Authored by Jon Mercer in Economy
Published on 01-24-2009

With the approval of Congress’s $700 billion rescue plan for our nation’s financial institutions, the troubles of the banking system have become more significant. The main idea behind the bailout plan was to help struggling borrowers and increase lending to stimulate the economy, however many banks that have received the bailout funds are still reluctant to lend, fretting that if the economy remains flat they could wind up in even worse shape.

With increasing losses at major banks like Citigroup and Bank of America, regulators are still searching for ways to stabilize the banking system. As the Obama administration gets ready to implement a sweeping economic stimulus plan, they could be in a situation where they will have to find a systematic plan to remove bad loans from balance sheets of major financial institutions, so they will be encouraged to start lending again. This is essential to get businesses and consumers spending again.

Many lawmakers are saying that they want to know how the first half of the bailout money is spent before approving a second round of bailouts. Consequently, few banks that have received funds from the first $350 billion from the Treasury’s Troubled Asset Relief Program have offered any public details about how they plan to spend the money. According to the Treasury Department, the banks are not required to disclose what they do with the bailout money.

In a recent review of some two-dozen banks that received the bailout funds, the majority of the banks interviewed saw the money as a no-strings-attached windfall that could be used for investments, paying off debts, or acquiring other businesses. Very few of the banks saw lending as a priority. The bailout funds that were intended to increase loans and stimulate the economy are being used by the banks to take advantage of opportunities that have presented themselves because of our weak economic situation — just the opposite of the intentions of congress when they approved the vast bailout plan.

There is much confusion over exactly what the intentions of the Treasury Department were when they began issuing the money. The loose requirements of the original plan have contributed greatly to the confusion surrounding the use of the bailout funds; but without strict regulations or conditions being placed on the bailout moneys, the banks are in a prime position to take advantage of the situation, leaving the American taxpayer to wonder what the program was intended to accomplish.