Thursday, December 11, 2008

Should Banks Start Lending Again?

Banks aren’t doing a lot of lending these days.

Why not?

The Federal Reserve System has bent over backwards dumping liquidity into the financial system. The United States Treasury Department has provided the banking industry with a lot of new ‘capital’. Why aren’t the banks’ lending? Why aren’t the banks even lending to themselves…

My question: Why should the banks be lending?

My answer: they shouldn’t…not right now!

A good reason for this is that United States financial institutions still do not have a firm grasp on the value of a large portion of their assets. “The biggest US financial institutions reported a sharp increase to $610 billion in so-called hard-to-value assets during the third quarter…” (“Financial groups’ problem assets hit $610 bn”, These assets, primarily mortgage-backed securities and collateralized debt obligations, don’t have active markets at the present time and they are difficult to value. I should be noted that the assets so identified “are many times bigger than the market cap of the banks.”

If you were a banker right now, where would you be focusing your resources at the present time? Would you be attempting to put new loans on the books that would pay off over several years’ time…or…would you be trying to get your arms around the value of these ‘level-three’ assets and see how you can minimize the damage they might cause…in the immediate future?

As long as these assets are on-the-books bank managements are going to muddle around, attempting to minimize the information that is released, and ask for the government to protect them from the downside through asset purchase programs that shore up asset price and the like.

This only distracts efforts and prolongs things! Until the banks are forced to write down their assets to realistic (some form of market) values and take their hits…they will be unable to focus on business and get on with their lives.

But there are other things looming on the horizon. Why would you want to put on new loans when you have people talking about the rising level of foreclosures? Elizabeth Warren of Harvard who is leading the oversight of TARP stated on television last night that in the next two years 8 million houses will be in foreclosure, an amount that is about 16% of the housing stock. That is one out of every six houses in the United States will be in foreclosure within the next two years!

And, why would you want to put on new loans when you have people talking about the rising level of charge-offs related to credit cards? (See “Charge-offs Start to Shred Card Issuers”, All the statistics in this area point to a surge in charge-offs that will be faced by credit card issuers in the future.

Furthermore, there is still the unknown number and size of business defaults that are coming down the road. Of course, there are the auto companies…but, the condition of the credit wings of the auto companies reinforce the concern. Ford Motor Credit Co. is teetering on the brink of bankruptcy…as is GMAC. (“GMAC Bondholders Balk at Debt Swap”, Also see “Doubts on GMAC bank holding plan”,

Financial institutions cannot make loans when they are so uncertain about the loans that they have already made. Financial institutions cannot make loans when there is so much uncertainty about the length and depth of the recession, the rise in layoffs and the falloff in employment. (Just released: Jobless Claims hit a 26-year high!) Those individuals and businesses that are seeking loans want to refinance or restructure…to gain control over cash flows so that they don’t run out of cash. Borrowing related to expanding business or creating jobs is almost non-existent. (“Executives Are Grim on Economy”,

Should banks be lending now?

The answer to this is no…they are not social institutions.

Yes, it would be helpful to the economy if all banks opened their doors and started flooding the market with loans. Everyone would benefit…right?

OK, then…who wants to be first?

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