[Marxism] Bailout was not used to increase lending

Louis Proyect lnp3 at panix.com
Sun Jan 18 07:10:12 MST 2009


NY Times, January 18, 2009
Bailout Is a Windfall to Banks, if Not to Borrowers
By MIKE McINTIRE

At the Palm Beach Ritz-Carlton last November, John C. Hope III, the 
chairman of Whitney National Bank in New Orleans, stood before a 
ballroom full of Wall Street analysts and explained how his bank 
intended to use its $300 million in federal bailout money.

“Make more loans?” Mr. Hope said. “We’re not going to change our 
business model or our credit policies to accommodate the needs of the 
public sector as they see it to have us make more loans.”

As the incoming Obama administration decides how to fix the economy, the 
troubles of the banking system have become particularly vexing.

Congress approved the $700 billion rescue plan with the idea that banks 
would help struggling borrowers and increase lending to stimulate the 
economy, and many lawmakers want to know how the first half of that 
money has been spent before approving the second half. But many banks 
that have received bailout money so far are reluctant to lend, worrying 
that if new loans go bad, they will be in worse shape if the economy 
deteriorates.

Indeed, as mounting losses at major banks like Citigroup and Bank of 
America in the last week have underscored, regulators are still 
searching for ways to stabilize the banking system. The Obama 
administration could be forced early on to come up with a systemic 
solution, getting bad loans off balance sheets as a way to encourage 
banks to begin lending, which most economists say is essential to get 
businesses and consumers spending again.

Individually, banks that received some of the first $350 billion from 
the Treasury’s Troubled Asset Relief Program, or TARP, have offered few 
public details about how they plan to spend the money, and they are not 
required to disclose what they do with it. But in conversations behind 
closed doors with investment analysts, some bankers have been candid 
about their intentions.

Most of the banks that received the money are far smaller than behemoths 
like Citigroup or Bank of America. A review of investor presentations 
and conference calls by executives of some two dozen banks around the 
country found that few cited lending as a priority. An overwhelming 
majority saw the bailout program as a no-strings-attached windfall that 
could be used to pay down debt, acquire other businesses or invest for 
the future.

Speaking at the FBR Capital Markets conference in New York in December, 
Walter M. Pressey, president of Boston Private Wealth Management, a 
healthy bank with a mostly affluent clientele, said there were no 
immediate plans to do much with the $154 million it received from the 
Treasury.

“With that capital in hand, not only do we feel comfortable that we can 
ride out the recession,” he said, “but we also feel that we’ll be in a 
position to take advantage of opportunities that present themselves once 
this recession is sorted out.”

The bankers’ comments, while representing only a random sampling of the 
more than 200 financial institutions that have received TARP money so 
far, underscore a growing gulf between public expectations for how the 
$700 billion should be used and the decisions being made by many of the 
institutions that have taken part. The program does not dictate what 
banks should do with the money.

The loose requirements in the original plan have contributed to 
confusion over what the Treasury intended when it abruptly shelved its 
first proposal — to buy up bad mortgages — in favor of making direct 
investments in individual banks in return for preferred shares of stock.

The Treasury secretary, Henry M. Paulson Jr., said in October that banks 
should “deploy, not hoard” the money to build confidence and increase 
lending. He added: “We expect all participating banks to continue to 
strengthen their efforts to help struggling homeowners who can afford 
their homes avoid foreclosure.”

But a Congressional oversight panel reported on Jan. 9 that it found no 
evidence the bailout program had been used to prevent foreclosures, 
raising questions about whether the Treasury has complied with the law’s 
requirement that it develop a “plan that seeks to maximize assistance 
for homeowners.”

The report concluded that the Treasury’s top priority seemed to be to 
“stabilize financial markets” by simply giving healthy banks more money 
and letting them decide how best to use it. The report also said it was 
not clear how giving billions to banks “advances both the goal of 
financial stability and the well-being of taxpayers, including 
homeowners threatened by foreclosure, people losing their jobs, and 
families unable to pay their credit cards.”

For the banks, fearful that the economic downturn could deepen and wary 
of risking additional losses, the question of what to do with the 
bailout money comes down to self-preservation.

Mark Fitzgibbon, research director at Sandler O’Neill & Partners, which 
sponsored the Palm Beach conference, said banks seemed to be allocating 
the bailout money for four general purposes: increased lending, 
absorbing losses, bolstering capital and “opportunistic acquisitions.” 
He said those approaches made sense from a business perspective, even 
though they might not conform to popular expectations that the money 
would be immediately lent to consumers.

“For the banking industry, this isn’t a sprint, this is a marathon,” Mr. 
Fitzgibbon said. “I think over time there will be pressure to lend that 
capital out and get a return for their shareholders. But they’re not 
going to rush out and lend all that money tomorrow. If they did, they 
could lose it.”

For City National Bank in Los Angeles, the Treasury money “really 
doesn’t change our perspective about doing things,” said Christopher J. 
Carey, the bank’s chief financial officer, addressing the BancAnalysts 
Association of Boston Conference in November. He said that his bank 
would like to use it for lending and acquisitions but that the decision 
would depend on the economy.

“Adding $400 million in capital gives us a chance to really have a 
totally fortressed balance sheet in case things get a lot worse than we 
think,” Mr. Carey said. “And if they don’t, we may end up just paying it 
back a little bit earlier.”

In addition to wanting more lending, members of Congress have said TARP 
should not be used to fuel mergers and acquisitions, although Treasury 
officials say the financial system would be strengthened if healthy 
banks absorbed weaker ones. To that extent, bailout money has been 
useful for improving capital ratios — the amount of money available to 
absorb losses — for banks that merge.

On Friday, Bank of America said it would receive $20 billion more from 
the Treasury to help it digest losses it took on by acquiring Merrill 
Lynch, a process begun in September.

At least seven banks that received TARP money have since bought other 
companies, including one that had been encouraged to do so by federal 
regulators. That one, PNC Financial Services, took $7.7 billion from the 
Treasury and promptly acquired the struggling National City Bank for 
$5.2 billion in stock and $384 million in cash.

Among the others, PlainsCapital Bank of Dallas announced in November, 
not long after the bailout program began, that it planned to merge with 
a healthy investment bank, First Southwest. PlainsCapital received $88 
million from the Treasury on Dec. 19, and the all-stock merger was 
completed two weeks later. PlainsCapital’s chairman, Alan B. White, 
insisted in an interview that the two events were not connected.

He said the bank had not yet decided what to do with its bailout money, 
which he called “opportunity capital.” Increased lending would be a 
priority, said Mr. White, who did not rule out using it for other 
acquisitions, adding that when regulators invited PlainsCapital to apply 
for federal dollars, there were no conditions attached.

“They didn’t tell me I had to do anything particular with it,” he said.

None of the bankers who appeared before recent investor conferences 
offered specific details about their intentions, but recurring themes 
emerged in their presentations. Two of the most often cited priorities 
were hanging on to the money as insurance against a prolonged recession 
and using it for mergers.

At the Sandler O’Neill East Coast Financial Services Conference in 
Florida, bankers mingled with investment analysts at an ocean-front 
luxury hotel, where the agenda featured evening cocktails by the pool 
and a golf outing at a nearby country club.

During his presentation, John R. Buran, the chief executive of Flushing 
Financial in New York, said the government money was a way to up the 
“ante for acquisitions” of other companies.

“We can get $70 million in capital,” he said. “So, I would say the price 
of poker, so to speak, has gone up.”

For Mr. Hope, the Whitney National Bank chairman, “the main motivation 
for TARP” was not more loans, but rather to safeguard against the 
“possibility things could get a lot worse.” He said Whitney would 
continue making loans “that we would have made with or without TARP.”

“We see TARP as an insurance policy,” he said. “That when all this stuff 
is finally over, no matter how bad it gets, we’re going to be one of the 
remaining banks.”




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