The current Presidential administration has used the bailout of the banks as an economic recovery strategy citing that these institutions are too big to be allowed to fail. It is widely believed that the banks and other lenders engaged in risky loans by lending money to clients who did not have any means of paying them back. As a result of the defaulting of such loans, the banks have adopted a new strategy to ensure their survival.  The reason why the banks aren’t lending now, according to an article on Forbes.com, is:

“The economy is weak and so is the asset quality on the books of our financial institutions. 30-40% of JP Morgan¹s current earnings are based upon loan loss reserve adjustments (reducing them).  Banking regulators are doing their jobs and requiring financial institutions to bolster reserves to protect taxpayers and the FDIC insurance deposits. World banking regulators are discussing increasing capital requirements at banks which would further require an increase in capital but more likely a reduction in growth or amount of total assets on financial institutions balance sheets.” (Forbes.com)

With this in mind, many experts project that in response to a judgment in favor of the Government, the banks would tighten their loan requirements even more in an attempt to protect their assets and deposits.

Reasoning/Fallacy:  The reasoning used here looks like an Argument from Sign. The arguers are suggesting that in the event the Government is successful in suing these institutions, the institutions presumably will adopt protective strategies that include a reduction in loans as a means of securing their assets. This reasoning seems to be sound because in the event that the banks have to pay out billions of dollars in settlements as a result of the lawsuits, they will effectively have their capital reduced. Such a reduction of capital will hinder the banks’ ability to lend money.