The Banks; the Contradiction

Have you been paying attention lately to the headlines? Yeah, you see all these things in the print and on the internet. But, have you put all these things into context and make them make sense? So, I ask again, have you really been paying attention.

The Government wants the Banking Industry to get more capital but to reduce their capital by forgiving (writing off) loans to GM and Chrysler. The Government is critical of the fees that the Banks charge to consumers. The Government wants the Banks to make more loans. Now, have you been paying attention?

Lets work through this a little.

First of all a couple of facts. Our banking industry is assessed by the government as needing more capital. Secondly, the banks thus need to make more money as one of the ways to generate more capital (earned capital). Banks do make money from loans (the Government says make more loans; quit hoarding money)via interest and fees and they make money from consumer fees like overdraft fees. The Banks also need to obtain capital from other providers such as stockholders, private investors, and others. Next, the Banks hold hundreds of billions in loans to GM and Chrysler.

So, with that as a backdrop what is the U. S. Government (let’s call it Gov) saying about the Banks? Are you ready for this? Can you deal with these contradictions?

Gov wants the Banks to have more capital. Gov wants the Banks to not charge so much for overdraft fees and thus earn less money. Gov wants the Banks to forgive some of their loans to GM and Chrysler since GM and Chrysler can’t pay back the loans. The Banks would get equity for their loans. When the Banks forgive debt and get equity, they have to write off the amount of the loans thus reducing their capital position. With respect making more loans, if the economy is in recession and borrowers aren't earning money and cannot pay loans back, then tell me again why the Banks should make more loans to more borrowers?

What? Huh? Gov says get more capital but reduce capital by forgiving loans! Gov says get more capital and earn more money but reduce overdraft and other consumer fees!
Gov says attract more capital from outside sources of money but how can this be done when the Banks are writing off loans and reducing their source of income via fees, thus reducing profitability? Gov says make more loans but be sure they are good ones.

What is going on here? Does this make any sense? Has Gov gone bonkers?

Yes, GM and Chrysler have too much debt and cannot pay it back. Yes, the Banks did loan it to them; no one made them. Yes, Banks do charge fees to consumers but people shouldn’t overdraw their accounts anyway. Yes, Banks do need more capital since they have paper losses on these loans and they might as well write them off and get something for them, such as equity in GM and Chrysler. Yes, the Banks did get money from Gov and were told to make loans; but only good ones.

So, the bottom line is that Gov is right. They are not crazy. However, they could make this a little more clear to people. They could explain their actions more clearly to the lay person who doesn’t have the knowledge of high finance.

Really this is low finance! When you have bad loans, you have to write them off. Then you need more capital to replace that which you just lost. It all makes perfect sense. The only things that don’t fit are Gov being critical of Bank fees and being critical of Banks not making enough loans; Banks are just doing what they need to do to make more money i.e. capital; charge fees and make loans to entities that can pay them back. That is capitalism at its best.

We are still a capitalistic society; aren’t we?