bingo
pushing on a string as all banks cut credit lines
world wide
U.S. banks put bailout money where it's safe: The vault
By Gretchen Morgenson
Sunday, November 23, 2008
So goes the old saw about bankers: They loan you an umbrella when the sun is shining, only to ask for it back when it rains.
But with the U.S. economy and markets in a world of hurt, the nation's banks were supposed to stow their self-interest and help start lending again.
When the Troubled Asset Relief Program of the U.S. Treasury Department handed over $125 billion in taxpayer money to nine banks a month ago, they were supposed to lend to small businesses, home buyers and other worthy borrowers to keep the economy's gears in motion.
At the time, the Federal Reserve Board and three bank regulatory agencies said: "The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers and other creditworthy borrowers."
Alas, that admonition wasn't accompanied by any real requirements to lend. When the U.S. Treasury gave taxpayer billions to the banks, it attached no strings. So is it any surprise that lending is tight?
Reports from institutional and individual borrowers across the United States indicate this. Nervous lenders are demanding that even healthy loans be paid back. Banks and other financial institutions, meanwhile, are reducing exposures to borrowers and doing whatever they can to discourage the assumption of further debt.
Borrowers I have heard from don't want to get into trouble with their lenders by speaking publicly about their experiences. As a result, they will remain nameless. But their stories are all the same.
The problem is, unless the U.S. government puts serious pressure on banks to start lending, the value of assets used as collateral will fall as individuals and institutions everywhere are forced to sell.
"Every bit of leverage is being pulled," said Robert Smith, chairman of Smith Affiliated Capital, an investment management firm. "The brokerage firms are pulling in their lines and so are the banks. At the same time, there is nobody putting one cent of capital into positions. The name of the game, the stated goal of TARP, was to make loans. Regulators are inside these firms. Why is this not happening?"
A commercial real estate borrower in Texas who owns properties financed by GE Capital said his lender was tightening the screws - despite the fact that all of his loans were current and his properties robust.
He said GE Capital had told him that when his loan came due, there would be no negotiation; it must be paid off in full or foreclosure proceedings would begin.
But while GE Capital is among the banks playing tough with some borrowers, it is tapping funds through the Federal Reserve Bank of New York, which makes it easier for the company to finance its operations at low cost.
A General Electric spokesman said that because of the current downturn the company needed to give extra scrutiny to certain loans but that it was on track to lend $50 billion this quarter, down from $80 billion in the same quarter last year.
"We are being extra careful to avoid any potential future losses," said Russell Wilkerson, the GE spokesman. "But fundamentally we have continued to do a lot of lending." And, he added, the company has not received any money from TARP.
Last week, Bank of America announced that it would spend $7 billion to increase its stake in China Construction Bank - just weeks after receiving $15 billion from taxpayers.
Why, when the nation needs access to loans in the worst way, did Bank of America choose to deploy $7 billion overseas?
Robert Stickler, a Bank of America spokesman, said that no TARP money had been used to increase its Chinese bank stake and that the bank had planned the investment and set aside money for it months earlier.
"A lot of banks have cut back their lending, but at Bank of America we are making every good loan we can make," he said. "There is a recession out there, and that does reduce the opportunity to make good loans."
Indeed, with so many swooning assets on their books, it is easy to see why banks are inclined to hoard capital.
And the Treasury's decision not to buy toxic mortgage assets with TARP money after it said it would do so has produced paper losses for the banks that hold these securities. The value of those securities rose when TARP was announced but fell significantly when the mortgage purchase program was abandoned.
"It was a waste of money to put $25 billion into Citibank when within days the value of its underlying mortgages fell because TARP decided against buying distressed mortgages," said Jonathon Trugman, founder of Pendulum Capital Management, a hedge fund. "The uncertainty that Treasury has introduced with TARP has cost investors far more in declining stock and bond prices than the $700 billion that the program received from Congress."
Individuals are also encountering headwinds when they tap into overdraft lines of credit tied to checking accounts, for example. On Nov. 7, Citibank joined a host of banks charging a $10 "overdraft protection transfer fee" on such lines of credit each time the bank has to transfer money into a customer's checking account.
Liz Fogarty, a Citigroup spokeswoman, said the bank had changed its policy "to be consistent across our overdraft protection services and align with industry practice. It in no way changes how customers can use their lines of credit."
There is an ugly precedent for banks refusing to renew loans during a time of crisis, said Frederick Rowe, a money manager at Greenbrier Partners in Dallas. That is what Texas institutions did during the savings and loan crisis in the late 1980s, and the consequences were disastrous.
As the overheated real estate market cooled back then, Texas banks hurried to shore up their capital by forcing repayment on good loans, because their borrowers were the only ones who could do so. This put additional pressure on the very assets that backed the loans, and a deflationary spiral began. Many banks in Texas failed because everybody tried to foreclose at the same time.
"The banks that have taken the taxpayers' money ought to be part of the solution, but they are acting like war profiteers," Rowe said. "If I were in charge, I would haul them all down to Gitmo, put them in a room and say, 'You have used the taxpayers' money to pervert our objectives. It is morally wrong, and we are not going to stand for it."' |
