by Frank James
Evidence is mounting that the federal government has been pushing on a string when it comes to trying to free up lending by throwing money at the nation's largest banks. The Wall Street Journal reports that bank lending is actually heading south, exactly the opposite of what policymakers thought would happen when they approved $700 billion in federal infusions into the financial sector.
An excerpt from the WSJ:
Ten of the 13 big beneficiaries of the Treasury Department's Troubled Asset Relief Program, or TARP, saw their outstanding loan balances decline by a total of about $46 billion, or 1.4%, between the third and fourth quarters of 2008, according to a Wall Street Journal analysis of banks that recently announced their quarterly results.
Those 13 banks have collected the lion's share of the roughly $200 billion the government has doled out since TARP was launched last October to stabilize financial institutions. Banks reporting declines in outstanding loans range from giants Bank of America Corp. and Citigroup Inc., each of which got $45 billion from the government; to smaller, regional institutions. Just three of the banks reported growth in their loan portfolios: U.S. Bancorp, SunTrust Banks Inc. and BB&T Corp.
The loan figures analyzed by the Journal exclude some big TARP recipients that haven't reported fourth-quarter results yet, such as Wells Fargo & Co.
The overall decline in loans on the 13 banks' books -- from about $3.36 trillion as of Sept. 30 to $3.31 trillion at year's end -- raises fresh questions about TARP's effectiveness at coaxing banks to reopen their lending spigots.
"It has failed," said Campbell Harvey, a finance professor at Duke University's business school. "Basically we have dropped a huge amount of money ... and we have nothing to show for what we actually wanted to happen."
The WSJ story doesn't mention the government action that dare not speak its name: nationalization. Federal policymakers have indicated they don't have the stomach for such radical action though there are experts who believe that may be the only way to change the lending posture at banks.
Investors were heartened by comments House Speaker Nancy Pelosi made on the ABC News program "This Week" Sunday when she said she wouldn's support such an action.
Here's her exchange with interviewer George Stephanopoulos:
MR. STEPHANOPOULOS: And many analysts have looked at it and said the only way to really deal with it, these banks are so close to insolvency, dealing with so many toxic assets, that the only way to deal with it fairly without giving a big boon to shareholders, is to have nationalization or partial nationalization of the banks. Good idea?
SPEAKER PELOSI: Well, whatever you want to call it. There has to be -- if we are going to put money into the banks, we certainly want equity for the American people. In other words, if we are strengthening them, then the American people should get some of the upside of that strengthening. Some people call that nationalization. I'm not talking about total ownership, but we're just saying.
Now, how big that investment becomes is -- would we have ever thought we would see the day when we'd be using that terminology? Nationalization of the banks. You see the impact it has on the stock market. Just terrible in terms of the bank stocks going down. Because if you're a shareholder and you see what would be a dilution of your investment because now the federal government -- if we're putting -- if the taxpayer is putting money up, the taxpayer should have equity.
MR. STEPHANOPOULOS: So it might be necessary?
SPEAKER PELOSI: Well, not by the terminology that you use, but some increased investment. Change has to happen in terms of what is done, what the transparency of it is, what the accountability of it is. Only then would be able to pass any additional funding.
But what if the federal government injects more cash and lending still doesn't increase? What does it do then?
According to some experts, the nationalization drumbeat is only getting louder:
An excerpt from UPI:
"The case for full nationalization is far stronger now than it was a few months ago," said Adam Posen, the deputy director of the Peterson Institute for International Economics
"If you don't own the majority, you don't get to fire the management, to wipe out the shareholders, to declare that you are just going to take the losses and start over," he said.
Comments
Nationalize the banks !! Begin Senate hearings, on who did what and if guilty, put them in jail. Good, old American justice, if it still exists !!
SUPPORT OUR TROOPS, BRING THEM HOME, ALIVE AND WHOLE. NOW.
Posted by: Don Fitzgerald, Chicago | January 26, 2009 3:08 PM
More BS propaganda from the Murdoch Street Journal and Frank James.
When I see a lead story in today's Wall Street Journal deceptively proclaiming that lending is off 1.4% at 10 of the top 13 recipients of the government's TARP funds, I simply cannot believe that the WSJ would actually attempt to put forth this totally bogus claim and then place it on page one of their rag.
But, they did just that....
Consumer lending's not off 1.4% from the previous quarter. Today's Wall Street Journal story's a complete sham! On average, I'd say it's somewhere around half of what it was a year ago.
It's time to put some guarantees in our government funds when it comes to insuring liquidity in the marketplace, dammit! It's at the heart of the effort needed to pump life back into our economy.
Banks are "gaming" the numbers, they're cutting back credit card lines (to credit worthy people) all over the place; approving customers for less than they're requesting to conclude a purchase; and, otherwise, just shutting down entire operations in given sectors (instances noted by me, above).
Lending is waaaay off from previous quarters, bigtime! These are NEW loans/credit lines that I'm talking about here.
Posted by: Zappo | January 26, 2009 3:20 PM
On the issue of nationalization ... The American taxpayer has dropped $45 billion plus over $100b in back stops for *each* of Citi and Bank of America. The value of the equity (market capitalization) of Citi is only $17b and Bank of America, $27b. Hence, we have put way more in than they are worth. Yet, we have very little loan creation - which was the idea in the first place. I agree that no one wants to nationalize. I believe that there is an intermediate step. The government "asks" for the Board of Directors to resign. I put ask in quotations because if they refuse, the firm could reasonably be expected to be nationalized. Given the massive investment of hard earned taxpayer money, we need these firms to do what is best for the financial system. That is not how they have been operating.
If you are interested in more of my writings, see my blog at
http://dukeresearchadvantage.com/author/charvey/
Posted by: Campbell Harvey | January 26, 2009 3:44 PM
I love the blinkered only-2-options view of Frank James. "If the bailout fails, nationalize the banks!"
If the bailout hasn't succeeded, maybe that's because government bailouts never work. Maybe that's because government is the problem, not the solution. Maybe the policymakers like Nancy Pelosi, Barack Obama and George Bush who were wrong 6 months ago are the last people to steer us to what's right today.
Posted by: "Dissent is Patriotic" | January 26, 2009 4:16 PM
* * * * *
Posted by: Campbell Harvey | January 26, 2009 3:44 PM
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I watched your videos. I think you should get the job of running the FRB.
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Having said so, I think there is something at work here that you my not have completely considered. In particular, I think you might want to consider the possibility that all these high flying banks are still facing trillions of dollars in potential losses from bad loans. The worst is not over. There are, in fact, trillions of dollars worth of outstanding mortgages that are at risk of going underwater and defaulting. Banks took the TARP money, but are shaking in their boots about letting go of it because of the perceived need to have assets to cover further disastrous losses. That’s probably one of the major reasons they’re not lending.
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The same possibility is something that should make us all pause long and think hard before proceeding with nationalizing any of these banks. If we nationalize the banks we could well get stuck with their debts as well as their assets. If we can’t write them off or discharge them, those debts could turn nationalized banks into the financial black holes that bring the government and the economy to the brink. Even if we did discharge the debts, we still might see a lot of toxic paper go even more toxic because more of the pooled obligations are likely to go bad.
.
I think caution ought to be the rule, and big plans the exception.
Posted by: John W. | January 26, 2009 4:47 PM
Maybe that's because government is the problem, not the solution. Maybe the policymakers like Nancy Pelosi, Barack Obama and George Bush who were wrong 6 months ago are the last people to steer us to what's right today.
Posted by: "Dissent is Patriotic" | January 26, 2009 4:16 PM
When you put people in charge of government (like the Bushie Republicans) who hate government, govenment will always fail.
It was the free market rules our world/deregulation Repuglican clowns who got us into this mess in the first place.
Mission Accomplished!
Posted by: allardice | January 26, 2009 4:52 PM
Cambell, welcome to the dissfunctional family! Loved your site, and I actually agree with John W., that you should be somewhere in Washington. You do have some impressive thoughts on things, which appears to be very central and non-partisan based.
Zappo, while Frank does need a good slapping from time to time, he deserves an appology from you for this one. The numbers are right, and you are reading them wrong. They exactly show the financial bomb that you claim they do not. If the banks have gotten 300B from the governement and turned arounds and loaned that to the people, then they would have at least a +$300B increase in their loan portfolio, but what the WSJ story says is that the portfolio has a -$46B drop, which means a difference of $346B in loans!! Yeah, that's a chunk of money right now that surely could be used to jumpstart this frozen mess.
For my .02 on the matter, yes, I think it is time to nationalize the banks. Hell, the FRB is a form of that already, and certainly is supposed to be "controlling the levers" anyways, so that is drastic form of nationalization already in place. For all those that think the government is bad with our money, they are not paying their top dogs millions of dollars like the banks are.
Posted by: Xcellentform | January 26, 2009 6:13 PM
What happens when countries who own our debt stop buying this new debt to pay for bad debt and start asking to be repaid? Does anyone in Congress and the WH believe this policy is sound? This bailout business is spooky economics.
Posted by: Bubba Porter | January 26, 2009 7:24 PM
The data are difficult to deal with. I agree the 1.4% is potentially misleading. For example, the Commercial Paper market disappeared. Firms that were in that market had to hit the banks for short term loans. These firms are large and the banks wanted to accommodate them. They gave them loans at the expense of small and medium sized firms. So a better comparison is to strip out the loans that replace the Commercial Paper. That would then show a big move down. Also, I am not sure these loans include Lines of Credit. Basically, firms maxed their lines of credit even if they didn't need the money because they didn't know if the bank would be around - or if their line would be cancelled.
Posted by: Campbell Harvey | January 26, 2009 7:24 PM
Cambell....where do you figure the bailout money has gone so far? My guess is to pay down their derivative debts, but I'm sure you have much better information than my hunches. I would also love to hear your thoughts on the role derivatives have played in this mess.
Posted by: Xcellentform | January 26, 2009 9:04 PM
It failed because of too little government regulation. Nothing in the original bail out mandated the money to go back into stimulating the market through loans. Thrifty capitalists like PNC Financial Services used the money to take over weaker banks for pennies on the dollar.
And millions of stockholders have been royally screwed in the process.
Government is not the problem. Poorly run government by unregulated capitalist pigs is the problem.
Posted by: Former NCC stockholder | January 26, 2009 10:34 PM
Hard for me to respond in real time - given I have two blogs of my own. I agree with John W. This is not a billion situation, it is a trillion situation and it makes me want to puke. We have to give AIG $150b to cover them because they took a reckless 400+B unhedged bet. That's $1,000 for every working (or want to be working) American. I definitely know the situation is dire. In addition, the government is not helping - they are making it more expensive for us.
Posted by: Campbell Harvey | January 26, 2009 10:48 PM
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.
http://tinyurl.com/ObamaTARP
Posted by: jgogek | January 27, 2009 1:50 AM
BY ANY OTHER NAME, THIS IS DISRESPECT AND ABUSE, OF TAXPAYERS AND SHAREHOLDERS
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http://pacificgatepost.blogspot.com/2009/01/disrespecting-taxpayers-shareholders.html
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The White House and Congress continue with misguided policies, and sloppy distribution of taxpayer money.
Posted by: James Raider | January 29, 2009 2:14 AM