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VOL. 124 | NO. 4 | Wednesday, January 7, 2009

Bailout Questions Remain in ’09

By Andy Meek

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BUCKS START HERE: Lawmakers, including U.S. Sen. Bob Corker, R-Tenn., shown speaking during a Washington news conference in December, approved a $700 billion plan in late 2008 to shore up the country’s financial system. -- AP PHOTO/SUSAN WALSH

Back in October, U.S. Sen. Bob Corker, R-Tenn., stood before an audience of bankers, civic leaders and businesspeople at the University of Memphis and defended his vote for the Emergency Economic Stabilization Act of 2008.

With the underpinnings of the country’s financial system threatening at the time to collapse, the goal of the bill was to provide up to $700 billion to shore it up. Locally and nationally, the extent to which that money is used largely will determine the full measure of the recession.

With the book now closed on 2008 – a year in which billions of dollars of market value evaporated and investors and businesses from all sectors of the economy were knocked on their heels – a page in the calendar at least has been turned. It soon will become apparent whether Corker and other lawmakers were right to support what the general public eventually began referring to as a bailout for Wall Street.

Burdens of leadership

Corker, the former mayor of Chattanooga, told the recent gathering in Memphis that when he’s faced with difficult votes, he’ll often retreat to a lobby behind the Senate chamber.

“There’s a balcony out there I’m pretty sure nobody in this room has ever seen,” Corker told the audience, which included First Horizon National Corp. CEO Bryan Jordan and other representatives of banks such as Regions Financial Corp. and SunTrust Banks Inc.

“There’s never anybody out there, and sometimes on tough votes I’ll go out and stand on that balcony,” Corker said. “Sometimes I’ll get there 20 or 30 minutes before the vote and just try to weigh what the right thing to do is, because some of the bills we vote on are so convoluted, it’s hard to know what the right thing to do is.”

But he said that was not the case with his vote for the bailout bill, which he and other Washington officials like U.S. Treasury Secretary Henry Paulson remain convinced was the right thing to do. But even the Treasury Department admits the program’s effectiveness can’t really be measured yet.

One feature of the bill allows the federal government to pump money directly into banks as injections of new capital.

“Treasury is executing at a rapid speed, but it will take some time to review and fund all the remaining applications (from banks for the bailout money),” wrote Treasury official Neel Kashkari in a letter sent last week to the Congressional oversight panel monitoring the effort. “Clearly this capital needs to get into the system before it can have the desired effect.”

The letter continues: “In addition, we are still at a point of low confidence – both due to the financial crisis and the economic downturn. As long as confidence remains low, banks will remain cautious about extending credit, and consumers and businesses will remain cautious about taking on new loans.”

Nevertheless, millions of dollars in new capital will end up in Memphis banks as a result of the program. In the late fall, the Treasury Department began approving and sending out bundles of new capital for banks large and small, and several Memphis-area banks applied for the money.

Creeping molasses

The money is being invested in banks under the Treasury’s Troubled Asset Relief Program (TARP) and is part of an effort to keep the flow of money going to banks as capital investments, and then on to consumers and businesses in the form of loans. Ideally, that would rev up the country’s economic engine and lift it out of the current slump.

But as Kashkari’s letter noted, that hasn’t happened yet for a variety of reasons. One reason is that the new capital still is in the process of flowing from the Treasury to banks across the country.

Some Memphis-area companies such as First Horizon National Corp. and Magna Bank already have received their TARP money. Many more banks have applied for the money and have not yet announced their approval. Local banks in that category include Bank of Bartlett, Triumph Bank, First Alliance Bank and others.

Memphis-based First Horizon National Corp. in November received its investment of $866 million from the Treasury, money that’s generally being used to support new lending.

“I think generally there’s a lot of benefit to having additional capital,” said Dave Miller, director of investor relations for First Horizon. “And whether that’s protecting against the downside of a tough ’09 economy or other uses, lending is probably our first and foremost priority. I don’t know that you can explicitly say, ‘Here’s exactly how that specific money has been spent.’ But first and foremost, what we’re using it for is to facilitate lending.”

Kirk Bailey, chairman and CEO of Magna Bank, tasked his senior staff several days ago with the job of coming up with a plan to start making more loans to credit-worthy borrowers. Magna Bank got almost $14 million through the TARP program.

But because of what banking officials see in store for 2009, borrowers who apply for loans at Magna Bank are likely to get extra scrutiny.

“We’re going to have to be very careful working with our clients so that people don’t get overextended or significantly delinquent,” Bailey said. “It’s going to be a very difficult environment. We think things will improve somewhere in the middle of the year, and gradually we will start to see a recovering economy and employment stabilizing and hopefully starting to build back. And we look forward to 2010 as a better year. But we don’t see 2009 as a rebound year.”

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