Published: March 02, 2009 08:59 am      

Lending is dependent on stable, and higher, asset values

Ideas, good or bad, have many parents.

The first major step toward recovery was the fiscal stimulus plan, followed by help for the housing markets, financial sector and credit markets. A variety of plans are coming out of Washington, some general, some specific. We are about six weeks into the new Administration and several major programs to date have been rolled out.

The speed of these initiatives is unprecedented and provides hope the stimulus will begin to make an impact later in the year. In 1981 and 1993, major fiscal legislation took eight months before Congressional passage. The first initiative is the $787 billion American Recovery and Reinvestment Act. Among the $301 billion in tax cuts are a tax credit of $400 per person implemented through reductions in payroll taxes, an increase in the exemption amount of the alternative minimum tax, addition of a post-secondary education tax credit, extension and changes to a credit for first time home buyers, deductions for state and local taxes on vehicle purchases and credits for energy-efficient home improvements. Much of the balance of the bill is slated for infrastructure projects targeting job creation, transportation and alternative energy projects.

A second initiative initially unveiled by Treasury and later called the Homeowner Affordability and Stability Plan replaces prior programs with the Financial Stability Plan. Initial market reaction was negative, citing a lack of detail. This initiative has several components, including a Capital Assistance Program permitting Treasury to purchase bank capital in the form of preferred shares and used as a bridge until private capitalization becomes possible.

Participation requires a bank to undergo a “stress test,” which began this past week. Another aspect, to keep interest rates low, is the expansion of a program to purchase qualified asset-backed securities, including consumer and small business loans, and also expanded to include commercial mortgage-backed securities. Another part of this initiative is a public-private fund to purchase troubled assets from banks, funded by the government initially but intended to attract private capital for the bulk of its funding. The fund would negotiate the price of troubled assets, a problem much discussed as to creating a market for such assets, but the purpose being the removal of these bad assets from bank balance sheets.

The final aspect may have generated the largest amount of derision and populist scorn. Approximately $275 billion is intended for a mortgage loan modification program. The largest amount is to be used to purchase mortgages, mortgage-backed securities and provide guarantees. The smaller portion, possibly $75 billion, is to be directed to assist modification of debt of owner-occupied property, not that held by investors or speculators. Part of the program would provide a backstop that would permit refinancing at lower rates and lower periodic payments. The intent is to assist those homeowners, not yet in default, but unable to refinance because of job status or decline in property values. There is to be further detail announced in the coming weeks.

In the past week, the administration announced plans to consider converting existing preferred stock holdings to common equity holdings in major banks, increasing the public ownership but less than outright control. The President spoke to a joint session of Congress on Tuesday, broadly describing long-term goals and plans including the economy. Part of his address concerned the long-term goal of deficit reduction as a means of reducing government obligations in the future. Fed Chair Bernanke in his Congressional testimony on February 24 began to fill in some of the details of restoring stability to the financial sector, while discounting recent discussions of bank nationalization and stating that the majority of banks are well capitalized.

There will likely be additional programs announced to address more areas of economic concern. All of these proposals and, more to come possibly to oversee and regulate financial activity, all within the first 45 days of the current Administration. The present initiatives are intended to spark consumer and business spending, decrease the number of foreclosures and decelerate the decline of home values. Our current situation is hardly a time for partisan acrimony or the assignment of blame. Decades long excesses are only some of the reasons for the current morass. Clichés and sound bytes are not answers or solutions.

Lending is dependent upon stable and eventually higher asset values. Capitalism depends on credit, advanced by lending through the banking system. To ensure a working credit system, asset values need to be rejuvenated. The idea behind the proposed initiatives is an attempt to start this process.



David Helscher is a senior vice president and trust officer with Clinton National Bank.