Why Big Finance Is Laughing All the Way to the Bank
Continued from previous page
The mergers are large-scale -- the Financial Times calls them a "wave of consolidation as banks scramble to use the cash on takeovers and bolt-on acquisitions." BusinessWeek reports "what could emerge is a barbell-shaped system with megabanks, small banks and little in between." The business reporters for the New York Times describe the Treasury Department as "using the bailout bill to turn the banking system into the oligopoly of giant national institutions." An oligopoly is a market, such as banking, dominated by a few very large companies.
If any doubt remained, it was put to rest by the minor scandal that has emerged over a quiet change to the tax code made by the Treasury Department. This change allows banks to apply the losses of other banks they buy against their own taxes. In other words, when a bank buys a struggling smaller bank, the buyer can deduct the money lost by the struggling bank against its own tax bill. This is clearly meant to further encourage merger activity -- for example, when Wells Fargo bought Wachovia, it paid $15 billion. But Wachovia's losses total over $19 billion. Meaning, Wells Fargo was paid by the government for buying a highly valuable bank, for a profit of $4 billion, at our expense.
By way of comparison, the SCHIP program granting health insurance to children in low-income families cost about $5 billion in 2007.
In fairness to the Treasury Department, Secretary Henry Paulson has been urging banks to use our public money to lend more. But tax breaks speak louder than words. It also might be pointed out that in Britain, banks are being recapitalized in a similar way as here, but the U.K. requires banks to formally agree to make loans with the public money. The American situation was described by David Walker, former U.S. comptroller: "It is the government's responsibility to set the terms and conditions on this money…They're giving it out with no rules."
This tax change may be undone if Congress confronts the Treasury, since the legislative branch is supposed to be in charge of the tax code. But the intention of the Treasury Department to encourage mergers at the top of the banking world is very clear.
In fact, the government is going to great lengths to avoid doing what little the Brits have done. Rather than require our banks to make loans with the bailout money, our central bank, the Federal Reserve, "has already started a campaign to lend directly to damaged financial markets and companies -- nearly anyone with collateral … officials have effectively concluded that if banks and financial markets won't extend credit, it will do part of the job for them." This is according to the Wall Street Journal, which also reports that Paulson "acknowledged that banks aren't lending enough money despite the government infusion, but said the U.S. didn't want to nationalize the industry and dictate the loans banks make." Our government will do anything, even supply the economy with credit itself, before it will tell our huge banks what to do.
So to summarize, after creating a national economic crisis by wildly overinvesting in securities representing bad loans, the banks are being paid, by us, to become even larger. In spite of their being too big to fail in the first place, and even if that means the government has to do the banks' job for them. Of course, with 1 in 10 mortgages in delinquency and job losses mounting, it's easy to come up with some better uses of our tax money. But it would take a whole lot of us putting down the snack chips, turning off "When Celebrities Attack" and organizing ourselves to put pressure on the government and change the economic system. The "megabanks" of our "oligopoly of giant national institutions" aren't going to overthrow themselves.