Kashkari: Credit to Remain Slow Until Confidence Returns

With Friday’s investment in 43 financial institutions, the Treasury Department‘s allocation of Troubled Asset Relief Program funds through the Capital Purchase Program has grown to $189 billion of the $250 billion allotted. Pending applications under the program remain “in the thousands,” according to a speech given Monday by interim assistant secretary Neel Kashkari. After the funds set aside for the CPP and the latest infusion given to Citigroup Inc. (C), as well as the automaker bailout, the first $350 billion of the TARP funds has been “fully allocated,” according to Kashkari. Now the Treasury awaits release of the second half of the funds, an action for which President-elect Barack Obama requested Presidential approval yesterday. “President Bush has asked Congress to make available the remaining $350 billion for the next Administration,” Kashkari said. In his speech, he also supported the much-criticized decision by Treasury secretary Henry Paulson to change strategies with the TARP into making these direct capital investments under the CPP. Turning away from illiquid mortgage-related assets was a necessary move to take “more immediate and powerful” actions that became necessary in the face of an imminent collapse of the banking and financial system, according to Kashkari. “Whenever possible, we have designed programs that avoid the government controlling private institutions,” he said. “We have used a combination of tools such as preferred investments and asset guarantees as a means to enhance the confidence of systemically-important institutions on a case-by-case basis.” Instead of taking over financial institutions, the Treasury has strived to increase bank capital and provide strong incentives to “deploy the capital profitably,” Kashkari said. He did, however, acknowledge the ability and right of the banks to use the capital to absorb losses, write-downs and expenses related to restructuring. Shareholders of banks that don’t put the capital to work making loans and earning profits will eventually suffer, though the Treasury cannot force banks to lend if they are uncomfortable doing so, he said. “We absolutely need our banks to continue to make credit available,” but it’s understandable that lending and borrowing would be so low during the economic downturn when confidence has all but disappeared, he said. While Kashkari acknowledged recent vocal criticism that TARP funds given to banks has not been tracked, he explained such a process is deeply complex and cannot be measured easily. The Treasury will monitor quarterly earnings calls to see how the various banks’ lending business has diminished or increased, but not much else can easily be done, he said. There also remains $61 billion of the $250 billion reserved for the CPP that needs to get into the banking system before the TARP “can have the desired effect…. As confidence returns, Treasury expects to see more credit extended” but cannot judge the effectiveness of the program until then, he said. “The EESA is not an economic stimulus plan, nor is it an economic growth plan,” Kashkari said. “It was one of several initiatives taken by the Federal government to stabilize the financial system…. Nonetheless, the current crisis took years to build up and will take time to work through, and we still face some real economic challenges.” Read his remarks. Write to Diana Golobay at [email protected]. Disclosure: The author held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.