Much Chagrined? Me Too

Wed, 15 Oct 2008 12:54:11 +0000

This article by Binyamin Appelbaum in today's Washington Post captures my sentiment about the latest developments in the financial industry bailout plan. Turning over the microphone to some prudent bankers:

Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was "much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government."

At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. "We don't need a bailout, and if other banks had run their banks like we ran our bank, they wouldn't have needed a bailout, either," Adams said.

The opposition suggested that the government may have to continue to press banks to participate in the plan. The first $125 billion will be divided among nine of the largest U.S. banks, which were forced to accept the investment to help destigmatize the program in the eyes of other institutions.

As I have said before, the federal government has a tendency to intervene on behalf of the profligate at the expense of the prudent. Injecting capital via preferred stock is like taking on debt with the lowest possible seniority. Why does the Treasury need to do this, when the Fed is already available to provide short-term liquidity to otherwise solvent banks? That this is not as bad as overpaying for toxic assets directly does not mean that it is a good idea. That the government is forcing itself on banks in this way is also not a good sign. A little bit of stigma attached to stupidity might just save us from part of the next financial sector meltdown.