I’ve blogged incessantly about the need for the federal government to take direct steps to unfreeze the credit markets, to give employers enough credit to operate their businesses, borrow against customer invoices (even if the standards are tougher), purchase new and replace old equipment and fund their payrolls as cash flow rolls in. Congressional subcommittees hold hearings on how much federal money is pouring into lenders but how very little money is coming out in the form of consumer or business loans.
But the government speaks out of both sides of its carnivorous mouth: bank examiners – reacting to the massive stupidity of large institutions leveraging themselves beyond all logic, feasting on toxic assets, making tons of unsupported loans with now-severely-impaired-or-or failed collateral – are making damned sure that doesn’t happen again… even as banks collapse around them and the frozen credit markets threaten the very existence of small and medium-sized businesses (and a few of the bigger boys too – Circuit City, for example, was forced into liquidation because a once-routine form of loan – a “debtor-in-possession” loan – was nowhere to be had).
In short, the Federal Reserve, Comptroller of the Currency (Department of Treasury), and the Federal Deposit Insurance Corporation – the primary regulators (there are others) of the of virtually all American banks – are requiring lenders to exert much more care in lending decisions, prove that they have enough bona fide capital to access federal funds and make loans, and properly account for the decreased or destroyed asset values that are still on their books. Complete write-offs, where banks literally have to remove that portion of a loan (sometimes the whole thing) that truly cannot be repaid, are the disaster scenario that can sink a bank and take it into bankruptcy when the volume of failure gets high enough.
If a loan sits between failure and “maybe,” banks have to place such loans on a “classified” list – and an awful lot of such “classified” loans include those where the installment payments may be current but the principal is totally beyond the borrower’s ability to repay on maturity (or to secure alternative financing). Many of these loans really shouldn’t be on the bank’s books at all, but they have an excuse (“the borrower’s still paying!”) to pretend that they have solid asset potential even though they know damned well that’s this is a myth.
So the infamous governmental “bank examiners” descend on the banks – they’re visiting the biggest ones first – to make sure it’s “real” (we know it isn’t) and that apply the very strict lending criteria imposed by the federal laws and regulations to any loans that they do make. All this does is apply mega-brakes to whatever small incentive banks had to lend in the first place.
I thought you might like to see the job description of a “bank examiner” that you can find on the FDIC’s own website: “Examiners participate in the assessment of financial institutions to determine the existence of unsafe and unsound practices, violations of law and regulation, the adequacy of internal controls/procedures and the general character of management. Examiners write comments and analyses for inclusion in reports of examination and meet with insured depository institution officials, including the board of directors, to discuss the finding of an examination and, if necessary, to institute any corrective programs. Most positions require a degree in business, finance, accounting or a related field with at least 6 semester hours in accounting.”
In short, what President, Congress and even Treasury want to have happen – unfreeze the credit markets – requires banks, who are being visited by hoards of federal bank examiners, to make loans that would very much be in conflict with the very rules and regulations that the federal bank examiners are sworn to enforce! But if they don’t enforce the rules, they will be blamed if the banks engage in another round of “stupid bank tricks.” Catch-22.
I repeat, if you want to see lending money flowing out of banks, then unless we have infinite patience for the indirect fix to kick slowly – snails on a break – the government is simply going to have to place that “available for loans” money into banks, who can administer the lending practices, specifically for those banks to deploy into the ordinary course of business. Or we can wait… suffer… wait… suffer… I will run out of space to repeats those phrases, but you understand.
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