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Treasury Secretary Hank Paulson will probably never live down his statement to Congress that, "If you have a bazooka in your pocket, and people know you have a bazooka, you may never have to take it out."
Arnold Schwarzenegger tried this, too, when he said, "To those critics who are so pessimistic about our economy, I say: Don't be economic girlie-men."
Too bad neither of the comments seemed to work.
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. Here are a handful of bazooka backfires the good banks will have to deal with:
- Dwindling opportunities for distressed purchases. One good thing about a financial melee is the opportunity for healthy banks to swoop in on floundering banks at bargain prices. Remember JPMorgan Chase's (NYSE: JPM ) original offer for Bear Stearns, which amounted to less than what the Yankees paid for Alex Rodriguez? Odds are, JPMorgan will make a fortune off of that deal. Once the government starts artificially propping up banks, the prospect of bargain purchases that'll pay off down the road goes down the tubes.
- Competition won't diminish. Banks that were on the verge of going bust -- like Washington Mutual (NYSE: WM ) -- will remain competition for healthy mortgage lenders, which would have had the market to themselves if the forces of a free market had been allowed to run free.
- Increased regulation. I'm only guessing here, but the odds that bank regulation will be turned on its head in the coming years seem pretty good. Who knows what that could mean: increased capital requirements, a clamping down on certain types of lending products, and maybe even forced breakups. For banks that know and have known how to manage their risk appropriately, that's a terrible thought.
- Increased interest rates. Again, I'm only guessing, but the odds that pumping $700 billion into the financial system won't cause a tsunami of inflation seem pretty slim. What happens when inflation goes up? Interest rates go up ... ergo, bank margins get pinched, home affordability goes down, and it becomes more difficult for homeowners to refinance.
- People lose faith in the financial system. One of the most shocking developments of last week was that Goldman Sachs (NYSE: GS ) and Morgan Stanley (NYSE: MS ) -- banks that by most accounts sidestepped the financial crisis -- faced the possibility of collapse. Should it be any wonder that the last remaining independent Wall Street banks had to switch to bank holding companies over the weekend? The mother of all bailouts sent a false signal to the financial world: "We're all up to our necks in trouble. Every single one of us needs help. The entire system is ruined." Unfortunately, that isn't true, and now the banks that were smart enough not to leverage to the moon with subprime CDOs have to pay for it.
Yes, I happen to be one of the few who think the bailout will end up being a net positive. Regardless, what a shame that nearly every bank that kept its act together over the years has to pay the price of those that were overrun by greed and speculation.
Free markets? What a joke.