Why the banks should be hoarding their TARP money, Part II

A couple weeks back, Justin liked Jack Guttentag’s explanation of why banks receiving TARP money shouldn’t be made to immediately lend it out. This morning I am equally impressed with Bert Ely’s opinion piece in the WSJ about why pressuring banks to lend could backfire. Among the points that bear repeating:

Lost in too many discussions of the financial sector is that banks and other depository institutions account for only 22% of the credit supplied to the U.S. economy (down from 40% in 1982). “Shadow banking” — notably asset securitization and money-market mutual funds — now supplies 33% (up from 14%). Insurance companies, other financial intermediaries, nonfinancial firms and the rest of the world provide the balance.

As far as commercial banks go, Federal Reserve data released last week show that their lending increased 2.36% during the last quarter of 2008. For all of 2008, commercial-bank lending rose by $386 billion, or 5.63%, even as the economy slid into recession.

Also this:

The drop in stock-market and house prices has made millions of families feel poorer and led them to save more than in recent years. It has also encouraged them (especially Baby Boomers approaching retirement) to pay off debt. They don’t need more debt.

More broadly, many of the most creditworthy neither need to nor want to borrow right now. Richard Davis, CEO of U.S. Bancorp, recently said that he is seeing the demand for loans diminish at his and other banks “from people and businesses spending less and traveling less and watching their nickels and dimes.”

Lenders moreover have tightened lending standards, correcting an excessive laxness that contributed to our financial mess… And contrary to the “lend more” message broadcast from inside the Washington Beltway, bank examiners are criticizing weak loans and forcing banks to tighten lending standards. Bankers are caught in a vise between politicians and examiners.

On principle alone, in a head-to-head between politicians and bank examiners, I’m going to hope the examiners win.

Barbara!

Stocks Rally Further in Run-up to EU Summit

MOSCOW — Global stocks enjoyed one of their best days in weeks on Tuesday ahead of a summit of European leaders that’s expected to be dominated by calls to boost economic growth.

Europe remains the focus of attention across all financial markets in the run-up to the June 17 Greek election that could go a long way to determining the country’s membership of the euro as well as the future of the single currency zone.

plukasiak

I guess the real question is not whether banks should be hoarding TARP money, but whether they should be getting it at all.
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There’s an interesting piece in today’s Times (http://www.nytimes.com/2009/02/02/business/economy/02value.html?_r=1&hp ) that notes that suggests that (temporarily?) relaxing “mark to market” rules, combined with preventing foreclosures, may be a far smarter way to “save” the banks than throwing money at them through the (highly problemmatic) proposal to buy troubled assets.

The financial institution that owns the bond calculates the value at 97 cents on the dollar, or a mere 3 percent loss. But S.& P. estimates it is worth 87 cents, based on the current loan-default rate, and could be worth 53 cents under a bleaker situation that contemplates a doubling of defaults. But even that might be optimistic, because the bond traded recently for just 38 cents on the dollar, reflecting the even gloomier outlook of investors.

The big problem for banks right now is that they appear insolvent on paper because of a lack of investor confidence in the assets the they hold. An agressive program that renegotiates/resets mortgages (including principle reduction) aimed at restoring confidence in mortgage backed securities would probably make banks look a lot more solvent.
bryanfromhouston

pluk,
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“that they APPEAR insolvent on paper…”
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Sir, I take issue with this statement. APPEAR? No, let’s just state the facts.
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The banks are insolvent. I rest my case on numbers and analysis by Satyajit Das and chronicled in this article.
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http://articles.moneycentral.msn.com/Investing/SuperModels/why-the-bank-bailouts-are-doomed.aspx
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Further, I am prepared to cite to 10 more articles that all arrive at the same conclusion.
donthelibertariandemocrat

“Should the Congress choose to undertake fiscal action, certain design principles may be helpful. To best achieve its goals, any fiscal package should be structured so that its peak effects on aggregate spending and economic activity are felt when they are most needed, namely, during the period in which economic activity would otherwise be expected to be weak.” Bernanke

http://www.federalreserve.gov/newsevents/testimony/bernanke20081020a.htm

So, a stimulus should occur in the downturn, not wait until it’s over. After TARP shifted gears, it was sold as a Credit Stimulus Plan. Even the tax changes were sold that way:

http://economix.blogs.nytimes.com/2008/10/04/will-paulsons-two-plans-unplug-the-liquidity-trap/

Some of us said this wouldn’t work because the plan is a hybrid. The interest’s of the government and banks aren’t the same. One answers to taxpayers, the other answers to shareholders. One wants the banks to loan money, the other wants them to hoard money. But it’s worse than that, because, with the money, taxpayers became shareholders as well. In other words, shell shocked and barely competent bankers were told to loan money as fast as they can, but make sure not to lose any more money. This had to be one of the more oddly designed plans in recent years. So odd, that the GAO couldn’t even figure out how to assess it, another problem some of us warned about.

After the credit stimulus went nowhere, others rationales were offered. However, especially after Iraq, many of us are tired of an endless cascade of shifting rationales.

For those of us who wanted a version of the Swedish Plan ( And that doesn’t mean following them to the letter, and even given our banks Swedish names ), this entire process is a nightmare. Even now, it looks like the ship keeps trying to head towards nationalization, only to be waylaid by another costly and messy detour. I guess since everybody is now too poor to qualify for a loan, we might at least be given an idea of what could change that situation, besides giving money to banks that won’t help us get there.
bryanfromhouston

DTL,
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I refer you to exhibit A.
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http://www.portfolio.com/views/columns/2009/01/30/5-Steps-to-Fix-the-Banks
donthelibertariandemocrat

Bryan, It was a good post. I didn’t agree, but I appreciate the link.

Take care,

Don
bryanfromhouston

Finally a comment for Barbara (missed you btw- although did see last article)
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Isn’t TARP really just a multi-stage plan for stealth nationalization?
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http://www.portfolio.com/views/blogs/market-movers/2009/01/19/why-nationalization-is-the-best-alternative
Barbara Kiviat

Hi, Bryan. It’s nice to be missed. But I didn’t go far—just busy writing about layoff survivors for Time.com and the future of securitization for the magazine. As for your question—I’m not sure I’d use the word “plan” in reference to TARP, but I see where you’re going and smile in response.