You have to wonder what the Treasury Department said to the chief executives of the nine largest banks in the United States when it called to tell them of the Monday afternoon meeting and before anybody knew of the remarkably desperate plan to inject $250 billion into the American banking system.
Here’s how the New York Times described the scene: “The executives trooped into a gilded conference room at the Treasury Department … To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry M. Paulson Jr. said they must sign it before they left.”
One person who was briefed on the meeting called it a “take it or take it offer.”
If they were astonished, it was surely by the blunt presentation of the strategy and not the strategy itself. Some analysts, like University of Minnesota Finance Department Chair Andrew Winton, saw cause for such a move weeks ago when the first bailout plan was floated and then rejected. “My thought was that we would need to take on some equity — partly just to share in the upside.”
But the upside is almost an abstraction at this point. Soon a more immediate factor began to fuel Winton’s anticipation of Monday’s big news — the Brits. On Sunday the British government announced its own massive cash intervention in its banks. Suddenly, says Winton, the United States had to act. “It became clear that if we didn’t make a similar move we may see money move to Britain — and that was apparently motivating other European countries as well.” In short, the U.S. government faced its own “take it or take it offer.”
Everything that rises …
The U.S. stock market responded emphatically to Monday’s news with one its biggest rallies ever. Then came Tuesday’s response: another dramatic drop. Again, Winton was not surprised: “When there are big moves sometimes there is overreaction,” he says.
Wednesday’s news was another thing altogether. Federal Reserve Chairman Ben Bernanke warned of still more economic peril even in the face of worldwide efforts to turn things around.
The day’s headlines bear that out: “Next Victim of Turmoil May Be Your Salary,” “Retail Sales Slump” and “Forget the silver bullet.”
“The bailout may stop things from getting really horrible,” Winton says, “but we are still in for a major downturn.”
“Even if banking system was completely sound there are still negatives in the economy: oil prices went up and the housing market went down. When the housing market goes down it hurts construction, which is a big chunk of our economy. The fact that we also had a banking crisis didn’t help. Even if banks recover some will not be as willing to lend as they were a year ago and that will hurt economic activity.”
That euphoria we tasted upon Monday’s gains? “Even if things stabilize to where they were Monday,” Winton says, “I think we’d be in for a downturn with what this other stuff has done.”
That notion has certainly taken hold, even if Americans are largely befuddled by the endless complexities of the crisis — especially the banking crisis. “Last week people became aware that, if nothing else, ‘This is hurting my 401(K)’ — and some people are starting to have trouble — it’s becoming harder to get a mortgage loan and credit card limits are being cut back,” Winton says. “It’s slowly trickling through.
“Even for some of my colleagues it was an eye-opener to see just how much our economy depends on banks,” Winton says. Mostly, Winton sees people being indignant. “It’s like: ‘The bankers screwed up so why should we be bailing them out?'”
“The only way for people to become perfectly aware is to let the crisis fester,” he adds. “We’ll never know what we’ve been saved from.”
In the New York Times account of Monday’s Treasury Department meeting, Wells Fargo chairman Richard Kovacevich is said to have resisted vigorously at first. He reportedly “objected that his bank, based in San Francisco, had avoided the mortgage-related woes of its Wall Street rivals. He said the investment could come at the expense of his shareholders. Mr. Kovacevich is also said to have expressed concern about restrictions on executive compensation at banks that receive capital injections.”
Winton’s best guess at Kovacevich’s worst fear, next to executive compensation issues, is that “there may be some concern that taking money sends bad signal to the market — especially if you don’t feel you need the money. There’s no shame in taking the money — despite that Kovacevich may have been thinking this makes them look a little weaker than they really are.”
Still, he says, while our two major local banks — Wells Fargo and US Bank — so far don’t seem to be hurt as much as others, “they’re still pulling back some.” And that stings in Minnesota, he says, where we’ve “been hit a little harder by the downturn than the average state. Our job market has deteriorated more rapidly. I imagine wage growth is going to stagnate.”
Temporary repeal of capitalism?
The government’s move to buy up hundreds of billions of dollars in U.S. bank shares has been called lots of things — most compellingly “nationalism” and its partner “socialism.” Winton sees an end to government intrusion into the banking system. His best guess has the government selling off its stakes inside of a few years.
The effects of the move on policy makers and taxpayers may outlive the action itself, however. Bankers fear a loss of control. These are nonvoting shares, Winton points out — but there is a “but”: “People may say, ‘We used tax money to bail you out and as a result we want more say in what you do.’ The reality is there will be more regulation coming.”
Jeff Severns Guntzel writes about the arts and other topics for MinnPost.