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

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?

Banks: Just a Shadow of Their Former Selves

If the system was forced to go cold turkey, wouldn't that help define a bottom? It's been like throwing a drowning man a life preserver that's water soluble -- you gotta keep tossing more, hoping that he makes it to shallow water before you run out of life preservers.

If there was a permanent fix forced on them from the beginning (break up into managable businesses, bring all off balance sheet assets on, mark everything to market, etc., etc., maybe they wouldn't still be drowning?

Of course, the best solution of all would have been to let the market exact its punishment. Would a short death have been any worse than the slow death we're now experiencing?

How Are Banks Spending Bailout Money? Anyone's Guess

How is the TARP investment "being spent?" Hopefully, not at all!

Do you know anything about banking? If you did, you would know that capital (which is what TARP investments are) is not "spent."

Capital is a cushion against future expected and unexpected losses. It isn't spent, it is held.

The spread earned from investing deposits and borrowed funds in loans and other types of investments is what is "spent" on day-to-day operations.

TARP investments, per se, would never be lent out or used to pay salaries or other expenses.

All the TARP investments have done, so far, is replace capital that was burned-off due to unexpected write-downs of non-performing loans and investments.

Wall Street, R.I.P. Now What?

Puh-leez.

Once the "big kids" on Wall Street started playing with other people's money -- e.g., when the firms converted from private partnerships with their own money at risk to public corporations, it was only a matter of time.

It wasn't pure greed that killed them.

It was simple arrogance.

Or, as a wise sage once told me during the peak of the bull market, "they're like fat guys riding their bicycles downhill thinking they're going fast because they're good athletes."

The Outlook for Financials Failure

The big ones won't fail, but they won't succeed, either?

What does that mean?

For me, it means it will be another 3-5 years for them to be able to get beyond the effects of their current problems and completely redefine themselves (which they must do to survive).