Lending Stalls; Banks On Sidelines

Stock prices are at six-year lows. Over the past two days, the Dow Jones industrial average has lost more than 6 percent of its value. The $700 billion bailout was supposed to stabilize the financial industry and get banks lending again. But that hasn't happened yet.

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STEVE INSKEEP, host:

It's Morning Edition from NPR News. Renee Montagne is away. I'm Steve Inskeep. Good morning. Some of the people who engineered the financial bailout are starting to wonder if it's working as they intended. Treasury Secretary Henry Paulson says the government action prevented financial collapse. It has not prevented the giant bank Citigroup from losing half its stock value in a week. The Dow Jones Industrial Average is down 47 percent from its record high a year ago. A broader measure of stocks, the S&P 500 is at its lowest level in more than a decade. The government's big bailout fund was supposed to stabilize the financial industry and get banks lending again. But as we'll hear in a moment, one leading lawmaker, Chris Dodd, says the banks aren't doing their jobs. We begin with NPR's Jim Zarroli.

JIM ZARROLI: When the bailout was approved this fall, the financial sector appeared to be sinking into the quicksand. All over the world banks were being seized by governments or were collapsing altogether. In the turmoil, no one wanted to lend. U.S. officials hoped the bailout fund would help restore confidence in the financial sector. In one sense, it has. The London Interbank Offered Rate, or LIBOR, which is an important barometer of credit, has fallen sharply. Treasury Department official Neel Kashkari, who runs the bailout fund, spoke about the drop in a speech on Wednesday.

(Soundbite of speech, November 19, 2008)

Mr. NEEL KASHKARI (Interim Assistant Secretary for Financial Stability, U.S. Department of the Treasury): We believe the combined actions of Treasury, the Federal Reserve and the FDIC have stabilized the financial system and prevented a financial collapse. Nonetheless, the current crisis took years to build up, and it will take time to work through, and we have some very real economic challenges ahead.

ZARROLI: The drop in LIBOR means it's cheaper for banks to borrow money from each other. That's critical for shoring balance sheets and preventing anymore bank failures. But Nigel Gault, chief U.S. economist at Global Insight, says there is no sign that banks have became anymore willing to lend.

Dr. NIGEL GAULT (Managing Director, North American Macroeconomics Group, Global Insight): But if you look at everything that matters to consumers, businesses, I think it's pretty hard to find any signs that things have started to unfreeze there, or if anything, may have got a bit worse.

ZARROLI: Gault says even though banks can now borrow from each other more cheaply, they're not yet turning around and lending more to consumers and businesses. Banks haven't lowered the interest rates they charge, and they're still imposing much tighter credit standards on borrowers. Joseph Mason, professor of banking at Louisiana State University, says the problem is that many banks haven't been really open about the magnitude of their losses in the subprime mortgage debacle, and until the day of reckoning takes place, a lot of banks are living in the past. Mason says they're waiting for the return of the easy-credit days, when deals were plentiful, and they could always sell the loans they issued in the securities market.

Dr. JOSEPH MASON (Finance, Louisiana State University): The money that Congress gave to the banks is helping them sit on the sidelines and wait for the better day tomorrow. In other words, they can store away the problems for longer and still not have to report their losses and get honest with investors.

ZARROLI: And Mason says in the mean time there's a kind of stalemate, and lending has stalled. Mason says by failing to acknowledge their losses, the banks are only hurting themselves. He says investors suspect that the banks haven't come clean.

Dr. MASON: So, investors are rationally bidding down the values of firms that have significant -what they feel to be significant exposures.

ZARROLI: In other words, they're selling off banks stocks as fast as they can. That's why Citigroup has fallen so sharply in recent days, despite its efforts to convince investors it's gotten its house in order. The slowing economy alone would probably be hurting these banks, but the hangover from the mortgage downturn has complicated their recovery enormously. And until that changes, the economy will pay the price. Jim Zarroli, NPR News, New York.

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