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Last fall, former Treasury Secretary Hank Paulson decided it would be good to buy the toxic waste off of bank balance sheets, so he persuaded the President and Congress to spend $700 billion to create the Troubled Asset Relief Program (TARP).
Once he got the money, he changed his mind and decided that buying toxic waste made no sense -- so he used it to buy big chunks of senior preferred stock in U.S. financial institutions (FIs). Why? I don't know, but it certainly was not to get lending going again.
How so? After spending $590 billion of TARP money, lending is way down. Between October 2008 and February 2009, bank lending among 21 big TARP recipients dropped $52 billion or 23% -- from $226 billion in October to $174 billion in February.
We know $18.4 billion of that TARP money went to Wall Street bonuses, but what happened to the rest? They couldn't have spent it all on corporate jets and plush vacations. Meanwhile, the U.S. has lost $104 billion on its TARP investments so far!
To be fair, these lending figures mask wide variations between the good guys who are lending more and the bad guys who are cutting back. Specifically, Wells Fargo (NYSE: WFC) boosted lending 60% and Morgan Stanley (NYSE: MS) lent 46% more during the period, while Goldman Sachs Group (NYSE: GS) slashed lending 50% and JP Morgan Chase (NYSE: JPM) cut its lending 35% -- despite protestations by CEO Jamie Dimon.
So why don't we just end the TARP program and make all the banks pay back all the money? Because getting lending going is not the real reason for the TARP. If the U.S. wanted to get lending going again, it would create new banks -- if $350 billion were used to create new banks, we could add $3.5 trillion in lending capacity.
The real reason for the TARP is to lower the cost to the U.S. of fixing the zombie banks -- those that are burdened by too much toxic waste to take the chance of lending out more money. The idea seems to be that if we put enough capital into the zombie banks, they can survive until the economy improves enough so that they can sell their toxic waste and resume lending.
As I've posted, this is a huge waste of money. Instead, we could spend $70 million getting hard data on which individual mortgages are bad within the mortgage-backed securities (MBS) the zombie banks hold, and then sell those bad mortgages to the FDIC. This would cut the cancer out of the MBSs and investors would buy them since they would consist only of paying mortgages.
It's time to shred the TARP and cut the cord to Paulson's lame-brained schemes.
Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College. His eighth book is You Can't Order Change: Lessons from Jim McNerney's Turnaround at Boeing. He owns Wells Fargo shares and has no financial interest in the other securities mentioned.
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Reader Comments (Page 1 of 1)
4-29-2009 @ 8:33PM
marq said...
If your debt is currently so high you can not service it then adding more debt will make it more so.
The highest total debt to GNP ratio in over a 110 years and the banks know not to increase the ratio. We also have had a credit account deficit (exodus of wealth) for over 30 years. The US lacks the ability to create wealth as most production has been moved to our trading partners. Now with the government monetizing debt why would the lending institution lend out money knowing they will be paid back with less valuable dollars? They will not do it unless the interest rate is high enough to compensate for the reduced dollar value. Current government intervention has made the problems worse by imitating what Japan did in the 1990's. The recinding of the Glass-Steagall act, the House-Senate banking commission changes of relaxing the debt to income ratios for home buyers and the leveraging increase in 2004 for equity banks from 13:1 to 40:1 have also caused the banks inablity to increase debt to the US.