“Guarantor agrees to notify Bank of any violation of any applicable usury law within 60 days of its occurrence, and Bank will have 60 days to correct

Just another tidbit from Joe Nocera's blog on the NY Times. It's from an Anon Banker:

"Banks are not making loans. Does that comment mean that no loans are being made at any bank? Of course not. If the borrower provides the bank with both a belt and a pair of suspenders, the loan is being granted. The banks need to recapitalize and they are going to do that. But if the banks receive federal funding through the bailout program they should be required to utilize some of those funds for S.B.A. loans. The big banks are not going to voluntarily engage themselves in boosting our failing economy by proactively utilizing the SBA program, whether it is priced with a base of Prime or a base of Libor +3 percent. I just don’t see it happening. In fact, I see just the opposite. In addition to not making new loans, the banks are systematically withdrawing commitments and capital from the economy. "

This is the problem with a Hybrid Plan like TARP. The interests of the Government and Banks are not the same, and the banks are going to look out for their own interests. Thank you for the money.

"Another friend had his credit line cut. He has a business equity line of credit, a fairly unique product in the industry where the line is actually to the business, but it is secured directly by a lien on the personal real estate. He asked me to look over his loan documentation to see if he had any case for an argument against cutting his line.

I read his personal guarantee, security agreement and Business Equity Line of Credit Agreement from that bank. And, basically, if the bank chooses to cut his line because the value of the collateral decreased, he cannot do anything to change that.

But there was an interesting line written into the guarantee, that I thought might bring some humor to this otherwise humorless topic. And I quote, “Guarantor agrees to notify Bank of any violation of any applicable usury law within 60 days of its occurrence, and Bank will have 60 days to correct such violation.”

Big Banks! Love them, or perhaps, leave them, and go to the community banks."

I'm not sure that I read that correctly. It seems to say that if the bank breaks the law, the borrower needs to tell the bank and allow them to correct the situation, if they don't want to contest it, before they can be prosecuted or fined. I'm pretty sure that I misread that.

"Tits on a bull": Pardon Me?

Willem Buiter with a terrific new post on the current situation:

"The depth of the current crisis is such that the last two tasks of the financial system (risk trading and portfolio management) are being performed abysmally, and the first, the intermediation of financial surpluses and deficits, has effectively ceased to be fulfilled by our financial markets and banks. Financial intermediation has all but ground to a halt.

Many systemically important financial markets are closed to new issuance. Even secondary markets (for trading and pricing existing asset stocks) are badly impaired. Banks have all but stopped lending to households and to non-financial enterprises. Where banks are notionally still present as lenders, the financial terms and non-financial conditions (collateral and other covenants) are often prohibitively onerous."

Please read it all. Here's my comment:

1. After laughing for about ten minutes, and then crying for another ten minutes, these are my, now wait for them, votes:

   (4) Blind fear and panic rule the roost in the banking sector. Bankers are shell-shocked and paralyzed. More Prozac please. ( I’m taking Xanax )

   (C) Nationalise the banks (paying as little as possible to the existing shareholders), fire the existing management and board of directors, and have the government appoint a new executive and a new board that are serious about meeting lending targets. With 100 percent share ownership by the state, there is no risk of lawsuits about the executive or board of the bank not meeting their fiduciary duty to the shareholders. Full state ownership would make transparent and formal what is already true in substance: but for the financial support of the government (past, current and promised/anticipated in the future), there would no longer be more than at most a handful of viable cross-border banks in the north-Atlantic region.

   ( I’ve been for this from the beginning,not because I like it, but because I could see that TARP or other Hybrid Plans would make a Pig’s Breakfast eventually look like a delicacy )

   Posted by: Don the libertarian Democrat | November 26th, 2008 at 2:21 am |

"less lending for years or public ownership of the banks for the foreseeable future. It's not an easy choice, is it? "

Robert Peston on BBC probably doesn't like my hijacking his point for the Swedish Plan, but he probably doesn't read my blog, so here goes. Here's Peston:

"In saying that there's a case for nationalising the entire British banking system, John McFall - the chairman of Commons Treasury select committee - has shone a light on the paradox of the recent global rescue of the world's biggest banks (listen to his interview on Today).

McFall and many others are exasperated that our banks remain deeply reluctant to lend to businesses and to individuals, even after so much taxpayers' money has been pumped into the banking system.

"What are the banks playing at?" many of you ask.

Well, funnily enough, part of the reason our banks are restricting the supply of credit actually stems from the official description of the bailout as "temporary".

Governments and central banks are saying that they want their (our) money back from banks within about five years.

That may seem a long time. But it's no time at all in the context of all the money that we've pumped into the banks.

The capital element of taxpayer support is only a small part of the problem."

This is a good point, but that's no more than saying that banks are looking out for their own interests. Either you have to tell them what to do with the money, or they'll do what they want with it, as they see what's in their best interests.

"And, again, the imperative of paying this back is a massive drag on banks' ability to lend and is therefore also a ball-and-chain on economic growth.

This, of course, is just one of the deadening weights on banks' ability and desire to lend.

The other severe constraints are:

1) regulators' very belated stipulation that banks and other financial institutions should hold much more capital and cash in their balance sheets relative to the value of their loans - which in a world where capital and cash is scarce and expensive is a massive disincentive to lend;
2) the devastating effect on credit creation of falling asset prices;
3) the relative dependence of British banks on funding from overseas institutions which are progressively calling in their loans;
4) the considerably increased risks of lending to individuals and companies when the economy shrinks.

Against that backdrop, the question is whether it is remotely sensible to put a deadline - implicitly or explicitly - on the repayment of all that taxpayer funding for banks."

One thing's for sure, they're don't think that it's sensible. In which case, they're not likely to do it.

"But if we don't demand our money back, we'd be formalising that there's been a semi-permanent nationalisation of the entire banking system.

And that would massively encroach on the ability of our banks to operate as independent commercial entities.

There would be massive political pressure on them to become quasi-social utilities, providing loans at the behest of ministers and officials rather than on the basis of commercial criteria.

So here's what may turn out to be the choice: less lending for years or public ownership of the banks for the foreseeable future. It's not an easy choice, is it?"

This is why a hybrid Government/Private Bank arrangement is so messy. The two don't often see eye to eye, and often don't have the same interests. This leads to lobbying, fudging, needless delays, etc., the whole list of problems I've talked about from the beginning.

That's why a Swedish Plan would have been preferable. Nationalize, then Privatize. What we have now is neither, and we aren't likely to get out of it soon, as Peston observes.

"If banks don’t lend to the real economy, there is no reason for them to be in business at all."

Willem Buiter proves to be provocative once again in the FT:

"I propose the following form of forced lending by banks to non-financial businesses. Every loan that matures during the coming year gets extended/renewed for another year on the same terms as the maturing loan. This applies to both secured and unsecured loans. Likewise every credit line or overdraft facility that expires during the coming year gets extended/renewed for another year. Expiring loans, credit lines or overdraft facilities that had an original maturity of less than a year or more than a year will have the same interest rate and other conditions for the one-year extension/renewal as the original arrangement."

Wow.I must say that I didn't see that on the horizon. Here are my comments:

“Now, from my view as a novelist and philosopher, there’s something irrational at work here. The Human Agency type of explanation would recommend combating the irrational fear and aversion to risk. How to do that?

For Corporate Bonds, I would think tax breaks down the line will help, but now? How about Agencies? Fully back them, or not? Into this mix the auto maker’s bailout fits, which is why it is such a hard call in this crisis. But not to understand the effects of human agency in this crisis, is to resort to the kind of mechanistic explanation that got us into this mess in the first place, although not by itself, by any means”

I wrote that this morning about the flight to Treasuries and the problem of getting people to lend to corporations ( Bonds ).

“But given the capital injections, guarantees and other forms of financial support extended by the state, a lot of banks are liquid and capable of lending. They refuse to do so.

“Where just a year and a half ago, hubris, recklessness, overconfidence and rampant optimism ruled, we now have fear bordering on panic, total lack of confidence, timidity and pessimism verging on institutional clinical depression. The loan officers are brow-beaten and rendered impotent by internal risk controllers. The bean counters are in charge. ‘What you don’t lend, you can’t lose’ is the new micro-prudential ethic. The macroeconomic consequences of this lending paralysis are potentially disastrous. It could turn a global recession into a global depression, with many years of stagnation and cumulative declines of GDP of 10 percent or more.

So, what is to be done? These are extraordinary times that could become desperate times.”

So say you. Also this morning, I read this post on BBC by Peston:

http://www.bbc.co.uk/blogs/thereporters/robertpeston/

Here’s what I wrote:

“I should hope that they are called to account. But, I also want to file this one, unless otherwise informed, under panic selling or deal making. I simply wonder how much, in retrospect, of this kind of panic will turn up.”

I have been collecting posts documenting panic behavior and cases where the fundamentals are being ignored because of the fear and aversion to risk. The evidence is everywhere.

You are correct, this is the opposite of what we just went through going up. Namely, not paying attention to fundamentals and allowing emotion to overly influence our behavior.

What we now need are policies and incentives that can help us combat this fear and aversion, not to fool ourselves, to be view our situation as it really is. All human knowledge and expertise was not lost in this crisis.

Oddly, this is one case where a novelist and philosopher can help. Not me, but someone else, in helping us confront the human agency problems we’re facing in this crisis, not simply throwing numbers around like the quants whose sagacity worked so well in getting us here. We can use the numbers, but they’ll only be as useful as the wisdom of the men and women using them.
Posted by: Don the libertarian Democrat | November 20th, 2008 at 3:37 am |

I did wonder if you were being provocative. I’ve been thinking about offering incentives, but you know more than I do. Cheers. Don
Posted by: Don the libertarian Democrat | November 20th, 2008 at 7:46 am |

""The important thing is to get the banks now lending to businesses and to families," he said."

Where have we heard this before? From the FT:

"Alistair Darling, the chancellor, will today unveil details of the arm's-length agency that will manage the £37bn in stakes the government agreed with banks to help them in the credit crisis.

The Treasury said the agency's staff would be tasked with monitoring the lending activities of the banks to ensure that they fulfil the pledge to ensure funding of small businesses and that mortgage borrowers get a fair deal without the banks ramping profit margins at their expense.

As reported in the Financial Times last week, ministers have been in talks with high-street lenders to rewrite their voluntary code on lending to small businesses to ensure that customers are given reasonable notice before loans and overdrafts are axed or made more expensive.

Attempts by the Treasury to strengthen the code, as it has done for mortgage lending, comes amid increasing political concern that the £400bn state bail-out of the sector is not reaping the promised benefits for small companies. Gordon Brown has insisted repeatedly that support for such companies is a condition of the £37bn taxpayer-funded recapitalisation of Royal Bank of Scotland, HBOS and Lloyds TSB.

Yesterday in an interview for the BBC Mr Brown reiterated that his first priority was to get the economy moving. "The important thing is to get the banks now lending to businesses and to families," he said"

Let's see, not lending, keeping money, sounds like TARP. Notice that the British are creating an agency to monitor the lending practices of the banks that received government money. I guess that you can't trust banks anywhere.

Actually, it doesn't sound like the Brits got the banks on paper either. Is insisting like jawboning?