By Jonathan Stempel
NEW YORK (Reuters) - The former chief of the PaineWebber brokerage said the U.S. government's $700 billion financial industry bailout was a good step toward restoring the health of financial markets, but that banks shouldn't hoard it even as they tighten lending standards.
"The program has done exactly what it was supposed to do in the beginning, but the next step is to get the markets moving," the executive, Donald Marron, said at the Reuters Global Finance Summit. "Banks have to lend money, and that's just not happening."
Marron ran PaineWebber until Switzerland's UBS AG (UBSN.VX: Quote, Profile, Research, Stock Buzz) bought it in 2000. He became chairman of UBS America, leaving in 2003 to found Lightyear Capital, a private equity firm specializing in financial services, which he still runs. Marron is also a former chairman of the New York Stock Exchange.
Credit markets tightened steadily beginning in the summer of 2007 and seized up in September after the bankruptcy of Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz) made many banks afraid to lend to customers, and to each other.
Many prospective borrowers are now afraid to try for loans, fearing they will not get a friendly reception from loan officers, or that their credit ratings will fall if lenders turn them down, Marron said.
"You have to create a climate where individuals and small businesses feel comfortable going to banks to borrow," he said. "The role of banks, essentially in this country, is to keep people's money safe and to lend money.... Both of those issues have been challenged considerably."
He said that did not mean lenders should regress to the more carefree days earlier this decade, when they could reap hefty fees by making more and riskier loans, and then selling them within days or weeks to yield-hungry investors who thought they understood the risks.
"Banks went from making 30-year loans to making 45-day loans, essentially," Marron said. "That had the counterintuitive effect of not raising standards for loans, but lowering them. You would think normally that when there is bigger demand for loans, you would put in higher credit standards and charge higher rates."
Marron was noncommittal on whether the $700 billion would be enough to unclog markets. "I haven't a clue," he said. "There's no reason to think this money is going to be lost."
(Reporting by Jonathan Stempel; Editing by Lisa Von Ahn)
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