Banks Aren't Lending, Don't Have Enough Capital, Other Than That They're Fine
Tim Geithner showed up on Capitol Hill today, facing the Congressional Oversight Panel (whose leader got a brushback from the Beltway establishment and the right leading up to this hearing) to defend his plans for the financial industry.
Treasury Secretary Timothy Geithner defended the bank rescue program devised by the Obama administration Tuesday as the International Monetary Fund predicted U.S. financial institutions could lose $2.7 trillion from the global credit crisis [...]
Geithner said the new plan "strikes the right balance" by letting taxpayers share the risk with the private sector while at the same time letting private industry use competition to set market prices for the assets.
"If the government alone purchased these legacy assets from banks, it would assume the entire share of the losses and risk overpaying," Geithner said in his remarks. "Alternatively, if we simply hoped that banks would work off these assets over time, we would be prolonging the economic crisis, which in turn would cost more to the taxpayer over time."
Geithner said "the vast majority of banks" have more capital than they need to be considered well-capitalized. But he said the economic crisis and the bad assets have created uncertainty about the health of individual banks and reduced lending across the system.
I think the vast majority of banks are well-capitalized only if you mean "not the big ones." I mean, we have pretty hard evidence on this. The Treasury wouldn't play accounting games by converting preferred shares to common stock, which has the express purpose of reducing the liabilities on the banks' balance sheet and giving the impression that THEY ARE MORE WELL-CAPITALIZED, if the opposite was true. James Kwak pretty well takes apart the whole idea, so I won't comment further.
In addition, if the banks were so well-capitalized, they would actually lend instead of hoarding capital, which after all is the function of a bank.
Lending at the biggest U.S. banks has fallen more sharply than realized, despite government efforts to pump billions of dollars into the financial sector.
According to a Wall Street Journal analysis of Treasury Department data, the biggest recipients of taxpayer aid made or refinanced 23% less in new loans in February, the latest available data, than in October, the month the Treasury kicked off the Troubled Asset Relief Program.
The total dollar amount of new loans declined in three of the four months the government has reported this data. All but three of the 19 largest TARP recipients with comparable data originated fewer loans in February than they did at the time they received federal infusions.
Interestingly, the same banks that cut back the most on lending are the ones who have received the most money from the federal government, which suggests that the TARP funds might as well have been thrown down a well. But the banks want to return that TARP money (and I'm sure they'll get around to that any day now) while talking up their own earnings, which have been seen by the street as soft as tissue paper. To their credit, Treasury wants to put some limits on that return of TARP money, based on some amorphous idea of whether repayment is in the "national economic interest". But clearly, the banksters have never acted in that interest. This sad tale is sadly indicative:
Top officials at Chrysler Financial turned away a government loan because executives didn't want to abide by new federal limits on pay, according to new findings by a federal watchdog agency.
The government had offered a $750 million loan earlier this month as part of its efforts to prop up the ailing auto industry, including Chrysler, which is racing to avoid bankruptcy. Chrysler Financial is a major lender to Chrysler dealerships and customers.
In forgoing the loan, Chrysler Financial opted to use more expensive financing from private banks, adding to the burden on the already fragile automaker and its financing company.
They have always been more concerned with their personal fortunes than the health of the overall economy or even their own businesses. The greed here is astonishing.
Let's be honest here. Many banks are insolvent, and even the Administration admits that some will need more help. They don't want to sell the toxic assets because their essential insolvency will be too obvious to ignore. And they don't want the stress tests revealed for basically the same reason. At no point has the government appeared willing to end the stranglehold that the elites and the financial interests have over this economy.
I continue to worry that the Administration’s “wait-and-see” strategy is just increasing the ultimate costs - in terms of financial losses and unemployment. No government ever likes to tackle a severe banking crisis head on (mostly because that would greatly upset the financial elite), but it’s almost always the right thing to do.
I remain unconvinced by the Treasury’s line that “there is no alternative” to their approach. Or perhaps they are shifting towards the line that: “based on information that only the government has (and can have), it is our assessment that all other approaches would be more damaging.”
If that is now their position, we have built a financial system that is immune to democracy - today’s complexity and lack of transparency mean that it is easier than even to become too big to fail. The major banks now know this and will behave accordingly.
Oh, and by the way, the PPIP plan may be open to fraud and puts the taxpayer on the hook for close to $2 trillion.
It's their world, we just live in it.
More at TPM Muckraker.