Tuesday, October 21, 2008

Stimulating the economy -- through bank mergers?

Maybe I'm just a dumb dirt lawyer. But I really, really don't get this.

A big criticism I had of the government "stimulus package" was that banks would have no obligation whatsoever to actually go out and lend money again. So what are banks planning to do with their government investments? If you said "lend money," guess again. No, they plan to use the taxpayer-financed infusion as cheap money to buy up banks that are weaker. As the story says:

If the banks use the government funds to pay for acquisitions, it could prove controversial. Taxpayers essentially would be footing the bill as strong banks gobble up their weaker peers. Such acquisitions probably would provide less of a boost to the economy than would new bank lending.
Controversial? That's putting it mildly. Scandalous is more like it. And the impact on the dirt market? Well, what confidence there was about loosening credit may fade. Somebody who understands economics please tell me: how will this help Main Street? Call me what you want, but when you do so keep this formula in mind. Government = more costly + less efficient.

I guess one thing is good -- full employment for the M&A lawyers.


Anonymous said...

I agree. Too Few Banks poised to get way too big is bad news. They need to focus more on getting the market liquid again and less on looking for opportunities to make the most money in the next upswing, as the largest bank. But the way the bailout is structured- they really have no incentives to lend...

Jim Tracy said...

You are right. This is strange. The whole justification, I thought, was that you get more "bang for your buck" by beefing up banks' capital reserves than by buying their bad debt. But shouldn't there be requirement that the cash actually be used for this purpose, instead of for acquisitions? Maybe I'm missing something.

Anonymous said...

Think about it this way. The government is a partner in these large banks. If they use the infusion money to go out and acquire more banks than isn't the government consolidating power? Won't their role in banking be even larger?