That really should not be a surprise. When you see your assets or income shrink, you conserve money and do not lend it to risky people or businesses. That applies to
banks, businesses and individuals. Especially true if you have debts that need paying off.

Odd point: just got a book with some history of the 1920s post-inflation in Germany, and it has an ad in it that urges people to spend, buy and help accelerate the flow of money. Those were tough times there too, with high unemployment.

The banks getting the TARP money are using it to buy up the assets of failing banks for pennies on the dollar and get bigger. The TARP and TARP Reform bills were just as treasonous as the Patriot Act.

http://ewebsmith.com/gov/tarpreform.html

The more relevant question to ask is whether or not credit worthy borrowers who represent good risks in the current economy are getting loans that they ought to receive. I’d expect that the lending standards have rightly been tightened from the bubble days and that the balance sheets of many borrowers have deteriorated making them less credit worthy. But if deserving borrowers aren’t getting loans, some sort of action should be taken to fix that.
 
These banks are also getting money from the government because they are in trouble with bad assets, which in turn requires them to increase their capital reserves to meet regulatory requirements. That they are buying other banks goes to the notion that too big to fail means the socialization of their bad investments, so the bigger the better for them. It’s time to consider nationalizing the banks given that the main asset of the shareholders, if one actually prices the bank’s assets on their books to market, is the notion that they are too big too fail.

This is not surprising, and also may not be a bad thing. Banks know that with the economy stumbling and more and more businesses going under and people losing their jobs, defaults on mortgages and unpaid auto loans and credit cards increase. Delinquencies rise for all types of consumer credit. With fewer people buying, business lending gets riskier. In such an environment, banks loan less, not more. They hoard cash for an even rainier day.

A better idea is to help consumers pay the debt they already have through mortgage restructuring or mitigation and economic stimulus through job creation. If you lose your job, the best way to keep paying your mortgage, car note and credit card bills is to get another job. At the same time, government can twist lending institutions and investors to renegotiate consumer debt, like threatening them with cram-downs, which already seems to have worked. Use TARP to help banks stay solvent, while economic stimulus creates jobs so people can pay their bills, then debt restructuring makes those bills easier to pay. That will loosen up credit – slowly, but in a sustainable way. Anyway, do we really want to increase consumer and business debt right now?

In return for bailing out banks, let’s get the biggest equity stake possible. I’m not afraid of the N-word: nationalization. We don’t nationalize like Venezuela does; whatever chunk of the banks that taxpayers buy will be sold back to private investors later on. The key to whether Obama’s bailout of banks is a success is whether the federal government recoups its losses, or turns a profit, a few years from now. If it does, it will all be worth it.
http://tinyurl.com/ObamaTARP

Debt restructuring is dealing with the bad assets of banks. For many banks if those assets were “cram-downed” into good assets, that is affordable debt, the banks would be insolvent. If the assets are worth less than the obligations and capital reserves of banks, then what equity are the taxpayers buying for their investment in the banks? The CBO did an analysis of the government “investments” on the first round of TARP spending and concluded it represented some $80 billion in net present cost of the future value it assumed. Of course guessing what future value is going to be isn’t easy. And that TARP spending isn’t working as the unresolved question of toxic assets hangs over the banks and much of the rest of the economy. That why some are proposing that the government buy those toxic assets to take them off the books of banks. But unless you overpay for the current market value of them, banks would be insolvent.

The article linked to in your link was not about negotiating cram down with banks, it was about Citigroup’s reversal on the issue of Congress abrogating the law that underlies the existing mortgage contracts to allow cram down in bankruptcy courts of mortgages in general. As the article states, the other banks oppose it. I suspect the reason for Citigroup’s 180 was that it is one of the banks that are actually insolvent and they see the value of their enterprise as dependent on Congress picking the pocket of taxpayers by buying their toxic assets for more than they are worth. So they are making nice with the people who they think will do that for them; Dodd, Durbin and Schumer.
I just did a search and in fact Bloomberg reported this about Citigroup existing preferred shares: 

“Citigroup’s $1.4 billion of 6.95 percent preferred shares lost 34 percent in January, the worst performing securities in the Merrill Lynch preferred and hybrid index.”

The article goes on to say that a tiny amount of this type of investments have been sold relative to normal and to fairly recent predictions.

“Only $694 million of preferred securities were sold in the U.S. since September”

” Insurance companies, hedge funds and other investors bought more than $73 billion of hybrids in 2008, taking advantage of yields that were generous for issuers they considered too big to fail.”

In other words there is no private option to raise capital that would keep them from going under. The article also quotes Dr. Doom who has unfortunately been more prescient that most.

” U.S. financial losses may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” New York University Professor Nouriel Roubini.”

So if the government nationalizes banks whose value, other than potential gifts of taxpayer money, is non-existent, it isn’t really confiscating assets of value. And doing so would change the calculus of investors regarding the moral hazard of too big to fail. That still leaves the question of how the government would manage the portfolio it would take over. Are they going to hold them off the market or undertake a process to discover their value? And I suspect the Democrats would want the nationalized banks to make gifts of taxpayer money at a different level.

Re jskdn: So, cram-downs would not only apply to mortgage originators but also to investors. Being only a layman, I’m not sure that’s doable. But that’s the only way they would work. Banks cannot get caught in the middle between cram-downs by government and their own obligations. Obviously, somebody’s gotta take it on the chin. But the alternative is allowing the spiral of foreclosures and real estate devaluation to continue. I can’t see a way out, can you?