Perhaps a dumb question but why arent banks loaning. So many analysts are saying that the problem is banks not loaning money to people.
What if you had $1 to your name, would you lend out to someone or would you rather keep it in your pocket? Very basic example I know, but true. Also, if you were to lend your $1 to someone, you would do it at 50% interest if you could, right? Well there aren’t many people who want that loan.
There’s a lot of reasons. The main one I believe is that they are worried about having more of their assets marked down in the near future (which would ruin their capital base even more). Therefore, they are holding on to capital anticipating this. Also, look who they are loaning to: A struggling business, someone who is unemployed or who has a decent chance of being unemployed soon, municipalities who are having trouble servicing their obligations (and tax revenues to secure are down). These are very over-simplified explanations, but to discuss this fully would take forever.
OK, why does the bank HAVE TO resume to the same level of lending before the crisis?
(OK, I wrote a long one, partly because I’m trying to develop a presentation on the material and this is helping me think through it) BTW, tvPM had a nice simple way to describe it. As I understand it, banks are scared that their equity will go to zero, or low enough that some other bank will buy them out (and probably toss out the management). Right now, banks have a lot of loans to pay off, but many are not sure whether the assets (some toxic, some not) they hold are worth enough to cover their liabilities. So when the bank gets an injection from the federal government, they want to keep it as a buffer and reserve so that their equity goes up and they can therefore weather more bad news without going under. If they lend it out, they have more liabilities (to the govt, basically), the assets are risky (will new borrowers really pay back?), and it doesn’t solve the fear problem about the equity levels they have. Problem is, the government injects that money because they want the banks to lend it. Now there is more squabbling over why aren’t they lending. This is why getting toxic assets off of bank balance sheets is an important part of the solution. The challenge is to do it in a way that doesn’t tell people that the outcome for being stupid about risk is that the government hands you money and you go back to your old job doing the same thing. One way to handle toxic assets is to just buy them up (TARP 1.0) and give the banks a clean slate to start again. Another way to handle it is to try to shore up the underlying stuff (the mortgage plan tries this) to make them less uncertain, but there are so many different things that have been securitized carelessly (mortgages, credit cards, autos, CDOs, etc.) that there’s a lot of shoring up to go around. Part of the solution then is that government probably needs to recapitalize the banks AND try to get lending going. By recapitalizing banks, it is probably going to become an owner, like anyone else who would want to add capital to the banks. The difference is that a typical investor would add capital in order to get a decent return on capital, whereas the government would add capital because there is a public need for a banking system to function. If government is the dominant owner, that is tantamount to nationalization, which entitles government to control of management just like any other major capital provider would have had. This gets lots of free marketers and libertarian panties up in a bunch because government is supposed to be inherently inept (unlike the private sector bankers who jacked up risk and leverage to levels as high as 30:1), and these guys cry socialism and want to reach for guns and run for the hills. But there is a key difference between nationalization by necessity (i.e. no one else will provide capital for an essential part of the market system) and nationalization for ideological reasons (traditional socialist ideology) or for political control of key resources (e.g. Vladimir Putin, Hugo Chavez, etc.). The danger of bank nationalization is not that banks should never be nationalized, but that Congress will suddenly start thinking of all sorts of political programs (many no doubt well intentioned) that the bank can start to administer in addition to its functions as a normal bank. This will tend to distort the incentives guiding management and tend to pull resources this way and that. The goal of a bank nationalization program should be 1) to stabilize the banking system so that truly qualified borrowers are not cut off from money that they could normally count on, and 2) have private sector owners buy out the government stake as quickly as possible. Preferred stock may be the best tool here, because it is basically like a debt that has to be paid off before shareholders get anything, but has enough flexibility that banks wouldn’t have to pay of the debt when it interferes with their ability to lend. Government may insist on preferred stock with some voting privileges for management, which would be an unusual type of preferred stock. Convertible preferred stock would be a sensible choice, because it provides a way to turn the loan into equity after the crisis has passed. Personally, I think the government does need to nationalize some banks, recapitalize them, and use those banks to lend to companies and businesses that have shown themselves to be conservative with their risk taking. I’m trying to put together a presentation that makes just this argument, but it’s probably too late for this round of adjustments.
Well a lot of banks are offering money to lenders but finding there aren’t enough people out there who want it. Or at least those that do want it are the kind of people you don’t want to be lending to. For example, a lot of corporates are cutting capex this year - hence reduced demand for loans. Also, very few people are buying houses right now - hence reduced demand for home loans. Many banks are eager to lend to good quality homebuyers and corporates right now. So it’s not always lack of supply that’s causing loan issuances to dry up.
One of the reasons is returns (at least in our bank). Considering what the market has gone through, and how scarce capital sourcing has become, every institution out there is trying to find/channel the capital they have in the most high return investments. Which goes on to say that any company with even the most slight risk of a downside would be subject to a lot of scrutiny by the lender and the time involved in the final decision would be further extended. I have seen the return hurdles at our institution creep up by double digits in the past month and have seen some more volume flow through, although not even close to YOY #s.
Very helpful. So then I ask, instead of giving money to banks hoping they would loan out to public, why doesnt government directly loan out money to people? Wouldnt they avoid nationalizing the banks that way?
the government has plenty of loans to people as is (just the other way around).
SalZ Wrote: ------------------------------------------------------- > One of the reasons is returns (at least in our > bank). Considering what the market has gone > through, and how scarce capital sourcing has > become, every institution out there is trying to > find/channel the capital they have in the most > high return investments. Which goes on to say that > any company with even the most slight risk of a > downside would be subject to a lot of scrutiny by > the lender and the time involved in the final > decision would be further extended. > > I have seen the return hurdles at our institution > creep up by double digits in the past month and > have seen some more volume flow through, although > not even close to YOY #s. Hurdle rates in the double digits? rofl. I can do deals in the ABCP world for 1,500% ROE. Why can’t I actually do them? Everybody is trying to guard capital at this point.
needhelp Wrote: ------------------------------------------------------- > Very helpful. > > So then I ask, instead of giving money to banks > hoping they would loan out to public, why doesnt > government directly loan out money to people? > Wouldnt they avoid nationalizing the banks that > way? Government may need to do this, but to do so, they would need to set up a structure to manage that money, find customers, do the evaluation, service the loans, etc… Best way to do that is to buy up an existing bank (i.e. nationalize it), and use those skill sets, structures, and relationships to manage the money.
My question is what impact nationalizing a bank will have on the other banks. Example, Citi is taken in by the Govt. Well as a customer, who do you want to bank with, the government or BAC? I figure loans would be cheaper from the govt run bank as they dont worry about profitability like BAC would, deposits over the FDIC limit would be better off with the govt bank too. So if one goes, do they essentially all go or do you see other banks able to maintain customers?
needhelp Wrote: ------------------------------------------------------- > Very helpful. > > So then I ask, instead of giving money to banks > hoping they would loan out to public, why doesnt > government directly loan out money to people? > Wouldnt they avoid nationalizing the banks that > way? I don’t think that is such a good idea…here is why. 1) How to underwriter everybody “fairly”? 2) It is too political! 3) If you are low-income, can’t qualify for a loan, government will be sued for discrimation 4) If the low-income family happens to be minory, government will be sued for discrimation. 5) The only"fair" way (for government) is too lend to everybody regardless of income, race, loan-to-value ratio, asset verification, income verification (all the essentail for loan underwriting… I think you know where I am heading with this…IMO, I think this won’t work.
Because you touch yourself at night
One reason is the increase in the cost of capital, since available liquidity has sought safe havens. The U.S. Federal Reserve Bank reduced the Federal Funds Rate to zero in the hope of simulating credit availability and lending among financial institutions. This reduction caused other short-term nominal interest rates for Libor, Prime and U.S. Treasury securities to also decline to or near historically-low benchmarks. The simultaneous impacts of the increase in the cost of capital and reduction in short-term interest rates have had a real effect on a banks cost of funding and net interest margin. Even banks with an unblemished Balance Sheets and ability to lend to new and existing customers have seen a disproportionate reduction in the net interest margin. Due to this the banks will be increasing rates on customers, at least those who have capital to lend.
bchadwick, I’m sure you’ve been asked before but what is your background in finance? Based on your knowledgeable posts I would assume that you are a charter holder.
I’m a former academic political economist, and only recently got the charter. Before I decided to focus using my macro knowledge for asset management, I didn’t really have any finance background, other than what I read in newspapers about stocks and bonds. CFA was great for filling in that missing stuff about how you do bottom-up valuation and some of the issues in portfolio management that you don’t concentrate on unless you’re a finance specialist. So I’m not very good about figuring out whether Coca-Cola is doctoring up its financial statements, but I do have a lot experience in analyzing how countries get themselves into and try to dig themselves out of crises, and particularly how the political and economic logics interact with each other.
SalZ Wrote: ------------------------------------------------------- > One of the reasons is returns (at least in our > bank). Considering what the market has gone > through, and how scarce capital sourcing has > become, every institution out there is trying to > find/channel the capital they have in the most > high return investments. Which goes on to say that > any company with even the most slight risk of a > downside would be subject to a lot of scrutiny by > the lender and the time involved in the final > decision would be further extended. > > I have seen the return hurdles at our institution > creep up by double digits in the past month and > have seen some more volume flow through, although > not even close to YOY #s. Hurdle rates in the double digits? rofl. I can do deals in the ABCP world for 1,500% ROE. Why can’t I actually do them? Everybody is trying to guard capital at this point. Well, maybe you should start underwriting some and get the economy rolling, like we have! Giddy up.
SalZ Wrote: ------------------------------------------------------- > One of the reasons is returns (at least in our > bank). Considering what the market has gone > through, and how scarce capital sourcing has > become, every institution out there is trying to > find/channel the capital they have in the most > high return investments. Which goes on to say that > any company with even the most slight risk of a > downside would be subject to a lot of scrutiny by > the lender and the time involved in the final > decision would be further extended. > > I have seen the return hurdles at our institution > creep up by double digits in the past month and > have seen some more volume flow through, although > not even close to YOY #s. Hurdle rates in the double digits? rofl. I can do deals in the ABCP world for 1,500% ROE. Why can’t I actually do them? Everybody is trying to guard capital at this point. Well, maybe you should start underwriting some and get the economy rolling, like we have! Giddy up.
Banks are just taking the money and reinvesting in treasuries right now. The government blew it by not mandating that they dole out the cash instead of giving it right back to the govt. It’s part of my short treasuries thesis that when banks regain the confidence to lend they will sell their treasury investments and drive rates back up.