Fatal Flaws and the Credit Cycle.

I find it funny and interesting that the original intent of all of the bailout money was to unlock a frozen credit system so that banks can go back to lending. But what I am increasingly finding out is if banks don't want to lend...is that necessarily a bad thing? It shouldn't be, as the economy sinks deeper into a recession, wouldn't it be beneficial for banks to become more stringent in their loan practices? Who is the government kidding? Why is the government so obsessed with increased lending activity in the banking sector? They must be aware that unemployment and falling home prices have a direct correlation with a persons ability to pay ones debts? Don't they? You would think, but then again its just one more way for the powers that be to look for answers other then the obvious to fix a corrupt system. They can not explicitly come out and say stop lending, study your loan practices, and fix your loan books, because the political, public, and economic fallout would be huge, so they make a thin mandate to the banks.

The Paulson treasury knew that the credit cycle was getting very gray in the tooth, but the mammoth trading positions that all of the financials had, needed to be financed and turned over on a daily basis and no interbank lending was taking place. Libor rates were sky rocketing and banks couldn't lend with each other to pay every day expenses. This is what eventually doomed Bear Stearns. But then again, they couldn't come out and hand over hundreds of billions of taxpayer money to make sure Lehman or Merrill can make payroll, so they invent this idea of unlocking the credit system so that everyday American Citizens can buy that big screen TV, car, and or house. Forget the fact that the consumer is already tapped out, the banks just need to lend.

So when TARP money was handed out by the government, the banks couldn't lend because... guess what...its bad business! The reason the banks are in this mess, was predatory and out of control lending with no risk assessment, so the obvious fix is to lend more? Even the banks are not that stupid. So even after $3 Trillion has been handed out, there is still not one single change in any consumer/commercial metric with regards to lending. Congress is up in arms because the banks are not lending, the banks say they are lending...Yada Yada Yada.

The banks are not lending because they cant quantify the bad loans they already have on their books, let alone any new loans they wish to make. It doesn't matter if they lend to good credit borrowers, because unemployment trends are getting worse across the board.
The banks should stop the charade and just come out and say we are not lending, because we refuse to go about business as usual.

In yesterdays BOFA earnings release, we heard the following from CEO Ken Lewis.

- "Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve."
-"Even our internal economists are a little at odds as to the timing with some seeing recovery earlier (than year-end)."
-"We believe unemployment levels won't peak until next year at somewhere in the high single-digits."

But...he goes on to add, we are still lending and doing whats needed to get the economy back to where it should be.

Something doesn't jive here. So the CEO is bearish on the economy yet bullish on loan growth? He cant be that short sighted.

No bank CEO can reconcile more lending with a deteriorating economy, especially one in which economic conditions are the worst than they've been in generations. But that's exactly the claim Ken Lewis is making.

Lewis described a deep recession that's going to be here for months. Still, BOFA touts that it's "helping" homeowners and small businesses with new loans. It claims to have added 45,000 customers and provided them credit.

The reality, however, is less impressive: BOFA loaned $183 billion during the quarter, up just 1.6% from the last quarter of 2008, when lending took a big dive industry-wide.

All of the financials are in the same game...talk like you are lending, but hoard the money. Again...I agree that banks should stop lending until unemployment and the economy some what improves, just stop the double talk.

Every bank that has taken TARP money has curtailed lending, you would have to be stupid not to.

One of the main intentions behind TARP was for it to be a stimulus program made through the banks. After plugging holes on each bank's balance sheet, the TARP cash was supposed to flow into new mortgages, auto loans, credit card lines and corporate lending. Six months later, it's fair to say TARP has helped prop up some banks, but it hasn't flowed into the consumer credit markets the way the framers intended.

Now, critics have argued that the banks should be loaning this money to help stimulate the economy. Companies need credit to expand and hire, they say, and consumers need credit to buy products and help feed the economy. In almost any other economic time, this would be true, but not in a time where an over extension of credit created the recession we are fighting.

Credit cycles by definition are periods where banks overextend credit and then pull back to correct the over extension. If the government forces banks to lend to at-risk borrowers, we're going to aggravate an already dire credit picture and require more government intervention. Again....the wrong policy message.

Forget about low income, no income, and weak credit borrowers who cant afford any loan or mortgage, how about small businesses? The so called life blood of the economy? It turns out that even small businesses are in trouble as the default rates are climbing there as well.

It doesn't matter what type of loan, lending into an economic downturn is an invitation to trouble, too bad the government doesn't think so