Should We Force Bailed Banks to Lend?

It was only months, maybe weeks ago that banks were being scolded for their loose lending practices -- rightfully ridiculed for loaning money to anyone with a heartbeat, a smile, and an itch to get rich.

Oh, how the tables have turned.

Some banks are now drawing fire for not lending enough. Specifically, some are crying foul that banks that received direct injections from the Treasury aren't ramping up lending, and have instead opted to sit on the cash and wait or use it to acquire other banks.

"What we're trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money," said White House Press Secretary Dana Perino.

Treasury undersecretary for domestic finance Anthony Ryan added, "As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend and support the American people and the U.S. economy."

Responsibility to lend? Really?
Come on: Banks don't exist to lend money; they're in the business of lending money -- meaning it should be done responsibly, and only when profitable. And banks don't have a responsibility to lend; they have a responsibility to do what's best for their shareholders. (In this case, taxpayers, too.)

The money injected into these banks is dirt, dirt cheap: an initial 5% dividend and warrants worth 15% of the principal. That's a fraction of what Warren Buffett got from Goldman Sachs (NYSE: GS  ) and General Electric (NYSE: GE  ) . With cheap money like that, any reasonable bank would be lending every penny as quickly as possible … provided it was the best use of the funds and the borrower was an attractive candidate. Right now, that category is a dying breed.

These guys aren't brain-dead
Can you blame banks for not wanting to lend money right now? The reason they aren't lending isn't because they want to swim through taxpayers' money like Scrooge McDuck … it's that they know darn well the economy is in phase one of a brutal economic downturn.

Back in July -- when things were "stable" -- Citigroup (NYSE: C  ) Chairman Win Bischoff warned that real estate could fall for another two years. And how about unemployment? It's now a touch above 6%. During the 1980-1982 recession, it shot past 10%. During the Great Depression, it surged to 25%. Banks have written off about $600 billion in bad debt in the past year. Nouriel Roubini expects that number could reach $3 trillion. And we wonder why banks aren't eager to flood the economy with loans?

Look, the last time the government forced an institution to lend resulted in the beauties known as Fannie Mae (NYSE: FNM  ) and Freddie Mac (NYSE: FRE  ) . And their final outcome probably wasn't coincidental.

Besides, who says banks aren't lending enough? Despite the exhilarating headlines, one piece of credible analysis from the Minneapolis Federal Reserve shows that lending to non-financial entities remains healthy.

Can't do anything right
Another group is peeved that some banks are using the cash to scoop up weaker competitors. As the New York Times put it, "the dirty little secret of the banking industry is that it has no intention of using the money to make new loans."

Sure enough, PNC Financial bought National City financed with a $7.7 billion injection from the Treasury. An unnamed JPMorgan Chase (NYSE: JPM  ) executive recently commented that the $25 billion his bank received "will help us … be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling." The nerve!

The alternative, of course, would be to let weaker banks fail, reliving the joys that Bear Stearns, Lehman Brothers, and WaMu brought us. If bigger banks like JPMorgan or Wells Fargo (NYSE: WFC  ) are willing to buy beleaguered competitors with their cheap funds, are we really going to complain about it? Perhaps if banks had the funds a few months ago, someone would have stepped up and bought Lehman Brothers, bypassing this whole thing to begin with.

Reality hurts
I guess the bottom line is that the $700 billion bailout was never designed to get banks lending at the foolhardy rates they had been in recent years -- it was designed to prevent banks from collapsing after being besieged by fear. If the painful medicine we need requires banks to scale back lending, good riddance.

For related Foolishness:

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. JPMorgan Chase is a Motley Fool Income Investor recommendation. The Fool has a disclosure policy.


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  • Report this Comment On November 02, 2008, at 2:04 PM, websmith1 wrote:

    The 90% of Citizens who opposed the bank bailout don't look so stupid now, eh Frank? The legislatures that went against the will of the people do look stupid, eh Frank? It was called a bank bailout or bank rescue, if you prefer. It was not called a enrich banks not in trouble bill. Perhaps you should have asked if the banks intended to loan out the money ahead of time? The banks have said that they intend to use the money to buy up the assets of failing banks for pennies on the dollar. In the meantime, foreclosures and layoffs are still on the increase while reporting of the situation by the corporate owned media is on the decrease. Are we really going to put these clowns back in office?

    http://ewebsmith.com/Finance/notlistening.html

  • Report this Comment On November 03, 2008, at 10:16 AM, McCrikey wrote:

    Put guns to their heads. It's the national socialism way.

    I'm kidding about the first part, but not the second.

  • Report this Comment On January 31, 2011, at 12:49 PM, compristous wrote:

    My wife and I opened a couple businesses in 2009. That is right against the odds and when things couldn't get worse in our economy we opened our own businesses. We deposited over $35,000.00 our first year,not bad since the companies were not fully operational until April of 2009. Last year we almost tripled our business depositing over $127,000 dollars. We have never been late on any payments, we also have plenty of credit letters from companies who do not report to the credit report, but instead will issue you a payment history and account statement, and in most cases will also give you a letter of good credit standing, our bank accounts have never gone into the negative, never accessed any overdraft charges, insufficient funds fees, no late fees, Nothing negative at all. Credit Score in the 700's. Average balance in our First Citizens Bank of SC accounts well over $2,000.00 a month. Here is how the banks are lending!!

    We had to spend $3,500.00 of our own money to secure a credit card thru Bank of America in order to get a credit card. Never been late on the payment, and never maxed out the card, and still to this day 2 years later, they refuse to roll it into a regular unsecured credit card. We need an expansion loan, do not need the money to progress forward, we make a profit in the company, but I am at a flat line, Better advertising, or the ability to secure an equitable asset that brings in revenue will help boost our current revenue and leave more profit at the end of the year! This Loan is meant only to help us to make even more money. So the need for the loan is not to survive, not to keep our business afloat, but merely to increase my revenue only. We asked for a 7,500 dollar loan from First Citizens Bank of SC 2 years ago, when we first opened, they had ridiculous application fees up to $3,000.00 dollars on a $7,500.00 loan. We were not worthy enough for that loan. This loan was to purchase equipment 2 years ago that would have benefited us and could have enabled us to secure an account that was guaranteed for 2 years at $125,000.00 a year. So First Citizens Bank of SC used their better judgment and said no to a $7,500 loan that would have resulted in $250,000.00 of revenue 2 years later. They also declined us for a credit card, but offered us a secured credit card with 120% down on the card. NOPE went to Bank of America and got the $3,500.00 secured card there. We then go back to First Citizens Bank of SC. We found another investment opportunity but needed $15,000 To purchase the existing business. The owners got what they wanted out of the business and wanted to move abroad for retirement. I turned in a 19 page business plan, included with it another 12 pages of financial and projections. THEY LOST THE APPLICATION. Said I had to resubmit my application, buy the time First Citizens Bank of SC wasted a month the opportunity was gone, they packed up the shop and moved out of the country like they told us. This business was doing $98,000 a year in revenue. So again First Citizens Bank of SC Lost another $100,000 over a $15,000.00 Loan. SO far the bank and their upstanding intelligence on lending practices, kept them from investing $22,500 dollars that would have resulted in $348,000 of revenue. We Are now in our last argument with First Citizens Bank of SC,we are asking for a $30,000.00 Line of credit, we deposited over $125,000.00 in their bank last year and hmaintain an average in one of our 3 accounts at $1500 dollars a month, the other accounts are still quite positive, and we have all our letters of credit. They are still fighting me on the application, they do not seem to want to lend any money at all. If they don't we will pull our money out and go to a 1 single branch bank, not county wide coverage, or state wide and definitely not nation wide. 1 Bank 1 Location. Then I will be important, and my banking relationship will finally be a relationship with a bank that meets me in the middle, instead of sitting in their million dollar mansion on the other side of the road waiting for me to do all the work! TRUST ME THE BANKS ARE NOT LENDING, not even Bank of America who our tax dollars bailed out of their bad judgments!

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