16 January 2009
Jose D. Roncal
I remember the good old days when banks used to lend money to "we the people." Now we’re being forced to lend money to them. Not so long ago, banks were eager to get anybody and everybody into their dream home. "No job? No problem. Just sign here." We all know how that turned out—tons of toxic debt that brought down the banks and gradually, the entire economy.
When the Feds stepped in with their $700 billion Troubled Asset Relief Program, they gave most of the first installment of $350 billion to the banks. Since it came out of our pockets, it came with instructions to start lending it back to us. The banks got the money, but apparently they didn’t get the memo because they’re still hoarding our money.
Throwing more money at the problem obviously wasn’t the solution, so other tactics were tested. The regulators changed the rules so that banks can borrow at the lowest rate possible, the Fed Discount Window Rate, but that didn’t change things.
The FDIC might help with plans to expand its Temporary Liquidity Guarantee Program and start backing debt with a maturity of up to 10 years, versus the previous 3-year maturity. This could get funds flowing again for student loans, credit cards and other products not mortgage-related.
Now there’s a bolder plan being proposed to unfreeze lending—set up a government-backed "aggregator" bank,the so-called "bad bank," to acquire hundreds of billions of dollars of these bad debts, get them off lender’s balance sheets and hopefully get lending back into motion. At this point, nobody knows how, or if, that’s going to work.
Meanwhile the banking news goes from bad to worse. Citigroup, with as much as $150 billion in toxic assets, posted an $8.29 billion Q4 loss. Now the financial world watches as the mighty Citi ponders how to break itself into separate entities.
In other news, Bank of America announced a $1.79 billion loss, the first since 1991, and a cut to dividends. Naturally, according to the "make-it-up-as-we-go-along-rules," that means we’ll be giving BofA between $15 billion and $20 billion of additional capital.
Getting things back on track is going to require a major balancing act. On one hand the banks have to be sufficiently capitalized in order to start lending, but they also have to be prudent about their lending practices going forward. On the other hand, banks will be under pressure from the government and taxpayers to start lending aggressively, but without returning to their former footloose and reckless ways.
In my opinion, since the government has deemed these banks too big to let fail under any circumstances, they are on the brink of becoming fully nationalized. How will the break up of Citi, and the additional infusion of capital into BofA affect other banks? Will this cause them to become even tighter with their cash so they can avoid becoming the next failed bank?
As a former CFO, I can assure you that these guys are playing with the numbers and releasing the facts piecemeal. If the full extent of loan losses were exposed on their Profit and Loss statements, it would be over for them. This is misleading and outright immoral, and both CEO and CFO of BOA should get tossed out along with the board of directors. Taxpayers should not be paying for their mistakes and dishonesty.
Smaller banks do not have the luxury of bailouts. Today, we had our first bank failure of the year. National Bank of Commerce in Illinois was just closed by regulators. The FDIC will take a $97.1 million hit on this one. This is just the tip of the banking bailout iceberg, so stay tuned.
On January 15, the Senate voted in favor of releasing the last $350 billion of the TARP. But there’s still close to $60 billion earmarked for the banks before dipping into the second chunk. There are already thousands of applications sitting on the desks of regulators and more pouring in from banks in every state in the country. Hundreds more have been reviewed and pre-approved.
But questions still remain. Why, if the banks have the lowest possible borrowing rates available to them, are we not seeing drastic reductions in mortgage rates? And the most pressing questions of all, exactly what has happened to all the funds previously doled out to banks and why aren’t they lending it?
Now we are being told that the Treasury department that manages the TARP program is finally developing tools to measure bank lending. Better late than never, I suppose. The tools are supposed to measure whether or not the banks that received bail-out funds are making an effort to increase lending. Then the Feds will compare the level of lending done by those banks with similar banks that didn’t receive government money.
Sounds like a long drawn-out affair to me and probably won’t do much to shake the recipient banks into action. The most we can look forward to in the short-term is a chance to review the economic plans from the next administration, and hope that it offers enough hope to restore some confidence.