As my friend Joe Nocera pointed out in his terrific piece yesterday in the NY Times, some of the (shameless) banks that have benefited from the huge public bailout bill are (shamelessly) planning to use the money not to loosen up lending to their client businesses, helping to offset the inevitable damage to the "real" economy that the credit freeze-up is causing. Instead they are using it as cheap capital for their own expansion plans.
Grrrrrrr. Or as Nocera put it, after hearing a JP Morgan Chase official indiscreetly confess this plan:
[T]he dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who's been indiscreet enough to say it within earshot of a journalist.
I asked another industry insider about this -- and about whose fault the misallocation (waste, diversion, rip-off -- choose your term) was. This person made clear that the same behavior should be expected from other banks, starting with Citibank, and he gave this explanation:
Frankly I think the fault lies with Paulson (and his boss...). The bankers didn't ask for it. Paulson pushed it on them. (Read WallStreet Journal commentary on the meeting, from witnesses) but after the bankers realized they had no choice but to say yes, they also saw it was an incredible gift which floated from the sky: cheap equity
I don't think there's sufficient public awareness of a profound diversion of $ 250 BILLION which got shifted deftly from "starting to fix the mortgage-backed security crisis" to "relatively low cost equity to banks for them to use however they see fit".
Remember that 35-year old guy who Paulson was going to appoint to oversee the purchasing program of the mortgage-backed securities? What's his job now? I imagine he has little to do anymore (because $ 250 billion of the initial $ 350 billion -- within the total $700 billion TARP program [Troubled Asset Relief Program]-- has already been earmarked for this "nice new equity" deal" hence the 35-year old only has the rump $ 100 billion to play with).
Ps I don't think it was design. I think it was impromptu. Paulson had been fixated on the asset purchase program up until time Congress approved the $ 700 BN TARP. Then Gordon Brown in UK applied the bank equity deal in England for some UK banks. And a day or two later, Paulson followed the UK practice shifting away from asset purchase to equity donation.
Financial press has made it clear that the UK came up with the formula which Washington (ie Paulson) eventually adopted. But US public is very much unaware
This will become a bigger issue.