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A Scam of a Bailout Plan

By Bizbox

For the record, we were in favor of the bailout, even though some in the small business community were skeptical. Even though it appeared to contain little specifically geared towards small businesses, it did contain some provisions that appeared to help them a bit. More broadly, and more importantly, though, we agreed with the National Federation of Independent Business that "This is Not About Wall Street, It's About a Firewall For Main Street". That is: the bailout would unfreeze credit markets, which would not just rescue banks and big corporations but also small businesses in desperate need of credit.

That the bailout was quickly changed from $700 billion to buy up toxic mortgage-backed assets to $700 billion to be injected into banks, if anything, shored up our confidence, as we assumed the banks would take that new capital and do what banks do: lend it out to get the economy going.

Silly us! A phenomenal and important New York Times piece lets us in on the "dirty little secret" of the big banks: they're not lending that money out any time soon! Why would they do such a thing when they could use it to buy up other, smaller, struggling banks and enhance their own positions with the taxpayers' money?

Columnist Joe Nocera managed to listen in on a conference call among top JPMorgan Chase brass (you remember JPMorgan, right? the one that was able to buy Bear Stearns at a laughably great bargain thanks to huge federal government backing?). Like three other big banks, JPMorgan is getting $25 billion in government capital as a part of the initial, $250 billion phase of the bailout plan. Mind you, JPMorgan had no choice as to this: the government has essentially forced it on them. Presumably this was with the understanding that their ability to lend is crucial to jumpstarting the shocked economy?

Well, no such luck. Quoth one executive, when asked how the new capital will affect the bank's lending policies, “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers."

He added: "I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

In other words: acquistions, mergers...consolidation. Not more lending. Just ask this same executive: "We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.”

And remember: this is an executive talking to (he thought) only other JPMorgan employees. This is where the executive is going to be the most honest.

This is stunning. And it makes you wonder why the goverment didn't insert a provision that compels banks to use the new capital to help unfreeze the credit markets. One imagines such a provision would not have been too controversial given that the government is already dictating private enterprise to an unprecedented extent. Certainly, as we wrote last week, the government should take a greater hand in ensuring the flow of Small Business Administratin-backed 7(a) loans from private banks.

But, according to Nocera, shyness was not the government's problem; not including a clause compelling recipients of government cash to increase lending was not an accident. Rather, says Nocera, "Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation." He quotes another Times article to the effect that “the government wants not only to stabilize the industry, but also to reshape it," and pithily adds: "Now they tell us."

Outrageous--outrageous from the perspective of the taxpayer and of the economy as a whole. But also, and maybe most of all, outrageous from the perspective of owners of small businesses. The federal government needs to come up with a new answer, and fast, as to why the bailout deserved their support. We'll be listening.

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