Remember how that bailout money was to stabilize the banks?

by: cindik

Fri Oct 24, 2008 at 16:42:57 PM EDT

At first, they were going to buy the mortgage-backed securities... with the Congress's encouragement to rework the mortgages to keep people in their homes.

But of course that was too complicated, so the government instead decided to just buy stock in the banks. Of course, this does nothing for people stuck in adjustable or balloon mortgages with falling home prices.

But at least that money would get the banks to start lending again, so the economy could get unstuck. Unless, of course, the banks decided to just hang on to the cash. They did.

So on what are the banks spending money?

Bonuses. 

NOTE FROM PAM: Are we surprised that the greed that was responsible for this mess has not been purged from the executive set at these institutions? The homeowners, the public are still on the hook. Look at this NYT report, "So When Will Banks Give Loans?" --

“Chase recently received $25 billion in federal funding. What effect will that have on the business side and will it change our strategic lending policy?”

It was Oct. 17, just four days after JPMorgan Chase’s chief executive, Jamie Dimon, agreed to take a $25 billion capital injection courtesy of the United States government, when a JPMorgan employee asked that question. It came toward the end of an employee-only conference call that had been largely devoted to meshing certain divisions of JPMorgan with its new acquisition, Washington Mutual.

Which, of course, it also got thanks to the federal government. Christmas came early at JPMorgan Chase.

In point of fact, the 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.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “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. 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.”

Read that answer as many times as you want — you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “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.” In other words JPMorgan has no intention of turning on the lending spigot.