It’s Time for Banks to Start Acting Like Banks Again

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It's tough to be a bank these days. Maybe that's why banks don't want to act like banks anymore. Earlier this week, an ominous piece of news appeared in the Journal:

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.

It might seem like it makes sense for banks not to lend money right now. After all, irresponsible mortgage loans are one of the things that got banks into this mess. But it is only lending that will get the rest of us out of it.

Smart lending — not the low-interest free-for-all that reigned before. If banks aren't making loans, companies can't invest to grow or improve and expand. Unemployment will remain high, and our economy will stagnate. As FDR said in one of his fireside chats during the Great Depression, which was compounded by banks' refusal to lend, banks need "to put your money to work to keep the wheels of industry and of agriculture turning around."

In the aftermath of the financial meltdown in September, the federal government attempted to spur lending by giving banks easy access to cheap government money to sell at a profit. There was the $700 billion TARP, of course, and the Fed's brilliantly successful Temporary Liquidity Guarantee Program, which provided banks with access to cash at startlingly low rates — banks could save $24 billion in borrowing costs on the TLGP alone, according to an analysis by the Journal. When, in the face of this largesse, banks still held their purse strings tight, the House held several long, tortured hearings to shame them into lending.

But the banks, it seems, weren't interested in working their way back to profitability through loans to the common consumer. Instead, they looked for a place to make lots of money quick: trading. Or, as Columbia professor and economist Joseph Stiglitz described it to New York this week, "gambling."

Consider the recent contretemps over star Citigroup trader Andrew Hall. Hall's energy-trading unit, Phibro, is one of Citigroup's most profitable properties, accounting for $667 million in pretax revenue in commodities trading in 2008, and a whopping 10 percent of Citigroup's total net income in 2007. Hall is due to receive a $100 million bonus this year, and some are questioning whether he should get his money. But this is the wrong question. The question should be: Why is Citigroup — one of our nation's largest banks, which holds $136 billion in regular-person deposits — making more money trading than lending?

Citigroup is actually losing money on lending — negative $928 million this last quarter. Apparently, the bank badly hedged its loan losses. They're hoping the trading gains will make up for this failure — so much so that they're willing to bet a $100 million bonus on it.

It's not just Citi. In the first quarter, trading revenue hit a record for U.S. banks, to the tune of $9.8 billion. At JPMorgan, trading represented 13 percent of its gross revenue and contributed 8 percent to both Citigroup and Bank of America's bottom lines.

In the second quarter, Bank of America's sales and trading revenue rose to a record $6.7 billion. Bank of America is the single biggest lender in the United States! Or, it's supposed to be.

As of right now, it appears that banks are willing to venture their money on hedge funds and other financial institutions, but not on you, the consumer. Or you, the small-business owner. Or you, the homeowner. The number of loans the Small Business Administration backed though its flagship program declined 57 percent in the last quarter, partly because several banks abandoned participation.

But if the bets they're making go sour, the banks are even more likely to take the entire U.S. money supply with them. After the failures and the mergers, we now have only three incredibly powerful banks in the U.S.: Bank of America, Citigroup, and JPMorgan, and from too big to fail, they're now too ginormous to fail. We don't want them futzing around with trades they may or may not get right. The government can't afford it. Bailout costs have already fattened the Federal Reserve's own balance sheet to $2.2 trillion from $800 billion just last year, much of it dominated by mortgage-backed securities.

So what can we do to get the banks to lend to businesses again? We can't depend on the heads of the Treasury and Federal Reserve. Neil Barofsky, the overseer of TARP, recently said he last spoke with Treasury Secretary Tim Geithner in January — a surprising contrast with the recent Times profile of Jamie Dimon, which said the JPMorgan executive spoke with Geithner around once a month. And Fed chairman Ben Bernanke lately seems more focused on trying to keep his job than on taking care of TARP.

The only solution left is for Congress and the White House to meddle even more, and threaten to mete out punishment if the banks don't lend. The congressional threat to tax Wall Street pay at 90 percent, for instance, was extreme and misguided, but in the end it was effective, scaring banks like JPMorgan and Goldman Sachs into rushing to pay back their TARP money. Wall Street doesn't respond to shame. But it does respond to a strike at its own pocketbook.