Banker: "TARP helped avert a global calamity"

[PBS Poll-435]

Banker: "TARP helped avert a global calamity"

Bank of New York Mellon's CEO sees a brightening picture and credits the government with halting last year's panic.

Fortune Magazine via CNNMoney.com
By Maha Atal, reporter
July 23, 2009: 3:58 PM ET

NEW YORK (Fortune) -- Bank of New York Mellon is not a name familiar to retail customers, but its role in the financial system is important enough that it was one of the first nine banks persuaded to accept billions of dollars last October from the Troubled Asset Relief Program -- in Bank of New York Mellon's case, $3 billion. The company is the world's largest custodial bank, handling more than $20 trillion in assets for other banks and investors.

In February, federal regulators stress-tested the nation's 19 largest banks and found only three institutions will be profitable in 2010 if the economy gets much worse. Bank of New York Mellon (BK, Fortune 500) would lead that pack, ahead of American Express (AXP, Fortune 500) and Goldman Sachs (GS, Fortune 500). In a recent interview with Fortune's editors, CEO Robert P. Kelly has more praise than criticism for the government's interventions.

What happened during the stress tests?

It was breathtaking. It culminated in joint sessions of the various regulatory bodies on our premises including the FSA from the U.K. and the Canadian regulators. Our regulators wanted loan-loss forecasts for the rest of this year and next year using two scenarios: what they expect and then an "adverse case," which was actually, in many ways, worse than the Great Depression. Then they applied haircuts to our revenue estimates and raised expenses to imply capital ratios.

Have you paid back your TARP money?

Yes. We raised $1.5 billion in uninsured debt, at a much lower rate than TARP and common equity of $1.4 billion, proving that we could access the capital markets. We reduced our dividend, which provided us with another $750 million per year. The sum of those three things is more valuable than having $3 billion of preferred . Our balance sheet is stronger today than at the time of receiving TARP.

More at: http://money.cnn.com/2009/07/23/news/companies/tarp_banks_new_york_mellon.fortune/?postversion=2009072315

[PBS Poll-435]

1. Nothing?

[4lbs]

4. It appears that showing that TARP actually prevented a financial calamity isn't popular anywhere.

It's easier for everyone to blast TARP as some evil rich giveaway, even though a lot of it is being paid back already.

Let me see, oh yeah, existing home sales are also increasing.

How are those home sales financed? Via bank lending.

That means banks are starting to lend again and have been for several months.

Yet, it would actually hurt some people to admit that TARP is successful in that aspect, and instead they still want to cast it as some rich giveaway, money never to be seen again, except that isn't the case.

[brentspeak]

10. Please demonstrate proof that TARP "prevented a financial calamity"

Thanks in advance

[4lbs]

12. Here it is.

The financial calamity is the banks unwilling to lend money temporarily to businesses to meet payroll and purchase necessary items to maintain functionality.

What happens when a company can't get enough funds from it's line of credit (provided by a bank or other lending institution)? It delays payroll, lays people off, or doesn't buy items for it to function properly and efficiently.

That has a ripple effect on other businesses that sell to the first business, and to people who suddenly are dealing with unstable paycheck situations. This can also have an effect on accounts receivables further delayed in being reconciled.

Why would a bank freeze or shorten lines of credit? Because they need all their cash reserves to deal with all the losses. That means they don't have money to lend, and can't make enough profit to stay in business. Remember, banks make money by lending and getting interest from that lending. If they need all their money to cover losses, where's their profit going to come from? Without profit, the bank fails and people that work at the bank lose their jobs.

I, being a small business owner, faced such a situation early this year. My line of credit was cut in half. It was just enough to meet payroll each month for my employees, while I waited for my outstanding invoices to be paid from customers. However, some of my customers had trouble themselves getting money to pay for services already rendered. So, I made deals with them to pay half now, and half later, in a sort of partial Net-15/Net-30 situation.

Nevertheless, because all my available cash was going to pay my employees, I had to withhold purchase of increasingly necessary items for day to day business. That means less money going into other businesses that relied on me being a regular customer.

Now, imagine this being repeated thousands of times over, across the country, across thousands of businesses and you can see how a national economy could grind to a halt because of that. There's your financial calamity.

TARP loaned the banks some extra temporary money immediately so they could use it to deal with the losses quicker and easier, and so they could ease up on the lending much quicker.

Once TARP was passed, my bank reinstated my original line of credit a month later, after it reconciled it's accounts.

Without TARP, I would likely still be constrained under a limited line of credit, eventually reaching the point where I might have to cut payroll significantly (which I didn't want to do) to free up some space for purchase of goods I needed for my business to function. Otherwise, I could always ask my employees to temporarily take less money per paycheck until the credit began flowing again. But that could be for six months or more without TARP.


I'm not even mentioning all the cars and homes that couldn't have been purchased because people wouldn't have been able to get loans. Without TARP, Ford likely wouldn't have been reporting a profit this week. Without TARP, the report of increasing home sales would not have been possible.

Not too many people have $20,000 or so laying around to buy a new car, or $200,000 laying around to buy a house.

[brentspeak]

14. If your credit line was reinstated, then you were among the extreme minority

http://online.wsj.com/article/SB123981607918021761.html

http://www.zacks.com/stock/news/19207/TARP+Recipients+Not+Lending+More+

http://agonist.org/stirling_newberry/20090117/banks_not_lending_with_tarp_money

http://www.propublica.org/article/banks-getting-tarp-money-lending-less-than-other-banks-090203

http://www.correntewire.com/banks_not_lending_tarp_money

[4lbs]

15. During February it was indeed tough.

My line of credit was cut in half in late January, and reinstated March 1.

So, yeah, during February, when most of that data was drawn, it was tough.

It took releasing the second half of TARP to get it reinstated in March.

[skipos]

5. Funny, huh?

If it makes you feel any better, you can post one of those "White House declines to disclose visits by health industry executives" article and get tons of angry "that's not 'change I can believe in' type posts. Or post about the Gates thing.

[PBS Poll-435]

6. I tend to stick to positive topics

[gauguin57]

17. I love your user name!

Mention of that poll makes me misty-eyed with nostalgia.

[Canuckistanian]

2. Boy

Those TARP funds sure are being paid back fast, aren't they?

[vaberella]

3. The fear of socialism does that to bankers who want to make profit. n/t

[Canuckistanian]

8. It's almost as if...

They didn't really need the money in the first place and now they're getting nervous at all the attention paid to sudden profits being made.

Wait, wait, I didn't mean that. It's just crazy talk.

[vaberella]

11. Ding! Ding! Ding! That's exactly what I've deduced from the situation. n/t

[boppers]

16. I'm "cash okay" in November.

I lose my Job in December.
I get a new Job in February.

Did I need a loan in January?

The argument seems to be that if I can pay back a loan in February, it wasn't needed... which doesn't quite make sense to me.

[depakid]

7. I doubt that point's much in question

The real problem is the utter lack of accountability and the unwillingness of Obama's Justice Department thus far to prosecute those who repeatedly violated federal law- as happened under Bush I in the aftermath of the Savings & loan debacle.

[RandomThoughts]

9. Unless the global calamity is the corruption in the banking system. n/t

Then regulation or some other similar method will be needed to prevent Global Calamity.

[grahamhgreen]

13. 1.5 billion. Where's the rest of the 12 trillion? Video

Prepared to be shocked:

http://wallstreetblips.dailyradar.com/video/is_anyone_minding_the_store_at_the_federal_reserve/

Rep. Alan Grayson asks the Federal Reserve Inspector General about the trillions of dollars lent or spent by the Federal Reserve and where it went,

[brentspeak]

18. The cluelessness and dishonesty of the Fed's Inspector General in that video is nauseating

First, she claimed that it isn't her office's job to perform audits. Then, when Grayson pressed her on it, she admitted that, ok, it really is her office's job to perform audits, after all. And instead of answering Grayson's question on what, specifically, her office has done to investigate the Fed's off-balance loans, she instead responded by saying she would first have to "look specifically at that Bloomberg article" whose figure of $9 trillion off-balance loans Grayson had quoted. A sickening display of obfuscation.

[wicket]

19. K & R

[Wednesdays]

20. K&R

:kick:

[GeorgeGist]

21. If profit was eliminated ...

capitalism wouldn't need to be subsidized. Think about it.

[QC]

22. Thank God It Passed!!!!!

:eyes: