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The Government Wakes Up, And Lending May Be On The Way

By Bizbox

Well this seems--emphasis on seems--a step in the right direction. We've complained over and over that a key problem with the $700 billion bailout package is that while the money is ostensibly geared towards unfreezing the credit markets, the bank-recipients of the government capital are under no obligation actually to lend the money out. Not only that: according to some, they seem intent on not lending it out but instead on using it to buy up smaller banks. Not only that: according to some, this is what the Treasury Department wants. Which is all well and good for the country's biggest banks, the nine biggest of whom are already slated to receive the first $125 billion of the capital. It's less good for the community banks, who are relatively fiscally healthy, don't really want to take the money because of what taking the money may say about them, but who are therefore vulnerable to takeover by a bigger bank that is 'roided up on government capital. And it's even less good for the small businesses, who rely on the community banks, and who, more generally, really, really need to be able to borrow money right about now.

Phew. Anyway. The Washington Post reports that the government may be getting its act together after all, coming close to compelling (though ultimately, it will probably end up amounting to quite strong encouragement) recipients to lend that money out and grease the underheated economy.

The compromise among different legislators and federal agencies will probably take the form of a "federal guidance" that urges banks to lend out the money to creditworthy customers. Such a rule isn't as strong as, say, a law, but it does leave banks that don't observe it at risk of sanctions.

We say "compromise" because several agencies--most notably the Treasury Department--truly do want this money to go towards consolidation, a la the recent $5 billion purchase of Cleveland-based National City Bank by PNC Financial Services, which made the deal once it knew it would be flush with over $7 billion in new government capital.

But others felt that the money ought to be put back into the credit markets. The heroes here should be familiar to readers of this blog. They include the Federal Deposit Insurance Corporation, headed by Sheila Bair, whose decisions to raise the limit of fully insured bank accounts from $100,000 to $250,000, among other things, have been the most overtly pro-small business aspects of the whole bailout effort. They also include Sen. Chuck Schumer (D-N.Y.), easily one of the country's ten or so most powerful legislators, who called well over a month ago for the federal government to lend directly to small businesses. Take note: these are the people looking out for you.

What form will the federal guidance take? It's not altogether clear yet. But according to the Post, it will apply to all financial firms--that is, even those who didn't take government cash. It will also address executive compensation (setting universal rules sounds like a good idea, no? that way there wouldn't be an artificial discouragement to taking government capital) and dividend payment (the Bush administration has supported banks using government money in part to pay dividends to shareholders; Democrats have not). The main purpose of the guidance will be to increase lending.

Meanwhile, banks have til Friday to apply to receive government cash. Let's hope by the time the initial $250 billion is invested (which will be over the next few months), it is crystal clear that recipients are expected to lend much of it right back out to the businesses that need it and deserve it.

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