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Banks can't be forced to lend: The REAL Story

Discussion in 'Political Discussion' started by PatriotsReign, Dec 11, 2008.

  1. PatriotsReign

    PatriotsReign On the Roster

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    Some Keynsians here believe that because the federal gov't has invested in the financial industry, they can now force banks to lend or "persuade" them how to run their business. Well, here's the truth about how this all went down and why our federal gov't has no legal leverage on the banking industry.

    First off, the nations largest banks were FORCED to accept bailout money. They did not come to the gov't seeking it. See NY Times article below;

    Drama Behind a $250 Billion Banking Deal

    "The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left."

    The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

    But by 6:30, all nine chief executives had signed — setting in motion the largest government intervention in the American banking system since the Depression and retreating from the rescue plan Mr. Paulson had fought so hard to get through Congress only two weeks earlier."


    http://www.nytimes.com/2008/10/15/b...d=2&adxnnlx=1228971554-GCq4RMcdp2MV3foNb1aYJA

    Now, based upon these FACTS, does the federal gov't have any leverage to compel banks to lend or tell them how to run their business? See answer from Bloomberg below;

    Paulson Lacks Leverage to Make Banks Put Cash to Work


    "The truth of the matter is, they can't put a gun to their head and say you have to lend this money,'' said Charles Horn, a former official at the Office of the Comptroller of the Currency, part of the Treasury Department, and now a partner at the Mayer Brown law firm in Washington.

    Treasury officials acknowledge they can't force banks to get the taxpayer money into the hands of their customers. Instead, officials are betting that the government's investment will create conditions where banks have a greater incentive to earn profits from lending than to hoard money to shore up their balance sheets."


    Bloomberg.com: Worldwide

    Furthermore...

    There seems to be a fine line between ...
    1) Illegally forcing supposedly well capitalized banks at bazooka point to take money on questionable terms
    2) And illegally forcing those same banks at bazooka point to lend it
    Last edited: Dec 11, 2008
  2. PatsFanInVa

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    I read this back when it was fresh. Somehow the notion that a bank exec can end up signing a deal he's putatively against within a three-hour period, suggests that government indeed has some sway over banks' behavior at present.

    Your point that one large bank felt it was capable of riding things out without signing is not lost, but neither is the point that the other eight largest banks had no such qualms, or that the investment banks specifically were lining up at the window begging for bailouts (beginning with Lehman's, which was allowed to fail, and extending immediately to other troubled institutions.)

    Of course we're both proceeding from incomplete information, which is the nature of the world. You evidently believe that the failure of the financial sector would be okay in the end. I believe that when a parade of reluctant Keynsians emerge from the ranks of the biggest defenders of market purism and government non-intervention, something catastrophic was a definite possibility (oh and by the way, as we both acknowledge, still is.)

    Your "REAL story" analysis that banks "can't" be forced to lend is a tad off. They are not currently being forced to lend. The thought is to lead them to lending by other means.

    It is worth noting, however, that your thesis rests on our current body of laws. While banks typically trump lawmakers, because they do business where the rubber hits the proverbial road, this is not the case in rulemakings and legislation.

    Given the political will, tomorrow morning banks could be compelled, by law, to lend.

    This may be a good thing or it may be a bad thing. It is simply a thing. Your thread title is incorrect. The question facing the banks is whether they want to do this the easy way, or dare the lawmakers to do it the hard way.

    PFnV
  3. PatriotsReign

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    The thread title is perfectly accurate at this very moment. So you're wrong to say it's innacurate because the laws can be changed...until they ARE changed, it is accurate.

    I'm glad you responded to this thread. I don't agree with your assessment that our gov't can or will begin to change our laws to satisfy their wishes or their vision of our economic future. they very rarely even attempt to do such things historically.

    I think you'd agree that we don't want our gov't running (or TRYING to run) every major sector of our economy. That could result in complete gov't control of supply and demand of basic goods and services. I think our gov't has ENOUGH power as it stands. I don't want precedent set that would result in permanent increases in gov't control of our society...that scares the sh1t out of me. I highly doubt you trust our federal gov't that much...or at least you shouldn't. Take our illustrious governor of Illinois as a classic example. The more power, especially economic power, we allow our federal gov't, the more open they are to corruption & greed.

    After all, member of our federal gov't are not specially gifted human beings. they are not geniuses....and they are certainly NOT an entitled members of our society to which we have passed the proverbial torch of democracy. I have always felt members of our federal gov't actually believe they have more power than you & I when the truth is, they have the exact same powers that all citizens have.

    I do believe in gov't intervention in corp America. I have been very disappointed with the last 20 years of mergers & acquisitions without regard to anti-trust laws....and that is why we have businesses that are "too big to fail".
    Last edited: Dec 11, 2008
  4. atomdomb

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    I believe that by signing the document the banks were forced to take a little bit of money even if they didn't need it. How the US government forced them to do this I don't know. I believe that by taking money this allowed the US government to look over the books of these big banks.

    When this actually happened a couple weeks ago the government didn't have a real handle on how big the problem was. By forcing the banks to take money they were able to go in and look at these company's books to see exactly what was going on. I completely understand why the government did this. Is it legal and/or ethical? Probably not. Was it the right thing to do at the time to get a better understanding of how big this crisis really was? Maybe.

    As far as being forced to lend...I think the banks will start lending and the won't really matter. Wells Fargo is completely financially strong and they were forced to take government money. Could the banks be forced to lend out the loans they got from the government? Probably. It is in fact the government's money they would be lending out. What if the government says "lend it or give it back"? The credit markets will continue to thaw and banks will start doing what banks do. Lend.
  5. PatriotsReign

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    I think banks will lend as long as there are qualified loanees with minimal risk.
    Historically, there are times to lend and there are times when you hold onto your cash.

    Here's another comparison to consider...If a banks lends you money, they have no right to tell you how to spend the money even if you tell them a story/lie in order to get the loan.

    As I wrote to another member, the thread title is completely accurate unless the gov'g changes the current laws.
  6. PatsFanInVa

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    And banks can't be forced to take bailout money, as was the case with the single holdout. Yet at the end of the day, they did... and if TARP didn't have enough strings attached you can bet Son of TARP will... and hanging over them like a sword of Damocles is the pen of Beaurocrocles, which, by the transitive power of cliches, they perceive as infinitely more powerful. So okay, banks can't be forced to lend. Auto execs can't be forced to drive down to DC in their hybrids. I can't be forced to go to work. But I'm gonna.

    And you're right, I do not see a command economy as remotely desireable. We are really only differing about the extent the current emergency measures should go to, and whether the public should get something for the money (as in a stake in outcomes.)

    One last note: seizing up the credit markets and refusing to lend to anybody is a perfectly legit way for a bank to look at its balance sheet at present.

    Lending to hobos was a perfectly good way for a bank to look at its balance sheet in the past.

    What we disagree about is whether government has a role in saying "market forces right now are irrational and incorrect."

    We would not disagree about this in any normal times, in regards to a subject like "forcing banks to lend." But we would agree with the government preventing some of the excesses of unregulated markets. So yeah, better that we never got to where we are now.

    But by my read, these are not normal times. When the government buys a stake in the financial sector, and the financial sector is behaving in a way it very rarely behaves to the detriment of the economy at large, I have a hard time believing the government should not use the stake it has purchased in order to press for the goal it meant to achieve in purchasing that stake (i.e. the restoration of some liquidity.)

    PFnV
  7. PatriotsReign

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    Now that you, me, RW and shmessy have squeezed every last drop out of this debate, I want to say that I've enjoyed it. You're all extremely knowledgeble and even when you get frustrated, are able to maintain respect...however sarcastically!

    That's the New England way man. Seriously PFiVA...good stuff!

    even though you're wrong :eek:
  8. IcyPatriot

    IcyPatriot ------------- PatsFans.com Supporter

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    #87 Jersey

    No disrespect PR but we are a captalism system ... why would you want to force banks to lend? Government intrusion into the economy does not work on the side of business intervention.

    What the government should have done is more tax breaks both on the consumer side and the business side. It would have taken longer for a recovery but with way less risk and the weak poorly run companies still would have disappeared which would have been a good thing.

    Even the big 3 bailout is dumb. Like the big 3 would go out of business and nothing would take their place ... what a load of crap. Would have been better if 1 of the 3 would have went into bankruptcy ... preferably Ford ... Found on Road Dead ... Fix or Repair Daily ... hate Ford.
  9. PatriotsReign

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    How can you be disrespecting me when you're backing up my argument and disputing PFiVA's?

    My man IcyPat!!! :rocker:
  10. IcyPatriot

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    #87 Jersey


    Geez you make me sound like Glen Ordway ... :p
  11. PatsFanInVa

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    Yeah, Icy, but the facts in this should tip you off that the building of autos has less to do w/US automakers' problems than the role we are all assigning that endeavor. Sure making cars that work is a really good way to "win" the autobuilding game, but like every other industry, car making is vulnerable to The Poseidon Economy.

    If you decide it's "sink or swim" for the Big 3, Ford is in the best shape. They had better foresight in some regards, made a ton of moves and leveraged everything from their corporate HQ to their logo to have cash on hand... exactly what GM and Chrysler don't have. They also started the process of moving over (or more accurately, duplicating) their small-car operations from Europe, in a long arduous process that won't be done until 2010 (just in time for people to get car loans again!)

    I'll throw this into the hat regarding the automakers, foreign and domestic:

    Nobody's making money. Nobody's going to be making money for a while. There will be pent-up demand, as everybody saves based concentrically on anxiety. Even those whose jobs are no more in doubt than 3 months ago, are acting as if their jobs are in doubt, because there is a mood to a recession, not just rational numbers. And the ones who can legitimately consider themselves threatened, of course, are in the millions or tens of millions.

    So, when people say the Big 3 will be back, hat in hand, looking for their next handout... they're right.

    But you know what else? We blame these guys for building SUVs and trucks, but what did we buy, year in and year out? Righhhhht.

    Those were what Detroit could make money on. With gas cheap, in fact, were we not already ultra-aware of how expensive gas could get, I wouldn't put it past these guys to try to move the dinosaurs again. In fact their commercials are back.

    But that's not working either.... nobody is buying.

    So once again, whether your pet beef is union contracts or feul efficiency, there are some unsustainable models. UAW came to the table again in recognition of this, and gave up some gold-plating. The Big 3 are all ears, right now, in terms of feul efficiency arguments. As long as you lend them the money to get there.

    And guess what? You shutter Detroit, and they don't all get jobs in Kentucky. The transplants are losing sales too, and I doubt they'll be hiring 250,000 workers. So: would you rather have the hit to the economy and the revenue base (!) of shuttering the Big 3, to save a fraction of that in bridge loan money, or would you rather have the Big 3 over the proverbial barrel, and able to dictate terms including correcting the myopia that's afflicted Detroit -- both management and unions -- for decades?

    I know, I know, no good can come from better feul efficiency, unless THE MARKET tells Detroit to pursue it.

    Well, if I'm buying a damn car company, I want to buy the steering wheel too, personally.

    And like PR says we've milked this subject for all its worth. I'm still on the same argument as the last time I went at this.

    PFnV
  12. PatriotsReign

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    LOL! He does say that all the time, doesn't he?;)
  13. PatriotsReign

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    Hey...I disagree with you on another issue. I don't think Detroit has "reacted" to the market or public demand at all when the decided to push huge SUV's and walk away from fuel efficiency. I STRONGLY believe that Detroit is one of the most successful industries at creating the demend they seek through advertising.

    I also STRONGLY believe that Detroit has long conspired with Big Oil in their effort to push the SUV craze. When we see commercials day in and day out year after year on the "Status" symbol of the SUV in America, people bought it hook-line-and-sinker. Why do you think companies spend sooooo much on advertising in this country? Because it works...it's that simple.

    Had Detroit advertised fuel efficiency as the status symbol of the successful American family, we would have bought that as well. Just like you stated, SUV's were more profitable and that is why they continued to invest in that doomed model.

    I don't blame Americans even 1% for buying them. I give 100% of the blame to Detroit and the oil industry. If we can add 2+2, we know this was a dual effort by both of these giants. For the past 20 years, there is very little that Americans buy that they really NEED. We have been buying based upon a dream created by American industry.

    There is a reason that those old studies about subliminal advertising in theaters during the 1960's found that they worked better than one would think. Humans are very suceptable to persuasion.

    But if we learn anything from these difficult times, we need to learn to stop believing in these lies and to stop dreaming about "things" and start to think rationally & responsibly....for once.
    Last edited: Dec 12, 2008
  14. NEPatriot

    NEPatriot Banned

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    Some people blame the politicians for this mess because they 'forced' the banks into lending the money to irresponsible people. It's the reason we had many bad loans. I don't think that the banks will do it any more because they don't want to go down.

    The banks will seat on the bailed out money. It's very strict to ask for a loan right now if you don't have any 'collatorial'.
  15. PatsFanInVa

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    Well, PR, that much I can agree with. Have patience. If Wall Street needs a bailout, and Main Street needs a bailout, eventually Madison Avenue will look for one... THEN we'll have those advertising bastards right where we want them... :D:rolleyes:
  16. PatriotsReign

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    EXACTLY!! Then we can tell them to stop fugging with our minds and trying to make us buy crap we don't need.

    Somehow, I doubt that will work.;)
  17. PatsFanInVa

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    I can see it now...

    "We are not the industry you're looking for."

    "These aren't the ones we're looking for."

    "Move along."

    "Move along."

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