SO goes the old saw about bankers: they loan you an umbrella when the sun is shining, only to ask for it back when it rains.
But with our economy and markets in a world of hurt, the nation’s banks were supposed to stow their self-interest and help start lending again.
When the Troubled Asset Relief Program of the Treasury Department handed over $125 billion in taxpayer money to nine banks a month ago, they were supposed to lend to small businesses, home buyers and other worthy borrowers to keep the economy’s gears in motion.
At the time, the Federal Reserve Board and three bank regulatory agencies said: “The agencies expect all banking organizations to fulfill their fundamental role in the economy as intermediaries of credit to businesses, consumers, and other creditworthy borrowers.”
Alas, that admonition wasn’t accompanied by any real requirements to lend. When the Treasury gave taxpayer billions to the banks, it attached no strings. So is it any surprise that lending is tight?
Reports from institutional and individual borrowers across the country indicate this. Nervous lenders are demanding that even healthy loans be paid back. Banks and other financial institutions, meanwhile, are reducing exposures to borrowers and doing whatever they can to discourage the assumption of further debt.
Borrowers I have heard from don’t want to get into trouble with their lenders by speaking publicly about their experiences. As a result, they will remain nameless. But their stories are all the same.
This is from last week
ReplyDeletePaulson Will Keep Reserve to Stay Flexible for Future
By DEBORAH SOLOMON
WASHINGTON -- Treasury Secretary Henry Paulson is unlikely to use what remains of the $700 billion Wall Street rescue fund to launch substantial new programs, preferring to keep money in reserve for unforeseen emergencies and to preserve flexibility for the Obama administration.
In an interview Monday, Mr. Paulson said the financial system is stabilizing, and he is thinking about how the remaining $410 billion could be best utilized, but that he doesn't plan to tap it unless a further need arises.
Treasury Secretary Henry Paulson defended the Bush Administration's $700-billion bailout plan, telling WSJ's Alan Murray he doesn't think he's doing FDR-like experimentation with liquid assets. (Nov. 17)
"I'm going to do what we need to do to keep the system strong and to react the ways we need to react during the nine weeks I'm here, but I'm not going to be looking to start up new things unless they're necessary or it's just clear that they need to be done or [that they] make great sense," Mr. Paulson said. "I want to preserve the firepower, the flexibility we have now and those that come after us will have."
Congress approved a $700 billion bailout in October after Mr. Paulson and Federal Reserve Chairman Ben Bernanke insisted a broad response was needed to prevent an economic meltdown. Mr. Paulson was allowed immediate access to $350 billion, with a second tranche available upon issuing a written notice to Congress. Lawmakers would have 15 days to deny such a request.
Mr. Paulson's decision is a signal that the Bush administration is unlikely to heed demands by some in Congress that the rescue funds be used to help mitigate mounting home foreclosures. That has been a thorny issue, prompting clashes within the administration over the intent of the fund and the best way to help homeowners. Mr. Paulson has already ruled out using the money to assist U.S. auto makers.
His decision also in effect hands the choice of how to spend the remaining funds to the next White House. Obama advisers haven't said publicly how they might use the money. Of the $350 billion he has tapped, Mr. Paulson has committed $250 billion to buying equity stakes in banks and $40 billion to buy preferred shares in American International Group Inc. An additional $60 billion remains unused, in addition to the second $350 billion installment.
[Alan Murray, Henry Paulson and Robert Rubin] Associated Press
On Tuesday, Mr. Paulson could face a hostile reception from lawmakers when he testifies about the bailout, including Treasury's decision to forgo its initial plan to buy bad loans from banks and other entities, and instead inject capital directly into banks. Mr. Paulson plans to tell Congress that Treasury couldn't pursue its first option because after investing $250 billion in banks, it didn't have enough left to make a meaningful impact.
"We recognized that a troubled-asset purchase program, to be effective, would require a massive commitment of TARP funds," Mr. Paulson plans to say, according to a draft of his prepared testimony, referring to the Troubled Asset Relief Program.
Mr. Paulson defended that decision, saying Treasury's equity-purchase program has helped stabilize the financial sector and limited the potential for the future collapse of any big financial institution. "We've turned the corner in terms of stabilizing the system. There's no longer this worry out there that some systemic institution is going to fail."
Still, Mr. Paulson acknowledges that dropping the asset-purchase plan will leave a key problem unresolved: "These institutions are still clogged with these assets. They're going to need to write them down, sell them over time, take losses," he said. Mr. Paulson added that he is working with the Fed to develop a lending facility that would encourage investors to buy some of these assets.
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If Mr. Paulson doesn't request the second TARP installment, he could avoid some political backlash from Congress. In addition to criticizing the Treasury's switch of plans, lawmakers might seek to add new conditions to the funds, such as requiring that participating companies make more loans or refrain from using the money for dividends or acquisitions.
Treasury initially planned to use leverage it would earn from buying residential loans and mortgage-backed securities to encourage lenders to help troubled homeowners. But having dropped that approach, there is no alternative for aiding homeowners through the TARP.
On Monday, House Democratic leaders met with Mr. Paulson and Mr. Bernanke and "made it clear...that they must take immediate action and do everything they can to help hard-working Americans stay in their homes," House Speaker Nancy Pelosi (D., Calif.) said in a statement.
In the interview, Mr. Paulson seemed to rule out embarking on any large-scale foreclosure-mitigation program through the rescue fund, though. He argues that the TARP money is meant to be invested, and that most foreclosure programs would require a direct expenditure of taxpayer dollars that won't likely be paid back.
Instead, the Bush administration is likely to focus on programs already in place, including a plan to have mortgage giants Fannie Mae and Freddie Mac, which are under government control, help halt preventable foreclosures. The voluntary plan, which officials hope will be adapted by other mortgage holders, would enable certain borrowers to receive loans that would make their mortgage payments at most 38% of their monthly income.
Pressure has been building within the administration to do something broad to attack the foreclosure problem. Federal Deposit Insurance Corp. Chairman Sheila Bair, a Bush appointee, has criticized policy makers for not doing enough to help homeowners. Ms. Bair has been pushing a plan within the administration to use some of the $700 billion to have the government share in the loss of any modified loan that falls into default.
But many within the Bush administration are opposed, arguing that her plan provides an incentive for banks to foreclose on homeowners and gives a windfall to investors who own the securities backing the loans.
In the interview, Mr. Paulson said Treasury has "spent a lot of time on the FDIC program" and is "working to see if we can come up with something that works."
"Foreclosures are a significant problem, they're an economic problem," Mr. Paulson said. But finding a solution is complicated, he said, because "the issues then become, 'How effective are the individual programs going to be, where did the money go, is it going to banks or is it going to homeowners, and what's the cost-benefit analysis?'"
—Damian Paletta contributed to this article.