Nine large U.S. banks are preparing to receive $125 billion from the Treasury Department as part of the government's plan to recapitalize the banking sector and reignite lending.

Treasury Secretary Henry Paulson has urged the banks to use the capital to start lending again, but the government's equity stakes come with no power to influence how they actually spend it. For weeks, the Feds have tried one measure after another to spur lending, to no avail.

Skeptics wondered if this plan would yield any different results. One by one, the banking executives are addressing this question publicly. So far, it doesn't look good for Paulson, or the frozen credit market. They'll take the money, alright, but they evidently see a more urgent need to improve their balance sheet than to start lending again.

Here's an exchange on an earnings call with Bank of New York Mellon chief executive Robert Kelly:

Brian Foran, Goldman Sachs:

As we think about this capital injection you're getting from the government, is that capital that you view as capital to be deployed or is that just capital you view to be sat on in terms of bolstering the current capital ratios?

Robert Kelly, Bank of New York:

I think the latter. This is an environment where we have a lot of uncertainty and it's really good to have some revenue growth. It's been good expense control in this environment to help our earnings, and obviously we're not going to be raising dividends because of this new injection. This will just be something that, in essence, strengthens our balance sheet and I don't intend to be using it.

And here's Merrill Lynch chief executive John Thain, who won't have much control over his funds once the merger with Bank of America is approved:

The capital injection is a cushion and in this environment I think you will see us continue to shrink our assets and continue to improve and de-risk our balance sheet. That capital cushion will provide an opportunity. It will be really after the merger closes. I think you really have to think about it more from the point of view of the combined companies, which of course will have $25 billion of this capital injected into it. I think we will have the ability to re-deploy that on a combined basis going forward, but at least for the next quarter, it's just going to be a cushion.

On CNBC today, Morgan Stanley's John Mack didn't offer a lot more hope:

David Faber: Are you going to put it out into the system or are you going to happily sit on it and bring your leverage ratios down?

John Mack: Well, clearly we're going to bring our leverage ratios down a little more. As far as sitting on it, I think what we need is confidence in the system. For these banks to be capitalized that well, they're not going to go out and play big casino with that money.

In other words, banks won't lend until there's confidence in the system, and Hank Paulson is trying to inject confidence in the system by investing this money in them. It's enough to make your head hurt.

However, one executive has indicated the money will spur lending at his organization. Golden boy Jamie Dimon over at J.P. Morgan is once again looking like the teacher's pet:

John McDonald, Sanford C. Bernstein:

On the government's plan with the preferred, do you expect them to be restrictive on how banks deploy the capital or pretty much free reign for the banks to use their discretion subject to—?

Jamie Dimon, J.P. Morgan Chase:

It's a non-voting preferred, so we don't expect the government to get involved in our business. But it's clear that 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, so I think we have a common interest in this.

 

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