On the Banking Rescue: Clueless Politicians and Banks' Refusal to Lend

Following on a topic I touched upon yesterday, here is a tidbit from the WSJ on how the banks receiving the next round of cash infusions plan to use the money:

(From the WSJ): "The federal government's bank-rescue plan will spread more than $15 billion among 10 regional banks, those companies announced Monday. But some banks acknowledged that perhaps only a small chunk of the money would be funneled into loans.

That deepened criticism from some lawmakers that Treasury Secretary Henry Paulson should have set tougher conditions on the $250 billion being pumped into the U.S. banking industry through capital infusions. "In their eagerness to get everyone on board, I think they failed to make the program stringent enough," Sen. Charles Schumer (D, N.Y.) said in an interview.

Monday's announcements ranged from credit-card issuer Capital One Financial Corp. (COF), based in McLean, Va., and approved for $3.55 billion in taxpayer-funded capital, to First Niagara Financial Group Inc. (FNFG), a 114-branch Lockport, N.Y., bank that will get $186 million.

Nearly $35 billion in capital infusions have been disclosed since Friday, led by the $7.7 billion in cash that PNC Financial Services Group Inc. (PNC), Pittsburgh, is using to buy National City Corp. (NCC) for $4.69 billion in stock. The first nine banks in the Troubled Asset Relief Program are getting an additional $125 billion, meaning the Treasury Department now has doled out roughly two-thirds of its planned injections…

...Several banks said Monday they plan to use their new capital to make loans and possibly buy weakened rivals. Others suggested a substantial increase in loan volume is unlikely as long as the U.S. economy is troubled, since that is likely to worsen loan delinquencies and charge-offs.

James M. Wells III, chairman, president and chief executive of SunTrust Banks Inc. (STI), said the Atlanta bank will engage in "prudent deployment" of "some" of the $3.5 billion for which it was approved in "expansion of careful lending" and potential acquisitions, according to a statement. SunTrust also slashed its dividend Monday by 30%.

First Niagara President and CEO John R. Koelmel said the bank is "strongly committed to supporting the economy in upstate New York." In a conference call last week, Mr. Koelmel said that First Niagara was "clearly looking longer term, and opportunities would certainly include M&A at that point, as well as continued organic growth."

Zions Bancorp (ZION), Salt Lake City, is expected to announce later this week that the Treasury Department has approved its application for a sizable infusion, according to a person familiar with the matter. A Zions executive said last week the company wasn't likely to plow much government capital into new loans unless Zions also could increase its deposits.

Synovus Financial Corp. (SNV), a Columbus, Ga., bank, applied Friday for government capital, spokesman Gregory Hudgison said. Other banks are still working on applications. Still others haven't decided whether to apply."

I think the people who are criticizing the banks for not lending out the bulk of the funds they receive from the Government need to stop and think for a second: if the banks are electing not to use their newfound capital to engage in a profit generating activity (lending), doesn't that suggest that they have some other needs/problems/etc. that they need to use that capital for?

In other words isn't it a bit unrealistic to ask banks that are both undercapitalized and are facing rapidly escalating loan losses, to lend out the very capital they need to hang on to in order to address issues that could potentially destroy them and have already taken down other banks?

The thing that bothers me the most about this issue is that instead of complaining that the banks aren't lending, why aren't the politicians asking the regulators going in and evaluating each bank's capitalization needs (immediate term and to insulate against future loan losses), and then determining what percent (if any) of the received capital could reasonably be used for lending? There is no point in complaining about how the banks (or a particular bank) are using the capital they're getting from the government, without having some sort of mathematical argument/justification around how a particular bank could realistically use new capital based on their financial situation.

I find the fact that certain politicians can't seem to grasp this relatively simple idea, especially when they're the ones who are supposed to guide the nation out of this crisis, and are in charge of regulating/managing our nation's banking infrastructure, to be quite disturbing. I have no problems with stipulations being placed on the banks that are receiving capital, but I think they need to be realistic and considered against the financial situations the banks are in. The firing off of complaints without any mathematical justification behind them is patently fatuous, especially when the complaints are coming from the people who are allegedly going to save us.

Do we want to create a situation like what Japan has with Mitsubishi UFJ (MTU) where the bank invested $9 Billion in Morgan Stanley (MS), only to have to run around and raise additional cash a few weeks later due to having its own capitalization problems?

I.e. there are some very valid reasons for the banks to hoard the capital infusions they're receiving from the government. In fact, you could argue that due to being undercapitalized many banks don't exactly have any choice but to hang on to the vast majority of the capital they're raising from the government and other sources.

Finally, I think that the volume of bank lending needs to be put in the proper perspective: the banks got themselves into trouble by lending too much (and with poor standards to boot), so in relative terms lending has to slow down compared to where it was during the credit boom. Like it or not many consumers were extended credit lines that were too high in comparison to their income, lending standards were too low, etc, etc. So for the future viability of our banking system, lending needs to be reined in, credit lines should be cut, people/businesses who could get credit before shouldn't necessarily be able to get it now, etc., etc.

It's a harsh reality, but it's one that we all have to accept.

When evaluating lending volume, we need to compare now to before the credit boom, as opposed to comparing present times to a time frame where the banks were lending irresponsibly.

You can read more here, and get a chart of the banks that have received capital here.

You can also read another article discussing how small (and healthy) community banks are worried their larger peers will use Government capital to swallow them up, and how they want to reduce the percentage of deposits any one bank is allowed to have (currently at 10%).

Sources

The WSJ: "Much Bank Aid May Not Go to Loans" -- David Enrich, Robin Sidel and Michael R. Crittenden, October 28, 2008.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

Comments

[sumosama:]

Good article. Good title. Far be it for Chuck to understand your point. Clearly, many banks need the capital to shore up reserves and ratios, thus they cannot lend (at least not all of it).

2008 Oct 29 11:34 AM