Oct 17, 2008 @ 11:38 am
NEW YORK - Now that U.S. banks have access to $250 billion worth of taxpayer money, they'll lend it wisely, the markets will rejoice and all will be well again.
If only.
The first banks to participate, nine in total, have been given anywhere from $3 billion to $25 billion each. In exchange, the government gets preferred shares in the financial companies. What the banks haven't been given is many strings attached.
"It's clear that the government would like us to use the money to make loans," said JPMorgan Chase & Co.'s CEO Jamie Dimon at a recent earnings conference call with analysts. "I don't think the government is telling us what to do with the capital."
Doling out taxpayers' money in this way can result in moral hazard--maybe even on steroids. That means companies, individuals or investors could start taking big risks again because they think the government has their back.
Back in the olden days of September, Lehman Brothers was left to fail because our leaders in Washington didn't want to set a precedent of bailing out Wall Street's gamblers.
They've since changed their tune. The government has swooped in often in recent weeks--at mortgage giants Freddie Mac and Fannie Mae, at massive insurer AIG, in the $700 billion bailout legislation.
Whatever actions Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and others have taken, they aren't without reason. While the current financial crisis began with the housing market collapse, it has ballooned into something more complicated and more far-reaching than anyone ever thought it would be.
Financial companies have had to take massive losses on their mortgage-related and other risky assets, which is constraining their capital and causing them to tighten credit. As fear has gripped the marketplace, lending between banks and to consumers and businesses has virtually shut down--to the detriment of the overall economy.
This can't continue. That's why the government's involvement has been required and welcomed.
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