As Big Banks are Criticized for not Lending, Small Banks Find They Can’t Lend

By Don Miller
Associate Editor
Money Morning

While congressional leaders this week excoriated the leaders of banks that have received billions of dollars in government bailout money for not doing enough to end the credit crisis, it may actually be consumer fear of borrowing that's blunting banks' efforts to lend.

Chief executives of eight big U.S. banks that have received the taxpayer-provided rescue money were in Washington this week to testify before Congress told U.S. lawmakers that their institutions have lent out more than $400 billion. Skeptical congressional leaders excoriated the executives for not doing enough to end the credit freeze that's blunting consumer confidence and threatening to plunge the U.S. economy into an even deeper recession.

But the U.S. consumer may now be the real culprit. Banks want to make loans. The problem is that fear-frozen consumers just aren't biting, said Curtis Hage, CEO of closely held Home Federal Bank of Sioux Falls, S.D., which received $25 million worth of federal bailout money via the Troubled Assets Relief Program.

"If there was a greater demand out there for loans, we'd be out there after them like a dog after a bone," said Hage.

The upshot: Big banks are under the congressional microscope, even though the appetite for loans among many typical American consumers seems to have dried up.  Small bankers around the country are finding that, for now, many customers are sitting tight.

Congressional leaders didn't want to hear that as they grilled the CEOs of big U.S. banks earlier this week.

"There is a great deal of anger about the financial institutions here," House Financial Services Committee Chairman Barney Frank, D-Mass, told the CEOs. "There is anger about us, and there is anger about the executive branch. If you want to give the money back, we'll take it."

TARP was designed to thaw frozen credit markets, then-Treasury Secretary Henry Paulson told Congress on Nov. 24. But lending nationwide actually slowed after the Treasury Department began giving 389 banks $236 billion in TARP money on Oct. 28.

Outstanding loans and credits at commercial banks fell to $7.057 trillion in the week ending Jan. 28 from $7.266 trillion in October, according to the Federal Reserve.
The CEO's of the big banks that received the first allocation of $125 billion of TARP funds were put on the hot seat yesterday (Thursday) as Congress demanded to know exactly what they had done with the government money, MarketWatch reported.

But they defended their actions, saying they had actually increased lending, largely because of funds they had received from the bailout program. In fact, two bank chiefs said they lent out even more money than they received from TARP.

"We are actively putting our capital to work," said Goldman Sachs (GS) CEO Lloyd C. Blankfein.

  • Wells Fargo & Co. (WFC) CEO John G. Stumpf said that his bank made $72 billion in new loans in the fourth quarter, adding that the loans were almost three times what the bank received in bailout funds.
  • Bank of America Corp. (BAC) CEO Kenneth D. Lewis said the bank lent roughly $127 billion in the fourth quarter. More than half that money was doled out to commercial real estate and businesses.
  • Citigroup Inc. (C) CEO Vikram S. Pandit said that the bank provided more than $75 billion in new loans to consumers and businesses in the fourth quarter.

But some question whether enough lending is taking place. Based on a 1 to 10 lending ratio, critics argue that these banks should be lending $1.3 trillion based on the $125 billion allocated to them.

House members reiterated their concerns about how banks are using the government money and raised questions about whether banks have been using the capital injections for making acquisitions instead of lending.

In fact, Money Morning was one of the first news organizations to really examine how TARP money was being misdirected, and wasn't being deployed as originally intended.  As our ongoing investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide - instead of lending at home. Some of those buyouts deals are being done in markets as far away as China, even as banks outright refused to discuss the matter.

For its part, the Obama administration will mandate that any TARP funds it releases to banks will be directed specifically for lending, Treasury Secretary Timothy Geithner said on Tuesday  (Feb. 10).

But by essentially targeting Wall Street banks, Congress may be missing out on what's really happening - or not happening - out on Main Street.

C.R. "Rusty" Cloutier of MidSouth Bank in Lafayette, La., wants to do his part for the economy by lending locally for cars, homes, and small businesses - if only he could get his customers to cooperate.

After his bank received a $20 million cash infusion from TARP on Jan. 9 he went on the road to 14 "town hall" meetings, hoping to entice borrowing by consumers in its business market.

"What we want to do is make people aware we have $250 million to lend," Cloutier said.  But, at one meeting, the 20 or so customers in the audience were outnumbered by bank employees handing out cookies and bottled water. Not one person asked for an application.

While he has attracted a few fresh borrowers, people are "very, very nervous" about taking on significant new debt, the 61-year-old banker said. "Credit hasn't tightened, but the ability to find creditworthy borrowers has tightened."

Some MidSouth officials wonder if the bank did the right thing in accepting TARP assistance, said Will G. Charbonnet Sr., MidSouth's chairman.

The $20 million was in exchange for 20,000 preferred MidSouth shares, which the Treasury Department bought for $1,000 each, according to the bank. MidSouth pays a 5% annual dividend. In addition, the Treasury received 208,768 warrants for common shares, according to Bloomberg. 

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