More Accountability, Not More Accounting
President Obama was sworn in and gave a memorable speech. He takes office at the time of economic crisis, and one of his first priorities will be the economy. CNN/Fortune had some interesting reporting on the TARP yesterday. The premise of the Troubled Asset Relief Program (TARP) was that it was a plan to “reinforce the stability of the financial system, to increase confidence and capacity to lend, and in turn to support the recovery of the economy.” Offering loan guarantees to a broad array of banks is reportedly among the options being considered by incoming President Barack Obama as he seeks to restore economic growth. According to Joseph Mason, a finance professor at Louisiana State University, the problem with a loan guarantee plan is that it will not necessarily force the banks to fully recognize their losses on souring positions taken on during the credit boom that ended in the summer of 2007.
That point does not go far enough, though, because it’s not a matter of accounting, it’s a matter of accountability. It’s not a matter of how the banks keep their books, it’s a matter of holding the banks responsible for reinvesting the funds and utilizing the funds to fund consumer borrowing a small business financing. It’s about fulfilling the purpose of the bailout, not about keeping a nice set of records.
On Friday, Citigroup said it lost $8 billion for the fourth quarter and $19 billion for the year. Bank of America said it lost $1.8 billion for the fourth quarter and announced a plan under which the government will backstop $118 billion in troubled assets, about three-quarters of which are tied to the bank’s acquisition of Merrill Lynch.
Paul Miller, an analyst at FBR Capital Markets, wrote in November research report that the biggest U.S. banks — names like Citi, BofA, JPMorgan Chase and Goldman Sachs, to name a few — needed $1 trillion or more in new common equity to be well enough capitalized to handle surging loan losses.
On ABC’s “This Week” Sunday David Axelrod, senior adviser to Obama, said that Obama would emphasize that lenders need to keep funds flowing to keep an already sputtering economy from slowing even further. “I think he is going to have strong message for the bankers,” Axelrod said. “We don’t want them to sit on any money that they get from taxpayers.” The contrarian view was expressed by Ed Gainor, a structured finance lawyer at McKee Nelson in Washington, who said dictating that lenders must lend could be counterproductive. One reason lenders are conserving capital, he noted, is that the economy is slumping — which raises the odds that even good borrowers will default as they lose their jobs. “Demanding that they make loans is somewhat silly on a grand scale,” says Gainor. “If the lenders can lend and make a profit, that’s what they will do.” What got the lending industry in trouble was the fact that they weren’t providing value or service to borrowers, they were only interested making a profit on transactions with borrowers who were unqualified with collateral that was overvalued by an artificial economy.
This position completely ignores the purpose of the TARP. Does Gainor think that the bank’s pocketing the funds is going to help the economy? In response, Mason said the strong message the government needs to send is that existing losses must be recognized, and failing institutions allowed to fail.
Question: Why should the taxpayers be willing to bailout the banks unless they are obligated to not only lend it out, but pay it back to the government and the taxpayers?
The self interest of the banking industry without regard to the general economy should be evident. The point is that from the taxpayers’ point of view, there is no reason to bail out the banks if they are not obligated to pass it on to consumers, because one of the big reasons the economy is slumping is because of the restrictions on lending, consumer and small business borrowing. Just talk to the Retailers or Building Industry Associations. The taxpaying citizens are, after all, the ones who are ultimately paying for the bailout. It’s absurd under the present scenario that ordinary taxpayers are expected to pay for the bailout of financial institutions without the funds being passed on through.
Considering Gainor’s point of view, which sounds like “we’ll lend money if we feel like it,” the taxpayers would be better of if the banks kept their hands out of Congress’s and the taxpayers’ wallet. Now is not the time to start exercising overly strict and scrupulous lending practices, which should have been instituted long before the spiral dive began. Given the present lack of accountability, the TARP is nothing but the biggest charitable giveaway in history. If the banks are unwilling to pass the bailout on to the public who is paying for it in the first place, Congress should simply refuse to distribute any more funds, allow the banks fail, and let the forces of market capitalism take over. Without insisting on accountability in the utilization of the TARP funds, the plan is just simply another fraud on the American public. It’s Robin Hood in reverse, stealing from the common man to give to the rich.
If Congress fails to demand accountability and the Banks fail to fulfill the purpose of the TARP, another option that Obama might consider is placing the insolvent Banks in an involuntary Chapter 11 and appointing a Trustee, or “Banking Tzar”to ensure the funds are administered properly, rather than to keep throwing good money after bad. Yes, its a little far fetched. On the other hand bailing out the banks while letting everyone else wither away on the vine isn’t a very attractive option.
Paul R. Bartleson, sactobankruptcy.com