I promised you last week after outlining my belief the “frozen credit markets” was a contrivance by Fed Chairman Ben Bernanke and Treasury Secretary Hank Paulson, I’d spill the beans on why the dynamic duo wanted to lay their hands on $700 Billion since it wasn’t needed to thaw out anything.
So here goes..and I warn you it’s a little radical…but given this weeks events, I’m even more convinced it’s true.
My Theory on the Fed’s Bailout
As we discussed last week, the TED spread is the measure everyone is using to show how frozen the credit markets are and to repeat, this measures the willingness of banks to lend to each other.
The current story is the banks that formerly lent to each other at .5% now won’t lend to each other at 4.5%…and the TED spread proves it. Paulson and Bernanke used this “fact” to extort $700 Billion from Congress for the expressed purpose of ‘buying the toxic loans’ (I never bought that “toxic loan” story. The banks already took the hit, so how does getting a few dollars for yesterday’s writeoff help?) which are causing banks not to trust banks. Once those bad loans are taken off the backs of the banks, the fear to lend bank-to-bank will disapper…frozen credit markets thawed…crisis averted.
There’s only one thing wrong with this story…it’s not true.
Did anyone bother to ask if there might be another reason banks don’t want to lend to other banks?
The real reason the banks still left with capital (ie. Wells Fargo, JP Morgan, Bank of American…a few other mega-banks) don’t want to lend to the those banks who need it is simply because they don’t want to.
Yep, that’s right…they don’t want to.
If you were them, one of the Big Three, why would you lend to a small regional bank when withholding the loan will most likely make the bank a takeover opportunity for you at pennies on the dollar once the FDIC closes them down due to (because they couldn’t raise the capital) failure to meet reserve requirements?
You wouldn’t. You’d let them go under.
Big banks are withholding loans so under-capitalized banks fail. Once the under-capitalized banks fail, invariably the FDIC brokers a buyout to one of the Big Three or another mega-bank. This is market consolidation at gun point, but it’s working. Two more regional banks failed today.
To support my hypothesis, over the last couple of days, Paulson has saber rattled about buying a direct stake in some banks (an idea he never mentioned as the bill was getting debated in Congress) seemingly frustrated by the lack of “thaw” so far. This means the few big banks are going to get Treasury money to continue their buying spree. Buying failed banks even at pennies on the dollar costs money and they just as well use Hank’s money (I mean your money) as their own.
What Hank doesn’t spend help big banks gobble up small ones, he’ll use to appease our foreign credit buyers. A little unintended consequence of an artificially raised TED spread is a stock market tumble and confused foreign central bankers.
Simply call a quick meeting of the G7 financial leaders to calm their worries…and that is taken care of. Watching the stock market fall has it’s up side. It lends further credence to the whole “frozen market” cover story and puts even more pressure on those banks on tilt.
The biggest consolidation of banking, investment, and mortgage power, after all this over, will rest with just a handful of companies…companies hand-picked by Ben and Hank. Call me a quack, but in a few years when you have only 4-5 companies to pick from to get a checking account…it will be too late.
I really hope I’m wrong…
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Article Author:
Rob K. BlakeRob K. has written 49 articles for us.
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Rob K. Blake, a 15 year veteran of the mortgage industry, is a renowned public speaker, author, and former radio talk show host. His blog, TheMortgageInsider.net, is dedicated to educating mortgage consumers, mortgage providers, and investors about both mortgage and housing markets.
Joshua Dorkin
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If you were them, one of the Big Three, why would you lend to a small regional bank when withholding the loan will most likely make the bank a takeover opportunity for you at pennies on the dollar once the FDIC closes them down due to (because they couldn’t raise the capital) failure to meet reserve requirements?
Ouch! Your hypothesis looks like a real potential outcoome and reason the for the events. It owuld not surprise me on bit that this administration would pull something like that on the way out.
Another thing to add to your theory.
Paulson was the CEO of Golman Sachs. They are getting a good share of those $600 billion.
Cramer also supports the bill… Cramer also worked for Goldman…
and then, the best stock picker in the US, chooses to invest in Goldman.
Since you can’t fight it, might as well join in, I think I’m going to be buying some Goldman stocks at $88… we’ll see how I do.
I used to think it was the bigger fool theory or maybe that someone took our seat in musical chairs. Now I think that the whole world is a telethon for billionaires.