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Banks must start lending: Siegel

by Gabriel Lacroix | Friday, 28 November 2008

Before the markets can return to something that looks like normal, banks must start lending, according to Wharton Finance Professor Jeremy Siegel.

In an exclusive interview with Knowledge@Wharton , Siegel discussed how banks in America are trying to improve their balance sheets, and the government rescue of Citigroup.

"Banks should not be trying to improve their balance sheets by calling in loans to companies that have always paid on time," Siegel said. "They are doing that and I think that it is adding a tremendous amount of increase anxiety and stress in the system right now."

He said the big problem was to make the banks lend. "And I don't mean to new borrowers. I mean, they must continue the lines of credit to their credit-worthy customers," he adds.

Siegel said that if it was up to him, anyone who took money from the Troubled Asset Recovery Program (TARP) – and most banks did, he recalls – would have to keep lending to their good customers.

The whole purpose of TARP was to facilitate lending. "And the lending is not taking place," he said.

When asked whether the government should have acted to bail out Citigroup, he was adamant. "You look at the terms - up to $306 billions in assets to be guaranteed. Now, 360 billion?" he asks. "First of all, of course, Citigroup has about $2 trillion worth in assets. Still, it's only about one out of every $6 worth of assets."

Siegel said that nobody knows how they are valuing these assets. The government is going to take up to 90% of those losses, whereas Citigroup is going to take the first $30 billion and 10% above that. "What the Fed has done, and the government has done, is said 'We are going to make sure Citigroup does not fail'," Siegel said.

He believes the message the Feds are sending is: "Hey, we're going to stand behind Citigroup, and that probably means we're going to stand behind most of these commercial bank mortgages."

However, he thinks the problem has not been fixed as banks still refuse to lend money. "They thought that would start the lending. It's not starting the lending. Change the rules," he concludes.

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