Peer Pressure to Join the Bailout Club

November 3rd, 2008 by Phil Mattera

Once upon a time, there was a stigma attached to businesses that had to be bailed out by government. Only ones that desperately needed help—the likes of Lockheed, Chrysler and Continental Illinois—would resort to such a step.

In the upside down world of the current U.S. economic situation, the tainted firms may be those that are not being rescued. That seems to be the growing sentiment among the country’s banks, which are feeling increased pressure to participate in the partial nationalization plan being pursued by Treasury Secretary Henry Paulson. As the Wall Street Journal put it today: “Now institutions across the U.S. worry that if they don’t try for the money, the market will judge them as too unhealthy to qualify, or lacking the savvy to deploy cheap government capital on acquisitions and investments.”

It thus appears, according to the Journal, that thousands of banks will be applying for capital infusions from the federal government, whether they need them or not. For example, US Bancorp, known for its stability and conservative practices, announced today that it will be getting $6.6 billion from the feds. Depository institutions that for decades have proudly displayed their “Member FDIC” sign now feel obliged to advertise that they are also members of Paulson’s bailout club.

One banker already in that club told the Journal: “There’s a perception in the market that the government is actively picking winners and losers…we wanted it well-known in the market that we’re on the list of survivors.”

Those survivors are making sure their status as wards of the state does not cause them to lose much of their autonomy. High-powered banking lobbyists are working hard to thwart any new strings that might come with the federal investment, while financial industry trade groups such as the American Bankers Association are signaling that they would like to remove the modest restrictions on executive compensation that Treasury has already imposed.

Given the mood of the public, the pay rules are not about to be lifted, but neither is Paulson likely to go along with any additional rules. Banks may be largely responsible for the mess we are in today, and they want to use their federal money for acquisitions, bonuses and dividends rather than new loans, yet Paulson continues to treat them with kid gloves. His successor should be a lot less accommodating.

2 Responses to “Peer Pressure to Join the Bailout Club”

  1. Jay Dunham says:

    Don’t these financial institutions have to complete and submit some sort of detailed application to participate in the bailout? If so, what power does the treasury have to “hold them to it” and/or to deny them any funds if the facts/numbers stated in the application don’t warrant it? In other words, where’s the accountability?

    Query: Does the False Claims Act apply here?

  2. Phil Mattera says:

    I just put up a post about new revelations on how the application process is working. The forms that banks have to fill out when applying for the capital infusions do require some disclosures about their finances and operations, but Treasury is not applying very rigorous standards when it comes to things like requiring to banks to use the funds for the intended purpose: an expansion of lending.

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