For years, I heard from my friends in the banking industry that the government was requiring them to make bad loans. They could stand it, on account of Freddie and Fannie taking the risk off their hands and transferring it to the taxpayers, at least as far as mortgages were concerned, although the bad loans didn’t end there. We all know how that turned out.
Dodd-Frank, legislation that was passed ostensibly to prevent future financial collapses, in fact institutionalized bailouts and bad banking practices. I missed this Wall St. Journal editorial when it came out a week ago, but it’s not too late:
Citigroup CEO Michael Corbat announced last week that Citi is going deep in green technology. Citi “will lend, invest and facilitate $100 billion over 10 years for projects ranging from energy, to clean tech, to water, to green infrastructure. Simply put, it is a $100 billion investment in sustainable growth.” That all this reflects the No. 1 domestic priority of the Obama Administration is no doubt a coincidence.
Banking is increasingly intertwined with government. We are steadily approaching the national socialist ideal in which all industries, while nominally private, are subordinate to government.
Apologies for the skepticism, but banks have entered a new age. It may or may not be the age of environmental economic opportunity. It is unquestionably the age of Dodd-Frank and its creature, the Financial Stability Oversight Council. Banks understand that their first client today is in Washington.
In my own law practice, I have seen this over and over. Everything else is a footnote: what matters to American companies, large and small, is government regulation and the endless threats that emanate from Washington.
Citigroup says it has already met a 2007 objective of raising $50 billion for “climate friendly projects.” With Mr. Corbat’s announcement it will add $100 billion by looking for “opportunities to finance greenhouse gas (GHG) reductions and resource efficiency in other sectors, such as sustainable transportation.”
We don’t doubt there will be such projects worthy of financing when the planets of market economics align. But green projects not subsidized by taxpayers have been at a price disadvantage for years, and their competitiveness isn’t likely to improve as the price of oil and natural gas declines.
Shaping a lending policy around a green agenda while the politics and science of climate change remain controversial and the technology of fossil-fuel extraction is advancing rapidly seems like a recipe for raising risk.
Of course: just like the sub-prime mortgage fiasco. Lending to “green” energy projects that are economically uncompetitive is pretty much exactly like making sub-prime mortgage loans. It is stupid on any traditional analysis, but makes sense if you think the federal government stands behind you, so that you get any possible profit, and the taxpayers eat the loss. That is the situation we have here. The WSJ concludes:
[O]ne of the unspoken political goals of Dodd-Frank was to give the government more influence over credit allocation, and this looks to us like an example. Politicized lending in time always leads to trouble. We thought that lesson had been learned in the housing-mortgage crisis.
What lesson, though, was learned by the people who matter? The sub-prime mortgage crisis worked out great for the government. Create a problem, then pretend to solve it by grabbing more power: what’s not to like? Liberals will be perfectly happy to do it all over again.