Banks start giving back

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Apparently, the restrictions that Congress is putting on bailout monies is pushing a number of institutions to give the money back. 

What to think of this?  One's first instinct is to say that this is an unalloyed good--the restrictions have made taking the funds costly enough that only truly troubled institutions will do so.

The problem is, that's precisely what the Fed was trying to avoid.  Central bankers have long made a practice of keeping it a secret who borrows from them at the discount window, because publishing the names of those who need a temporary cash infusion could trigger a bank run.  In order to get the money into the banks that needed it to stave off a liquidity crisis, Bernanke and Paulson very deliberately asked banks that were widely believed to be sound to take the money too.  Otherwise, the government bailout funds might have touched off the very crisis we were trying to avert.

It doesn't do us much harm to put taxpayer funds into banks that don't need it--we're borrowing at low rates right now, and the banks that don't need the money are the ones with very low default rates.

It's also possible that some of the measures that express our collective rage at the bankers could tip the banks over the edge.  It's satisfying to make AIG cut out junkets for independent insurance agents, but it also probably means that fewer AIG policies will be sold.  Since we now own the company, we probably cost ourselves money in order to express our outrage. Similarly, watching the conga line of Merrill's top performers snaking up Wall Street to other firms, one can't help but wonder if B of A shareholders did themselves any favor by complaining about the bonus structure.  The major assets of these institutions are client relations and human capital that tend to adhere to the individual, not the firm.

Yes, yes, I quite realize that many of these bankers are not nearly as smart as they think themselves.  But they aren't nearly as stupid as popular legend would have it.  I've sat in the investment banking department at Merrill Lynch, and found the whole thing quite ludicrous.  I also grew quite amused at the confidence of vast swathes of America's educated class that of course they could do a much better, and more socially responsible, job running banks and corporations if they weren't much too busy finishing up their thesis on early renaissance poets.  Successful bankers are really, as a class, quite bright, and also have a whole lot of skill sets, like OCD-level attention to details, that pretty much every one of the journalists and bloggers snarking at them lack.  Moreover, the really stupid ones have already been fired.

But even if they are splendid all around chaps, I don't actually want to give them large sums of my hard-earned cash.  Deeply sympathetic though I may be to the problems of maintaining a moderately large co-op apartment and a really modest place in the Hamptons on a mere $500,000 per annum, I fear that unless the need is dire, I must reserve my dollars for the more pressing problem of maintaining a miniature row-house and a bullmastiff on journalist wages.

The only reason I'm willing to give any of them any money is if failing to do so will cost me even more money in the future.  And I'm not sure that I buy the notion that spreading the funds around keeps needy banks from sending a potentially disastrous signal.  At least at the "too big to fail" end of the market, everyone's pretty much clear on which banks need the money, and which could squeeze by without it.  If Goldman wants to return their funds . . . well, they know where to find us.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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