This one took me completely by surprise. Deal Book has a post which contends that the funds directed to the banks so far via TARP and I presume through the various guarantees of debt has been directed to the bank holding companies and not the bank operating subsidiaries.

To see why, it’s important to understand the distinction between banks and bank holding companies. Banks take deposits and make loans to consumers and corporations. Bank holding companies own or control these banks. The big holding companies also own other businesses, including ones that execute trades both on their clients’ behalf and for themselves.

It would seem obvious that helping banks, not holding companies, would be the most direct way to stimulate bank lending. But when TARP purchased preferred stock and warrants, it bought them from holding companies, not their bank subsidiaries.

While TARP has been generous with bank holding companies, these companies have not been so generous with their banks. Four large holding companies — JP Morgan, Citigroup, Bank of America and Wells Fargo — initially received a total of $90 billion in TARP money in the fall, but by the end of 2008 they had contributed less than $15 billion in equity capital to their subsidiary banks.

The holding companies seem to have invested most of their TARP money in their other businesses or else retained the option to do so by keeping it in deposit accounts, even as the capital of their banks decreased. At the same time the banks, which provide the majority of loans to large corporate borrowers, drastically reduced lending to new borrowers.

It’s easy to see why holding companies would withhold capital from their troubled banks. If a bank is insolvent — as many are now believed to be — and the government has to take it over, the holding company loses any capital it gave to the bank. Rather than take that risk, the holding company can opt to spend its money elsewhere, perhaps on trading of its own.

This all seems pretty basic and I would have thought that all of the expensive talent gathered to work these things out would not have missed this one. It was drummed into my head many years ago that you never lent money to a holding company when the intended beneficiary of the money and source of repayment was the operating subsidiary. To do otherwise effectively eliminated your control of the transaction. Most of the guys who put this together are at least as old as me so they had to have had a similar education.

Details matter a great deal. It looks like we need someone to focus on that.

more: here