Bank Lending, You Can Lead A Horse To Water…

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Paulson’s plan to put $250 billion into nine banks, whether they want the money or not, is really supposed to do as much for financial firm customers as it is for the companies themselves. The theory behind the credit crisis is that no one would loan anyone else a dime for a cup of coffee. To make matters worse, Citigroup (C) would not loan money to Bank of America (BAC), even overnight.

Treasury’s plan may work in part. It could allow big banks to weather more write-offs as they have to mark down more securities, especially those tied to mortgages.

But, the banks are not going to lend their customers anything, no matter how many times Paulson goes on national television and asks them to. Financial houses want that cash as dry powder and there is not much more to be said.

According to Bloomberg, "Treasury officials acknowledge they can’t force banks to get the taxpayer money into the hands of their customers." The capital was supposed to meander back to corporations which employ taxpayers so they could borrow for operations and expansion. Perhaps more important, consumers were supposed to get loans for cars and improve mortgage terms.

The theory was nice but flawed at its core and at its beginning. Once Congress and the administration forgot to put provisions into the Paulson legislation to force bank lending, the cause of moving capital downstream from the banking system was lost.

The ancillary conclusion which can be drawn from the fact that banks are not likely to loosen credit is that financial firms expect more monumental losses. It has occurred to them that the housing market is still getting worse and much of their fortunes are tied to that.

Banks won’t lend out money because they know they are as poor as they were when Paulson sent them their big checks.

Douglas A. McIntyre