Has Funding Really Dried Up?
TARP funds may not be helping, but there are other ways…
by Salmeh Fodor
March 18, 2009
No matter what you call it, it’s not helping yet. As we all know, the federal government has come up with the “Troubled Asset Relief Program” (TARP) to help alleviate the credit crisis. In light of the bad name TARP has garnered, the federal government has tried to make it appealing by changing the name. TARP has magically transformed into the Financial Stability Plan (FSP). Now, that sounds pretty. Has it made a difference?
The idea behind TARP (now FSP) was that by providing capital to somewhat healthy financial institutions, banks would be better able to maintain the required reserves while at the same time provide desperately needed credit. Furthermore, the thought was that banks would have no choice but to lend money out or restructure.
Under the terms of TARP (or FSP if you prefer), in return for taxpayers’ money, the federal government took convertible preferred shares of stock in the receiving bank. Those preferred shares payout a 5 percent dividend (which increases to a shocking 9 percent after 5 years). Banks would seemingly have to put the capital to work earning a decent profit or significantly reduce losses in order to meet such dividend demands. The usual way for the bank to put money to work to make a profit is to lend money.
In accordance with the plan, since its inception in October 2008 and through the following three months, $194 billion has been injected into 317 financial institutions.
However, in less than three months, between November 2008 and January 2009, commercial and industrial loans on the books of banks in the United States dropped by $358 billion.
So, is the magical plan working? Has it helped you? Doubtful.
Only a small fraction of the money from the Financial Stability Plan (FSP) has seen the light of day. Most of it is neatly stacked in the steel vaults of banks. Many banks have had the capital since last October, yet none of us have seen it.
If you have credit cards or lines of credit – take the money
In the last six months or so, many banks have significantly reduced the dollar limit on existing lines of credit and will likely continue to do so. In fact, the Federal Reserve recently reported that 50 percent of banks have reduced credit lines extended to financial institutions, 30 percent have lowered the limits on business credit-card accounts, and 25 percent have reduced commercial and industrial credit.
If you are one of the lucky few with a line of credit, equity lines, or credit cards with available balances, pull out all of the money as soon as possible. Even if you don’t need it now, having the money at your fingertips is most likely worth the interest payments. Like so many others have already experienced, you may wake up tomorrow to a letter stating that your equity lines have been cut for no reason at all.
Second quarter hope for small business lending
There might be some hope for getting commercial loans from community banks and credit unions soon. The federal government has come up with another plan – a plan to provide cash for entrepreneurs and small businesses.
According to the Treasury Department, by the end of March it will purchase securities backed by parts of Small Business Administration (SBA) loans. The idea behind this plan is to pump up secondary markets for such loans that will, in turn, provide liquidity for local banks and credit unions. Theoretically, if these banks can package and sell their loans more easily, the banks will have more free cash to lend to you and me. Only time will tell if we see any of those funds, but there’s hope.
The accidental angel
I’ve said it before, and I’ll say it again – there are wealthy individuals out there sitting on a pile of cash (collecting little or no interest) and looking for a way to use it. Many people who had their money in the stock market have taken the precautionary stance of removing their capital from the market and are now storing it away in extremely low or no return investments.
In a speech on March 2, FDIC Chairman Sheila Bair said sources of bank funding have largely dried up in the past six months, but deposits have not. In fact deposits are growing.
However, even such low or no return investments, like money markets in banks, are now of questionable security. A mere two days after Chairman Bair’s speech, she made another speech in which she essentially said that the insurance fund guaranteeing bank deposits would dry up this year without government intervention.
What does this mean? It means even putting your money in an FDIC insured bank may not be safe. Raising the FDIC insurance level to $250,000 may have been meaningless.
With the potential of receiving even a small return becoming dimmer and dimmer, and the integrity of the principal deposit potentially at danger, such wealthy individuals must look for alternative uses of their money. There are now many incentives to pull money out of the banks and put it to work with something tangible – an entrepreneurial company with potential to grow in this new economy.
Now more than ever is the time to find that wealthy individual who is sitting on cash and needs to do something with it. These are not the type of people you’ll meet at venture capital or private equity conferences; they’re not the type of people you’ll meet at professional angel roundtables. They’re people you meet through high-end networking – luxury networking.
Salmeh K. Fodor, Esq. is a Partner with Marchman, Kasraie & Fodor, LLC with 18 years of financial and legal experience. Her practice focuses on corporate, business and securities law, and her clients have ranged from start-ups and emerging growth companies to publicly held corporations. For a full résumé, see the firm’s site at www.kflawllc.com.
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