Here are some observations for bankers
By Daniel at 13 December, 2008, 10:22 am
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1. A number of banks that received TARP funds did so only because the Treasury and Fed insisted that they accept these funds. Is it reasonable to suggest that these banks, that did not want to participate in TARP, undertook some special obligation to make loans when they accepted TARP funds?
2. The Treasury, in exchange for TARP funds, received tangible value from the issuing banks (or their parent holding companies) in the form of preferred stock and warrants to purchase common stock. Thus, the banks (through the holding companies that issued the stock and warrants) undertook obligations to the Treasury as the holder of these issued securities. The banks also have obligations to their other stockholders to act in a prudent fashion, and there is nothing in TARP or the securities issued to the Treasury that obligates the banks to act contrary to the interests of all stockholders, such as by making loans that are imprudent but are deemed by AB or others to be in the best interest of the US economy.
3. Banks only achieve optimum results for their shareholders by realizing an adequate return on their assets and equity, which can only be accomplished by investing funds. Thus, it is their self interest for banks to make prudent loans using available capital. In fact, banks that have excess unemployed capital are punished economically, through their stock prices, if they do not achieve sufficient returns on total assets and equity.
4. Banks are rightly being punished by the market for their stocks for bad loans and other investments that they have made. In this highly challenging economic environment, is it prudent for banks to lend unless there is a high degree of certainty the loans will be repaid? Isn’t the United States economy in the pickle it is in today because too many loans were made that cannot be repaid? AB seems to be suggesting that the banks should be acting pro bono publico to make loans for the benefit of the US economy rather than their stockholders. Fortunately, the law is clearly to the contrary.
5. Home equity loans are typically secured by a second mortgage on the residence of the borrower. This means that if the borrower defaults in the payment of the loan securing the first mortgage, the bank holding the second mortgage must pay off the first mortgage (thereby increasing the total funds invested) or lose its entire investment in the home equity loan. It is completely understandable that in a period of declining residential values banks making home equity loans would want take special measures to ensure repayment, such as requiring a lower loan to value ratio, than in a period of stable or increasing residential values.
— Alan Barton
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