White house served notice to banks who received bailout packages to start lending money.
It was known that banks did not use the bailout money to lend. They were simply sitting on the cash and only buying out distressed banks. Credit market remained closed even though there were some signs that credit was moving. Wall Street responded in negative way as many Americans could not get a loan. Therefore, white house stepped in.
“What we’re trying to do is get banks to do what they are supposed to do, which is support the system that we have in America. And banks exist to lend money,” White House press secretary Dana Perino said.
Anthony Ryan, Treasury’s acting undersecretary for domestic finance, made the same point in a speech in New York before financial executives.
“As these banks and institutions are reinforced and supported with taxpayer funds, they must meet their responsibility to lend, and support the American people and the U.S. economy,” Ryan told the annual meeting of the Securities Industry and Financial Markets Association. “It is in a strengthened institution’s best financial interest to increase lending once it has received government funding.”
Treasury is buying preferred shares in banks in return for cash infusion, however; about 6,000 banks are not publicly traded and cannot get funding due to restrictions Treasury currently has.
Treasury is currently working on a plan where both banks, publicly traded and private can qualify for the program.
Treasury has pumped up money to help economy get back on its track and avoid national recession. Treasury Department will buy $125 billion of preferred stocks from nine largest banks, which account for 50 percent of all U.S deposits. An additional $125 billion will be passed to banks in upcoming weeks.
Rep. Henry Waxman, D-Calif., chairman of the House Oversight Committee, asked banks who received $125 billion to address executive pay, employee pay and other bonuses.
“I question the appropriateness of depleting the capital that taxpayers just injected into the bank through the payment of billions of dollars in bonuses, especially after one of the financial industry’s worst years on record,” Waxman said.
Many reports were surfacing when news spread out that banks are only buying other banks and have no intension of lending and opening their credit lines. Indeed, the government approved PNC Financial Services Group Inc. to receive $7.7 billion in return for company stock on Friday and, at the same time; PNC said it was acquiring National City Corp. for $5.58 billion.
However, there is no language in bailout plan that would tell banks to use the money for lending. Many officials argue that attaching requirements, banks will discourage to take advantage of this program.
Other efforts have included:
-A Federal Reserve program, to commercial paper or business debts.
-Temporary guarantees by the Federal Deposit Insurance Corp. of new issues of bank debt fully protecting the money, for a fee, even if the institution fails.
-Emergency loans from the Fed for financial institutions.
-A temporary increase in the cap on deposit insurance from $100,000 to $250,000 on interest-bearing accounts, and unlimited deposit insurance for non-interest bearing accounts, which small businesses often use to cover payrolls and other expenses and which frequently exceed $250,000.
-The Fed’s half-point reduction in its target interest rate on Oct. 8, done in conjunction with rate cuts by other central banks around the world.