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January 15th, 2009

Why Government Interaction is Ruining the Marketplace

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In a deal that was set to finalize at the turn of the year, Bank of America’s acquisition of Merrill Lynch has been delayed over BofA’s claims that they’ll need more money in order to complete the government-encouraged deal:

The commitment of funds is further evidence of the banking system’s delicate condition and its hunger for more capital, despite billions of dollars already invested in financial institutions by the government.

Why would BofA risk their own capital when they could use billions of government funding that they may not even have to pay back? The TARP funds have persuaded institutions to change their attitudes toward certain deals/mergers. While the funds don’t demand specific up-front restrictions, they don’t go without political influence.

Last year when the Treasury Department began doling out TARP funds, their message was clear: they didn’t want to lend to weak institutions. Thus, the Treasury encouraged mergers in order to build larger, more stable institutions.

Just a few months later, some analysts feel the government is reconsidering that strategy:

“Citi is being unwound because it’s too big and the government wants it smaller,” said Paul Miller, an analyst with Friedman Billings Ramsey & Company. “I think Bank of America, either a year or two out, is going to be dismantled also because its returns are going to be too weak. No management has the expertise or brain power to provide the right required return for investors with institutions that are this┬ásize.”

The Treasury needs to make up their minds. Unfortunately, throwing money at the problem du jour, is the wrong solution. Rather than deal with more failures and bailouts, the Treasury has decided to lend instead. The smartest lending decision the government has made to this point has been to purchase $600 billion in debt and mortgage-backed securities (MBS) from Fannie and Freddie. At least there’s a opportunity for the taxpayers to see some return on their investment.

Throwing money at massive institutions distorts the marketplace, plain and simple. Government interaction influences institutions away from making their own private market business decisions. Instead of lending, the government should do more investing.

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4 Responses to “Why Government Interaction is Ruining the Marketplace”

  1. Educational Technique Resources » Blog Archive » Do Online Mbas Make the Grade Says: March 17th, 2009 at 10:32 am

    [...] Why Government Interaction is Ruining the Marketplace [...]

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    [...] -FHA: A Bigger Down Payment Isn’t Necessarily Better (Peter Miller, HSH) [...]

  3. Originations 7/13: U.S. Home Prices Undervalued | The Basis Point Says: July 13th, 2011 at 11:21 am

    [...] Share  |   |  PRINT -Fed Wants Out & Here’s Their Plan (HSH) -Can’t Sell Your Home? Consider Renting It (MSNBC) -Sorry & Pity of Another Liquidity [...]

  4. Who’s Really Putting Down 20 Percent? | Houston Agent Magazine Says: December 12th, 2011 at 6:02 pm

    [...] A recent HSH blog by Peter Miller cites similar statistics, except Miller’s stats, ironically, come from the National Association of Realtors (NAR), one of the most vocal critics of the private home loan industry. [...]

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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 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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