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October 21st, 2008

Treasury Said to be Encouraging Bank Mergers and Lending

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“You will lend” was the implicit message passed on to the initial nine banks that received capital injections as apart of the $250 billion TARP program. “We expect all participating banks to continue to strengthen their efforts to help struggling homeowners,” said Treasury Secretary Henry Paulson in a New York Times article yesterday. The simple message here is, “if you’re deemed too big to fail, you must function.”

The Treasury Department is well on its way to rebalancing the entire structure of the banking system. Not only is the Treasury asking the chosen financial institutions that are receiving capital in exchange for preferred shares to jump start the credit markets, they are also urging new bank mergers in order to create fewer, but stronger institutions:

“Treasury doesn’t want to prop up weak banks,” said an official who spoke on condition of anonymity, because of the sensitivity of the matter. “One purpose of this plan is to drive consolidation.”

The point here is to spread the systemic risk among more stable, well-capitalized banks. The nine banks that were chosen because they “influenced markets to the greatest degree,” says HSH Vice President Keith Gumbinger.

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2 Responses to “Treasury Said to be Encouraging Bank Mergers and Lending”

  1. Rebecca Wilder Says: October 21st, 2008 at 7:08 pm

    Hi Tim,

    How are ya? Paulson is making it up as he goes along. On 10/14, the NY Times writes this (http://www.nytimes.com/2008/10/15/business/economy/15bailout.html?_r=2&partner=rssnyt&emc=rss&oref=slogin&oref=slogin):
    “Mr. Paulson announced the plan Tuesday, saying “we regret having to take these actions.” Pouring billions in public money into the banks, he said, was “objectionable,” but unavoidable to restore confidence in the markets and persuade the banks to start lending again.”

    So the funds are to get banks lending again! And now, Paulson is claiming that the intention was to form restructure the banking system? That is completely ludicrous – I am pretty sure that market mechanisms could have consolidated the banking system quite nicely without all of the government brew-haha messing things up. And by the way, whose to say that the Treasury can in any way better decide how to “restructure” the banking system than can the markets?

    The same NY Times article writes:
    “The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.”

    Point: JP Morgan is in worse shape than Wells Fargo, but they both got the money.

    Whatever, I really disapprove of Paulson and his handling of the situation.

    Thanks for the post – aggravating, but surely informative. Rebecca

  2. Tim Manni Says: October 23rd, 2008 at 2:53 pm

    Rebecca,

    Great to hear from. Maybe the government should provide some breathing room between every new initiative to allow the markets to adjust and react accordingly.

    In a sense the Treasury is making it up as they go along. These are unprecedented solutions to unprecedented problems. At this juncture it feels like taxpayers have no control, it’s a very uneasy feeling.

    Thanks for the insightful comments,

    Tim

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HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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