Citi, TARP and Trust: Banks May Trust Each Other More, But Consumers Lag Behind

Citigroup (C) announced plans to use $36.5bn of the $45bn in TARP funds it received for the purpose of lending in the following areas: $25bn in mortgages; $5.8bn for credit card loans; $2.5bn for consumer loans; $1.5bn for corporate loans; and $1bn for student loans.

CEO Vikram Pandit issued this statement: "Our responsibility is to put these funds to work quickly, prudently and transparently to increase available lending and liquidity."

Furthermore, Pandit stated, "The government, on behalf of the American taxpayer, has invested in Citigroup…. We have an obligation to repay in ways that go well beyond the $3.41bn Citigroup will repay the government each year in dividends associated with its TARP investment, and a separate loss-sharing agreement."

It is reported that none of these TARP funds would be used for compensation, bonuses, dividend payments, lobbying, marketing, advertising, and corporate sponsorship.

On the surface, this appears to be a positive development. Could it be that other banks will follow C’s lead? Most likely the answer is yes. Banks make money when they lend it and these loans are resold or repaid and right now the financial markets are struggling to re-establish a healthy equilibrium of cash flows.

The TedSpread has come down considerably to suggest that the trust level amongst banks has improved. Actually, banks still do not trust each other, but they do trust the U.S. Treasury, which is willing to insure almost $400bn of illiquid assets on banks’ balance sheets with OPM (other people’s money), e.g. taxpayers. To a certain degree, some of these perceived and real risks have been mitigated.

The lender of last resort has stepped up and right now no one seems concerned about the fact that there is no back-up plan for the back-up. Actually, there is a back-up plan. If you examine any form of U.S. currency, it clearly states "In God we trust" and apparently this is the real secret to operating and managing a fiat currency. God help us all, should this system ever collapse.

Now just about every criminal act of any great magnitude has its accomplice(s), intended or unwitting, unless you are Bernie Madoff (of course). In this instance, irresponsible greedy bankers have the immediate-gratification-seeking American consumer as their accomplice in the current financial crisis.

However, the word on the street from the man on the street (latest Gallup polls) is that consumers are currently enrolled in a 12-step program and it may be premature to expect them to fall off the wagon anytime soon. Consumers are still too painfully aware of hitting rock-bottom, and not enough progress has been made or enough time has passed to induce a false sense of self-control over their addiction to credit.

Yesterday’s Personal Income and Outlays economic report shows that consumers are holding on to their precious dollars. December 2008 spending declined for its sixth consecutive month, falling -1% after the previous month’s -0.8% reading. Faced with shrinking income and the prospects of rising unemployment trends, borrowing money without certainty of the means to repay it may curb the cravings for more debt. The American consumer has learned a hard lesson, and the tuition for this education has been expensive, i.e. depleted home equity, foreclosures, bankruptcies, and ruined credit.

Therefore, one must ask if it is realistic for an economy that derives 3/4 of its GDP from consumer activity to recover in the midst of a such a consumer confidence crisis just because banks may be willing to lend again. Not!

This crisis in confidence will come to an end, but there needs to be a different catalyst. Perhaps the catalyst will come in the form of a stimulus package that creates sustainable new employment opportunities. This will take time, and so will any other positive forces driving a recovery.

Furthermore, the global economy will need to recover as well, as it is clearly evident that the American consumer is vulnerable to another overdose of credit if other economies are not willing to indulge in a "moderately" excessive consumption habit.

Comments

[anonon]

this guy lost me at schitty group. how old do you have to be to write here?

2009 Feb 03 01:54 PM

[Big Al45]

I think he's trying to say that it doesn't matter what the banks do with their TARP money, as long as the consumers (i.e. us) don't borrow money from the banks and spend it.

Which is probably true, but it doesn't really agree with the headline for the post.

2009 Feb 03 03:24 PM

[jsc173]

Will everyone please stop this "what are they doing with their TARP money nonsense!"

Here's the bottom line for those of you who aren't bankers, here's a little Bank Finance 101:

1. TARP funds, so far, have been capital investments in banks and thrifts.

2. Banks DO NOT EVER lend out their capital. Capital exists to protect the bank from unexpected losses. It is never "spent", nor is it ever "lent."

3. Banks only lend money they have borrowed. That money comes from depositors, the FHLB and Fed borrowings and other short-term sources. Banks make money on the spread between what they pay for borrowing versus what they charge for lending, plus fees.

So, the lesson here is that most TARP investments replaced capital and reserves that had vaporized in the first couple of waves of write-downs. It was restorative, not additive.

Once that was accomplished, the banks were still able to survive, but are now only lending to the best credits. Why? Because that's all the regulators will let them do. The regulators are hypersensitive to the criticism they allowed this to happen so they are clamping down on lending much more than banks doing it voluntarily.

So, net-net, since banks can no longer lend to crappy customers (even if they wanted to) and the strongest borrowers are no longer interested in being highly leveraged, who in their right mind would expect banks to be lending more than they did last year?

2009 Feb 03 03:58 PM

[Timmothy Posey]

The banks will just put on a show that they have money set aside for lending (the same amount from last year coincidentally), however I doubt 100% of the money set aside (36.5 billion) will actually be used for lending due to the higher standards for credit, and the consumer's increasingly declining credit.

2009 Feb 03 11:13 PM

[Dave Wrixon]

Problem is that banks got so lazy lending money against ever increasing housing asset values, they are generally clueless about how to evaluate a good lending risk. The only collateral they are interested in is cash, and they then expect you to pay about 20% interest.

However, lending is their business. If they fail to continue to participate in that business, as banks they effectively no longer exist. They have to relearn the whole financial thing from scratch.

Some of the names may be around in five years, but most of the existing equity holders will have been wiped out. And that may include the US Treasury!

2009 Feb 04 03:40 AM