applaud every financial institution that has stayed financially sound through prudent, time proven practices and sound management. If all, or even a significant portion of all banks had behaved so we would not have such a severe crisis on our hands.

Just because things seem to be improving is not proof that the government investment in banks is really helping. But banks are lending to each other again and maybe they will even start lending to others soon.

Banks don’t make money if they don’t lend. If a bank needs the government money to get back to lending it should take it. If a bank can turn a reasonable profit without the government money it should not take it. The idea cited in the article that banks that don’t take the money would have a disadvantage with regulators and lenders is hog wash.

John, we do not censor the blog posts. And I am fairly certain, since I am the one who moderates this blog, that you have had other comments posted before. The only times I will not post something is if there is objectionable language (i.e. profanity) in it, if it is not relevant to the topic or if the comment comes in several days after the original column goes up. Because of the large amount of comments we get, we cannot post them all. I try my best to post most of them though and I can assure you that I don’t delete posts based on whether or not people agree with me. In fact, a large majority of the comments to my columns are from people who often disagree with me.

Thanks again for your comment and please keep reading and posting.

PRL

This is a good thing. We must defend freedom, democracy, and free markets from the looters and theives who want to steal from the productive and the thinkers. I have seen that you don’t appreciate my free market responses Paul, so it will be a miracle if this gets posted.

But, the facts are the TED Spread (3MO Libor-3MO U$T) were around 48BP before BSC’s hedge funds collapsed 6/07 (historical average), were 109BP around 8/29/08, 302BP on 9/17/08, EXPLODED to 453BP on 10/10/08, and have since fallen to 243BP. While we are no doubt not out of the credit freeze, things are so much better. There is a sense of a slow return to normalcy.

THE FACTS ARE CLEAR: THIS WOULD NOT HAVE BEEN POSSIBLE WITHOUT TARP. TARP HAS SAVED THE UNITED STATES AND THE WORLDWIDE BANKING SYSTEM.

George W. Bush is the greatest janitor we have had a history will show that he has cleaned up Clinton’s final mistake: 1996 Red line laws (giving loans to unqualified borrowers). It will take many more years, assuming the liberals don’t hike taxes and hijack free markets.

It’s clear that a vote for liberals will lead to more economic calamities.

Bail out pluss the tax credit is also a bonus for some of these banks such as PNC requiering Nat City ths to me is that we will end up paying more on the Bail out, Put a Hold for 90 days on forcloseures STOP THAT BLEED