Posted 7:15 AM by steve

Neil Barofsky, an official at the Treasury Department is going to ask banks what they did with the money they received from the federal government.

Does Barofsky not realize that money is fungible?

It's not like asking someone to account for how they spent their paycheck. An individual tends to have a single source of cash and a relatively small number of uses for that money. Banks, on the other hand, have the thousands of sources (depositors, trading partners, etc.) and tens of thousands of uses (payroll, fixed operations, payments to trading partners, lending).

When a bank takes in a deposit (or, in the case of the TARP money, money from the federal government), they don't tag that money and follow it. They don't tell their employees that their paychecks came from depositors #AC543 and #DR876.... because they don't know where the money came from. They don't tell their borrowers that money for those loans came from borrowers #567333 and #984333 paying back their loans... because they don't know if that is 'where' the money came from.

Ah... but maybe Barofsky knows that tracking the use of funds on a transaction by transaction basis is a fool's errand and what he's really looking for is a funds flow statement (the financial statement that tracks uses and sources of cash on an aggregate basis). Such a statement would show if a given bank increased its loans outstanding in an amount that matched the amount of money that it received from the federal government.

Well, setting aside my question of why he would need to specifically request that information, as every public company has to produce that information on a timely basis, even if it turns out that banks haven't increased their loan portfolio in an amount equal to the money they received from the government, that would merely be a symptom of the real problem.

Without the TARP money, banks didn't have money to lend. With the TARP money, they now have money to lend, they just don't think there are a lot of credit worthy borrowers out there... at least not enough to 'use' up all of the money they got from the federal government.

And you might think that, having previously gotten in trouble lending money to people and businesses who were unable to pay back their loans, the Treasury Department would applaud banks instituting tougher lending requirement, of taking a less-rosy view of a particular borrower's capability and intent to repay the loans. Isn't it a good thing for banks to not shovel money out the door to everybody who comes in with a questionable appraisal and a lack of documentation of their income? Isn't it a good thing that it takes a bit more to approve a loan than a borrower saying "I've got a great idea for a business, let me have $1mm, you can trust me to pay it back"?

But that would make sense... and making sense is just not important to those in Washington who feel the need to interfere in what they know little - if anything - about.