Banks Getting TARP Funds Not Paying It Forward
Story from the Wall Street Journal

The largest bank recipients of U.S. government aid are offering less credit to businesses and consumers, the Treasury Department said Wednesday, reflecting and exacerbating the tenuous state of the current economic environment.

In a monthly snapshot of lending by the 21 largest banks receiving Troubled Asset Relief Program funds, the Treasury said credit being offered fell 2.2% across all commercial-lending and consumer-lending categories in February, compared with the prior month.

Particularly problematic: continued deterioration in commercial real estate and general business lending, as well as the credit being made available for auto and alternative student loans.

The lone bright spot remained home loans, with consumers eager to take advantage of record-low interest rates to refinance their home, business, or church mortgages.

The Treasury said 16 of the 18 banks surveyed increased mortgage originations in February, resulting in a 35% increase in mortgage lending from January levels.

The February decline in lending adds to pressure on the Obama administration's efforts to restart the still-fragile credit markets.

The Treasury has committed $95 billion in TARP funds for new programs to boost consumer and business lending, though they are either just getting started or are still in the development phase.

The report suggests that jawboning by federal officials for banks to use TARP funds to boost lending is having a limited effect.

The Treasury blamed the decrease on the broader economic weakness, including low consumer confidence, high unemployment and a decrease in U.S. exports.

It also said lending would have been lower absent the nearly $200 billion in capital injections the government has provided to about 550 banks.

Banks' diminished appetites for lending are forcing businesses and consumers alike to curb their spending, which risks prolonging the U.S. economic recession.

Demanding New Collateral

Dan Carl, who owns a handful of businesses including several car dealerships in Michigan, said Fifth Third Bancorp, Cincinnati, refused to renew some of his company's credit lines when they came due earlier this month. On other loans, Fifth Third raised interest rates and demanded Mr. Carl's firm put up additional collateral.

The lack of affordable credit was one factor prompting Mr. Carl's company to recently lay off 20% of the work force and close at least one dealership.

Lenders such as Fifth Third are punishing "the good customers to make up for the banks' mistakes," he said.

Fifth Third received $3.45 billion through TARP.

It made $634 million of new commercial and industrial loans in February, down from $785 million in January and $1.3 billion in December, according to the bank's filing with the Treasury Department.

"Demand for Small Business credit is still relatively stable but showing signs of weakening as application volume is starting to slow," Fifth Third said in its filing.

Fifth Third's Response

Fifth Third spokeswoman Stephanie Honan said the bank won't comment on specific customers.

In reviewing loans, she said, Fifth Third considers overall economic conditions and "any changes to the customer's business environment."

Overall, she said, the bank tries "to balance our commitment to our customers with safe and responsible lending practices."

The banking industry's lending pullback was particularly severe with consumer credit.

In February, according to the Treasury report, originations of new U.S. credit-card accounts fell 2.7%.

That number likely understates the magnitude of the retrenchment. Many banks have been slashing borrowing limits on cards, especially for customers who rarely approach their limits.

By reducing the credit lines, the banks can free up space on their balance sheets. But the move risks infuriating consumers.

Bank of America Corp., which received $45 billion through TARP and has the industry's largest U.S. card portfolio, said in its submission to the Treasury that credit-card loan balances and new account originations declined in February "due to continued reduction of exposure on long term inactive customers and line reductions on high risk accounts."

Bank of America recently informed longtime customer James S. Jensen that the interest rate on his credit card would leap into the double-digits, even though he had never been late on a payment.

Canceling His Account

"I could borrow on the street for less than this," says Mr. Jensen, a 61-year-old vice president at Navistar Truck Group in Warrenville, Ill.

Mr. Jensen says he is canceling his Bank of America card as a result.

Bank of America spokeswoman Betty Riess said the Charlotte, N.C., bank is "taking a more aggressive look at accounts to control risk given the current environment."

Libor's Accuracy Becomes Issue Again

Before we fund the $700 billion bailout...

Questions on Reliability of Interest Rate Rise Amid Central Banks' Liquidity Push

The accuracy of a widely used interest rate, seen as critical to judging the health of the financial markets at a precarious time, is coming under question for the second time this year.

Doubts about the London interbank offered rate, or Libor, center on whether banks are understating what it costs them to borrow dollars in stressed financial markets. Libor's reliability became an issue again this week when banks paid higher interest rates to borrow using collateral than they did for unsecured loans.

Those questions come as central banks inject liquidity into the market to restore the confidence of banks that have been reluctant to lend to one another. Other lending markets, including commercial paper, which are short-term IOUs issued by companies, have also struggled, potentially causing a credit crunch to spread throughout the economy.

Libor is supposed to reflect average bank-borrowing costs. Overseen by the British Bankers' Association in London, the rate serves as a benchmark for the borrowing costs of homeowners and companies. During the credit crisis, it has provided a gauge for whether banks trust one another enough to lend money. Last week, Libor rates surged in a sign that banks were having trouble borrowing money amid the problems at American International Group Inc. and Lehman Brothers Holdings Inc.

Concerns about Libor's accuracy emerged out of the rates being paid in another market used by banks to get cash. The Federal Reserve's term auction facility, one of numerous efforts the Fed has been using to fight the credit crunch, allows banks to borrow, but they must put up collateral.

Because of that, banks should be able to pay a lower interest rate than they do when they borrow from each other because those loans are unsecured. It is the same reason why rates for a mortgage, which is secured by a house, are lower than those for credit cards, where the borrower doesn't put up any collateral. In other words, the rate for the Fed auction should be lower than Libor.

But on Monday, the rate for the 28-day Fed facility was 3.75%, which was much higher than Libor. On Monday, the one-month dollar Libor rate was 3.19% while Tuesday's rate was 3.21%.

The Fed facility should be lower, said Scott Peng, a Citigroup Inc. U.S. rate strategist. The "market needs some accurate transaction-based measure of interbank lending."

Earlier this year, Libor appeared to be sending false signals. Banks complained to the BBA that rival banks might not be reporting their true borrowing costs because they didn't want to admit that others were treating them as if they had troubles. That led to a BBA review and the pledge that the rates banks contribute would be better policed. Every morning, 16 banks submit borrowing rates in a process that produces Libor rates at lunchtime in London.

Lesley McLeod, a BBA spokeswoman, said the BBA stands by the Libor. "Libor is accurate," she said. "It is constantly monitored and currently reflects the extreme market volatility present in these unprecedented circumstances."

By: Carrick Mollenkamp
Wall Street Journal; September 24, 2008