Banks Admit Bailout Won't Work

Posted Oct 17, 2008 09:48am EDT by Henry Blodget in Investing, Recession, Banking

From ClusterStock.com, Oct. 17, 2008:

So much for that story. A few days ago, when Hank Paulson called the heads of the nine families to Washington and shoved cash down their throats, he announced that the banks would use this new taxpayer cash to lend. They won't, of course. They'll hoard it like a starving family who has just been given a grocery cart full of food.

And after a few days of silence, even the banks are finally admitting that. So it's back to the drawing board for Paulson & Co.

Next steps? Find a way to force the banks to write their assets down to nuclear winter levels, so 1) private investors don't have to worry about getting sandbagged and therefore invest more in the banks, and 2) the banks know they won't be forced to take more multi-billion dollar losses. Only then will the banks begin to lend again. And at that point, the only challenge will be finding people and companies to lend to, in an economy headed straight into the tank.)

NYT: , John Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view.

“We will have the opportunity to redeploy that,” Mr. Thain said of the new capital on a telephone call with analysts. “But at least for the next quarter, it’s just going to be a cushion."...

“I don’t think that the market wants to see that capital being put to work to leverage the business up again,” said Roger Freeman, an analyst at Barclays Capital, which acquired parts of the now-bankrupt Lehman Brothers last month. “My expectation is it’s quarters off, not months off, before you see that capital being put to work.”...

Jamie Dimon, the chairman and chief executive of JPMorgan, said his bank was in a stronger position to use the money than some of its competitors.

“It’s clear that the government would like us to use the capital,” Mr. Dimon said on a conference call with analysts on Wednesday. “If you are a bank that is filling a hole, you obviously can’t do that.”

Who is "a bank that is filling a hole"? Seven of the nine that just got taxpayer money.

See Also:
Sorry, Hank, Bailout Isn't Working
But What About the Next $1 Trillion of Writedowns?

Banks borrow record $437.5 billion per day from Fed

Reuters
Friday, Oct 17, 2008

Financial institutions ran to their lender of last resort for record amounts of cash in the latest week, under extreme pressure from the worst global financial crisis in a generation, Federal Reserve data showed on Thursday.

Banks and dealers’ overall direct borrowings from the Fed averaged a record $437.53 billion per day in the week ended October 15, topping the previous week’s $420.16 billion per day.

Some analysts are concerned that banks’ dependence on Fed lending might become long term and difficult to change.

“The banking system is going to become addicted to this very cheap money. Unwinding it will be very difficult,” said Howard Simons, strategist with Bianco Research in Chicago.

“We have effectively allowed the central banks to disintermediate the banking system. Why would I want to borrow from you if I could do it with the central bank, because they can always print it up and say ‘here’…and they are in the business now of making sure I stay in business,” Simons said.

Primary credit discount window borrowings averaged a record $99.66 billion per day in the latest week, up from $75.0 billion per day the previous week.

Primary dealer and other broker dealer borrowings were $133.87 billion as of October 15, versus $122.94 billion on October 8.

“Other credit extensions”, mostly reflecting loans to insurer AIG, were $82.86 billion as of October 15, versus $70.30 billion as of October 8.

The Fed’s lending to banks to enable them to purchase asset-backed commercial paper from money market mutual funds was $122.76 billion as of October 15, versus $139.48 billion on October 8.

Full article here