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TMFBomb (95.56)

Why We'll Never Know If TARP Leads to More Lending



February 15, 2009 – Comments (3)

There's been much outcry over making sure banks use their TARP money for lending...rather than corporate jets, Vegas vacations, dividends, repurchases, or even shoring up their reserves.

For today's post, I'm leaving aside the whole "isn't this what got us into this mess" side of things.

Let's assume that the goal is making sure banks are using TARP money to make more loans and unfreeze the credit markets.  Geithner's financial stability plan has a few steps that seek to ensure this from banks taking future government cheese:

- Limiting dividends to $0.01 per quarter.

- No share repurchases.

- No acquisitions of healthy firms.

- Banks must submit to the government (who will make publicly available on a plan on how they will use TARP money to increase their lending and report on their lending activities on a monthly basis.  Plus, they must "include a comparison to their most rigorous estimate of what their lending would have been in the absence of government support."  

Totally onboard with the first two...dividends and repurchases just enrich shareholders at taxpayer expense.  Fair enough on #3...if you need government money, you shouldn't be buying rivals (remember when Citigroup almost bought Wachovia...yikes!).

As for #4, I'm fine with the transparency.  The more people that see this stuff, the better.  But don't be fooled.  It will be very easy for the banks to use the TARP money however they see fit. 

Let's take a simple scenario.  If I give you $20 and say, "You have to use this money to buy food."  You say "Fine."  You take the $20 and buy food.  Then you take the $20 you would have spent on food anyway and buy a DVD. 

Did you comply with my terms? Yes.  Did you really spend the incremental money on food? No.  You spent it on a DVD.

As long as you planned on spending at least $20 on food to begin with, you'd have no problem technically complying.

And I put no weight on the "rigorous" what-if lending scenarios.  I'm going to make the wild guess that every bank that takes money will say that they lent a lot more than they would have without TARP money.  Manipulating financial models to support bad decision-making is kinda their stock in trade.  




3 Comments – Post Your Own

#1) On February 15, 2009 at 6:09 PM, UltraContrarian (30.61) wrote:

Anyone actually watching the credit markets knows that bank lending has increased since TARP I and spreads have come way down.  If you want to argue that would have happened in an alternate universe where we did nothing, go ahead, but existentialist economics sounds like a waste of time to me.

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#2) On February 15, 2009 at 7:15 PM, rd80 (97.69) wrote:

Geitner's four steps suffer from the same fundamental flaw as the original TARP.

If the goal is to increase lending, then the money needs to go to banks that can lend it.  That means the relatively stronger, healthier banks that can lever the money up and get it to the credit markets.  But, those banks don't need the money.  If the government puts too many strings on it, they won't take it.

The banks that will take the money with significant strings are the ones in trouble.  But those firms need the money to strenghten their balance sheets and don't have a lot of other viable options for raising it.  Since it's needed to cover write-downs or to strengthen reserve ratios, they can't lever up and lend to the same extent as the stronger banks.

Put strings on the money to make the banks do what you want and the only banks that will take the money can't do what you want. 
Don't put strings on it and the banks you need will take the money, but they might not do what you want.

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#3) On February 16, 2009 at 3:38 PM, TMFBomb (95.56) wrote:

Let me clarify a bit...I don't disagree with either of the comments above...the announcement of TARP defused a very scary situation...confidence in our banking system was at unhealthy levels. 

My only point in this post is that (with no value judgment at this time), contrary to the sound of the monhtly lending reporting, the banks will have tremendous leeway in spending.

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