Treasury, Banks Start to Retreat from Battle; Refusal to CIT Helps Lead Way

The Washington Times (Washington, DC), July 20, 2009 | Go to article overview

Treasury, Banks Start to Retreat from Battle; Refusal to CIT Helps Lead Way


Byline: Patrice Hill, THE WASHINGTON TIMES

Washington's political leaders and the nation's big banks seem to have come to an uneasy truce after months of open warfare.

Top banks are returning the money Treasury gave them and mostly boycotting the department's lending revival programs in return for less meddling from Congress and the administration.

But analysts say the consequence of allowing banks to follow their natural urge to hunker down during a recession is that credit for consumers and businesses continues to shrink. Meanwhile, banks sweep their bad loan problems under the rug and nurture profits by, among other things, investing heavily in Treasury bonds.

The shift in Washington's stance was illustrated dramatically by Treasury's refusal last week to rescue CIT group Inc., a top lender to small businesses with shaky credit. After prodding banks for months to step up lending to small businesses - even setting up complicated government programs to promote loans to them - the administration abandoned the biggest lender in that market. That decision is likely to accelerate the cutoff of credit to many retailers, importers, franchises and other small businesses.

Peter Morici, a business professor at the University of Maryland, called it doughnut economics.

The stock market is rallying. The economy will recover by year end, and strong profits among big players like Goldman Sachs, IBM and Google will spread to other big corporations. However, many small businesses and working Americans won't be cheering, he said.

While troubled big banks such as Citigroup Inc. and Bank of America Corp. were showered with federal largesse to keep them afloat, regional banks that rely on Wall Street for credit simply can't get enough money to make loans or they end up like CIT Financial and others - broke and bankrupt, he said. Wall Street has an increasing aversion to the ordinary business of making sound loans, and obsession with abusive derivatives trading and the big bonuses that creates.

CIT's board was meeting Sunday night to discuss options that would allow the lender to small and midsize businesses to avoid bankruptcy, according to a person briefed on the talks. The Wall Street Journal and Reuters reported that the company was nearing a deal with bondholders for $3 billion in emergency funding.

Dozens of small banks have been quietly closed or merged by the Federal Deposit Insurance Corp., while Treasury has gone to great lengths to rescue banks deemed too big to fail.

Meanwhile, small and medium-sized manufacturers, builders and retailers that rely on those disenfranchised regional banks can't borrow enough money to sustain operations, Mr. Morici said.

That lending for most consumers and businesses has stalled or declined since the beginning of the year is unmistakable. Figures published by the Federal Reserve show that commercial bank lending to consumers, homebuyers, real estate developers and businesses is down by nearly $200 billion since December, despite the establishment of Fed and Treasury programs to jump-start lending. …

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Treasury, Banks Start to Retreat from Battle; Refusal to CIT Helps Lead Way
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