The Obama Administration didn't waste any time in getting its economic message across to Wall Street. As the last big banks scrambled to return their bailout funds in mid-December, the President summoned top Wall Street chiefs to the White House, urging them to increase lending to companies and individuals. "Now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy," Obama told reporters after the meeting on Dec. 14.
It will take more than a guilt trip to boost credit. With Citigroup (C) and Wells Fargo (WFC) joining JPMorgan Chase (JPM) and Bank of America (BAC) in repaying their rescue funds, the feds have lost a big lever for lending. Not that the Troubled Asset Relief Program proved effective in getting credit flowing again. Even when they had the federal funds, banks hunkered down in the face of losses. Loan originations totaled just $239 billion in September, down 14% from the average of $279 billion in the previous six months, according to a Treasury survey of the 22 biggest bailout recipients. Without TARP over their heads, bank CEOs are even less likely to lend.
That's because the banks still haven't recovered. JPMorgan CEO Jamie Dimon told investors on Dec. 8 that his credit-card unit—which has posted four straight quarters of losses—may lose $1 billion a quarter through June 2010. Citigroup is sitting on $182 billion of risky assets that the bank wants to unload. And Wells Fargo has $135.2 billion of commercial real estate loans; losses in the portfolio surged by 21% from the second quarter to the third. When the U.S. did its "stress tests" in May on the 19 biggest banks, the Fed estimated the group's total losses through 2010 might reach $600 billion. So far only 20% has been recognized, according to U.K. bank Barclays (BCS).
With loan losses looming, banks are squirreling away money. BofA, Citigroup, and Wells Fargo have raised or plan to raise at least $50 billion of capital. Citigroup's cash has doubled over the past year to $244 billion, according to regulatory filings. Richard X. Bove of Rochdale Securities says this is the largest stockpile he's seen at any bank in his 44 years as an industry analyst.
Regulators are encouraging the cautious stance. The post-TARP capital levels may become the new norm for big banks, says Ernie Patrikis, a former Federal Reserve Bank of New York general counsel who's now a partner at law firm White & Case in New York. Citigroup said in a Dec. 14 press release that capital by one measure would stand at 11% of assets after repaying TARP and selling stock. Under international banking rules, a well-capitalized bank is supposed to have a cushion of 6% of assets. "If the President wants the banks to start lending more, he might spend less time yammering at CEOs and more time talking to his own regulators," said hedge fund manager Tom Brown in an article on his financial research Web site, Bankstocks.com. Regulators "now seem to be insisting banks maintain minimum capital standards meaningfully above the published, official [levels]."
The Big Pullback
As capital rises, lending is falling. New York-based JPMorgan cut the unused portion of customers' credit-card lines by 6.3% this year, to $584.2 billion, as of Sept. 30, according to regulatory filings. It reduced home-equity lines by 32%, to $64.8 billion. Bank lending to businesses declined 17%, to $1.35 trillion over the past year, according to the Federal Reserve. "These guys are in it to make money," says White & Case's Patrikis. "Who wants to be the first banker to make a bad loan?"
With the big banks exiting TARP, the U.S. will have to find new ways to exert pressure. One method may be to raise the Fed funds rate, what banks charge each other for borrowing funds overnight, says Allan H. Meltzer, a Fed historian and professor at Carnegie Mellon University in Pittsburgh. Banks make money by borrowing from the central bank and investing it in higher-yielding loans and securities. With the rate hovering near zero, banks can make a nice profit simply by holding Treasuries. By upping the rate, banks would be forced to shift the money into loans. Right now "you can make three percentage points, which is a lot for a bank, for doing nothing," Meltzer says. "Why should the banks take risks?"
The government may to have rely on Fannie Mae (FNM) and Freddie Mac (FRE) to spur home lending. The mortgage industry is expected to make $1.6 trillion of new home loans in 2010, down from $1.9 trillion in 2009, estimates Bose George at Keefe Bruyette & Woods (KBW). The mortgage giants, which were seized by the feds 16 months ago, would seem an odd choice for federal lending efforts; the two companies have lost a combined $71 billion this year. But their influence on the mortgage market is so important that Treasury is considering an increase of their backup financing, now $400 billion, say people familiar with the situation.
If the banks don't open up their wallets soon, the Administration could decide to lower underwriting standards for loans sold to Fannie and Freddie, says George of Keefe Bruyette. "There's no question that if [Fannie and Freddie] loosen their standards we'd have far more loans being produced. The only provider of credit is the government."