The big idea behind the bank bailout was that the economy would recover when banks got back to lending, as we were told early in this administration by Larry Summers. How is that coming along? Second quarter financial reports of Citigroup (page 3), Bank of America (page 9) and JP Morgan Chase (page 2) tell the tale.

Here are the figures for corporate and consumer loans.

Lender/ Type Fourth Quarter 2008 First Quarter 2009 Second Quarter 2009
Citi Consumer loans 519,673 469,456 459,625
Citi Corporate Loans 174,543 202,259 196,316
BAC Consumer loans 588,679 623,049 602,857
BAC Corporate Loans 319,696 371,072 363,248
JPM Consumer loans 482,854 465,959 448,976
JPM Wholesale Loans 262,044 242,284 231,625

Note: Fourth quarter figures for Citi (page 53) and BAC are from the 10-Ks; BAC Fourth Quarter is calculated by subtracting consumer loans on page 56 from total loans on page 20.)

No good news there. Loans are falling at all three, with a small upward rise in the first quarter. This puts these big banks in line with most banks nationwide. After the first quarter, Bloomberg reported that “Bank loans fell to a record low in the first quarter as the Obama administration steps up efforts to jump start debt markets and revive corporate lending.” The great desire of banks to conserve cash led to gradual increases in rates for good borrowers just to preserve their lines of credit. So much for that rationale for the bailout.

The bailout hasn’t saved either BAC or Citi yet. The NYT reports that trading securities and sales of assets produced large parts of the gains at both companies. These banks are heavy in consumer lending, and as unemployment rises, consumers defaults will increase, and the banks will face bigger losses in the future. The question is whether they have set aside enough money to cover the anticipated losses, and whether they can sell off assets and make money trading against the vampire squid that is Goldman Sachs fast enough to offset the coming losses.

This calls into question the decision of the Obama administration to muddle through this crisis instead of closing these banks or forcing drastic changes in their structures. As Paul Krugman explains in the NYT:

Finally, given the possibility of bigger losses in the future, the government’s evident unwillingness either to own banks or let them fail creates a heads-they-win-tails-we-lose situation. If all goes well, the bankers will win big. If the current strategy fails, taxpayers will be forced to pay for another bailout.

The muddle-through strategy encourages unreasonable risk-taking, and all the giant banks are playing that game, with Goldman Sachs taking the ugly lead. In the meantime, as Gretchen Morgenson says, they have launched their lobbyists at Congress to stop any serious regulation, specifically anything that might impair their ability to keep playing the games that wrecked the economy, like credit default swaps.

Even the conservadem Colin Peterson, whose agriculture constituents want well-regulated markets, isn’t able to get a decent bill:

“The banks run the place,” Mr. Peterson said. “I will tell you what the problem is — they give three times more money than the next biggest group. It’s huge the amount of money they put into politics.”

The plain fact is that financial elites dominate the discussion. There is no one arguing for serious regulation, at least no one with the ability to stand up to the combination of true-believer republicans and easily frightened democrats. Chris Hayes tells us in The Nation:

On one side you have the entire networked overclass of twenty-first-century financial capitalism; on the other… the Center for Responsible Lending. That’s only a touch hyperbolic. The CRL does great work, and there are others–the Consumer Federation of America, Public Citizen–who have been toiling alongside it. But this doesn’t even rise to the level of being an unfair fight. It’s not a fight at all. "Dude, there’s just no comparison," one Democratic staffer on the House Financial Services Committee told me. "Just completely outgunned."

Right now, everyone is focused, rightly, on the health care debate. When that is over, attention will turn to financial regulation. I hope our side is ready.



I read a lot of books.