With Obama’s popularity ratings plunging, one would think an obvious step would be for the Administration to move forward with measures that have good PR value and carry little political and budget risk. Yet, as Marshall Auerback noted, the Obama Administration is increasingly all hat, no cattle, making lofty popular sounding promises and not following through. Last week’s object lesson was a show of a new, tough posture toward banks on 60 Minutes, which followed up by a tame meeting at the White House with the perps, with one participant describing the session as a “PR stunt”.
A longer time frame version of the same pattern appears to be underway with an initiative Obama announced October 21 to support lending to small businesses. Consider this component:
The Treasury also is looking at ways to expand its Community Development Financial Institutions program to promote small business lending, according to the administration statement.
Some credit unions also will be eligible for capital assistance under the administration’s new plan, the first time those institutions have had access to the bank rescue funds, according to the fact sheet.
Credit unions that qualify as community development financial institutions will be able to apply for capital injections in the form of subordinated debt.
Technically, this statement has proven to be accurate. The Treasury not only was “looking at ways” to help Community Development Financial Institutions and credit unions, it appear to still largely be looking, as in not acting.
By way of background, CDFI banks and credit unions are dedicated to serving low and moderate income communities and showed credit losses that were generally no worse, and often more favorable than financial institutions that had on average more affluent customers. The reason? They did old-fashioned credit screening. And more so than large banks,
But as the crisis has become more severe, unemployment has generally hit lower-income communities harder than higher income ones. So CDFIs have been showing higher loss rates recently than they have historically, more comparable to those of other financial institutions.
Only 26 of the 64 CDFI banks have been approved to date, because the regulatory agencies imposed unrealistically high “viability” standards. By contrast, consider Fed Chairman Ben Bernanke’s justification of the original TARP funding in response to a questionnaire from Senator Bunning:
When the first nine large banks received the initial 125 billion TARP dollars, Secretary Paulson and you said those nine banks were healthy. Do you now agree with the TARP Inspector General’s finding that Citigroup and Bank of America should not have been considered healthy by you and Secretary Paulson?
On October 14, 2008, the Federal Reserve joined in a press release with Treasury and the FDIC to announce a number of steps to address the financial crisis, including announcing the implementation of the Capital Purchase Program (“CPP”). The first nine banks to receive CPP funds were selected because of their importance to the financial system at large. In fact, the SIGTARP report notes that approximately 75 percent of all assets held by U.S.-owned banks were held by these nine institutions. In addition, these first nine institutions were considered to be viable, though some were financially stronger than others. The press release referred to these nine systemically important institutions as “healthy” to indicate that these institutions were viable and were not receiving government funds because they were in imminent danger of failure.
Yves here. So you can see, the “banks were healthy” is now revealed to have mean “we thought the banks were not going to drop dead in the next 24 hours”. So why is a much tougher standard being applied to CDFI and credit unions? The obvious answer appears to be that they don’t wield sufficient political clout.
Maximizing the number of CDFI banks and credit unions participating is critical to serving credit starved and distressed communities and getting the economy moving. Small business, job creation and neighborhood restoration are important to recovery of our economy.
Now before you argue that this is putting taxpayer dollars at risk again, consider: the amount under discussion is chump change, and these banks really do lend, rather than throw money at the top brass. At 5% of risk weighted assets, the total investment in CDFI banks would be less than $600 million and less than $213 million for the credit unions (but likely significantly lower). Treasury would be making a total of $813 million in investments — that total is less than each of 31 individual financial service companies got under the TARP Capital Purchase Program.
So this is a comparatively cheap way for the Obama administration to do something to help battered communities (or cynically, blunt criticism that it is favoring well connected banksters at the expense of real people). Yet Treasury is dragging its feet. What gives?