US banks refuse to open the credit tap despite government aid


Despite more than $1 trillion in federal largesse, US banks’ financial cushions may well not allow them to take the risk of making new loans.

At holiday time, the executives of the clothing group American Apparel (APP) would have done better to concentrate on the sales of the leggings and T-shirts marketed in their stores. Instead, the company’s management suffered the most critical period for the sale, while its debt, which was due on December 19, stood at $ 125 million. After weeks of endless meetings with major US banks, the popular retailer landed a last-minute loan extension. The result is this onerous succession: a deposit of 2.3 million dollars as well as a limitation of an expenditure of its capital. “The credit markets are still frozen,” says Adrian Kowalewski, the group’s Chief Financial Officer. Even well-performing companies cannot obtain loans without reasonable payment terms being imposed on them. »

The financial challenges facing Kowalewski and other business leaders pose a significant dilemma for the next Obama administration and policymakers in Washington as they attempt to revive the economy. Despite the considerable efforts made by the State in recent months, the big banks still do not grant loans for free. One sign of this credit crunch: new borrowing by large corporations fell 37% in the three months to November 30 from the previous three months. “Banks are extremely cautious,” says Edward Wedbush, president of Los Angeles-based brokerage Wedbush Morgan Securities.

The low profile adopted by the banking sector has drawn criticism. After all, the Treasury pumped $187.5 billion into the biggest US banks, including Citigroup (C), Bank of America (BAC), and JPMorgan Chase (JPM). Critics say recipients of taxpayer money should be forced to reopen their coffers. “The bad news (is that) the Treasury has no way of knowing the extent to which taxpayers’ funds are used to increase loans,” Massachusetts Democratic Congressman Barney Frank, chairman of the Committee, announced in December. of the Financial Services of the House of Representatives. Much worse news is that (the Ministry of Finance) has no intention of even trying to find out. »

Bank executives defend their opinions. They argue that the funds provided by the state are intended to consolidate capital and encourage loans, but that they are in no way obliged to grant new ones. “This is not a two-party relationship,” defends Bank of America (BofA) CEO Kenneth D. Lewis. It is not because the State has advanced us a sum of 15 billion dollars that we must grant loans also reaching 15 billion dollars. »

From a financial point of view, banks have little incentive to grant new loans immediately. In the current economic malaise, new loans granted to companies immediately result in their devaluation by between 60 and 80 cents against the dollar, forcing the banks to bear this loss. It is therefore more lucrative for them to take out existing and already discounted loans.

At the same time, some banks are no longer keen to achieve leverage by borrowing money in order to amplify their returns. Others announce that they would like to do so but cannot easily find people willing to grant them loans while offering attractive conditions. For a long time, leveraged borrowing has been a primary factor in lucrative lending.

It does not matter whether the position of the banking institutions is justifiable or not. In each of these two cases, companies struggle to obtain credit. And without further intervention, the mood surrounding lending could remain cloudy for quite some time, threatening companies’ economic prospects and influence.

Take the case of El Paso Corp (EP). As commodity prices tumbled, America’s largest pipeline operator cut capital spending by 16%, meaning its total output will remain flat this year. El Paso’s biggest debts will further diminish their profits. Afraid that its bank financing would anger lending haters, the energy company sold $500 million of junk bonds in December at 15% interest (more than double its total borrowing costs). “The price to pay was expensive,” says CFO D. Mark Leland. We weren’t sure (of) when things would get better. »

The banks don’t seem to know either. Moreover, they amass capital out of sheer fear. Some federal laws require banks to maintain asset-based capital at a certain level. When they experience losses, they must either increase their capital or sell assets in order to meet the required rates. After raising money from sources other than investors and being bailed out by the state in recent months, most major banks are compliant with federal capital standards.

However, these calculations do not take into account all the problematic assets on banks’ balance sheets. For example, they do not include securities whose losses appear to be temporary. Under such conditions, these losses can quickly become lasting, says Stuart Plesser, financial analyst at Standard & Poor’s (MHP).

Simultaneously, the big banks face another wave of losses, the only consequences of which would be to eat away at their capital. Businesses have already taken a heavy hit from subprime mortgages and other risky debt. But still other problems threaten the economy, this time concerning credit cards, agencies specializing in commercial real estate, as well as traditional mortgage loans. In an interview with Maria Batiromo, economics professor Nouriel Roubini of the Stern School of Management at New York University said credit losses will reach $2 trillion, increasing by about $1 trillion. dollars compared to today.

Even if the banks scoop up the state’s remaining $350 billion from its Troubled Assets Relief Program, the capital will still be a drop in the ocean compared to the sector’s total losses. banking. Based on this observation, Roubini and other economists assume that the creation of a new bailout plan by the state is only a matter of time. “Banks don’t have enough money to run the risk of lending,” said Anil Kashyap, a professor at the University of Chicago’s Booth School of Management. We will need a second, then a third rescue program for these risky assets. »

Unique way to encourage lending

Former US Labor Secretary Robert Reich says there is also weak demand for loans. Companies do not wish to borrow money for fear of being unable to sell their goods or services given the current weak economic environment. In order to stimulate this demand, Reich suggests the implementation of a fiscal stimulus plan reaching 900 billion dollars over the next two years. Without such support, job losses could skyrocket…and it won’t be possible to get the economy back on track for quite a while.

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