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New York Fed and Treasury Tell Banks to Hold Cash

Posted by Larry Doyle on March 10, 2010 2:36 PM |

How often have Americans heard politicians screaming at banks for not providing credit? How often have those same politicians and bank regulators informed us that they are working to have banks inject money into the economy to support Main Street?

Regrettably, America deals with this pandering and posturing from our political leaders and regulators all too often. While Americans are being told one thing, what are the regulators telling the banks? Hold cash.

I am not shocked, but certainly disappointed, that American financial periodicals failed to run this story detailing these recommendations from our bank regulators. The London based Financial Times highlights this bombshell in writing, Regulators Tell U.S. Banks to Hold Funds: >>>>

US regulators have told banks not to increase dividends or buy back shares until political and economic uncertainty surrounding the industry dissipates, in a move that will delay by months the return of capital to shareholders.

Some investors in financial stocks argue that winners of the credit crisis, such as JPMorgan Chase and Goldman Sachs, have profitable businesses and strong balance sheets and should consider raising dividends or buying back stocks.

Executives at the two companies have talked in public and with regulators about the possibility of returning cash to investors after taking action to conserve resources during the turmoil. But they say they are not in a rush to go ahead, especially if their watchdogs oppose such moves. “Regulators are gun-shy at this stage, partly because they fear that giving the green light to healthier banks to return cash to investors would prompt demands from more troubled institutions to do the same,” one senior Wall Street executive said.

People close to the situation said government agencies, led by the New York Federal Reserve and the Treasury, told banks they would have to wait until the economic and legislative picture became clearer before returning funds to investors.

In a letter sent in December, officials reminded financial groups they would have to meet criteria, such as “stress-testing” their balance sheets and achieving sustainable profitability, before releasing funds to shareholders. The New York Fed and Treasury declined to comment.

Mike Mayo, an analyst at CLSA, said: “The word banks have used the most … is ‘fragile’.

Economic growth is predicated on the flow of money, otherwise known as the velocity of money. With news like this, we should expect that velocity to remain at a trickle.

The burden will remain on the Fed to keep its Fed Funds rate low so these banks can continue to recover. The burden should also remain on the regulators and bank executives to not allow the Fed liquidity to walk right out the front door of these banks in the form of big fat bonuses.

LD

  • Mountain Man

    Banks Lending…really?

    1. Regulators are beating the banks about the head and shoulders on lending….the banking business is historically a 350 bp gross margin business. Why would a bank lend when they can invest in high quality bonds (govt or otherwise), have reduced risk and meet its 350bps return hurdle–all without getting beat up by my regulator?

    2. Regulators are forcing banks to increase their “core” deposits (i.e., retail)…that have a 50-90bps increased marginal cost over brokered deposits (without factoring in the costs of bricks and mortar, staff costs, etc. This essentially increases the banks’ “cost of goods sold”….and discourages lending.

    3. Banks have huge liquidity in with the TAG program where depositors (think corporates) have an unlimited FDIC guarantee. There is roughly $825Billion of this funding in the banks today….virtually free funding….program is supposed to cease as of June 30, 2010…anyone want to make a bet that this government guaranteed program doesn’t cease as of June 30, 2010.

    There is a tremendous stench in the air.. publicly stating more lending but behind the scenes using the baseball bat discouraging lending…and all the while…increasing the banks’ “cost of goods sold”…to make it less attractive….

    Does anybody believe anything this government tells you???

  • alfred

    You are mistaken if you think that regulators are there for the main purpose of insuring maximum return for investors. This attitude is what brought the system down. Before capital is going to be returned to investors it has to go into the economy first. Roughly 8 million unemployed Americans and millions more abroad are demanding it.

    • LD

      Alfred,

      When dividends are paid back, is that not injecting money into the economy?

      This has nothing to do with maximum return for investors, it has everything to do with putting money into the system,whether that is through dividends or otherwise.

  • dkinaz

    I’m not the brightest light on the strand, regarding this topic,so I’m apprehensive on commenting at all. But, I’m going to.

    A very very very wealthy customer of ours, who is also a banker among other things, told me to put a tighter grip on my money/spending because the “Shadow Market” (repossessed foreclosed homes)are a about to be released to the public as well.

    My cafe is located is in the heart of our construction industry here in AZ, one of the hardest hit states regarding foreclosures. So, that means with the flood of repo’d homes, no new building will be happening any time soon.

    After reading this article, I wonder if getting loans for remodels will be stamped Decline as often too?

    (People had a tendency to trash THEIR homes before they were booted out.) I’m talking about those with and without Liar Loans.

    Can someone enlighten me regarding this topic?

    • Sean

      dkinaz, I think you’re onto something here. The reason why the government gave the all of this taxpayer cash to hold is because the massive debt-deleveraging(credit write-downs & write-offs) of America’s burgeoning 2nd Great Depression is only just beginning, and the banks will need at least all of that cash if not more to try to save themselves by trying to absorb all of the hemmoraging that is to come within the next 6-18mos.

      The economic earthquake we experienced in ’07 & ’08 has created a gigantically unprecedented unpayable-debt tsunami which is now headed straight for us, and will soon wash-away what is left of the American middle-class; just keep your-eyes peeled on the events occuring and playing-out in Iceland, and Dubai, and Greece, and Italy, and Spain, and Portugal, and the whole euro-zone, and the U.K., and Japan, and California, and Illinois, for these events are soon headed to a theater near us.

      Thomas Jefferson once said “The central bank is an institution of the most deadly hostility existing against the Principles and form of our Constitution…A private central bank issuing the public currency is a greater menace to the liberties of the people than a standing army…If the American People allow private banks (directed by our central bank) to control the issuance of their currency, first by inflation (1913-1929 & 1945-2007) and then by deflation (1930-1938 & 2008-?), the banks and corporations that will grow up around them will deprive the people of all their property until their children (us and our children) will wake up homeless on the continent their Fathers conquered.” This quote accurately describes what is currently happening in America today, with “too-big to-fail” banks being given free taxpayer money by our government and growing even bigger than before when they were too-big to-fail. Large corporations and industries have also been bailed-out by the government, again with taxpayer money, and many of these large corporations are now thriving due to their access to investment-bank(bailed-out institutions) created capital markets, which most main street businesses across America don’t have access to and are now suffocating due to the lack of traditional bank lending that these main street business depend upon. Meanwhile, 2-million home foreclosures have occured over the past couple of years with an estimated 3-million more in the next year or so.

      dkinaz, once the unpayable-debt tsunami and 2nd Great Depression is gradually realized by all of America over the next 6-18mos, please also remember this other quote by Jefferson regarding a 2nd American Revolution: “Every generation needs a new revolution…What signify a few lives lost in a century or two? The tree of Liberty must be refreshed from time to time, with the blood of patriots and tyrants. It is its natural manure.” Unfortunately, this is what will be required of us if we are to renew and rebuild our republic to its former greatness for our children and their children.






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