Why Aren’t Banks Lending? They Are Being Rational
President Obama met with a dozen small banks yesterday, urging them to keep lending.
He did not have to tell that to this group — about 6500 mostly AAA rated, regional and community banks — who have been happily lending away. Its how they earn their money.
The larger banks, on the other hand, are the ones who have cut back lending dramatically. This is especially true of the 10 biggest banks.
Why?
Its the rational thing to do.
These banks STILL have to much debt, too little capital. They books are festooned with bad loans, which, thanks to our corrupt Congress, they no longer have to disclose appropriately. Thanks to Mark-to-Make-Believe, they can pretend these assets are worth near what they paid for them. In reality, they cannot sell them even at 50% off.
Lending money is a risky business; there is the possibility of loss. Under-capitalized banks cannot take that chance. By not lending, their capital base goes up. IT is the rational thing to do from their perspective.
Rather than engage in traditional money lending, these banks have decided to simply borrow from the Fed at 0%, and make risk free loans to the Treasury at 3%.
And, these banks are not lending because the way the Fed/Treasury bailouts were structured, they are encouraged NOT TO LEND.
Why? They need to rebuild their capital levels after 30 years of declining safeguards and capital ratios.
This is yet another unintended consequence of bailing out reckless bankers from their own folly. Their place in the economy has become so distorted as to become nearly economically meaningless . . .
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December 23rd, 2009 at 6:45 am
Why isn’t Obama asking GS to lend instead? Isn’t GS a bank after all? Oh wait GS needs that $$$ to pay the bonuses and to give to campaign contributions
December 23rd, 2009 at 6:50 am
Not to worry, Geithner says no chance of a further downturn because that is not “acceptable.” And, we know that what’s not acceptable never happens in a world run by Ivy Leaguers.
“We are not going to have a second wave of financial crisis,” Geithner said in an interview with National Public Radio. “We cannot afford to let the country live again with a risk that we are going to have another series of events like we had last year. That is not something that is acceptable.”
December 23rd, 2009 at 6:54 am
Robes: Didn’t you hear that GS is devoting a half billion dollars to lend to small businesses to show that even vampire squids have hearts. Mighty generous of them, although this, too, will be a money-making operation.
December 23rd, 2009 at 7:26 am
But why don’t the banks take the necessary write-down or ask the owners for more money. I know the textbook answer, but right now this could only lead to a recommendation upgrade and stocks running wild since there is nothing more out there holding the stock down. A profit warning these days is instantly rewarded, but in the wrong way.
If the issue is that it destroys current owner value, it will take place at a level where value is distorted anyway.
~~~
BR: Cause they don’t have to . . .
December 23rd, 2009 at 7:28 am
only way to save em next year in the coming foreclosure spike in option arms, it’s all planned out, what else can they do, if they didn’t prop up real estate every state would be bankrupt because all revenues and planning were based on ever increasing taxes, down here the local city is off 15% in total, they were totally off on price and time, and this is a city where prices have not collopsed in real estate, just permits, fee’s, and sales taxes, my sis in law is a big wig and next year is lay-offs and cut backs, it was kind of hilarious in a way, she was lamenting about this and that, and we were all like, uhhhhmmm, coroprate america did all those things twenty years ago
December 23rd, 2009 at 7:50 am
The no-business meetings
Extracts from “The Great Crash: 1929″, John Kenneth Galbraith, First Published 1955, Page 158 to 160
“Yet to suppose that President Hoover was engaged only in organizing further reassurance is to do him a serious injustice. He was also conducting one of the oldest, most important – and, unhappily, one of the least understood – rites in American life. This is the rite of the meeting which is called not to do business but to do no business. It is a rite which is still much practised in our time. It is worth examining for a moment.
[TEXT DELETED]
In recent times the no-business meeting at the White House – attended by governors, industrialists, representatives of business, labour, and agriculture – has become an estrablished institution of government. Some device for simulating action when action is impossible, is indispensible in a sound and functioning democracy. Mr Hoover in 1929 was a pioneer in this field of public administration.”
December 23rd, 2009 at 7:53 am
Don’t blame the larger banks from not being able to lend; if they did that they’d be “in” business instead of “out” of business – it’s much more profitable that way.
December 23rd, 2009 at 8:18 am
Too bad much of the new legislation that is about to be put in place is going to stop the banks from lending anyway.
December 23rd, 2009 at 8:39 am
“We cannot afford to let the country live again with a risk that we are going to have another series of events like we had last year. That is not something that is acceptable.”
m in nola-
I guess this means backstops are explicitly guaranteed- but really- how long can that go on?
December 23rd, 2009 at 8:41 am
Of course, suspension of Mark to market rules that would force them to realize losses on their books might have something to do with them sitting on their hands to preserve capital ratios and playing pretend and extend too.
December 23rd, 2009 at 9:06 am
I’m surprised the treasury hasn’t set up some kind of program to let banks unload their “assets”.
After all, if you’re going to bail them out, not regulate and lend them money at 0%, you might as well go the whole nine yards and buy their debt.
Why half-ass it?
We all know it’s never gonna change anyway.
December 23rd, 2009 at 9:19 am
[...] Aren’t Banks Lending? They’re Being Rational (The Big Picture) Under-capitalized banks are actually encouraged not to lend by Fed and [...]
December 23rd, 2009 at 9:34 am
“We are not going to have a second wave of financial crisis,” Geithner said in an interview with National Public Radio.
Translation: We are going to have more financial crisis, but it won’t be my fault.
Meanwhile Summers is on the teevee saying “everyone agrees the recession is over.”
Translation: I’ve done everything I can do, if it all goes down again it’s not my fault.
December 23rd, 2009 at 9:55 am
The consequence of “mark-to-make-believe” is that it results in “make-believe” profits which in turn results in real outlays of cash in the form of additional compensation and bonuses.
The reality is that these banks should be cutting costs (reducing compensation and bonuses) in order to preserve cash (generate capital) in order to be in a position to make loans (and make money) again.
Therefore, by being allowed to hide losses, banks are able to disburse to employees the cash that should be retained. This will slow the economic recovery since the real losses must eventually be put on the books thus draining capital, it will weaken the long-term health of the banks since capital that should have been retained was instead disbursed to employees and it will increase the risk of another bail out in the future since the capital position of the banks will be far worse than if they had honestly reported losses and taken the necessary steps to restore capital rather than distributing it to employees.
It is an absurd policy to be undertaking. Thank you Larry Summers and Tim Geithner for yet another bonehead policy. It will reserve your places in the history books as the village idiots who helped to bring down an economy.
December 23rd, 2009 at 10:01 am
I would have to assume that given the upcoming November 2010 elections, and a six month lag before increased lending to tangibly felt by main street, the administration will try to assure banks are recapitalized before May 2010. Either that, or they’re striking a deal to increase lending temporarily while keeping handouts going after the election.
Has anyone done any back-of-the-envelope math regarding when banks would be recapitalized again given realistic losses, their free ticket from the Fed, and new stock offerings?
December 23rd, 2009 at 10:14 am
“This is yet another unintended consequence of bailing reckless bankers from their folly. Theior oplace in the economy is so distorted, as to become nearly economically meaningless . . .”
Since the government didn’t want to take over any of their banks. One option is for the government to start a large bank to increase competition and lending. Then we would be truely Swedish. After saving the large Swedish banks in the early 90s crisis, there was an absense of competition between the large banks and they controlled the market. The government expanded the lending opportunity of a government owned bank, SBAB. Why not do something similar here? Why let the banks make 3% by shuffling money from fed to the treasury. It’s not helping, it didn’t help the Japanese.
December 23rd, 2009 at 10:15 am
This is truly an example of the rigged nature of the banking industry. Wanting to have their cake and eat it too. An investment bank joins up with a commercial bank in order to gain the rewards of access to cheaper capital and cash in the event of bank runs to mitigate risk. OK, so if the investment bank benefits on the upside and is able to take greater risks, it should also share on the downside, particularly since those “greater risks” contributed greatly to the commercial bank’s loan losses.
For a bank to say “We must pay large bonuses or we will lose our best traders.” is a self-serving, bullshit argument. If you want to be a TBTF bank and benefit on the upside, then you need to accept the consequences. If Bank A loses its best traders to Bank B because it did something stupid in the past, then it should. That is the free market way. Bank B should benefit because it was better managed than Bank A. Further Bank A will be less likely to do the same stupid things again in the future because its future earning suffered from its stupid decisions of the past.
We are witnessing a massive transfer of wealth from the middle class to a few wealthy bankers. It is being accomplish with the tacit approval of our government. The democratic institutions of this nation have been corrupted.
December 23rd, 2009 at 10:23 am
It was FASB that suspended MTM with pressure from Congress. There are some, including Brian Wesbury and probably Larry Kudlow who believe that the MTM requirement was the cause of the financial meltdown. As long as the aforementioned ‘experts’ exert that kind of pressure in the public domain the myth will be propagated. The rational to suspend the MTM accounting rules is given great ‘cover’ by these phony proponents of capitalism. The pressure to suspend MTM came from the private sector.
December 23rd, 2009 at 10:35 am
Look, the Fed and Treasury made a huge mistake. They thought that giving money to banks would stimulate Main Street. They were dead wrong and now they haven’t got the decency or balls to admit it because it was a trillion dollar mistake.
How people with advanced degrees in economics and years of experience could be so dead wrong is hard to fathom; it pretty much leaves blatant corruption as the only plausible explanation.
December 23rd, 2009 at 10:47 am
@wally: With all due respect, you think it was just “a huge mistake”? I beg to differ. Some of these same folks advised Japan against doing some of the very things that we’re doing now. This was no “mistake”. They KNOW damn well what they’re doing – preserving the status quo so that our master’s feel little, if any, pain.
December 23rd, 2009 at 11:05 am
@ Mannwich: Ding, ding, ding!!! You hit the nail squarely on the proverbial head!!!
They may not know what they are doing in terms of sound fiscal policy, but make no mistake about it, that they are doing exactly what they intended on doing. They just are not smart enough to understand that it will fail miserably in the end or perhaps they are and simply don’t care. As I stated above either scenario is a bad one.
The Fed and the Treasury are part of the banking system. They are run by former bankers for the most part and rely on their donations to keep their slush funds full to the brim. They care about roughly four things, give or take, from where I sit.
1. Re-election
2. Themselves
3. Money
4. Power
What is missing from this list you ask?
1. The country
2. The American tax payer
3. The constitution
4. The elderly
5. The minorities
6. Jobs for Americans
Well actually I don’t have the time it would take to list them all but I think from this ultra small starter list if you will, you get the point…
Don’t ever underestimate a fool on a fool’s errand. What was it that Einstein said?
“Insanity is doing the same thing over and over again and expecting a different result”
Welcome to the liberal, social, fascist and Marxist playbook. It is what has been tried over and over again the world over and the results will be the same as they have been each and every time to date.
The “GOOD” news is that we know the outcome, so we can prepare to the best of our ability.
The “BAD” news is that we know the outcome…
December 23rd, 2009 at 11:23 am
@Stu: I somewhat agree but don’t see how any of this is classified as “liberal” or “socialist” in any way. I’m not necessarily promoting a socialist state, but n so-called quasi “socialist” countries, at least the rabble actually reap a good degree of the benefits of their system. Here, we bail out the royals and leave the table scraps to the rabble, who seem OK with things as long as they have circuses to divert their attention from reality.
What we’re seeing now is all ABOUT a decadent, decaying culture. There’s no ideology behind it. It’s just a mass cultural problem and those are much more difficult (if not impossible) to “fix” without much upheaval in the status quo, so our master’s do everything they can to perserve that status quo.
December 23rd, 2009 at 11:24 am
Great, comment eaten again. Nevermind.
December 23rd, 2009 at 11:28 am
Lawyers need to get out there and lawyer, Investment professionals need to get out there and advise, insurance salesmen need to sell more insurance… and get this economy back on track. What’s wrong with them?
December 23rd, 2009 at 11:43 am
What’s wrong with them?
Easy money through corrupt practices?
December 23rd, 2009 at 11:51 am
@VennData: Simple!
Lawyers are staying very, very quiet so as not to draw attention to themselves and hence to have the discussion of “Tort Reform” start to develop.
Investment Professionals are staying very, very quiet due to nothing worth investing in if or until the Government gets out of the private sector so capitalism can once again thrive. This includes car companies, insurance companies, the housing and banking sector, etc.
Insurance salesman are staying very, very quiet awaiting the finished version of the healthcare, or lack thereof, plan gets implemented. They are scared to death and may be on their death beds alongside the elderly when all is said and done.
The only thing wrong is that big brother Government is standing squarely in the way of progress and as a result leaving way to much doubt as to what will, can, should or could happen in all industries and the country as a whole. Nothing will change until this occurs and nothing should if people are smart. Why would a business hire right now with the doubt cast over the country by our pols? Why would anyone move in any direction right now when you have not a clue as to where that direction will ultimately take you, your business and hence your life?
Stagnation is the word of the day for business in this country and that can only change when the rules change. Right now nobody has any idea what the rules are or will ultimately be in terms of doing business in this country. We are in a real mess and I don’t really see this changing until Fraudbama is out of office and / or the Republicans gain control of the House and Senate assuring an end to the games being played. At least the current shenanigans anyway. They all play games but with a ruling class the games take on a much more dangerous look and feel to them.
Our country and the constitution was never set up for one party rule and with it now, we are seeing the gross mishaps that result because of it.
December 23rd, 2009 at 12:46 pm
[...] banks aren’t lending and the payoff from bank lobbying. (Big Picture, [...]
December 23rd, 2009 at 12:47 pm
@Stu: Really? The GOP, the party that largely got us into this mess, is the answer? I would counter that neither party has any answers. That should be plain as day by now. Your posts lose much credibility with their ridiculously ideologically-based fact-devoid assertions. Sorry. Next.
December 23rd, 2009 at 12:53 pm
Once banks start chasing higher returns again (i.e., accepting risk), it will be interesting to see how inflation reacts to the increase in dollars let loose into the economy …
December 23rd, 2009 at 1:04 pm
@Mannwich:
I never said the GOP is the answer but rather that they represent a two party system which results in stop gaps from such idiotic proposals that come from one party rule… GOP alike I agree.
By the way the Congress, where it all starts, has been DEM controlled for years now and it is they that represented the stop gaps to not allow the GOP at the time to rule careless and reckless. They failed miserably in there charter and now with the GOP out of the way they are continuing to do so but more egregiously than ever. That is not to say that McCain or the GOP would not be doing the same thing if left unchecked as the DEM’s have been with one party rule.
My post are as credible as they come due to thousands upon thousands of hours of research and being in the business of knowing and hence understanding what I am talking about. Most comes with plain and simple common sense, but the balance through historic reference and research. If you need or require facts to backup any of my post then prey tell what specifically it is you are referring to and I will supply said facts.
December 23rd, 2009 at 1:14 pm
@Stu: Congress (the House) has been Dem controlled since ’06, but with a GOP president who would veto anything the passed (if it even got through a Senate that was basically 50/50). They’ve basically had real “control” for almost a year now. That’s not “control” and you know it. C’mon man. Please.
December 23rd, 2009 at 1:17 pm
@ Damien:
I agree Damien that it will be very interesting. The Fed and Treasury hope to rein in those dollars so as they never see the light of day for that very reason (hyperinflation actually), but I am of the opinion they will never get it right and / or in time to do so. Once those dollars begin to hit the street. If they in fact do so, then it will get very interesting and fast. LTR will skyrocket as treasury yields begin to explode (this is just starting now by the way).
The Fed and Treasury lent out money which is coming back to them and staying off of the street for now, but with the push to lend growing ever stronger some of this money supply will eventually find its way out there. How much and how fast will certainly be the answer to the question of whether or not inflation kicks in and if so how fast. For now deflation is the only game in town, but that can change quickly. As the dollar goes up and it has been and in my opinion will continue to do so, a lot of people will be scurrying to get out of situations they have placed themselves in via carry trade. This is when the game will begin to change dramatically. Of course as long as the Government continues the stimulus plans in place this will not be allowed to occur but the Government cannot add stimulus dollars forever into the economy thus the end game comes into play at some point. My guess is sooner rather than later like possibly the middle of next year or so.
Then as you say things will get very, very interesting around these parts…
December 23rd, 2009 at 1:19 pm
@Stu: Don’t interpret any of my posts as somehow being supportive of the Dems or the president. I voted for the man, for sure, but he’s been a major disappointment for me thus far, but it’s utterly laughable to think that anything will change for the better if we somehow just elect the GOP back into power. I’m on voter’s strike for the foreseeable future.
December 23rd, 2009 at 1:29 pm
“Their place in the economy is so distorted, as to become nearly economically meaningless.”
Were only their liabilities throughout the global financial system not so profound! Yet by how your statement might be seen advocating a flanking operation, I quite agree.
Likewise, there are many ways to skin a cat in whose latter lives among nine lives a hopelessly bankrupt illusion.
December 23rd, 2009 at 1:31 pm
@ Mannwich:
If you know how the Congress operates then you know that by having control they in fact control what comes up for vote in the house. They basically control the overall agenda via there majority. Since 2006 most policies coming out of Washington have been Democratic in nature in terms of theory and mind set. For example the GOP led charge to rein in Fannie and Freddie was never allowed to advance due to the DEM’s not wanting to do so. Look where that got us.
I want to emphasize once again that a GOP ruling party would have produced equally ugly and disastrous results as we are seeing today from the DEM’s. That doesn’t relinquish the failure of the DEM’s to do right since 2006 with their power in Congress. Much of the situation we are in today is a direct result of the failure of Congress to do its job and maintain a balanced budget, small Government, and a strong military. You know that pesky constitution and the oath these members of our Government take to uphold it. They have all fallen short in my opinion but at least with two party rule the chances of things getting woefully out of control, as they have become, are much less likely.
To be honest however, the true fault I believe is with the voters who have slowly become uneducated in the ways of politics and as a result the fox has been guarding the hen house. The lack of interest by most and voting with their feet by many who are engaged has allowed most of this to occur. This is changing I think and it can’t happen fast enough for me.
December 23rd, 2009 at 3:24 pm
1st – thread top post .. right on .. borrow at 1/4% then relend at 3% on up* .. its a no brainer
* hearing stories of 29% on credit cards
2nd – @ Mannwich who is “on voter’s strike” .. I hear ya .. I’m like there too BUT .. the agressor will win out .. imo its the GOPs nature to be the agressor .. I see Dems as turn the other cheek types
now .. I said ” hear ya .. I’m like there too” .. so whats the answer? .. pitchforks NOT
December 23rd, 2009 at 3:35 pm
stu,
it was 40-1 leverage that allowed it all too happen, if not for that fannie and freddie would have been a problem yet manageable
the banks saw global growth, hot housing, a recovering economy and wanted it all
they took it, levered it all up and bet on commodities and everything else, and then it all came down
now whoever let that one fly was truly isane, banks and everyone plays at the margins no matter what, so some group somewhere decided this was reasonable and good
now, you got zombie banks worlwide like japan did for forever
what control they had has been lost, a commodity rally will crush europe and us of a
December 23rd, 2009 at 3:43 pm
I’d like to know if Stu was decrying GOP “leadership” when they complete control for six years. My guess is not.
December 23rd, 2009 at 4:24 pm
“We are lending, Mr. President — to you and your friends in government, so you can spend like drunken sailors”
December 23rd, 2009 at 4:29 pm
Give up Manny; you know the drill for the dittoheads. Someone chrisitened one of the post WWII Soviet negotiators “Old Iron Ass” because he could sit there and put forth the same position all day regardless of facts or argument.
Agree with you on this. As I’ve said before, our government is like the British governments of 18th century: everyone looking to get and keep power so as to line their own pockets.
December 23rd, 2009 at 4:45 pm
@Mike: Totally agree. I had another post refuting Stu’s argument about so-called “liberal”, “soci@list” policies, but alas, it got eaten because of that word above was in it. There’s nothing “liberal” (progressive, if you will) or even “soci@list” about any of these bailout policies. Not a thing. It’s corporate f@scsism or f@scism-lite, if you will, but that one’s too complicated for the teabaggers, so they have to fall back on their tired old labels, however inaptly used they may be.
December 23rd, 2009 at 4:53 pm
@Mike: This is a great post that relates somewhat to what you posted.
http://www.nakedcapitalism.com/2009/12/is-kleptocracy-a-relevant-term-for-discussion-about-the-origins-of-the-crisis.html
December 23rd, 2009 at 7:07 pm
“Theior oplace in the economy is so distorted, as to become nearly economically meaningless . . .”
Their distortion causes them to be negatively, economically meaningful. Thanks Uncle Sam…
December 24th, 2009 at 1:45 pm
wally; The banking bailout was done by the Bush administration because they had to prevent the collapse of the finaincial sector, and this was the only politically palatable way they could/would do it. The right way to do it was to nationalize all the failing banks like Sweden did. When you looked back in history at the Swedish solution and the Japanese solution and their respective outcomes, it was a no brainer. Problem is that even a no brainer was to much for Bush. Remember also that even the dumb a$$ way they did it, had huge numbers of Republicans foaming around the mouth about soci@lism – they would never have gotten the Swedish solution through congress if the had wanted it. After Obama came into office he had to try to unwind the banking bailout, and he has actually gotten most of the money back from the big banks (except Citi). The reform of the banking system that was supposed to prevent something like this from happening again has so far been a disaster, in great part because he chose the wrong advisers.
December 24th, 2009 at 1:48 pm
Stu; sorry the two party system is actually badly broke and we have nothing to replace it with unless we rewrite our constitution. The one and only purpose of the republicans right now is to block anything that the democrats propose. They have even stopped pretending and now refuse to come up with any realitic comprehensive proposals of their own. So the minute they get their 41 senators they will block all legislation and start hoping the country will collapse so they can show what a failure Obama is. The democrats may attach a few things to the defense appropriations bills and dare them to filibuster, but nothing of any substance will change. This whole experience with a willfully destructive opposition will turn democrats bitter enough that when the republicans finally get back in power the democrats will do the same to them.
Sorry stu the GOP could have “reined in” F&F back in 2005 when that really would have meant something, trying to close the door after the horse is out of the barn is just political theater for gullible souls.
December 28th, 2009 at 2:08 pm
[...] asks “Why aren’t banks lending?” and suggests their rationale is [...]
January 15th, 2010 at 9:00 am
[...] will at most represent 5 percent of profits at the banks (according to the Journal), and given the overall lack of bank lending since the start of the [...]
February 9th, 2010 at 9:55 am
[...] community banks are not lending either. Why, you may wonder? According to finance blogger Barry Ritholz, because it is [...]