The Bank Bailout Money

http://www.nytimes.com/2008/10/25/business/25nocera.html?em
"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."

As long as loans (whether they be intra-bank loans or consumer loans) remain a risky investment... available cash will be spent elsewhere. That's just reality when it comes to investments.

But whether banks spend this bail-out money immediately on loans or on acquisitions... either way, the bad (and arguably fraudulent) securities will be off the table (and that's the point of the bail-out). If the banks hold real (and better yet, undervalued) assets- then they're less likely to fail. And the possibility of bank failure (including loan defaults) are the primary reason why banks won't loan. So I don't think this is necessarily a bad thing in the grand scheme.

IMO, this article tells us little about whether or not the 'bail-out' will work.