Despite urging from the White House and the Treasury Dept., banks aren't lending. Instead, they're hoarding money to bolster their own balance sheets. That's not helping consumers or the overall financial situation, and in the absence of consumer credit, the economy is stuck in reverse.

Nine leading banks will get half of $250 billion being doled out by the Treasury Dept. under the controversial TARP initiative. Those are Citigroup, JPMorgan Chase, Bank of America, Goldman Sachs, Morgan Stanley, Wells Fargo, Bank of New York Mellon, State Street, and Merrill Lynch. The rest of the money will be spread among smaller banks and mortgage lending companies. Financial institutions on the receiving end of the $250 billion should feel compelled and pressured to use the government money to resume bank lending. After all, they're overseen and regulated by the Treasury, which is giving them the money and wants to see it used to get the economy going again through mortgage lending. But, as the White House was careful to point out, the banks can't be forced to lend.

Choosing executive compensation over saving economy

Meanwhile, mortgage lending rates remain higher than they should be, considering the low underlying Fed rates, and bank lending to consumers remains stagnant. But consumer credit is vital to turn the economy around, and without brisk mortgage lending, the real estate market will remain unhealthy. At least for the time being, it appears that banks would rather hold the money. They're curtailing consumer credit, cutting back significantly on their mortgage lending products, and are generally avoiding bank lending in favor of their own agendas. Some are even making lawmakers and taxpayers upset because they continue to reward shareholders with dividends, and offer top executives fantastic salaries or golden parachute severance packages, while refusing to extend mortgage lending to customers. Although there are mandated limits on executive compensation attached to this $250 billion distribution, experts acknowledge that clever lawyers and accountants can find plenty of ways to still reward executives indirectly that don't violate those limitation rules.

Banks' interests taking priority

Acting Treasury Under Secretary Anthony Ryan made a speech recently during which he said, "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."

But despite threats and harsh words, banks are putting their own interests first. As the acclaimed New York Times writer and Nobel laureate economist Paul Krugman has noted, there are no real safeguards (like the ones the UK government wisely attached to its bank bailout plan) against the possibility that banks will simply sit on the money. Hoarding this mountain of cash is exactly what our big banks feel they need to do so that they have a shock absorber to protect them from future losses due to the continuing foreclosure crisis. Perhaps they'll change their tune once a new administration, with aggressive economic reform plans, assumes power.

Published on November 25, 2008