Thursday, December 17th, 2009






Yesterday President Obama held a meeting with the “too big to fail” CEO’s where he admonished the bankers who received TARP funds to start lending their dough “in the national interest.” Both sides of the aisle have weighed in on this issue-the left decrying the TARP recipients paying their profitable trading desks bonuses built on back of taxpayer money while the right saying that the bailout reeked of socialism and that the banks should manage their own affairs for better or worse.


But let us say you are running one of these banks and you look at the landscape.  Banks are in the business of buying and selling money, and like anyone else they want to buy low and sell high. Banks are getting (i.e. buying) money at pretty close to zero given the current level of short term rates via the Federal Reserve.  So they should do well lending that money to small businesses and real estate buyers -all of whom agree that getting a loan is about as easy as running a marathon with your legs tied together.  If you are paying close to zero for your money and can lend to a business or real estate buyer at 5 times that or better, isn’t that a favorable risk/reward-even if some of the loans don’t work out as planned?  That is true, but the banks have a greater carrot dangling in front of them and that is the yield curve. The math is far from complicated.  Here they can pick up 4.3% buying a 30 year Treasury or make a 30 year mortgage loan to a homeowner at around the same rate with a questionable asset the bank may end owning. Since there is a lot of that stuff in house already, there is not a whole lot of incentive to increase the inventory. They can hire loan officers and appraisers to determine the credit worthiness of the borrower and the asset-something which will generate positive press,   or have their fixed income traders click boxes on their Bloomberg screens and make loans to the US Treasury. Yes and these traders may get a year-end bonus for doing their jobs profitably which involves using leverage and derivatives. And if Obama says you guys have to start lending, the bankers can say, “Guess what, Mr. Prez-we’re lending to you.”  So as long as the yield curve looks the way it does at present, and the Fed and the Treasury Dept have not indicated otherwise, there is not a great incentive for the banks to lend, except to avoid a deluge of real estate bankruptcies through workouts and debt for equity swaps—that is the elephant in the room.


There is of course, a long history of US President’s spanking fat cat bankers. In the early years of the 20th Century, President Teddy Roosevelt often railed against the “corporate malefactors of great wealth,” although after 1907 Financial Panic he had no problems when the malefactor in chief—JP Morgan used his leverage with his fellow fat cats to rescue the US financial system from imminent collapse. That famous meeting at the Morgan mansion led to the formation of the Federal Reserve. The next Roosevelt made similar statements but kept mum when the bankers were doing what the current Goldman Sachs CEO called “God’s work.”  Like President Obama, TR certainly would have said he did not “run for office to be helping out a bunch of fat cat bankers on Wall Street.”  But the rest is and will be history.

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