Tuesday, October 14, 2008
A note on the government's investment in the big banks
Yesterday, JP Morgan accepted, perhaps reluctantly, a huge capital infusion from the United States government. Today it announced an investment in the Dubai Mercantile Exchange.
If they are paying attention, the xenophobes are going to go bananas. Let us hope they are not. I want JP Morgan and other American banks owning a stake in the exchanges through which the world's oil money will slosh.
Besides, JP Morgan does not even want the government's money ("Some of the big banks were unhappy about the government taking equity stakes..."). The government wants JP Morgan and other strong banks to accept it, for at least two reasons. First, the point of the plan is not to "bail out" particular banks, just as President Bush said in his speech. Rather, the government wants lending to expand. Healthy banks are probably better at doing that than unhealthy banks, if for no other reason than the healthy bankis have a recent track record of good credit analysis and their managements are not distracted with massive internal problems. Since every dollar of equity can support perhaps $11 in new lending, the new infusion into JP Morgan can generate a lot of new loans. Second, the government does not want its investments to become the stigmata of losers. For both reasons, it is giving the most money to the strongest banks, rather than the weakest. Good move.
4 Comments:
By 
Charlottesvillain, at
Tue Oct 14, 11:59:00 AM:
I just love the prospect of Barney Frank as a new "owner" of JPM, Goldman Sachs, etc.
Seriously, I hope this new strategy stops the panic (although anyone following recent events in detail might have some doubts) but we're about to get a big lesson in the law of unintended consequences.
By 
, at
Tue Oct 14, 01:09:00 PM:
By , at
Tue Oct 14, 01:31:00 PM:
I just love the prospect of Hank Paulson no longer having to make it up as he goes along:
Ih September, he told the Senate Banking Committee:
“There were some that said we should just go and stick capital in the banks, put preferred stocks, stick capital in the banks. And that’s what you do when you have failures. You know, that’s what happened in Japan. That’s what happened in other spots. And we have dealt with some failures. And we’ve dealt with them where there’s capital. But we said, the right way to do this is not going around and using guarantees or injecting capital, and there’s been various proposals to do that, but to use market mechanisms.”
Two days later, he told the House Financial Services Committee:
“There are a number of plans which say, ‘Let’s go to the root of the problem. Let’s just put capital in those institutions which we think are troubled.’ And that is one about dealing with failure, OK? And when you put capital in, that’s the Japanese solution. They were in a very long recession for many years, but what they did is they came in — you know, you put capital in the banks and then the government is essentially, in many ways, running them. So you’re sticking preferred stock in. What we are trying to do, we’re trying to take a different approach, which is, this is a different situation than anything you can find historically.”
Any guesses which party recommended that Paulson's 3-page document be revised to allow the government to inject capital into financial institutions?
By Charlottesvillain, at
Tue Oct 14, 04:57:00 PM:
No worries, he'll be back in two weeks with the next thing.
I haven't dug through the details of this plan, or the various but separate European plans, but I do have a prediction. Someone's guarantee is going to be tested, and a lot sooner than you might think.
I suspect the various European guarantees are being carefully analyzed. Money will flow to the better, more credible arrangements, making the next run on the relatively less comprehensive or less credit worthy. It will happen fast and the question will then be whether or not to bail out that nation, or to let them default on their guarantee. Iceland, except bigger.
I'd be worried about the Swiss and whether their resources are big enough to make good on guarantees of UBS, which is massively leveraged, and which some think is the next big problem. I think the answer is no.
Will the world end if we don't bail out Switzerland? They will tell us it will.
