Of Borrowers and Fortresses: Hoping for Something Other Than “TARP 2.0”

Dollars
Where have all the lenders gone?

Local banks are here, and they’re lending. That’s the good news.

The bad news, as we’ve all been discussing, is that the larger institutions aren’t here, and they’re not lending. So where have they gone? In a burst of sarcasm, one colleague suggested they’ve been camped out in Washington, D.C., and have canceled meetings of the credit committee until further notice.

Markets and commentators have been busy today examining the latest proposal to stabilize the lending sector. Observations from the Wall Street Journal and the Accrued Interest blog provide initial feedback about the plan. Reviewing this plan, I am most interested in its distinction from the Troubled Assets Relief Program (TARP) passed last year, which appears to have flaws rendering it ineffective.

As I discussed on this forum last month, interest rates suggest banks may have become more disposed to reengage in lending activity. In retrospect, events in the last few weeks seem to highlight that more than interest rates and capital will be required to improve the lending environment. TARP isn’t doing the job. I have multiple clients who are nearly at a loss for how to procure construction or investment financing – and these are seasoned, entrepreneurial borrowers.

In mid-January, the New York Times ran a piercing article about why the first round of federal funds targeted to financial institutions hadn’t spurred more lending activity. The article quoted three bankers with particularly striking perspectives about the premise of the public investment in their respective banks:

“We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.” – John Hope III, Chairman, Whitney National Bank

“With that capital in hand, not only do we feel comfortable that we can ride out the recession, but we feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.” – Walter Pressey, President, Boston Private Wealth Management

“Adding $400 million in capital gives us a chance to really have a totally fortressed balance sheet in case things get a lot worse than we think. And if they don’t, we may end up just paying it back a little bit earlier.” – Christopher Carey, CFO, City National Bank

As evidenced by reports of tense discussions inside the administration, there is a range of opinion about what and how strings ought to be attached to the public purchase of warrants in U.S. banks. But the costs of “fortressing” particular balance sheets are widespread – just ask any borrower stymied by current conditions. Unless the mission of the federal assistance to the banking sector is to pick and support “winners” in that industry, any future public positions in the industry must hinge on institutions actually lending with the capital.