NY Times: Banks not using Bailout money to expand lending

Joe Nocera, a business reporter at the NY Times, recently listened in on a JP Morgan Chase conference call. During the call, according to Mr. Nocera, an executive of the firm mentioned that the $25 billion given to them in government's Bailout plan was not going to be used to revive lending and get credit flowing again. Instead, the executive said, the money will be used by Chase to fund strategic acquisitions.

Here are the interesting excerpts from Mr. Nocera's Times story:

“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?”

. . . .

The JPMorgan executive who was moderating the employee conference call didn’t hesitate to answer a question that was pretty politically sensitive given the events of the previous few weeks.

Given the way, that is, that Treasury Secretary Henry M. Paulson Jr. had decided to use the first installment of the $700 billion bailout money to recapitalize banks instead of buying up their toxic securities, which he had then sold to Congress and the American people as the best and fastest way to get the banks to start making loans again, and help prevent this recession from getting much, much worse.

In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“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.

This is a major story. We were told by Sec. Paulson that the bank-recapitalization plan was meant to and, more importantly, would revive credit flows. This report paints an entirely different reality. I am interested to see how this story plays out in the week ahead.