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TARP Can’t Stanch Financial Crisis, Experts Say

The government's $700 billion bailout program isn't enough to get credit flowing, experts say.

See related sidebar: TARP May Need Tech Vendors: Kashkari Intimates

The other shoe is about to drop," said Gerard Cassidy, managing director of bank equity research with RBC Capital Markets (US$1.6 billion in assets), the investment banking arm of Toronto-based Royal Bank of Canada, referring to a crisis in commercial lending. Cassidy was speaking at the Securities Industry and Financial Markets Association's (SIFMA) November summit on the Troubled Asset Relief Program (TARP).

Though Cassidy added that thanks to TARP, RBC now expects 200 banks to fail, down from 300 predicted earlier this year, speakers at the SIFMA event agreed that the U.S. government's $700 billion bank bailout program is insufficient to spur lending because banks still have far from an optimal balance of debts to assets. The lack of available credit will bring many businesses to a halt, speakers forecast.

According to experts, after the TARP fund is exhausted at least another $600 billion in global loan losses will remain. And now TARP is unlikely to purchase bad loans to help banks' balance sheets -- its original intention. Two days after the Nov. 10 SIFMA summit, Treasury Secretary Henry Paulson said in a statement: "[P]urchasing illiquid mortgage-related assets ... at this time ... is not the most effective way to use TARP funds."

In the interim, American Express (New York) had become a bank holding company -- specifically to gain access to TARP funding, some observers contend.

While Paulson did not refer directly to Amex, he said the credit card market had almost "ground to a halt," that "both banks and nonbanks may well need more capital" and that future TARP funding directed at institutions might depend on "matching investments" from the private sector. Recipients, Paulson stressed, "have responsibilities in the areas of lending ... and foreclosure mitigation."

In remarks at the SIFMA event, Neel Kashkari, the interim assistant secretary of the Treasury for financial stability, who oversees TARP, defended the lack of lending to date by the nine banks -- which represent half of U.S. bank assets -- that received the initial $250 billion cash injection. "Less than half the money is out the door," he noted. Kashkari went on to encourage "potentially thousands" of other banks to apply for TARP funding.

A "backlash" among banks disgruntled over how funding is decided was forecast by William Seidman, former chairman of both the FDIC and Resolution Trust Corp., the government body that bought distressed properties after the savings and loan crisis of the late 1980s. "It's not entirely clear, even after this morning [when Kashkari presented]: Are they going to bolster the good banks or the bad banks?" Seidman, SIFMA's lunchtime speaker, said.

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