Are banks really in trouble?

Time

Commentary

Something doesn't add up in the news. On the one hand, banks called for a lot of help to keep the financial system running, to the tune of trillions of dollars. On the other hand, they declare billions of dollars in profits, give themselves billions dollars in bonuses, and do little to help the economy. The banks can borrow billions, perhaps trillions, at near 0% interest rate from the Federal Reserve, while holding on to unmodified mortgages at rates greater than 5%. That's a pretty hefty profit margin. Why is this allowed to go on? It's been over ten months, over 300 days. Where is the result of the biggest corporate bail out in capitalism's history?

Excerpts

Banks boosted borrowing from the Federal Reserve's emergency lending facility over the past week, but cut back on other programs designed to ease the financial crisis. The overall picture suggests some credit problems are easing.

The Fed, in a report Thursday, said commercial banks averaged $35.1 billion in daily borrowing over the week that ended Wednesday. That was up from $33.8 billion in the week ended July 29. (Read "Why the Banks Aren't Modifying Home Loans")

The identities of the financial institutions are not released. They pay just 0.50 percent in interest for the emergency loans.

The weekly lending report also showed the Fed's net holdings of "commercial paper" averaged $64.7 billion, a decrease of $29.7 billion from the previous week. That's an encouraging sign that investors' appetite for such help from the Fed has lessened.

Commercial paper is the crucial short-term debt that companies use to pay everyday expenses, which the Fed began buying under the first-of-its-kind program on Oct. 27, a time of intensified credit problems. The central bank has said about $1.3 trillion worth of commercial paper would qualify.

The report also showed the Fed trimmed its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae. They averaged $542.8 billion over the past week, down $1.6 billion from the previous week. The goal of the program, which started on Jan. 5, is to drive down mortgage rates and help the housing market.

Mortgage rates dipped this week. Rates on 30-year home loans averaged 5.22 percent this week, down from 5.25 percent last week, Freddie Mac reported Thursday.

Squeezed banks borrow from the Fed when they have trouble getting the money elsewhere. At the height of the financial crisis last fall, investors cut banks off and shifted money into safer Treasury securities. Financial institutions hoarded much of their cash, rather than lending it to each other or customers. That lockup in lending has contributed to the longest recession since World War II.