On Monday, the Wall Street Journal published an article containing the chart below showing that some of the major recipients of TARP funds have been shrinking their lending in recent months. What the chart failed to show is why this is the case. The answer is straightforward, but not pretty. Most of the TARP money has been pumped into desperately troubled financial institutions. It should come as no surprise to anyone (other than perhaps politicians) that institutions fighting for survival are unlikely to be focused on taking on new risky investments.
If you look at the same institutions in a little more depth, it becomes quite obvious that there is a close correlation between the profitability of these institutions and their willingness to lend.
|Company Name||Return on Assets||Return on Equity||Q4 2008 Lending Change|
|Bank of America Corporation (NYSE:BAC)||0.23||2.48||-1.25|
|BB & T Corp. (NYSE:BBT)||1.21||12.83||2.1|
|Capital One Financial Corp. (NYSE:COF)||0.05||0.33||-0.3|
|Citigroup, Inc. (NYSE:C)||(1.12)||(17.49)||-3.1|
|Comerica Incorporated (NYSE:CMA)||0.33||3.46||-2|
|Fifth Third Bancorp (NasdaqGS:FITB)||(1.83)||(19.90)||-1|
|Huntington Bancshares Inc. (NasdaqGS:HBAN)||(0.21)||(1.73)||-0.2|
|JPMorgan Chase & Co. (NYSE:JPM)||0.20||2.55||-2.2|
|Marshall & Ilsley Corporation (NYSE:MI)||(0.90)||(7.52)||-0.9|
|Regions Financial Corp. (NYSE:RF)||(3.89)||(30.49)||-1.3|
|SunTrust Banks, Inc. (NYSE:STI)||0.43||3.94||0.2|
|US Bancorp (NYSE:USB)||1.17||12.44||3.91|
What’s the profile of a loan officer at a troubled bank? He or she:
- Has been moved into the workout department,
- If still in the loan department, is looking furtively to his/her left and right to figure out who’s going to be next to go, or
- Has been recently laid off.
Nothing in this scenario would encourage us as prospective borrowers to believe that we’re going to get a loan, nor should it encourage us as taxpayers to expect additional TARP funding to generate new loans from such a bank.
What’s wrong with TARP is that we are putting money behind the losers rather than the winners. We’re filling financial holes created by disastrously bad management decisions in hopes that those who made the bad decisions will make better decisions the next time. The worse the mistakes, the more money the bank gets.
Now is the time for a fresh start - before we spend the next $350 Billion and find that we are just that much deeper in the hole without anything being fixed. It’s time for a simple plan:
- Declare one or more of the already semi-nationalized banks as our official bad bank(s). Several banks on the list above would seem to be good candidates.
- Sell off the remaining good assets from the bad bank(s) to better managed competitors before further damage can be done.
- Fund the bad bank(s) only to the extent needed to keep the bills paid as the unsalable assets are liquidated over time.
- Provide new TARP funds to well managed banks that are committed to continuing to build a sound lending base. These would include those national and regional big banks that have shown themselves capable of either avoiding the problems (such as US Bank and BB&T clearly appear to have done) or aggressively addressing the mistakes of the past (First Horizon appears to be a good candidate here). Equally important, rather than merging the community banks out of existence, we should provide support for the many well managed smaller institutions that still have strong capital bases, are close to their customers and know how to make sound loans. Properly structured this support can be used to leverage new equity investment in these sound institutions to take some of the burden off the Treasury.
- Finally a new regulatory structure is needed to encourage formation of well capitalized de novo banks backed by the private equity community, which remains relatively flush with cash, but finds it impossible to fund deals that fit the old leveraged acquisition mode of past years.
Source, Wall Street Journal, Capital IQ
Disclosure: I have no positions in any of these securities.