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February 03, 2009

WaPo: TARP Bailout Fails to Revive Lending

No big surprises here, though TARP supporters can continue to pat themselves on the back for preventing the banking system from collapsing. . . if that was ever really going to happen.

The government investment boosted EagleBank's capital, a cash reserve that regulators require banks to hold as a cushion against losses. More capital meant EagleBank could make more loans, but the company has not been able to take advantage. Lending also requires deposits, the money that banks give to borrowers, and EagleBank's deposit base shrank over the past three months.

"You look around and everyone is saying, 'Banks are not lending,' " said Ronald Paul, EagleBank's chairman. "Well, we'd like to. I could grow my loan base considerably if I just had the deposits."

EagleBank's struggles are part of a broader national pattern and illustrate the complexity of the government's attempt to prop up the economy. Rather than investing in the banks best equipped to increase lending, the government invested disproportionately in banks that needed money to solve problems. Those banks often were ill-equipped to increase lending because of financial limitations such as a lack of deposits.

The thing I like about this article is that there are no illusions about what the TARP was supposed to do. It was always intended to keep failing banks from closing or selling or declaring bankruptcy. It was not the purpose of the TARP to give money to "sound financial institutions" as David Freddoso incorrectly wrote last week and many other TARP supporters have claimed recently. Those banks didn't need the help.

So what we now have is a whole lot of functioning banks, only a few of which are genuinely healthy. The investor/depositor is having to make hard choices about putting their money in the healthiest banks or taking a risk with one of the bailed-out banks. That's when he can tell which is which, of course.

To top it off, the Democrats are pushing banks which received TARP funds to increase their lending, even though they may not be adequately capitalized and even though this likely means risky lending. Today, Barney Frank is holding hearings on attaching tighter conditions to TARP funds, including lending requirements.

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posted by Gabriel Malor at 09:26 AM

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