Bank Bailouts - Tell Me Again What the Point Was?

Tell me again: Why did we bail out the banks? To get credit flowing again? To stabilize the housing market? To revive our faltering economy? If so, the following Wall Street Journal report, "Loans Shrink as Fear Lingers," suggests the strategy has not been been particularly effective:

Lending continues to slow as bankers and borrowers refrain from taking risks, in a bearish sign for the economy.

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.

The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession.

Then again, maybe I misunderstood. Maybe there was some other motive driving Washington's taxpayer-funded largesse. Perhaps, as some might surmise after reading another story in Monday's Journal, "Banks Profit From U.S. Guarantee." we squandered those trillions on the financial industry so things could return to normal -- that is, where the moneyed interests are free to keep milk the system and avoid paying the price for greed, recklessness, and incompetence?

Lenders' Earnings Reap the Benefit of FDIC Backing on Company Debt

It is the gift that keeps on giving.

The government's guarantee since November on new debt issued by financial firms such as Citigroup Inc. (C) and General Electric Co. (GE) will save those companies about $24 billion in borrowing costs during the next three years, according to an analysis by The Wall Street Journal.

In the second quarter alone, the eight largest issuers of corporate debt under the Federal Deposit Insurance Corp.'s Term Liquidity Guarantee Program cut their interest costs by about $2.2 billion, increasing their profits and delivering an extra jolt to the stock market's two-week rally.

Citigroup saved nearly $600 million in the latest quarter on the $44.6 billion in medium-term FDIC-backed debt it has issued, or about 14% of its overall profit of $4.28 billion. Goldman Sachs Group Inc. (GS), which posted record quarterly profit of $3.44 billion, is cutting financing costs by roughly $205.5 million every three months by selling corporate debt through the government-assistance program instead of on its own.

Comments

[Moon Kil Woong:]

As we can now see, the bank bailouts help banks mitigate losses and report profit, but they did and do nothing to improve lending or stimulate the economy. Basically it is a save banks from their bad performance and save banks face from having to admit their executives were negligent and ran their financial institutions to the ground. Little good that does any of us. Rather now we have about $100,000 in US debt per person and about the same amount in potential Federal Reserve and Treasury loan losses and backstops (although some say it is more like 2.7x that much).

So I guess the point is this, we couldn't, shouldn't, and can't afford to bailout failed institutions.

Jul 28 04:42 AM

[mattm:]

You're a right wing idiot.

Jul 28 05:40 AM

[Davewmart:]

Absolutely. If anyone had been interested in simply providing finance, then the banks would have been allowed to fail, and the depositors bailed out, together perhaps with some of the pension funds etc, and certainly not the billionaires, who could have recouped some of their money by suing those who had run the banks into the ground for financial maladministration.
New banks and those who remained could have been financed, all at far lower cost than the present losses arising from this social welfare for billionaires, let alone future losses.
None of this suited the financial establishment, who after all had bought and paid for the legislature. and wanted their investment to pay off.
They have an excellent front man in Obama, although no doubt he will wear out before long and they will need a new puppet, possibly along the lines of Cheney this time, who will promise to rescue the system by 'tough' measures, cracking down on all dissent which the terrorism laws provide fine cover for and enhancing the military.

Jul 28 05:41 AM

[holmesnmanny:]

What essentially happened was the "bailout" kept the banks, as well as for the share price of each therein, afloat long enough for the government to request a "capital" increase. Then the banks sold more stock as a way to suck up more money from the suckers that bought the stock that went to helping the banks turn a profit and look like everything is honky dory.

Jul 28 05:43 AM

[holmesnmanny:]

That doesn't even include the gifts that the AIG bailout itself gave to all of the banks as well.

Jul 28 05:46 AM

[Angry Banker:]

Just because banks are lending less than before does not mean that they are not lending. In fact they are now lending more prudently, which if they had done so previously, they would not have ended up in the mess they are currently in. And they also would not have lent as much previously. So comparing the amount of lending banks are doing now vs. the amount they lent a year or two ago is really meaningless. We don't want the banks to lend the way they lent before, remember?!!

Jul 28 07:32 AM

[Trane250:]

Dr. Bernanke learned well the lessons from the great depression when from 1929 to 1933, 44% of all U.S. Banks (over 10,000) failed taking the depositors money with them. This massive financial system failure was the main culprit in the deepening of the depression not Smoot-Hawley. A cascading series of bank failures would have turned this recession into another depression.

Jul 28 09:19 AM

[jamesa40:]

Exactly. Seems like everyone wants the go-go days, but without all the risk. That's impossible. Welcome to the new world, a world of reality, where money doesn't grow on trees and banks don't just give you a loan because you showed up. You actually now have to have income and collateral. While this may cause short-term pain, it will right the system and result in a much stronger economy when we pull out of this.


On Jul 28 07:32 AM Angry Banker wrote:

> Just because banks are lending less than before does not mean that
> they are not lending. In fact they are now lending more prudently,
> which if they had done so previously, they would not have ended up
> in the mess they are currently in. And they also would not have lent
> as much previously. So comparing the amount of lending banks are
> doing now vs. the amount they lent a year or two ago is really meaningless.
> We don't want the banks to lend the way they lent before, remember?!!

Jul 28 09:26 AM

[DOUGLUVS:]

2 words: Lehman Brothers. 2 more words: systemic risk. 2 final words: great depression. This should help.

Jul 28 09:34 AM

[john s. gordon:]

trane -

smoot hawley made the depression world-wide.

the federal reserve shrank the money supply & without lubrication the wheels of commerce in the u.s locked up.
> jack

Jul 28 10:06 AM

[Teutonic Kn...:]

The bailout of the banks had never made any sense at all from the outset.

First of, there is so much excess capacity in banking. Second, it smelled fishy from the beginning when the most ardent advocators are bankers or former bankers themselves like the Benny and Hanky - kind of an old-boy network you scratch my back I scratch yours.

The most puzzling aftermath in retrospect is why our lady House Leader acted as she did as the crusading champion in passing the TARP bill. It boggles my mind when the Dems are, supposedly, with the folks below the Upper Classman - - A Mystery of the Mystery.

Anyone?

Jul 28 10:58 AM

[Snitzer:]

Calling someone a right wing idiot is tacky, one should state why he/she is a right wing idiot. Failure to do so indicates unfocused logic chains.

Jul 28 11:07 AM

[31October:]

Re:
On Jul 28 05:40 AM mattm wrote:
> You're a right wing idiot.

Mattm,

Thank your for your illuminating analysis of the fractional banking system and its flow of virtual funds. Your metrics dispelling the constraints regarding debt servicing have clearly eliminated any perceptions of currency risk.

Your comparison of asset-based vs. fiat currencies through history solidly challenges the author's premise.

Thank you for alerting us to the author's deficiencies relative to your obvious genius. Your thoughtful analysis is quite sufficient to be considered for a finance.yahoo message board.

I wish you well on your future position in Congress.

Jul 28 11:13 AM

[Davewmart:]

Calling for the banks to provide credit for productive enterprises is not the same as asking them to go back to indiscriminate financing of bubbles.
Many do not merit further finance, for instance much Commercial real estate, indeed tight finance for this would likely increase employment as it would drive down rents for retail premises.
This however is not what is happening. The reason that the banks are reluctant to lend is because they are trying to recoup their vast losses they are disguising on their balance sheets, so where they do lend they want lfast profits, not investment in boring things like manufacturing industry.
Since they cannot go bankrupt, and cannot recoup their losses with normal, modest rates of interest, they are using the funds they get almost free for wild gambles, for instance in manipulating the stock market which stands at vertiginous levels when earnings are about to be massacred - precisely because of this lack of credit to normal enterprises.
None of this would have happened if they had been allowed to go bankrupt, and prosecutions carried out where appropriate for insider trading etc.
The new institutions would not have massive losses to pay for, and so gambling wildly would have been neither necessary nor safe, as they might be held to account.
Just the bonuses these grifters continue to extract could go a long way to financing the small businesses etc who are currently being sent to the wall.

Jul 28 03:16 PM

[MattZN:]

People have such short memories. Unless your desire was to see the entire population of the U.S. abandon the banking system (I'm trying to imagine the situation we'd be in now if that had happened), there was really no choice. Instead, I guess, the author believes that if it didn't magically fix all the problems then it was no good to begin with. Pulleease.

Bailing out the banking system was never about giving people free credit again. Those days are long gone. Live with it.

-Matt

Jul 28 04:23 PM

[Ferdinand E...:]

Trane 250 posted the comment that I was going to post. The idea that the government should simply stand by and let the financial sector go to blazes is dumber than stupid.

Jul 28 04:36 PM

[Barbarous R...:]

"Systemic Risk" was one of the most over-used and deceitful terms of late 2008/early 2009. If companies make mistakes that push them into insolvency -- they have to be allowed to fail. In any industry. No exceptions. Let better operators pick up the pieces and build a better system. The world will not stop turning.

Instead our leaders have condemned us to years, if not decades, of stagnation. All to protect those institutions and managers who made the fatal mistakes. And we as taxpayers are being forced to pick up the tab.

Jul 28 04:54 PM

[Davewmart:]

Some here appear to be unfamiliar with the Swedish banking crisis of a few years back.
After some to-ing and fro-ing, essentially the shareholders in the defaulting banks were wiped out.
The bondholder could also be made to take full responsibility rather than the taxpayer.
The boards of the banks were dismissed, and new management put in place with the banks nationalised with a view to later sale.

What the US and UK measures have done is to indemnify the bondholders, partially indemnify the shareholders, especially the big players and leave incompetent management in place, whilst making staggeringly bad deals for the taxpayer.

Since the banks are neither being held to account to ensure prudent lending in future, nor are funds being provided for the normal purposes of keeping Main Street going, whereas the Swedish example achieved both of those objectives, it is difficult to see what benefit has been derived, other than to line the pockets of the politically connected.
The 'socialist' Swedes were in practice far more capitalist than the US and UK have proved.

Jul 28 05:05 PM

[perceptions...:]

"Tell Me Again What the Point Was?"

Remember Robin Hood, 'Steal from the Rich & give to the Poor'?

Well, it's the same, except in reverse!

Jul 28 09:52 PM

[31October:]

Yes, the government should have done something:

My plan: Sieze the irresponsibly run banks, fire the bozos, and liquidate them (the banks, not the bozos) in open-market sales to responsible, safe banks.
Cost to taxpayers: a million in Fed overtime pay.

Chosen plan: $12 Trillion direct bailout, $250 Trillion in guarantees (and yes, I do understand why that is actually a good idea; but it was totally over-the-top), 50% depreciation of the dollar just to cover debts, eventual refusal of anybody with a brain to buy Treasuries, loss of international trust (ask Geither what Chinese students think of us now), rewarding stupid, risky behavior with the tax dollars of working people + removal of accountability from the executive management who did it, attempting reinstatement of housing speculation, subjecting the Fed to political whims, and creation of more overlapping regulatory offices that still will not understand what they are regulating.
Brilliant! How could this be wrong???

In fact, just standing by and letting it go to blazes would have allowed better, safer banks to buy the good remnants for pennies on the dollar. No toxic assets need to have been absorbed by the working guy; they would have been part of the sale.

But if you think that buying toxic assets is a good idea, then I have a bunch to sell you.


On Jul 28 04:36 PM Ferdinand E. Banks wrote:

> Trane 250 posted the comment that I was going to post. The idea that the government should simply stand by and let the financial sector go to blazes is dumber than stupid.

Jul 29 02:33 PM