Banks need to be stable first before lending

March 16, 2009 7:45:38 PM PDT
Wall Street was unable to sustain a four-day advance on Monday. Although the Dow Jones average was up most of the day, things turned sour when American Express reported a growing number of people are falling behind on their credit card payments.

The Dow Industrial closed the day down, 7.01 points; the NASDAQ fell 27.48, which is almost two-percent. However, bank stocks did OK. Citigroup is up 30.9-percent for the day and Bank of America rose 7.3-percent.

The Federal Chairman Ben Bernanke says if we can straighten out the banks, the recession could be over by late 2009. Still, that is a very big if.

Banks are getting squeezed, not only by bad mortgage loans, but also by defaults on credit card loans.

The Federal Reserve chairman may have stated the obvious when he told CBS's "60 Minutes" that the key to recovery will be the banks.

"Recovery is not going to happen until the financial markets and the banks are stabilized," says Bernanke.

Many of the nation's big banks still have toxic assets on their books, those bad loans caused by the sub-prime mortgage meltdown. Even after $350 billion was pumped into banks with so-called Trouble Asset Relief Program or (TARP) loans, progress appears to be at a standstill.

"The Treasury has not yet come up with a program to solve these toxic assets. They have been working on it for the last couple of months, and they must be having problems in getting the program together," says Professor Mario Belotti Ph.D., an economist at Santa Clara University.

That means the toxic assets remain a liability on bank balance sheets, and until their fate is known, there's little appetite to make new loans. Banks are required to have sufficient money to cover its bad loan portfolios.

"They have to maintain in order to operate, they have to maintain a certain capital asset ratio, and if they write off those assets, their capital asset ratio goes down, which means they'll have to get more capital," says Professor Belotti.

Despite that, on Monday Treasury Secretary Tim Geithner urged banks to step up lending to small businesses.

"We need our nation's banks to go the extra mile in keeping credit lines in place on reasonable terms for viable businesses," says Geithner.

Employment services say the job picture will improve only when banks return to lending.

"When we see temporary employment increase, when we see work week hours increase, when we see professional skills begin to recover, then it will be a clear sign that the job market is coming back," says Tig Gilliam, the ADECCO CEO.

The Treasury Department is working on a plan to buy up to $1 trillion in toxic assets from banks. Several investment funds will be created to attract money from private investors as well as pumping in money from federal funds. That plan will be officially unveiled in two weeks.


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