Banks Insult The Government By Lowering Lending

Banks are getting TARP money, but they are not using it to ease credit to consumers and businesses, at least to extent that taxpayers and some members of Congress believed that they should.

According to The Wall Street Journal, “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 financial firms may be using the capital to brace their troubled balance sheets.

The news shows that the banks violated what was probably a tacit agreement between them and then-Treasury Secretary Paulson. TARP money was not just being invested in banks to save them; it was being invested to unlock frozen credit markets so that spending in the US might regain some of its traction. That, obviously, did not happen.

The banks may have taken some advantage of the change in administrations which occurred just three months after most of the TARP money was distributed. But, whether that is true of not, the lack of lending points to a tremendous weakness in the TARP program. It did not require banks to earmark a certain portion of the capital for lending purposes.

The banks would say that the government did not and does not have the right to mandate how the money is used. But, because of the “ownership” it received in the banks for its investment, that is not entirely true. Also, if the Administration can influence whether Citigroup (C) buys a new corporate jet, it can certainly weigh in on lending practices.

The Administration has also always had the “bully pulpit”, a way to publicly deride the banks for doing the wrong things with the capital that they received from taxpayers. By not electing to use that leverage, the likelihood that banks will thumb their noses at the government has increased.

Douglas A. McIntyre