Journalism in the Public Interest

Savings and No Loan: TARP Recipients Lending Less

Stan Honda/AFP/Getty ImagesBad news for anyone who still thinks the purpose of the Troubled Asset Relief Program was to encourage banks’ lending: 10 of the 13 large banks that have received funds so far actually saw their outstanding loan balances go down for the fourth quarter of 2008.

The Wall Street Journal, which crunched the numbers, reports that while banks have collected a total of $200 billion in TARP funds, their outstanding loan balances decreased by about $46 billion, or 1.4 percent.

Only three banks—U.S. Bancorp, SunTrust Banks Inc. and BB&T—reported increases.

(Here’s our running list of banks that have received bailout money.)

Companies appear to be feeling the chilling effect of a credit crunch, the Journal reports. A majority of 569 companies recently surveyed said they have been constrained by a lack of credit.

Instead of lending out the money, banks—under pressure from shareholders and, apparently, some federal regulators—have been using it to shore up their balance sheets.

And they are completely within their rights to do so because of a virtual complete lack of restrictions placed on banks as to how they can use the taxpayer dollars they receive.

The Obama administration did not appear amused. White House officials told the Journal they plan an overhaul of the program.

But banks defended their actions.

Some pointed out that a lack of capital on hand is what led to problems in the first place and called their decision to horde TARP funds fiscally responsible.

Others pointed to the difficulty of finding good lending opportunities in an era when many businesses are troubled and overall demand for loans is down.

As BB&T Chief Executive Kelly King said eloquently during a recent conference call, “We’re not going to make a bunch of bad loans.”

We now owe this year’s entire GDP to a private bank and foreign countries. Instead of borrowing more to give to these large banks so that they can buy the good assets from failed banks for pennies on the dollar, the good loans that the failed banks are holding should be forgiven. This will put cash into a cash poor and failing economy without borrowing more.

The money supply has been increased by 70% since October. We are not seeing inflation as a result because the money is being held onto by these large banks. When the economy improves and these banks dump the money on it, the dollar will rapidly drop 50% in value.

The Obama administration wants banks to use some TARP money to increase consumer and business loans. Or so they say. There’s talk of stricter controls and oversight for TARP II. But exactly how the Obama administration will force banks to start lending more money to consumers and businesses isn’t clear. Does the Obama administration really want to do it?

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.

As the loan assets on their balance sheets continue to deteriorate the banks need the money to maintain reserve requirements. I suspect that in reality many banks are actually insolvent, especially if their assets were marked to market as the market currently exists. Furthermore the incredible amount of intersecting financial obligations and dependencies makes assessing the value of or work outs of troubled assets difficult.

I wonder how difficult it would be to bring new banking institutions on line to make sure that the credit worthy can be assured access. As the industry shrinks aren’t there talented people with banking skills available to make use of world capital? Certainly good underwriting is necessary in this perilous time but the effort to lend when existing banks won’t with the expectation of future loyalty from those borrowers could be seen as a way of creating new institutions that will be valuable. How about taxpayers providing some type of insurance for such loans as long as they are done well. It seems to me that making sure the real economy isn’t pulled down by lack of credit in a self-reinforcing feedback loop between the financial sector and the real economy is itself a way to save or lessen the cost of existing bank rescues.

Or for that matter why not form a new nationalized bank, also bringing in capital from around the world, run by private sector expertise who would receive deferred compensation in the form of ownership shares based on the banks performance when the crisis ends and the bank is privatized. If they run it well and help keep the real economy working and don’t cost the taxpayers money they will be well rewarded down the line.

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