Fallout from the financial meltdown and bailout

Lehman Brothers Holdings is suing JP Morgan Chase.

From the link:

Lehman claims JP Morgan “siphoned off” billions of dollars of assets in the days leading up to its bankruptcy.

JP Morgan was Lehman’s main short-term lender before its September 2008 collapse. It is accused of contributing to the failure by demanding $8.6bn of collateral as credit markets tightened.

JP Morgan has called the lawsuit “ill-conceived”.

Small business and no credit, an explanation

Here’s about as as good an explanation as I’ve come across why big finance still isn’t putting capital into the hands of small business owners.

Big hint: it has nothing to do with the financial condition of that small business. It also seems bank regulators aren’t on the same page as the bailout artists who are trying to get more dollars into Main Street businesses.

From the link:

The phenomenon may extend well beyond Chase and its borrowers. “I’m hearing it more and more,” says Stacey Sanchez, senior community loan officer with San Diego-based CDC Small Business Finance, a community development corporation, who says entrepreneurs often turn to her institution when their credit lines are pulled. Sanchez says the increased aggressiveness on the part of lenders may be due in part to banks now being in possession of 2008 tax returns for most of their clients, which show the full ugliness of the last quarter of 2008.

And suspending lines of credit is certainly an efficient way to reduce the risk on a bank’s balance sheet. According to officials at the Office of the Comptroller of the Currency, bank reserves for bad loans are based on the total exposure to a customer. So if a bank has a $100,000 line of credit with a small firm and only $20,000 is drawn down, the total exposure is still $100,000, and the bank usually will reserve for loan losses based on that amount. But if they convert the $20,000 outstanding to a term loan and cancel the line of credit, or if they simply cut the line to $20,000, the reserves would be based on that $20,000 figure.

Regulatory pressure likely plays a part as well. Bert Ely, an Alexandria (Va.)-based financial-services consultant, says he hears repeatedly from banks around the country that while the White House and Treasury talk about the need for lending to small business, local bank examiners continue to pressure them to upgrade the quality of their loan portfolios. “You have a disconnect between what policymakers are saying and what the rank-and-file bank examiners and supervisors are saying,” Ely says. That has painful repercussions for business owners around the country.

Banks still aren’t lending

Remember that big ‘ole bailout of the financial sector, that little exercise in corporate socialism, that was supposed to thaw the credit freeze and get money flowing freely once again? Like pretty much every move taken by an inept Fed, our tax dollars are sitting in the coffers of banks and not flowing anywhere.

We may be in uncharted waters economically, but the bailout ought to be a public outrage. Our money, really our future, was taken from us forcefully by an incompetent government agency and handed to banks which are now doing nothing more than hoarding the dollars.

Nice.

From the link:

Despite all the government’s best efforts in recent months, big banks still aren’t lending money freely. One sign of the crunch: New loans to large companies slumped 37% in the three months ending Nov. 30 from the preceding three months. “Banks are being extremely cautious,” says Edward Wedbush, chairman of the Los Angeles brokerage Wedbush Morgan Securities.

The industry is getting flak for hunkering down. After all, the Treasury has injected $187.5 billion into the nation’s largest banks, including Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM). The recipients of taxpayer money, say critics, should be required to open up their coffers. “The bad news [is] Treasury has no way to measure whether taxpayer funds are being used to increase lending,” Representative Barney Frank (D-Mass.), chairman of the House Financial Services Committee, said in December. “The much worse news [is that Treasury] does not even have the intention of doing so.”

Banking chiefs defend their position. They argue that the government funds are designed to shore up capital and support lending, but that they have no obligation to make new loans. “It’s not a one-to-one relationship,” says BofA CEO Kenneth D. Lewis. “We don’t write $15 billion in loans because we got $15 billion from the government.”

Right now there’s little financial incentive to make fresh loans. In the current unease, new corporate loans are immediately marked down to between 60¢ and 80¢ on the dollar, forcing banks to take a hit on the debt. It’s more lucrative, then, for them to buy old loans that are discounted already.

Federal regulators take over Washington Mutual

While still negotiating the financial crisis bailoutthe government seized the failing commercial bank, Washington Mutual. It is the largest bank failure in US history. JPMorgan Chase picked up most of the broken pieces.

From the link:

Washington Mutual, the giant lender that came to symbolize the excesses of the mortgage boom, was seized by federal regulators on Thursday night, in what is by far the largest bank failure in American history.

Regulators simultaneously brokered an emergency sale of virtually all of Washington Mutual, the nation’s largest savings and loan to JPMorgan Chase for $1.9 billion, averting another potentially huge taxpayer bill for the rescue of a failing institution.

Like I’ve repeatedly blogged, this issue is not going away anytime soon.