"The United States government has socialized the American financial system," writes veteran bank analyst Richard X. Bove, of Florida-based Landenburg Thalmann & Co. "Large commercial banks are the winners under the new regime," and "will now take market share from all other institutions," as "the instruments of the new bureaucracy to control the system."
"There is no assurance that this plan will cause banks to lend," writes Joseph Harenza, chief executive of Griffin Financial Group LLC, King of Prussia, an adviser to mid-market banks, in a note to clients. "Will banks lend the capital to Main Street and industry, or will they hoard it? I'll bet the big guys will use it to fund acqusitions. They'll get bigger, and badder, in the fight for loans and deposits."
Also, Harenza told me, by charging banks just 5 percent yearly for money over the next five years, the government has undercut investors private equity investors like Warren Buffett -- who recently charged Goldman Sachs 10 percent for a capital investment, with other, less favorable terms.
"Part of the U.S. banking industry is basically being nationalized," writes Mark Fitzgibbon, director of research at Sandler O'Neill + Partners LP, a Wall Street investment bank specializing in bank stocks. The government investment in banks is "the best news yet for the financial system," but there's also danger:
That "our banks could now be directed to lend toward political and social ends...with the government effectively picking winners and losers";
That "the plan could reinforce negative behavior, (since) debt got us here, and it looks like more debt is the plan to get us out..."
And that the government "seems to penalize those institutions" that stayed out of trouble by bailing out those who were more reckless.
Jamie Dimon, chief executive of JPMorgan, Chase & Co., took on a string of tough questions in a morning conference call with investors.
Analyst Michael Mayo from Deutsche Bank asked Dimon if JPMorgan "would be willing to use that $25 billion for new acquisitions."
Yes, said Dimon: "I would be willing to use it for anything that made sense for JPMorgan shareholders." He also said, "The government would like us to use the capital to facilitate clients, to make loans and stuff like that, and we want to do that, too...
No, the government's not going to solve all problems. "We have to be prepared that it gets a lot worse..."
Yes, credit is going to get tighter. Instead of 100 percent loan-to-value financing for homeowners, "people have gone back to old-fashioned 80 percent," which means 20 percent down. And, since "they expect home (values to) decrease, we're not at 80 percent in California, Nevada, or Florida. 65 percent is the max." That's right: To buy a $100,000 worth of house in those states, you'll need $35,000 down.
The government, Dimon said, is trying to prevent "investors, banks...indivdiuals, small businesses, large businesses, all starting to take actions that are rational for them as an individual, but in total can...pull credit out" of the system "That is the one thing that has got people most scared."
"If you're not fearful, you're crazy," Dimon told analyst Meredith Whitney of Oppenheimer & Co., in one exchange.
"I'm fearful," said Whitney, who later in the day issued a report predicting foreclosures will double from their present level to about 1 U.S. home in every 22.
"We know you are," said Dimon. We're waiting for you to reverse your position."
He added, "Making policy on the run is a very hard thing to do, and it always has these huge unintended consequences..."
Will the government's $250 billion investment actually boost lending? It will, if Treasury Secretary Henry Paulson's scolding has anything to do with it.
"Jawboning is one of the key tools (if not the only one) that the Treasury Departmetn has to ensure that the massive injection funds actually goes to new credit creation," writes Louise Purtle of CreditSights Inc.
"What we have witnessed in the past few months is the end of an era -- not of free-market capitalism, as many would have us believe, but of excessive and inexpensive (credit).
"The quasi-nationalized financial system that is now in place will gradually give way to the dominance of global banking by a smaller number of institutions that operate under a much stricter regulatory regime, one that makes the kind of credit creation that drove much of the world's growth (since the 1980s) impossible."