Wednesday, May 13, 2009

Treasury Doubles Down on Risk

Treasury Secretary Timothy Geithner is now finishing a speech to the Community Bankers of America. Full text here. He's just announced, to large applause, that the Treasury Department finds itself addicted to private lending.

Treasury plans to used the "proceeds of repayments we expect to receive from some of the largest banks" to allow banks with total assets of less than $500 million to re-apply to the Capital Purchase Program (CPP). The CPP, which is the bulk of the TARP funding, will now be going to small public and private corporations and mutual intuitions, among other types. This applies both to banks that have applied previously and new applicants. Treasury will also extend the deadline for small banks to form holding companies and re-apply to CPP for the next six months.

This move puts the returns gained from CPP back up for market risk. In addition is does so just as markets appear to be recovering and we should be encouraging private capital not flooding another round of government investment.

In his remarks Geithner stressed that these community banks, such as Farmers National which has $400 million ins assets and received $7.5 million from CPP were healthy before they received CPP. Treasury's lending too such can make a "viable bank stronger and ensure that it could lend more aggressively."

Yet we know that smaller institutions were low on the totem pole of CPP from the start. The largest amount of funds went to small number of institutions in a short time, as I've posted previously. CPP began about crisis management and that lending strategy made sense. Yet CPP is beginning to look more like industrial policy. In fact if Bank of America, the firm which according to the Fed's stress test needs to raise the most capital of the 19 banks tested has already found $7.4 billion of its required $34 billion in private capital, "viable" banks should be encouraged and able to raise private capital. In fact the stress test made such encouragement. Yet in his comments to small banks, Geithner make no calls for them to raise private capital.

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