FOR MOST OF LAST WEEK, BEFORE CONGRESS signaled it would release the second $350 billion in financial relief money without a steep political ransom, most every microphone in Washington served as an invitation to some Representative from Gerrymandera to bluster and posture. Before new "TARP" money flowed, he or she would insist, banks would need to detail precisely how the earlier batch of funds had been used for the public benefit.
This might sound like a stringent and onerous demand. But such an explanation, for the largest TARP beneficiaries, could be summed up in a two-sentence letter to the House Financial Services Committee: "Dear Mr. Chairman: Our bank used the TARP funds to continue its existence. Oh, and capital is money, and money is fungible, so therefore every loan we've made and every credit line we've rolled over since the fall has in part been a use of TARP funds."Finally someone else notes the painfully obvious point regarding the inherent impossibility of tracking specific use of TARP funds, as I posted much less succintly last week.
TARP plugged large holes in the banks' capital bases. The credit mess, as noted here repeatedly, is not a crisis of confidence, but a crisis of capital, complicated by a collapse in collateral values. Honest observers can argue about whether TARP made sense or not, or whether the firms it kept afloat would be better off sunk. But the "They're not lending the taxpayers' money freely enough" mantra is misguided.It's obvious that a bank isn't going to say that they are desperate for additional capital unless under utmost pressure. The rumor that Jamie Diamon was furious about having to take TARP money strikes me as absurd. Although it makes total sense to SAY that you don't need it, want it, and are furious that they made you take it.
Banks and thrifts have continued to lend plenty. Robert Albertson, chief strategist at boutique investment bank Sandler O'Neill + Partners, detailed in a recent report that banks have persisted in increasing loan volumes.I haven't heard a lot of credible claims that solid credit risks can't get loans on good terms. In fact, I am hearing the opposite. That stronger credits are having money pushed at them at favorable rates. Banks certainly have the liquidity to lend. My local branch "tightened standards" and stopped doing HELOCs on second homes for example. But they have said that they have been getting lots of deposits as people have moved money from MM funds to local banks. That people with FICO's in the 600's are having trouble getting new car loans may be a problem, but I'm not really sure if people with less then strong credit scores SHOULD be buying new cars on credit. But that's just a personal prejudice.
"Bank lending historically and appropriately contracts during a recession," Albertson writes. "The odd and untold truth is that bank loans have actually been expanding in this one."
While politicians and cable-news shouters whine about "timid banks" sitting on taxpayer cash, they neglect the larger reality that scarce credit has much more to do with the near-disappearance of the non-bank, securitization-enabled "shadow banking" market. This accounts for a couple of trillion dollars in reduced lending capacity, and it won't return soon. The de-leveraging process is ongoing, and is irrevocable -- even by one-party control of Washington riding an impressive President-elect's ascension.And once again, the money quote. The meta picture is that there is forced deleveraging of the hedge funds, etc. Assets have to be sold, and to prevent a meltdown, when someone reduces leverage, someone else needs to lever up. In this case, it is the Treasury and to some extent, the legacy banking system. They can't replace it one for one, but to the extent they are buying or lending on assets at realistic or even bargain prices, they should do fine. As long as we avoid a total meltdown. But more importantly, facilitating a more orderly unwind of leverage is the only alternative to rapid and potentially catastrophic financial panic.
I would love to have the luxury of letting C or BAC just fail and see what happens, IF it would be possible to have a "do over" without cost. The problem with a panic is that reasonably strong firms get dragged down with the less solvent. An orderly process with adequate liquidity for those that need it and can demonstrate solvency and sufficient time for reasonably strong firms to straighten up their balance sheets is sensible. Anyone that thinks that a panic is a great idea to cleanse the system, ala Andrew Mellon, is simply being reckless or talking their book.