[Editor's Note: In this second installment of a two-part look at whether the credit crisis continues to crimp financing for companies and consumers, Money Morning takes a look at bank lending. In Part I earlier this week, we studied venture-capital-investment trends.]
By Don Miller
Since the Obama administration took office almost 100 days ago, it has repeatedly said the key to an economic recovery is to unfreeze the credit markets and increase bank lending.
So far, American taxpayers have shoveled out almost $600 billion in Troubled Asset Relief Program (TARP) funding to prime the economic pump and get the banks lending – and people spending – again.
Yet a report by The Wall Street Journal shows the banks are lending less money than they did five months ago. And further research shows no matter how much TARP money the government pumps into the U.S. banking system, American consumers may just not be ready to drink from the trough – a sobering reality that could doom the chances of a quick economic rebound.
Meanwhile, the banks' perceived reluctance to lend – coupled with their lavish spending on bonuses and management perks, has the the Obama administration on the defensive, sensitive to skepticism about the government's ability to revitalize the banking system.
Bank Lending Still Anemic
Despite government pronouncements to the contrary, pumping billions of dollars into the financial sector has not had the desired result, meaning lending hasn't accelerated. In fact, according to the recent Wall Street Journal analysis, initial loans and refinancing outlays at the nation's big banks dropped by 23% from October to February.
According to the data, 19 financial institutions made or refinanced a total of $226.3 billion worth of loans in October. That figure plummeted to $174.2 billion for February, The Journal reported. In fact, the total dollar amount of new loans declined in three of the four months the U.S. government has reported the data, and all but three of the 19 largest TARP recipients originated fewer loans in February than they did in October.
For its part, government officials say the current situation could have been a whole lot worse without TARP funding.
Just last week, the U.S. Treasury Department praised "the relatively steady overall lending levels." Without those capital injections, "lending would have suffered a far smaller total volume of loan originations in February than January," the Treasury Department said.
But bank executives defended their lending levels by saying the reason behind a decline in new loans, refinancing deals and modifications of troubled loans is the lack of demand from consumers and businesses – and not the banks' willingness to lend.
JPMorgan Chase & Co. (JPM) showed one of the biggest lending declines, dropping from $61.2 billion in October to $39.7 billion in February – a drop of 35%. But JP Morgan executives explained the bank made more than $151 million in loans in the first quarter, "despite the fact that loan demand has dropped dramatically."
Commercial lending slid by about 40% and may have been depressed by a partial thawing of the bond markets, where some corporations raise money instead of borrowing it from banks. About $70 billion of corporate bonds were issued in February, up from $21.4 billion in October, according to Thomson Reuters.
The figures show that consumer loans, especially mortgage refinancings, account for a large portion of bank lending. Nearly half of February's lending went to consumers, up from about one-quarter in October.
But excluding mortgage refinancings, consumer lending dropped by about one-third between October and February. And because the United States has accounted for one-third of total growth in global consumption since 1990, any change in U.S. consumer behavior has profound implications, not just for the United States, but for the worldwide economy.
Increased Savings Rate Could Slow Rebound
Consumer spending is the engine of the U.S. economy, accounting for about 70% of gross domestic product (GDP). And in the go-go days of the early 21st century, U.S. consumer spending was in full swing.
U.S. householdsto $13.8 trillion between 2000 and 2007, according to the McKinsey Institute. During that unprecedented period, personal consumption accounted for 77% of real U.S. GDP growth and personal liabilities reached an astounding 138% of disposable income.
But a shift occurred as the global financial crisis worsened at the end of 2008: U.S. households reduced their outstanding debt for the first time since World War II by curtailing spending and reducing borrowing.
In fact, recently released U.S. Federal Reserve data shows that outstanding consumer credit dropped from $2.95
trillion to $2.56 trillion in January.
But as consumer spending and borrowing plunged in recent months, the saving rate has rebounded, reaching 5% in January. And each extra point in the savings rate means more than $100 billion less in spending a year, according to a recent McKinsey study.
In fact, the study found that if consumers continue to reduce debt, the increased savings rate would result in $535 billion less consumption a year, a potentially serious drag on a nascent economic recovery.
Banks and Obama Still Not Out of the Woods
Looming over all this is the possibility that banks may need more government assistance in the near future in order to keep lending – even at the current depressed levels.
JPMorgan analyst Matthew Jozoff predicts banks could suffer another $400 billion in losses as a result of continuing credit deterioration, which could force policymakers to deploy yet another round of capital infusions.
Obama administration officials acknowledge that they may still have to ask Congress for more money in the future. Beyond the 19 big banks, which are defined as those with more than $100 billion in assets, the Treasury has also injected capital into hundreds of regional and community banks.
The most immediate expense may come in the next several weeks, when federal bank regulators complete "stress tests" on the nation's 19 largest banks. The tests are expected to show that at least several major institutions will need to increase their capital cushions by billions of dollars.
That could include Bank of America Corp. (BAC), a bank that many experts say probably should have been liquidated long ago.
In order to avoid another capital infusion, the government might elect to take equity in return for previous loans. Converting the loans into common stock would increase the capital of big banks by more than $100 billion and give the government a large equity stake in return.
Of course, converting those loans into common shares would turn the government into the bank's biggest shareholder – a move some critics see as a back door to nationalization. The move would also serve to further dilute the holdings of existing shareholders.
While the option appears to be a quick and easy way to avoid a confrontation with congressional leaders who are wary of putting more money into the banks, the administration would no doubt be heavily criticized for displaying such "socialist" tendencies.
[Editor's Note: When Slate magazine recently set out to identify the stock-market guru who most correctly predicted the stock-market decline that accompanied the current financial crisis, the respected online publication concluded it was Martin Hutchinson, a veteran international investment banker who is one of Money Morning's top forecasters.
It was no surprise to our readers: After all, Hutchinson warned investors about the evils of credit default swaps six months before the complex derivatives did in insurer American International Group Inc. Then last fall, Hutchinson "called" the market bottom.
Now Hutchinson has developed a strategy for investors to invest their way to "Permanent Wealth" using high-yielding dividend stocks. Indeed, he's currently detailing a strategy that will enable investors to make $4,201 in cash in just 12 days. Just click here to find out about this strategy – or Hutchinson's new service, The Permanent Wealth Investor.]
News and Related Story Links:
The Wall Street Journal:
Bank Lending Keeps Dropping
JP Morgan Sees $400 Billion More In Bank Losses
The Top 12 U.S. Banks: From Zombies to Hidden Gems
Money Morning Look at Liquidity Series (Part I of II):
A Look at Liquidity: Venture Funding Hits 12-Year Low Amid Cold IPO Market.