Wednesday, October 15, 2008

Do you know why "capitalism" didn't fail...?

Two words: Wells Fargo

The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. Monday. To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Henry Paulson said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head. The chairman of Wells Fargo, Richard Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages and did not need a bailout, people briefed on the meeting said.

That was the setting late yesterday afternoon at the Treasury Department where, like a scene from a gangster flick, SecTres, Henry Paulson made the CEOs of the nine largest banking institutions an offer they couldn’t refuse by “offering” to buy stock in the banks.

And did you get that? Wells Fargo didn’t even need or want the bailout but wound up capitulating in the end under the pressure of Paulson and the other 8 banks.

At the wave of his hand, Paulson commits the government to another $2.25 trillion in the form of capital infusion, insuring senior debt issued by the banks and insuring deposits in non-interest bearing accounts. Of course, this is triple the size of the original $700 billion bailout package upon which there was actually a vote.

Originally, the buzz surrounding this latest bailout was that it was going to be voluntary – banks that did not wish to participate would not have to. Uh, yeah. Obviously, there was no way in hell, Kovacevich was going to get out of that meeting alive without signing on. You just can’t have a solvent institution like Wells Fargo thumbing their nose at the government and the other Big Boys and still maintain the fa├žade of an all-emcompassing financial crisis. Fall in line, boys…

A couple of weeks back, we were talking to our banker…. from Wells Fargo. We asked her about this whole mess and she told us that during the housing boom she got frustrated when she saw competing banks snatch up a lot of the mortgage lending business and yes, she was aware that Wells never offered the greatest rates of return on a lot of their banking and investment plans but that fiscal responsibility was always one of the institutions top priorities.

We don’t want to do any cheerleading but here is a perfect case of a financial institution operating in the free market, providing a service to its customers in the form of investment opportunities and capital for home and small business loans all the while turning a profit for its shareholders. All of that was accomplished in a responsible and sober manner and as a result, they are on solid footing.

Not that that matters anymore...

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