The question everyone is asking about Treasury's plan to put $250 billion into U.S. financial institutions is this: Are these newly capitalized banks going to lend out this cash to the companies that badly need it—or just hoard it to protect themselves?
In a fascinating piece Friday, New York Times columnist Joe Nocera says that although Hank Paulson has been urging banks to turn these new funds into fresh loans, banks appear likely to sit on the cash. "The dirty little secret of the banking industry is that it has no intention of using the money to make new loans," Nocera writes.
The column was based on a JPMorgan Chase employee-only conference call that took place days after the bank agreed to a $25 billion injection from the feds. Nocera listened to a recording of the call but declined to identify the bank executive who was taking the questions.
At one point, the executive was asked: "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?"
"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.
Should this turn out to be the case—that banks hoard their billions of dollars in bailout capital—expect a fresh round of tantrums on Capitol Hill. Connecticut Sen. Chris Dodd, chairman of the Senate Banking Committee, said "there will be hell to pay" if it turns out banks are hoarding the capital, Nocera reports.