Foreclosure Swap
Why do congressmen and business pundits keep asking about banks “sitting” on TARP money.?
I keep hearing about the outrageous bonuses, and then complaints about how these TARP banks won’t loan out the bailout money. They all ask why the banks are just “sitting” on it. Banks don’t “sit on money” anymore than required by regulation and law. Hasn’t all that TARP money been spent on covering those Credit Default Swap insurance claims? Those banks sold CDS insurance will no requirement of maintaining any potential “claim reserves”. Who ever heard of a bank being “over leveraged”. The foreclosures are still coming in hot and heavy. A 2nd and 3rd TARP will just be used to pay off these CDS insurance claims. Really need to let those big banks go bankrupt, and loan new TARP money to solvent regional banks throughout the country. Right now, TARP is just pouring money down a hole. Bankruptcy is the only way out of legal contractual debt.
Are you asking a question or just ranting?
1. It is not true that “Banks don’t “sit on money” any more than required by regulation and law.”
Under most circumstances, it is in the banks’ interest to lend out as much as it can, but these aren’t the usual circumstances and there is a good bit of evidence that banks are not lending out as much as they can and as much as we would like them to.
And this isn’t the first time this has happened:
http://en.wikipedia.org/wiki/Credit_crunch
And it is not just banks. Other institutions that usually buy corporate bonds are also cutting back:
http://online.wsj.com/article/SB123224182986193619.html
2. As it happens, the perceived risk of “those Credit Default Swap insurance claims” has been much higher than the reality. Only a small percentage of the claims were not covered – but because banks had no way of knowing that in advance.
But of course, as the economy deteriorates, the chances of companies defaulting on their loans goes up, which is a good reason for banks and other lenders to be fearful.
But this is only one example where what is good for the individual (not making risky investments) is bad for the society as a whole. So who says the free market always gives the best results?
3. As for “Who ever heard of a bank being ‘over leveraged’.”, it used to be that banks had to satisfy reserve requirements which prevented them from being over-leveraged. But with the erosion of bank regulations, banks were allowed to invest in certain kinds of securities (such CDSs) without reserve requirements. And they grabbed the opportunities with both hands and went way overboard.
4. I’ve heard of many different proposals, but one thing is clear – there is no simple obvious answer. Some proposals are clearly better than others, so much so that some aren’t even worth considering, but it is clear that you haven’t considered what would happen to the rest of the economy if we just “let those big banks go bankrupt”. It may be the best thing to do, but it isn’t the only possibility, nor the clear best.
Crystal Gayle – Ready for the times to get better (sec edit)
