Tax payers and legislators alike are incensed that the recipient banks are refusing to detail how they are spending taxpayer money. In December 2008, the Associated Press asked 21 banks that received more than $1 billion from the program to describe what has been done with the money. None would provide any specifics.

Second and more importantly, Americans don’t understand why lending volume hasn’t picked up over the last few months despite all the bailout money. Legislators have blasted the banks for not lending more in the wake of the $700 billion financial rescue program approved by Congress last October. According to a March 2009 GAO report, $303.4 billion out of the $700 billion has been spent. Of the roughly $300 billion, $199 billion went to 532 financial institutions under the Capital Purchase Program (CPP).

Treasury Secretary Timothy Geithner announced that the Obama administration will continue to provide capital to financial institutions, but the new money will be awarded under tighter restrictions to make sure the recipients use the resources to boost lending to consumers and businesses. One of the primary challenges is that banks are overleveraged. As a result, before they can begin lending to consumers, they need the bailout dollars to bolster their riddled balance sheets. Paul Miller, managing director of FBR Capital Markets, said it’s a balancing act. If banks loan too much, they throw off their debt ratio and possibly hurt their stock price. According to Marc Lieberman, a professor of economics at NYU, “We are asking them to do contradictory things; Congress is telling banks to lend. Regulators are telling banks to build up capital.”

It appears that smaller banks across the nation are bucking the trend and have started lending with the money from the TARP. Michael Daniels runs a small bank in Green Bay, Wisconsin, that recently received $15 million in taxpayer money. He lent it out to homebuyers and small businesses. Daniels and a handful of executives — mostly at smaller banks — are doing everything possible to help their communities out. In fact, Daniels and the bank officers have so much confidence in their loans that they raised another $9.5 million through a private stock offering at the same time they got the TARP funds at the end of December. ­Approximately 40 percent of that new private capital came from bank directors and insiders. According to Daniels, “We put our own money right alongside it; you put your money where your mouth is.”

Certainly, lenders are taking into account the asset class into which they are willing to lend. Bill West, Senior Vice President of First Peoples Bank in Palm City, Florida indicated that he is focusing most of his efforts on the owner-occupied segment of the commercial real estate market, and is staying far away from any kind of speculative development ­lending.

Another problem banks face is that the increased lending standards have made the underwriting process much more onerous. A quarterly survey by the Federal Reserve earlier this month found that nearly 60 percent of banks said they had tightened lending standards on credit card and other consumer loans in the previous three months and that 80 percent had tightened lending standards on commercial real estate loans. The flip side of that coin is that those that can qualify for lending are not currently interested because they are nervous about taking on any new debt. It is a “Catch-22” type scenario that will slowly be resolved as investor confidence improves, asset prices stabilize, and the economy starts growing again. SLDT

About the author: Paul Silver is director of research for Wall Street Resources. He can be reached at 772-219-7525 or go to www.wallstreetresources.net