- The Washington Times - Tuesday, November 4, 2008

Attention members of Congress: U.S. banks are not hoarding their cash but have substantially increased lending in the past month to businesses, homeowners, the federal government and even the struggling auto sector.

Bank financing for all manner of borrowers jumped nearly $500 billion to $10.06 trillion in the week ending Oct. 22 from September lending levels, the Federal Reserve reported Friday. That amounts to nearly twice the $250 billion of cash infusions that the Treasury is planning to spur lending among banks.

Banks are even helping the shell-shocked auto sector at a time when it is suffering its worst sales in decades. General Motors Corp. reported a stunning 45 percent plunge in October sales - its worst since World War II - as a result of a major pullback in consumer spending combined with a credit crunch that has starved both the automaker and its customers of loans. Automakers overall reported a one-third drop in sales to the lowest levels since 1991.

As dire as GM’s plight has become, it would have been worse if it hadn’t been able to tap a $4.5 billion line of credit with Citigroup and JP Morgan - two major recipients of Treasury cash - after getting shut out of corporate borrowing markets.

The sizable shift to bank financing by big businesses such as GM and Marriott International that have had trouble accessing collapsed credit markets was evident in the Fed’s survey. In just the first three weeks of October, bank loans to businesses increased by $65 billion and banks purchased $132 billion in corporate debt obligations to finance business operations and expansion plans.

Banks in the same three weeks also financed an $87 billion jump in mortgage loans, a $38 billion rise in home equity loans, and an $18 billion uptick in credit card and other consumer loans. They also purchased $127 billion of bonds issued by the Treasury, Fannie Mae and Freddie Mac to help finance home mortgages and the government’s massive rescue programs for banks and other financial firms.

It has become fashionable in Washington to complain that banks are not using their Treasury cash infusions to lend to consumers and business customers as Congress wished. The Fed’s figures show, however, that banks have remained active in providing much-needed credit to the economy even as other markets for loans such as the corporate bond, municipal bond and commercial paper markets have all but collapsed.

The banks are getting little thanks or credit on Capitol Hill for playing this vital role, however.

Legislators from House Minority Leader John A. Boehner, Ohio Republican, to House Financial Services Committee Chairman Barney Frank, Massachusetts Democrat, have expressed outrage that banks may be using the taxpayer-provided funds to pay dividends to shareholders and bonuses to executives and to acquire other banks, often in deals arranged by federal regulators to prevent taxpayers from having to bear the burden to close failed banks.

“The capital infusion for big banks was for the purpose of getting some lending moving in the economy again,” not to pay for executive bonuses or acquisitions, said Democratic Policy Committee Chairman Byron L. Dorgan, North Dakota Democrat, who vowed to force reforms on banks.

“Any use of the these funds for any purpose other than lending,” Mr. Frank said in a terse warning to banks, “is a violation of the terms of the act.”

Many analysts dismiss the legislators’ complaints as election-year posturing and jawboning aimed at getting banks to lend even more. But some see a darker side to the congressional threats.

“Governments everywhere are trying to tie public money with commitments to lend,” said Pierre Briancon, an analyst with Breakingviews.com, noting that French President Nicolas Sarkozy also has been trying to bully French banks into lending more.

“The goal is worthy, since sudden credit withdrawal is a real risk,” he said. “But so is government micromanaging.”

Fed surveys show that banks are trying to execute a delicate balancing act of continuing to extend loans to worthy customers while nursing deep loan losses that have led to escalating bank failures and raising their lending standards - often at the behest of regulators - to avoid similar losses in the future. Banks are absorbing an estimated $1 trillion or more of losses from defaulted mortgages and facing sharply higher default rates on credit cards, commercial real estate and other types of loans.

A Fed bank survey published Monday showed that nearly all banks have significantly tightened their lending standards and raised the cost of loans in the past year, but demand for loans also is down dramatically as a result of a monumental housing bust, the biggest pullback in consumer spending in nearly three decades, and a general business recession. Many prime customers have no need for loans because they are in a retrenchment mode, while the people and businesses that need loans may have such poor credit that they present a risk for prudent banks.

Even so, banks continue to lend, however cautiously.

“History shows that well-capitalized banks eventually do lend, since hoarding doesn’t make money,” said Andy Kessler, a former hedge fund manager and author of books about Wall Street.

A recent study by the International Monetary Fund found that bank recapitalization programs like Treasury’s are effective at getting banks to start lending again sooner than they normally would after a major credit shock like the one that struck in mid-September after Lehman Brothers’ massive bankruptcy and default.

The study found that banks on average began lending near normal levels again about three months after a credit shock when they were recapitalized by the government, as opposed to taking nearly 10 months to return to normal without government funds.

IMF economist Fabian Valencia concluded that “banking bailouts in periods of significant financial distress may be justified to avoid an economically costly and persistent credit crunch.”

Mr. Kessler noted that the cost of government intervention, however, is political interference with the banks.

“Politicians won’t be able to help themselves and will inevitably meddle,” he said, but they should continue to support the recapitalization program.

“It’s the only thing to do at this stage. Next stop is full nationalization and no one wants that.”

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