Implode-o-Meter News - So When Will Banks Give Loans?

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 whoâ€™s been indiscreet enough to say it within earshot of a journalist.

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It is starting to appear as if one of Treasuryâ€™s key rationales for the recapitalization program â€” namely, that it will cause banks to start lending again â€” is a fig leaf, Treasuryâ€™s version of the weapons of mass destruction.

In fact, Treasury wants banks to acquire each other and is using its power to inject capital to force a new and wrenching round of bank consolidation. As Mark Landler reported in The New York Times earlier this week, â€œthe government wants not only to stabilize the industry, but also to reshape it.â€ Now they tell us.

Indeed, Mr. Landlerâ€™s story noted that Treasury would even funnel some of the bailout money to help banks buy other banks. And, in an almost unnoticed move, it recently put in place a new tax break, worth billions to the banking industry, that has only one purpose: to encourage bank mergers. As a tax expert, Robert Willens, put it: â€œIt couldnâ€™t be clearer if they had taken out an ad.â€

Ugly stuff...

Unlike the British government, which is mandating lending requirements in return for capital injections, our government seems afraid to do anything except plead. And those pleas, in this environment, are falling on deaf ears.

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Yes, there are times when a troubled bank needs to be acquired by a stronger bank. Given that the federal government insures deposits, it has an abiding interest in seeing that such mergers take place as smoothly as possible. Nobody is saying those kinds of deals shouldnâ€™t take place.

But Citigroup, at this point, probably falls into the category of troubled bank, and nobody seems to be arguing that it should be taken over. It is in the â€œtoo big to failâ€ category, and the government will ensure that it gets back on its feet, no matter how much money it takes. One reason Mr. Paulson forced all of the nine biggest banks to take government money was to mask thefact that some of them are much weaker than others.

Indeed. Why would banks want to lend to American consumers -- a totally exhausted market? After all, they had just been burned by mortgage defaults, now spreading to other areas of consumer loans. Why redouble those efforts? It all makes that much more sense when you note that the only figure available to force this sort of lending is Hank Paulson, who would never ask such sacrifice of Wall Street's fortress banks.

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So When Will Banks Give Loans?