Giving Credit Where Credit Is Due

Many of those large banks needed the capital to shore up their balance sheets. But Cleveland and Doyle say that some banks were doing okay and were told they had to take the money anyway to avoid disrupting the entire credit system.

“It seems that the government is making the second pool of capital only available to banks that are financially sound,” Cleveland says of the other $125 billion now available. “Most people believe TARP funds are only for sick banks, but that’s not true.

“That’s the first misconception about TARP capital,” he adds. “The next is that banks are not lending the capital back into the economy, but that’s not true either. It’s just that it is a complicated, borrower-by- borrower basis.”

Cleveland says that every bank in the United States has some toxic loans in its portfolio. To date, there hasn’t been a way for banks to divest themselves of these loans, so nobody knows how much excess capital they’ll need to weather the storm. “Do I want to get into bed with the government? No, but we didn’t have any other source of cheap capital right now,” he says.

For example, BNCCORP received $20 million in TARP capital at the end of January, and at the time of this writing in mid-February, it had made or committed to $20 to $25 million in new, ordinary commercial and industrial loans, and had about $45 million in mortgages in the pipeline. “The smaller community banks are the healthiest, and we’re lending only to the most credit worthy,” Cleveland says.

TARP Isn’t the Holy Grail

My banking friends and I also agreed that although TARP capital is a good source of cheap money for banks right now, banks will continue to extend credit only to very credit-worthy customers for quite some time. This recession is so deep and wide that it is going to take many forms of firefighting to squelch the blaze.

And the hottest fire remains declining real estate values, because things like houses, strip malls, and office buildings are the tangible assets that serve as collateral to extend credit. When will the bottom drop out of the real estate market? Unfortunately, it won’t be anytime soon. In the interim, businesses will have to figure out how to survive and prosper on their internally generated cash for operations and growth. Many won’t be able do that over the long haul and will fail, resulting in more job and tax revenue losses. Where it will stop? Nobody knows.