Using TARP Funds to Contract Lending

Includes: AXP, IYF, PGF, XLF
by: Tim Duy

Billions of dollars later, and consumer credit continues to contract...and now at least one firm is paying cardholders to drop their accounts. From Bloomberg:

American Express Co., the largest U.S. credit-card company by purchases, is paying some cardholders $300 each to close accounts so the lender can reduce the risk of defaults as the recession deepens.

People who got the offer to “simplify” their finances must pay off their entire credit-card balance by April 30, according to New York-based American Express. Enrolling in the program cancels a customer’s account and may lead to forfeiture of reward points or rebates, the company said on its Web site.

“What AmEx is trying to do is move to the front of the line in terms of getting paid back” by customers who owe debts to multiple lenders, said Michael Taiano, an analyst at Sandler O’Neill & Partners with a “hold” rating on the company. “They clearly grew loans faster than their competitors in the years leading up to this financial crisis.”

American Express (NYSE:AXP) was a recipient of TARP funding, albeit a "nominal" $3.39 billion. What makes this interesting is that not only is American Express not expanding lending - the selling point of the original TARP proposal - they are using the funds (money is fungible) to explicitly contract lending. Such a vivid illustration of the industry's challenges. And those challenges are only building. As the US government is goading investors with a line in the sand, consumer defaults are swelling:

Consumers are falling behind on credit-card payments as U.S. unemployment reached 7.6 percent last month, the highest rate since 1992.

This is just consumer debt; commerical debt pressures, including real estate, are building as well. With the situation rapidly deteriorating, the anticipated stress tests look like a smoke screen to buy time in yet another emphemeral effort to restore the elusive confidence that policymakers hope will magically restore the system.

Whatever news comes out of Washington regarding the plan-of-the-day for the banking system, I hope one thing is soon made clear to the public - fixing the financial system is not the same thing as expanding lending.

We are way past that point; you can't fix the system with more bad loans. If Treasury Secretary Geithner tries to sell his plans as the solution that will revive credit growth, I suspect he will further test the already strained credibility of the government.

A more honest approach: 'We are simply trying to prevent the financial system from outright collapse.'