The Ultimate Bailout Failure: Banks Decrease Lending Under TARP

By
Monday, January 26, 2009 at 8:23 am

As the economy continues to sink, the Wall Street Journal today documents an increasingly obvious fact: Most of the big banks that got a total of $148 billion in taxpayer money didn’t use it to make loans. Instead, lending activity at 10 of the 13 banks that received funds under the Troubled Assets Relief Program actually declined by 1.4 percent in the last quarter, the Journal reports.

So much for money well spent. The story also points out, using an analysis of the banks’ financial reports, what most people have come to conclude about TARP: It doesn’t work. From the Journal:

“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.”

But there’s more. The government’s decision to hand over the TARP money with no conditions also added to the decreased lending, the Journal said:

The fact that loan portfolios are shrinking at many of the largest TARP recipients underscores how few strings Treasury Department officials attached to the infusions. That has made it hard to prevent banks from using the money to pay dividends, make acquisitions and fund bonuses for top executives.

President Obama has pledged to overhaul TARP. There’s a lot on the administration’s plate already, but fixing TARP is going to have to be a high priority. One lesson here is that handing money over to banks and trusting they’ll lend it out is misguided. The government acted like an irresponsible parent in failing to spell out its expectations for the money. Another is that the government also never really explained what it wanted TARP to do: Was it to ramp up lending, or to get the banks in healthier shape?

If we’re going to hand over more taxpayer money to banks, either through TARP or other kinds of lending — and it looks like we’re going to have to, given the banking industry’s poor financial shape —  we need to be clear about how the money should be used, why we’re doing it, and to provide the money in a process that is transparent enough to allow policymakers to correct problems along the way.

A basic guideline would be to take the current TARP blueprint, throw it out, and start over. Do everything the opposite of the way it’s been done so far. Anything less means more of the obvious: another failure and billions of dollars misspent.

Comments

5 Comments

New Meme: Bill Zucker - I Want Some Tarp :: Zero Strategist.com
Pingback posted January 26, 2009 @ 12:28 pm

[...] went to the banks.  The fact that these banks are either sitting on the money (lending actually decreased under TARP) or using it to buy up other distressed banks (basically furthering mergers) is a total breach [...]


VirginiaJoe
Comment posted January 26, 2009 @ 3:18 pm

The saddest part of this is that the banks know full well the intent of this program. Has the greed on Wall Street become so perverted that these people can pocket the hard earned money from taxpayers, after they have made $100's millions in compensation from making high risk decisions that in the short-term were profitable, but in the long-term have seriously damaged the industry, the US and world economy and destroyed millions of people's lives, some permanently, without giving it a second thought??? The Wall Street high rollers should be investigated, and sent to jail if they are 10% a guilty is I believe them to be.


jgogek
Comment posted January 26, 2009 @ 11:53 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


jgogek
Comment posted January 27, 2009 @ 7:53 am

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


New Meme: Bill Zucker – I Want Some Tarp
Pingback posted January 3, 2011 @ 5:15 am

[...] that went to the banks. The fact that these banks are either sitting on the money (lending actually decreased under TARP) or using it to buy up other distressed banks (basically furthering mergers) is a total breach [...]


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