"What did the banks do with the money from Treasury?"

I must have heard that question a thousand times today from CONgrASS people, journalists, and ordinary people. What economic galaxy are they from?

 

Banks use capital (money) to make loans and investments in order to make more money to pay expenses and have enough left over to grow. If they run out of capital they can't borrow or lend, and they are history. Lehman was the famous example in 2008. What's unclear about that?

 

Many banks were running out of capital this year for all the reasons we now know, so no one wanted to lend them new money or continue to re-lend them old money. Suppliers didn't even want to sell anything to them to run their business with. They might not have got paid.

 

Some overseas investors did lend some new money, and Mr Buffet lent some, but few others did. So for many of the banks, and some of the non-banks, the Treasury bought preferred stocks from them which increased their capital so that they could continue to function. Presumably the Treasury thought they were decent enough banks who actually could make some dollars doing what they do and would keep the doors open, and that they, the Treasury, would probably get their money back too and with a profit. Capitalism as it were.

 

When corporations (banks in this case) sell stock the new money they take in goes for "general corporate purposes", which in the case of banks is for "banking"  in their best judgment. This is not "project financing" money as in pork barrel congressional financing.  If you don't know what general business the banks are in you don't invest in them. If you invest in them, as the Treasury did, you don't know or need to know all the tiny details of where your every dollar went: that you get from quarterly corporate reports and the success or failure of the bank. If you want itsy-bitsy details you'd better buy the whole damned company as the Treasury did with Fannie Mae and Freddie Mac. Then you put in your own management to sit in the front office and every other office and watch their every move, presumably also to make a profit and stay in business. You don't buy the bank's business with $20 billion or more in preferred stock each. You give them a breather from looming creditor shutdown and hopefully others will also be encouraged to invest in the bank since you did.

 

I certainly believe in the limitless capacity of human beings to be completely stupid. I watch the TV news every day and read newspapers and internut sites. But I must think a lot of this junk reporting and posing about "what are they doing with the money?" is just politics and not the incredible idiocy it appears to be.