Wednesday, January 14, 2009

NY defines irony

The top two stories on the NY Times website this morning:

Banks in Need of Even More Bailout Money


In Michigan, Bank Lends Little of Its Bailout Funds

How can that be? How can banks be sitting on the bailout money AND still need more? Well, my guess is that the banks are scared of what is coming down the road. They see more and more commercial and corporate loans going bad and they fear that without another injection of capital they won't weather that storm.

"The bad bets made by executives at Independent Bank of Michigan are on display in spots across the state: a defunct bowling alley, a new but never occupied shopping center and the luxurious Whispering Woods Estates, which offers prime lots for never-constructed dream homes.

Now it is the federal government making the big bet here.

The Treasury Department has invested $72 million out of the $700 billion in federal bailout funds to help prop up this community bank, which traces its roots back 144 years in Michigan. It is a small chunk of the giant rescue fund being wagered by Washington to encourage banks like Independent to resume lending and jump-start the frozen economy.

But Independent, hard put to find good borrowers in a suffering economy, and fearful of making the kind of mistakes that got it into trouble in the first place, is not doing much lending these days. So far it is using all of the government’s money to shore up its own weak finances by repaying short-term loans from the Federal Reserve. “It is like if you are in an airplane and the oxygen mask comes down,” said Stefanie Kimball, the bank’s chief lending officer. “First thing you do is put your own mask on, stabilize yourself.”

I absolute love that analogy even if I think the bank's lending officer didn't realize what she was saying - if a plane is going down you put on the oxygen mask. Great, how much good does your mask do you if you hit the ground at 625mph? That's the question we have to ask ourselves - is the financial industry suffering from a cabin pressure issue or have they lost 3 of 4 engines?

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