TARP Starts Spending Will Banks Start Lending?

The Treasury’s Troubled Asset Relief Program was approved a few weeks back, but the spending is just getting under way.  Now that the government is starting to invest when will the banks begin to lend?

There are many motivations behind (or should I say underneath) TARP, but unfreezing the credit markets is at the top of the priority list.  PNC was the first regional bank to receive direct investment from the government when the Treasury agreed to purchase $7.7 billion worth of PNC’s preferred stock.  Then, PNC announced plans to spend $5.5 billion on the acquisition of National City Corp.

National City was definitely in trouble.  The bank’s stock has lost 91 percent of its value in the past year.  Last week the company announced a third quarter loss of $729 million and plans to cut 14 percent of its workforce over the next three years. 

Saving other ailing institutions isn’t necessarily a bad thing, but M&A activity should not trump stimulating the credit markets.

The Fed is expected to lower rates again this week in yet another move to get the credit markets going again.  None of the government’s programs or policy tools will have an instant impact, so if the Fed does cut rates the market may budge up again, but it will not be a permanent move for the better.  TARP and the rate cuts need time to trickle through the system.

BTW…couldn’t they have come up with a better name for the program?  When I think of tarp, I think of the bright blue stuff people use to cover up large holes until the real fixing begins.   Any one else seeing similarities?