President Obama met with a dozen small banks yesterday, urging them to keep lending.
He did not have to tell that to this group — about 6500 mostly AAA rated, regional and community banks — who have been happily lending away. Its how they earn their money.
The larger banks, on the other hand, are the ones who have cut back lending dramatically. This is especially true of the 10 biggest banks.
Why?
Its the rational thing to do.
These banks STILL have to much debt, too little capital. They books are festooned with bad loans, which, thanks to our corrupt Congress, they no longer have to disclose appropriately. Thanks to Mark-to-Make-Believe, they can pretend these assets are worth near what they paid for them. In reality, they cannot sell them even at 50% off.
Lending money is a risky business; there is the possibility of loss. Under-capitalized banks cannot take that chance. By not lending, their capital base goes up. IT is the rational thing to do from their perspective.
Rather than engage in traditional money lending, these banks have decided to simply borrow from the Fed at 0%, and make risk free loans to the Treasury at 3%.
And, these banks are not lending because the way the Fed/Treasury bailouts were structured, they are encouraged NOT TO LEND.
Why? They need to rebuild their capital levels after 30 years of declining safeguards and capital ratios.
This is yet another unintended consequence of bailing out reckless bankers from their own folly. Their place in the economy has become so distorted as to become nearly economically meaningless . . .
Why isn’t Obama asking GS to lend instead? Isn’t GS a bank after all? Oh wait GS needs that $$$ to pay the bonuses and to give to campaign contributions
Not to worry, Geithner says no chance of a further downturn because that is not “acceptable.” And, we know that what’s not acceptable never happens in a world run by Ivy Leaguers.
“We are not going to have a second wave of financial crisis,” Geithner said in an interview with National Public Radio. “We cannot afford to let the country live again with a risk that we are going to have another series of events like we had last year. That is not something that is acceptable.”
Robes: Didn’t you hear that GS is devoting a half billion dollars to lend to small businesses to show that even vampire squids have hearts. Mighty generous of them, although this, too, will be a money-making operation.
But why don’t the banks take the necessary write-down or ask the owners for more money. I know the textbook answer, but right now this could only lead to a recommendation upgrade and stocks running wild since there is nothing more out there holding the stock down. A profit warning these days is instantly rewarded, but in the wrong way.
If the issue is that it destroys current owner value, it will take place at a level where value is distorted anyway.
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BR: Cause they don’t have to . . .
only way to save em next year in the coming foreclosure spike in option arms, it’s all planned out, what else can they do, if they didn’t prop up real estate every state would be bankrupt because all revenues and planning were based on ever increasing taxes, down here the local city is off 15% in total, they were totally off on price and time, and this is a city where prices have not collopsed in real estate, just permits, fee’s, and sales taxes, my sis in law is a big wig and next year is lay-offs and cut backs, it was kind of hilarious in a way, she was lamenting about this and that, and we were all like, uhhhhmmm, coroprate america did all those things twenty years ago
The no-business meetings
Extracts from “The Great Crash: 1929″, John Kenneth Galbraith, First Published 1955, Page 158 to 160
“Yet to suppose that President Hoover was engaged only in organizing further reassurance is to do him a serious injustice. He was also conducting one of the oldest, most important – and, unhappily, one of the least understood – rites in American life. This is the rite of the meeting which is called not to do business but to do no business. It is a rite which is still much practised in our time. It is worth examining for a moment.
[TEXT DELETED]
In recent times the no-business meeting at the White House – attended by governors, industrialists, representatives of business, labour, and agriculture – has become an estrablished institution of government. Some device for simulating action when action is impossible, is indispensible in a sound and functioning democracy. Mr Hoover in 1929 was a pioneer in this field of public administration.”
Don’t blame the larger banks from not being able to lend; if they did that they’d be “in” business instead of “out” of business – it’s much more profitable that way.
Too bad much of the new legislation that is about to be put in place is going to stop the banks from lending anyway.
"We cannot afford to let the country live again with a risk that we are going to have another series of events like we had last year. That is not something that is acceptable."
m in nola-
I guess this means backstops are explicitly guaranteed- but really- how long can that go on?
Of course, suspension of Mark to market rules that would force them to realize losses on their books might have something to do with them sitting on their hands to preserve capital ratios and playing pretend and extend too.
I’m surprised the treasury hasn’t set up some kind of program to let banks unload their “assets”. After all, if you’re going to bail them out, not regulate and lend them money at 0%, you might as well go the whole nine yards and buy their debt. Why half-ass it? We all know it’s never gonna change anyway.
[...] Aren’t Banks Lending? They’re Being Rational (The Big Picture) Under-capitalized banks are actually encouraged not to lend by Fed and [...]
"We are not going to have a second wave of financial crisis," Geithner said in an interview with National Public Radio.
Translation: We are going to have more financial crisis, but it won’t be my fault.
Meanwhile Summers is on the teevee saying "everyone agrees the recession is over."
Translation: I’ve done everything I can do, if it all goes down again it’s not my fault.
The consequence of “mark-to-make-believe” is that it results in “make-believe” profits which in turn results in real outlays of cash in the form of additional compensation and bonuses.
The reality is that these banks should be cutting costs (reducing compensation and bonuses) in order to preserve cash (generate capital) in order to be in a position to make loans (and make money) again.
Therefore, by being allowed to hide losses, banks are able to disburse to employees the cash that should be retained. This will slow the economic recovery since the real losses must eventually be put on the books thus draining capital, it will weaken the long-term health of the banks since capital that should have been retained was instead disbursed to employees and it will increase the risk of another bail out in the future since the capital position of the banks will be far worse than if they had honestly reported losses and taken the necessary steps to restore capital rather than distributing it to employees.
It is an absurd policy to be undertaking. Thank you Larry Summers and Tim Geithner for yet another bonehead policy. It will reserve your places in the history books as the village idiots who helped to bring down an economy.
I would have to assume that given the upcoming November 2010 elections, and a six month lag before increased lending to tangibly felt by main street, the administration will try to assure banks are recapitalized before May 2010. Either that, or they’re striking a deal to increase lending temporarily while keeping handouts going after the election.
Has anyone done any back-of-the-envelope math regarding when banks would be recapitalized again given realistic losses, their free ticket from the Fed, and new stock offerings?
“This is yet another unintended consequence of bailing reckless bankers from their folly. Theior oplace in the economy is so distorted, as to become nearly economically meaningless . . .”
Since the government didn’t want to take over any of their banks. One option is for the government to start a large bank to increase competition and lending. Then we would be truely Swedish. After saving the large Swedish banks in the early 90s crisis, there was an absense of competition between the large banks and they controlled the market. The government expanded the lending opportunity of a government owned bank, SBAB. Why not do something similar here? Why let the banks make 3% by shuffling money from fed to the treasury. It’s not helping, it didn’t help the Japanese.
This is truly an example of the rigged nature of the banking industry. Wanting to have their cake and eat it too. An investment bank joins up with a commercial bank in order to gain the rewards of access to cheaper capital and cash in the event of bank runs to mitigate risk. OK, so if the investment bank benefits on the upside and is able to take greater risks, it should also share on the downside, particularly since those “greater risks” contributed greatly to the commercial bank’s loan losses.
For a bank to say “We must pay large bonuses or we will lose our best traders.” is a self-serving, bullshit argument. If you want to be a TBTF bank and benefit on the upside, then you need to accept the consequences. If Bank A loses its best traders to Bank B because it did something stupid in the past, then it should. That is the free market way. Bank B should benefit because it was better managed than Bank A. Further Bank A will be less likely to do the same stupid things again in the future because its future earning suffered from its stupid decisions of the past.
We are witnessing a massive transfer of wealth from the middle class to a few wealthy bankers. It is being accomplish with the tacit approval of our government. The democratic institutions of this nation have been corrupted.
It was FASB that suspended MTM with pressure from Congress. There are some, including Brian Wesbury and probably Larry Kudlow who believe that the MTM requirement was the cause of the financial meltdown. As long as the aforementioned ‘experts’ exert that kind of pressure in the public domain the myth will be propagated. The rational to suspend the MTM accounting rules is given great ‘cover’ by these phony proponents of capitalism. The pressure to suspend MTM came from the private sector.
Look, the Fed and Treasury made a huge mistake. They thought that giving money to banks would stimulate Main Street. They were dead wrong and now they haven’t got the decency or balls to admit it because it was a trillion dollar mistake. How people with advanced degrees in economics and years of experience could be so dead wrong is hard to fathom; it pretty much leaves blatant corruption as the only plausible explanation.
@wally: With all due respect, you think it was just “a huge mistake”? I beg to differ. Some of these same folks advised Japan against doing some of the very things that we’re doing now. This was no “mistake”. They KNOW damn well what they’re doing – preserving the status quo so that our master’s feel little, if any, pain.
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