The holding companies seem to have invested most of their TARP money in their other businesses or else retained the option to do so by keeping it in deposit accounts, even as the capital of their banks decreased. At the same time the banks, which provide the majority of loans to large corporate borrowers, drastically reduced lending to new borrowers.
It’s easy to see why holding companies would withhold capital from their troubled banks. If a bank is insolvent – as many are now believed to be – and the government has to take it over, the holding company loses any capital it gave to the bank. Rather than take that risk, the holding company can opt to spend its money elsewhere, perhaps on trading of its own.
But this is not a good use of scarce capital. We might end up with too much of this proprietary trading and too little lending. It also means that when it comes time to recapitalize banks there is a bigger hole to fill, and when banks fail there is less capital available to meet the government’s obligations to insured depositors and other creditors.
Keeping money at the holding company may benefit its shareholders, but it is costly for taxpayers.
Bailouts, at the very least, should reach their target.
the Gov’t never wanted to help these banks. they wanted to own them. Control the money and you can control the actions.