Thursday, 30 October 2008
White House to banks: Start lending now
An impatient White House prodded banks and other financial companies on Tuesday to quit hoarding billions of government dollars flowing into their vaults and start making more loans. Wall Street soared almost 900 points on bargain hunting and hopes of a hefty rate cut on Wednesday by the Federal Reserve.
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White House to banks: Start lending now
29 October 2008
An impatient White House prodded banks and other financial companies on Tuesday to quit hoarding billions of government dollars flowing into their vaults and start making more loans. Wall Street soared almost 900 points on bargain hunting and hopes of a hefty rate cut on Wednesday by the Federal Reserve.
The stock market’s amazing climb, with its second-largest point gain ever, was a welcome burst of good news for a nation suffering big job losses and tumbling into a painful recession.
Consumer pessimism reached record levels in October amid rising unemployment, plunging home prices and shrinking retirement and investment accounts. The Conference Board, a private research group, said consumer confidence fell to its lowest point since it began tracking consumer sentiment in 1967.
Hoping to thaw the credit freeze that has chilled the economy, the Bush administration sent banks an unmistakable message to put aside fears and open loan windows for cash-starved businesses and consumers who have pulled back on spending.
‘What we’re trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money,’ White House press secretary Dana Perino said.
While there are limits to Washington’s power to affect banks behaviour, the White House decided it was time to use its bully pulpit.
‘They (regulators) will be watching very closely, and they’re working with the banks,’ Ms Perino said.
Meanwhile, US Treasury Department officials met with banking industry representatives to resolve a glitch in the rescue programme that has temporarily prevented some 6,000 of the nation’s 8,500 banks from applying for government support.
Treasury is buying preferred shares in banks as a way of injecting cash into the institutions. About 6,000 of the nation’s banks do not have publicly traded shares of stock and therefore are not set up in a way to meet Treasury’s current qualifications.
Treasury officials at the meeting assured banking industry representatives that they are trying to rework the application forms so that both banks with publicly traded stock and privately held institutions can qualify for the programme. They said if the Nov 14 deadline for applying for government support needs to be extended, it will be.
Washington has pumped money and confidence-building measures into the system over recent weeks to get lending, the lifeblood of the credit-dependent American economy, flowing freely again and to combat the worst financial crisis since the 1930s. So far, though, it has not worked.
While the crucial and much-watched short-term lending rate called the London Interbank Offered Rate, or Libor, has come down, it remains at elevated levels.
On Wednesday, the Fed is expected to announce a rate cut, and Wall Street is looking for a drop in the fed funds rate by half a point to 1 percent.
At the centre of the administration’s efforts to thaw credit is the US$700 billion financial bailout plan approved by Congress and signed by President George W. Bush this month. Under that law’s authority, the administration is doling out US$250 billion to banks in return for partial ownership.
The Treasury Department, which is overseeing the massive capital injection program along with the rest of the bailout, will pour US$125 billion into nine of the country’s largest banks, which account for 50 per cent of all US deposits. Anthony Ryan, Treasury’s acting undersecretary for domestic finance, said the first payments went out on Tuesday. An additional US$125 billion will start flowing to other banks within days, he said.
‘As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the US economy,’ Mr Ryan told the annual meeting of the Securities Industry and Financial Markets Association. ‘It is in a strengthened institution’s best financial interest to increase lending once it has received government funding.’
Democratic Representative Henry Waxman, chairman of the House Oversight Committee, asked the banks getting the US$125 billion to detail what they are paying their executives and employees, including bonuses.
‘I question the appropriateness of depleting the capital that taxpayers just injected into the bank through the payment of billions of dollars in bonuses, especially after one of the financial industry’s worst years on record,’ Mr Waxman said.
The infusion of federal money is to rebuild banks’ battered capital reserves so the institutions would feel comfortable resuming more normal lending practices. That confidence was undercut somewhat when reports surfaced that bankers might use the money to buy other banks.
Indeed, the government approved PNC Financial Services Group to receive US$7.7 billion in return for company stock on Friday and, at the same time, PNC said it was acquiring National City Corp for US$5.58 billion.
There is little federal officials can do about it. There is no language in the bailout bill that specifically obligates banks receiving money to increase their loans. Officials had argued that attaching strings to the capital-infusion programme would discourage financial institutions from participating.
‘The way that banks make money is by lending money,’ Ms Perino said. ‘And so they have every incentive to move forward and start using this money.’
Other credit-loosening efforts have included:
- A Federal Reserve program, begun on Monday, to buy the short-term debt of businesses, known as commercial paper.
- Temporary guarantees by the Federal Deposit Insurance Corp. of new issues of bank debt, fully protecting the money, for a fee, even if the institution fails.
- Emergency loans from the Fed for financial institutions and even other types of companies. The Fed has been tapping this Depression-era authority repeatedly to be a lender of last resort.
- New temporary federal guarantees to assets held in money market mutual funds as of Sept 19, but not since then.
- A temporary increase in the cap on deposit insurance from US$100,000 to US$250,000 on interest-bearing accounts, and unlimited deposit insurance for noninterest-bearing accounts, which small businesses often use to cover payrolls and other expenses and which frequently exceed US$250,000.
- The Fed’s half-point reduction in its target interest rate on Oct 8, done in conjunction with rate cuts by other central banks around the world.
Meanwhile, layoffs continue. Whirlpool Corp said Tuesday it will cut 5,000 jobs. That is on top of other recent layoffs of thousands of workers by Xerox Corp, drug maker Merck & Co and financial services firm National City Corp.
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