Banks use TARP funds to boost lending – NOT!

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Thumbnail image for Leo Hindery.JPGAs Leo Hindery points out on New American Contract’s latest US Economy Talking Points, the Financial Times may be missing the point about a recently released report on TARP’s impact on bank lending.

The headline of today’s Financial Times cover story “Banks use Tarp funds to boost lending,” could not be more misleading.
As the article itself makes clear, “Some 43 per cent [of banks] said that they had bolstered their capital cushion, 31 per cent made other investments, 14 per cent repaid debt and 4 per cent made acquisitions.” Clearly, the 49 per cent of the TARP funds (31+14+4) that went to something other than “bolstering capital cushions” did not go to loan making, but that does not at all mean that the 43 per cent which did go to capital cushions materially “boosted lending”, even though a large number of the respondents would have us believe it did:
First, one needs to measure the amount of TARP dollars not the number of TARP recipients, since of course a small distressed regional bank that received a de minimus amount of TARP monies is no comparison to, say, Citibank and BofA, and the article fails to make this distinction.
Second, a careful review of last week’s bank earnings reports shows that in the first half of 2009, the major banks, which received almost all of the actual TARP monies, actually used their bolstered capital cushions and the exceptionally high 25:1 leverage ratio permitted under the Geithner stress tests mostly for renewed proprietary trading – and, according to their very own statements, specifically NOT for much new lending.
- Leo Hindery
Chairman, Smart Globalization Initiative, New America Foundation
Managing Partner, Intermedia Partners

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– Samuel Sherraden

Comments

10 comments on “Banks use TARP funds to boost lending – NOT!

  1. George says:

    Wow i can’t believe TARP. This is one of the most deceiving things that I’ve heard

    Reply

  2. Dan Kervick says:

    Hindery’s reasoning seems quite flawed here, since he draws a wildly unjustified inference from the percentages of banks reporting the use of TARP funds for various activities to the actual percentages of TARP funds used for those activities. He says,
    “As the article itself makes clear, “Some 43 per cent [of banks] said that they had bolstered their capital cushion, 31 per cent made other investments, 14 per cent repaid debt and 4 per cent made acquisitions.” Clearly, the 49 per cent of the TARP funds (31+14+4) that went to something other than “bolstering capital cushions” did not go to loan making …”
    But the report in no way licenses the conclusion that 49% of TARP funds went into acquisitions, debt repayment and other investments. The report says, rather, that 49% of *banks* reported *some* use of TARP funds for these activities. But some banks clearly used TARP funds for more than one activity at a time, as can be quickly inferred on page 34, where we see that in each column the sums of numbers of banks using funds for the various specified activities well exceeds the total number of banks receiving funds.
    So far as I can tell, there is no way to pull out of the report what percentage of TARP funds overall were used for any given activity. However, the table on page 35 does give us a little bit of help. In that table, banks are classified according to the total amount of TARP funds received. We can see that for the 23 banks receiving $1 billion or more (first two columns) only 2 of them reported using any portion of the funds whatsoever for dept repayment, and only 6 used some portion of their funds to shore up their capital cushion. Banks receiving $100 million or less were much more likely to use some portion of their funds for these activities.
    And the second table on page 34 indicates that only 2 of the 14 largest banks (column 1) used any portion of their TARP funds whatsoever to pad their capital cushions. This point seems to tell against Hindery’s implication near the end of his note that the major banks were steering TARP funds into bolstered capital cushions that were in turn used to support renewed proprietary lending.
    These observations still don’t get us the information we would need to make even an intelligent guess on what proportions of funds were used for the specified activities. For one thing there are many more banks in the categories of banks receiving smaller portions of funds. But fundamentally the report just doesn’t include information on the percentages of funds used, per recipient or in aggregate, for any of the activities described.

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  5. rbbmis says:

    “FM” is correct.

    Reply

  6. ... says:

    the fiat system is about lending while not getting caught up in the pay back… find an excuse to bailout and print more funny money… back in 1913 the usa gov’t turned over control of its financial system to a group of crooks.. it has been downhill ever since, and it won’t change when the foxes continue to guard the chicken house and the general public is ignorant of this central system around money, who controls it and who gets to print it, etc. etc…

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  7. FM says:

    Whether the banks took the dollars recieved from TARP and lent them out or not is almost beside the point. The financial system was on the brink of collapse, which probably would have resulted in a chain reaction of bank failures. If many institutions had suddenly failed credit would have been much tighter for much longer, doing great harm to the economy. What many of the critics of tarp lack is a resonable counter proposal to what the government should have done. We tried doing nothing 80 years ago and the result huge numbers of bank failures, total loss of confidence, deflation, 25% unemployment etc.

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  8. Mr.Murder says:

    The gutting of personal bankruptcy laws is what started this. Unless you can recycle debt it will always end up robbing the economic engine of energy to deliver growth.
    We’ve been trying to bolster a one sided model. It will repeatedly fall short.
    Instead, we did the free bailout on the proprietary end. As the base pay of workers is diminished we lack the fundamentals to run even a service economy without better credit and the window of bankruptcy is a major leg in that.
    There is no fundamental basis for bailouts to work without the same kind of leniency being allowed to the individual consumer/borrower.

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