Bad Luck for Good Banks

Fri, 26 Sep 2008 21:21:19 +0000

I think Morgan Housel makes an important point, reminiscent of my "profligate vs. prudent" theme:

Let's focus on Paulson's bazooka: the mother of all bailout packages. Details are still absent, but that plan will likely purchase bad assets from banks, which should unclog the plug in the debt market and allow lending to resume, at least in theory.

There are all sorts of negative consequences to the proposed deal, including forcing taxpayers to hold the bag, sending inflation through the stratosphere, and running out of ink at the Treasury's printing presses. Those are problems that affect you, the taxpayer, but what about other innocent victims of this mess: the few banks that aren't in trouble?

Seriously, do those even exist?
Yes, believe it or not, there are a handful of banks that are actually doing just fine: Wells Fargo (NYSE: WFC), BB&T (NYSE: BBT), and US Bancorp (NYSE: USB), just to name a few. BB&T -- wonder of all wonders -- approached a 52-week high last week.

What does the bailout mean for them? Nothing good, to be honest.

He then gives a list of opportunities that a bailout takes away from banks that behaved prudently during the formation and collapse of the housing bubble. I would add two points:

  1. There are plenty of other banks -- many of them the community-minded ones you pass everyday -- that are also in good shape.
  2. The ridiculously low interest rates we have now force deposit rates close to zero. They cannot go any lower. That directly reduces the spread on which even prudent banks rely to make money.

Prudent banks lost market share on the way up and are being immiserized on the way down. Tough break.

Read the whole thing.