We Don’t Need a Bad Bank – We Have Several

Posted on January 28, 2009

On Monday the Wall Street Journal published an article containing the chart below showing that some of the major recipients of TARP funds have been wsj-chartshrinking their lending in recent months. What the chart failed to show is why this is the case. The answer is straightforward, but not pretty. Most of the TARP money has been pumped into desperately troubled financial institutions. It should come as no surprise to anyone (other than perhaps politicians) that institutions fighting for survival are unlikely to be focused on taking on new risky investments.

If you look at the same institutions in a little more depth as presented below, it becomes quite obvious that there is a close correlation between the profitability of these institutions and their willingness to lend.

bank-chart-cropped

What’s the profile of a loan officer at a troubled bank?  He or she:

(1) Has been moved into the workout department,

(2) If still in the loan department, is looking furtively to his/her left and right to figure out who’s going to be next to go, or

(3) Has been recently laid off.

Nothing in this scenario would encourage us as prospective borrowers to believe that we’re going to get a loan, nor should it encourage us as taxpayers to expect additional TARP funding to generate new loans from such a bank.

What’s wrong with TARP is that we are putting money behind the losers rather than the winners. We’re filling financial holes created by disastrously bad management decisions in hopes that those who made the bad decisions will make better decisions the next time. The worse the mistakes, the more money the bank gets.

Now is the time for a fresh start – before we spend the next $350 Billion and find that we are just that much deeper in the hole without anything being … read the rest

Categories: Bailouts, Banks, Economics, Uncategorized

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