Liz Moyer, 01.22.08, 3:54 PM ET
When Ben Bernanke cuts rates, banks don't necessarily lend more freely.
Despite the Federal Reserve's efforts to pump money into the banking system and get banks to jump-start the moribund credit markets, lenders have been pulling in their horns in the face of mounting losses. And the pullback isn't just in subprime residential mortgages. It's in virtually all categories, from consumer credit cards and auto loans to commercial real estate and loans to big business.
On Tuesday the Federal Reserve's Open Market Committee dramatically slashed short-term rates 75 points, to 3.50%. The Fed also slashed the rate it charges banks to borrow directly from its discount window, to 4%. Many economists expect it will cut again when it meets at a regularly scheduled session next week.
As many credit market observers note, however, THE PROBLEM ISN'T THE PRICING OF CREDIT, IT'S THE DESIRE TO LEND AT ALL. "THERE'S NO LACK OF CAPITAL IN THE SYSTEM," says Christopher Whalen, managing director of Institutional Risk Analytics, which advises banks on risk management. "It's just that credit availability has disappeared."
What the Fed is doing by cutting rates (this was the fourth time since August) is keeping more potential borrowers creditworthy enough for banks to want them as customers, but it was easy availability of credit that got banks into this mess in the first place.
According to the Fed's most recent senior loan officer survey, released last October, 20% of U.S. banks said they had tightened lending standards on commercial and industrial loans to large- and midsized companies after several years of remarkably easy credit terms. Last week, the Fed's periodic survey of its 12 district banks indicated this tightening trend has continued.
Part of the problem is that big banks, which have written off more than $100 billion in exposure to mortgage-related securities and derivatives since the third quarter, are dealing with depleted capital and mushrooming balance sheets. Many have been forced to sell shares to outside investors, or are issuing preferred stock or other securities to restore capital ratios.
On Tuesday, Bank of America (nyse: BAC - news - people ) reported a worse than expected 95% drop in fourth-quarter profits, to $268 million, because of more than $5 billion in write-downs from its holdings of complex credit derivatives. Bank of America, which acquired Chicago-based LaSalle Bank in the fall, said its tier one capital (a critical measure of financial strength) had fallen to 6.8% from 8.7% in the third quarter, hovering just slightly above where regulators consider a bank to be "well capitalized" (that would be 6%).
The company plans to raise capital in the near future, executives said. And that would come in the nick of time. Its deal to acquire the rest of Countrywide Financial (nyse: CFC - news - people ), the troubled mortgage lender, is still pending.
Charlotte, N.C., neighbor Wachovia (nyse: WB - news - people ) also reported a sharp decline. Profits fell 98%, to $51 million, including some expenses for its acquisition of Golden West, after a $1.7 billion write-down in mortgage securities holdings. Wachovia raised more than $3 billion of capital in the quarter through securities sales.
Rival banks, notably Citigroup (nyse: C - news - people ), have had to slash their dividends and tap equity infusions from outside investors. Citi said in a statement Tuesday it has raised or priced $30 billion worth of capital, including a $7.5 billion infusion from Abu Dhabi's investment authority and another $12.5 billion from a more recent private placement with several funds and individuals.
The capital will shore up the bank's tier one, which had dipped to 7%, back to 8.8%. "We wanted to make sure that we can put capital to work for our clients and capture market opportunities for our shareholders," said Vikram Pandit, Citi's chief executive.
Banks are being forced to hold more loans on their balance sheets, rather than selling them off in the secondary market, because that market has dried up in the global credit crunch. That adds to pressure on capital ratios and forces banks to reserve more for possible credit losses.
In addition to the write-downs of credit derivatives holdings, banks face billions more in write-downs as counterparties to bond insurers, which are under pressure and face ratings downgrades. (Ambac Financial Group (nyse: ABK - news - people ), in fact, was downgraded Jan. 18 by Fitch Ratings, to double-A from triple-A, putting billions of bonds it backs also at risk for downgrade.)
And there's the whole problem with mounting consumer debt problems. Delinquencies are on the rise as consumers, feeling the pinch of higher energy prices and falling well behind on their mortgage payments, stop paying credit card and car loans on time.
Bank of America doubled its provision for credit losses to $3.31 billion in the quarter, for example.
"Broader financial market conditions have continued to deteriorate, and credit has tightened further for some businesses and households," the Fed said in its statement Tuesday. "Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets."
Economists say the Fed is reacting less to trends in the banking system, which it regulates but can't seem to do anything about, and more to trends in the stock markets. Tuesday's rate cut came after a sharp sell-off overseas and fears of a similar plunge at home. Indeed the Dow Jones industrial average fell more than 400 points minutes after Tuesday's opening bell.
"The real motivation behind the Fed's move is what is happening in the financial markets," said Wachovia economist Mark Vitner. "This is a financial panic, and if left untreated it will drag down the global economy."
Сообщение отредактировал Azeken: 23 January 2008 - 19:01
