Most of the billions in bailout money that the government has handed out so far has gone to the nation's banks. The idea was to stabilize the financial system and ease tight credit markets. With more money on their balance sheets, the thinking went, banks would make more loans, and that would help jump-start the economy.
But it hasn't quite worked out that way.
Weighing The Risk
In the crazy days of September and October, policymakers were desperately trying to prevent the economy from going into free fall. Congress reluctantly approved a bailout package, and Treasury Secretary Henry Paulson decided to give the first chunk of money to the nation's banks.
Congress essentially invested in the financial institutions — getting preferred stock in exchange for capital. Taxpayer money went onto bank balance sheets and made them stronger.
"Banks might normally be leveraged 10:1, so some of the logic is that if you invest a billion dollars in a bank in capital, then over a period of time that bank may create $10 billion in loans," explains Mike Menzies, CEO of Easton Bank and Trust.
But exactly how much a bank is willing to lend depends in part on how much risk it's willing to take. And right now, says Wayne Abernathy, a senior official at the American Bankers Association, a tug of war exists. Congressional leaders and other government officials are telling banks to lend more money, but bank regulators are telling them to take less risk.
"The bank regulator's going to come in, and he's asking tougher questions than he did a year ago," Armstrong says.
It's all but impossible to get reliable numbers as to the amount of new lending taking place, but Armstrong says it appears to vary bank by bank and region by region.
"You have some banks saying, 'I see some really good opportunities; this capital is allowing me to move forward and provide these new loans, these new financings.' You're having other banks saying, 'Well, I've got the capital for now, and I'm ready when things start to pick up, but right now things aren't picking up,' " he says.
Still other banks needed all of the bailout money they got to meet minimum reserve requirements, and, in at least one case, a bank has used the government money to buy a weak, possibly failing bank.
Concerns About Accountability
Reporters and others who've queried many of the big banks that received money have gotten less than satisfying answers from the institutions as to how they are using taxpayer money.
Richard Shelby (R-AL), the ranking Republican on the Senate banking committee, says Congress didn't require the banks to disclose exactly what they were doing.
"Congress should have known that this was a rush to judgment — this was unprecedented. It was a lot of money that was thrown at a problem," he says. "There was not enough accountability in the language; there was not any real oversight."
His concern that the bailout program lacks internal controls is also being expressed by the Government Accountability Office. The GAO adds that, so far at least, there's no way to know if the money is aiding the economy as intended.
But Jim Wilcox, a professor at the Haas School of Business at the University of California Berkeley, says that, while the program hasn't turned the economy around, it has made banks stronger.
"One way or another, they were either going to have to get more capital, or they were going to do a lot less lending," he says. "And I think that the program has helped us avoid that reduction in lending."
In any case, it likely will be many months before there's an idea of whether the capital bailout for banks was a success. If things go according to plan, the economy will pick up, and the banks will pay the money back to the government with interest. Taxpayers could even reap a profit on their investment.