Gaze With Me Into The Credit Crystal Ball

[flacorps]

A customer and I had a discussion last year about where the next big sinkhole would be and commercial real estate was it. Kinda surprised it took this long for the spotlight to start finding it ...

 

Reggie Middleton has been predicting it for a couple of years. GGP (General Growth Properties) was a big recent BK that he predicted. Some others are in trouble too.

[flacorps]

Just a couple of quick thoughts. Reggie Middleton's blog (and others) suggest that the recent stock market rally has been entirely unsupported by any fundamental strength in the companies whose stocks have risen. We're now at 1,000 banks predicted to fail, and the FDIC's funds are so likely to be depleted that they have changed the rules to allow more private equity money into the banks (e.g.--creepy people we didn't think were fit to own banks before will now be allowed to play in the sandbox).

 

Bank of America has cut the lines of a ton of borrowers in recent days owing to its inability to access the Feds' term facility without admitting that its borrowers are in the aggregate subprime.

 

The "second wave" of mortgage problems has yet to hit, and it will be for just as many dollars as the first (only it will encompass fewer homes due to the homes' higher values) and even more intractable with even larger losses for the banks (homes that sell for fewer dollars are easier to sell and spend a shorter time on the market because they will cash flow for investors, while big homes typically won't cash flow until the price gets really, really low).

 

It's not a matter of not being out of the woods yet. It's a matter of getting deeper into the woods and not understanding that our compass is broken...

[flacorps]

Big trouble getting bigger in the banks' credit card businesses.

 

Fitch's Prime Credit Card Chargeoff Index rose 97 basis points (bps) to reach 11.52% in the September reporting period and is now 75% above year earlier levels.

 

 

http://www.istockanalyst.com/article/viewi...icleid/3519472#

 

'With recent volatility in bankruptcy filings and continued further increases in unemployment likely, Fitch expects more record setting chargeoff and delinquency metrics in the months ahead,' said Senior Director Cynthia Ullrich.

 

 

The big banks are going where Advanta Bank has already gone, in terms of credit card defaults (and they're also ratejacking like crazy in a self-defeating effort to make up for it, just like Advanta did). But they're too big to fail (unlike Advanta). The result will be TARP2. Big banks will get that, because as anyone who is capable of a web search can refresh their memories, TARP didn't go through on the first vote and Congresspeople were threatened with MARTIAL LAW. The exact mechanics of how banks can arrange that is anybody's guess, but I'm sure it's not too hard for them.

[flacorps]

CIT Group is teetering. As the largest lender to small and medium size businesses, you're looking at a linchpin of the economy, with cascading bankruptcies and massive unemployment if it fails. Unfortunately, Goldman Sachs is OVERHEDGED and if CIT fails they stand to make a billion dollars on the mess.

 

There's a Glenn Beck YouTube video on the subject.

http://www.youtube.com/watch?v=MM5PIqDJ8UA

 

He doesn't seem to be aware of Goldman's vested interest even though Goldman is his favorite whipping boy.

 

Along with Advanta Bank's being hors de combat this is not pretty ... not pretty at all.

 

When the small businesses fail, their owners and employees will go belly up on all sorts of other loans. This is the kind of thing that should have been prevented by TARP, etc.

[flacorps]

On his boombustblog today Reggie Middleton is calling Bank of America the next AIG, and says their derivatives exposure is about to destroy them.

[nothingtolose]

On his boombustblog today Reggie Middleton is calling Bank of America the next AIG, and says their derivatives exposure is about to destroy them.

 

and to think most media attn is focused on Merrill deal bonuses...

 

Reuters reported that House is looking into imposing new caps on OTC derivatives, not just CDS but other types of derivatives as well

[flacorps]

and to think most media attn is focused on Merrill deal bonuses...

 

Sleight of hand and misdirection....

 

But BofA went on a credit card limit slashing binge not long ago, and the Ann Minch YouTube revolt made clear their penchant for ratejacking to try to shore up their fortunes. Ultimately, as in Advanta's case ... this is self-defeating behavior as you just drive up chargeoffs without collecting enough interest to offset them, then you've got to jack the rates even more on the remaining borrowers ... lather, rinse, repeat until there's nobody left. At 14% monthly chargeoff rate in 90 days you have 37% fewer cardholders. How long does it take you to go below what it takes to have a viable business model?

 

Even though they are much more diversified than Advanta, I think that diversification is just (to use an old Peter Lynch term) diworsification and things are going bad in every direction.

[nothingtolose]

and to think most media attn is focused on Merrill deal bonuses...

 

Sleight of hand and misdirection....

 

But BofA went on a credit card limit slashing binge not long ago, and the Ann Minch YouTube revolt made clear their penchant for ratejacking to try to shore up their fortunes. Ultimately, as in Advanta's case ... this is self-defeating behavior as you just drive up chargeoffs without collecting enough interest to offset them, then you've got to jack the rates even more on the remaining borrowers ... lather, rinse, repeat until there's nobody left. At 14% monthly chargeoff rate in 90 days you have 37% fewer cardholders. How long does it take you to go below what it takes to have a viable business model?

 

Even though they are much more diversified than Advanta, I think that diversification is just (to use an old Peter Lynch term) diworsification and things are going bad in every direction.

 

LOL diworsification, priceless....

what may be helping BOA if this article is to be believed is that they aren't as heavily exposed to commercial mtg, and at least banks would like to believe that consumer defaults are slowing (not sure what to make of it)

[flacorps]

...banks would like to believe that consumer defaults are slowing (not sure what to make of it)

 

The Fitch folks are real clear that it's accelerating:

http://www.istockanalyst.com/article/viewi...ticleid/3519472

 

To the extent any bank says otherwise, they're uniformed, lying or an outlying exception.

[JerseyBaby]

One thing I've learned over the years is nothing is ever as bad as the doomsayers predict nor as rosy as the eternal optimists envision.

 

The thing is, we as human beings have our own predisposed biases and we tend to seek out information that reinforces those biases while disregarding information that contradicts them.

[JerseyBaby]

An economist is an expert who will know tomorrow why the things he predicted yesterday didn't happen today

-Laurence J. Peter

[flacorps]

Interestingly, over on seekingalpha, an investor's website the most popular post right now is one entitled "the greatest depression is coming"

 

http://seekingalpha.com/article/167060-the...ssion-is-coming

[Centrip]

Interestingly, over on seekingalpha, an investor's website the most popular post right now is one entitled "the greatest depression is coming"

 

http://seekingalpha.com/article/167060-the...ssion-is-coming

 

Good news if your betting against the dollar.

[flacorps]

Some more fun facts and figures (some of them wrong and mine ... but corrected) in this thread:

http://creditboards.com/forums/index.php?showtopic=414122

[flacorps]

Charge-off rate said to be higher than that during the Great Depression .... and set to go higher still, with reserves perhaps not able to keep up:

 

http://www.zerohedge.com/article/rate-bank...reat-depression

[toopooor]

Charge-off rate said to be higher than that during the Great Depression .... and set to go higher still, with reserves perhaps not able to keep up:

 

http://www.zerohedge.com/article/rate-bank...reat-depression

 

What was being charged off back then? I didn't think credit cards were around back then - many places offered customers credit or bartered. If the chart is including both consumer and commerical charge offs now but only commerical then, its not an accurate comparasion.

[nothingtolose]

The bigger the bubble, the steeper the correction.

With a combination of low rates + gung-ho credit underwriting banks have reinvented the meaning of bubble. What we are seeing now in terms of higher chargeoff rates is just a reflection of what happens when easy credit meets weak demand.

We've had weak demand and recessions before. Just this time it was growth on credit steroids. What goes up must come down *snicker*.

[flacorps]

Only one press source is reporting this for the moment ... Moody's expects the credit card default rate to continue to increase, peaking at 13% in the summer of 2010:

 

Moody's Investors Service said yesterday that Americans keep falling further behind on their credit card bills. "We expect the charge-off rate [to] peak between 12 percent and 13 percent" next summer, analysts Jeffrey Hibbs and Will Black wrote.

 

Moody's also cut its "baseline" rating on Bank of America Corp.'s Wilmington-based credit card arm to from Baa3 to Ba1 with possible future cuts to come.

 

Moody's cited both the weak economy and "structural changes in the credit card industry" because of stricter federal regulation, which makes it harder for banks to raise rates on people with bad credit records.

 

It expects "sizable net losses" at BofA's card arm, the nation's largest credit card business, this year and next.

 

What will BofA do about that? Moody's predicts "tightened credit and collections initiatives," and notes the parent company has already given the card group "substantial cash infusions."

 

 

http://www.philly.com/inquirer/business/65...?cmpid=15585797

[toopooor]

It expects "sizable net losses" at BofA's card arm, the nation's largest credit card business, this year and next.

 

I saw basically the same thing about Citi - and i suspect citi is much worse off than BOA. That's why the RJ to 30% on so many good accounts. They are in a panic. I think its bad enough that if many borrowers withheld payments for a month or two to just citibank, they'll be cooked.

[jtoast]

*shrug* and this is news why? There are no surprises here. economy down...unemployment up....of course the default rate is going to be rising.

 

All the more reason to pay down balances and dig in since it's only going to get worse before it gets better.

Edited October 27, 2009 by jtoast

[flacorps]

This is something that I read about months ago that is still not resolved, but it is right on the knife edge of going one way or another:

 

http://www.reuters.com/article/bondsNews/i...845115720080908

 

Essentially, Montgomery Alabama is about to default on $3.2 billion dollars worth of sewer bonds, and it will be the largest Chapter 9 since Orange County California's in '94 if it there isn't a workout arranged.

 

A few months ago, this seemed a significant number that had national implications.

 

After all that has happened in the interim, it's more than a drop in the bucket, but not by much...

 

Montgomery (Jefferson County) is still teetering:

http://www.reuters.com/article/financialsS...350476520091103

[TennisGalnAL]

This is something that I read about months ago that is still not resolved, but it is right on the knife edge of going one way or another:

 

http://www.reuters.com/article/bondsNews/i...845115720080908

 

Essentially, Montgomery Alabama is about to default on $3.2 billion dollars worth of sewer bonds, and it will be the largest Chapter 9 since Orange County California's in '94 if it there isn't a workout arranged.

 

A few months ago, this seemed a significant number that had national implications.

 

After all that has happened in the interim, it's more than a drop in the bucket, but not by much...

 

Montgomery (Jefferson County) is still teetering:

http://www.reuters.com/article/financialsS...350476520091103

 

Um...that is not Montgomery. Jefferson County, AL is home to Birmingham, not Montgomery. Montgomery is the state's capital. Birmingham is the state's largest city. And I ASSURE you this is not the result of a bad economy. This is a result of crooked politicians, the main one of whom was just found guilty on all 60 counts last week. Birmingham City Mayor (former) Larry Langford used to be President of the Jefferson County Commission. He is the one who racked up all the debt and started the corruption process. The lady that was quoted in the article you posted - Betty Fine Collins - is one of the biggest crooks in office as well.

 

It has not been "resolved" due to the folks on the commission (read Betty Fine) not wanting to file bankruptcy because then the books would be open and all would see the way they have been running the county.

 

I could go on for days on this subject (I live in Jefferson County) but will stop here and just say THIS WAS NOT CAUSED BY THE CURRENT CREDIT CLIMATE.

 

This was caused by crooks.

[flacorps]

Sorry about the city confusion. The banksters have been leaning on Montgomery, whispering that if the state doesn't pick up the tab nobody anywhere in Alabama will ever be able to float a bond on Wall Street again.

 

I hope the statehouse calls their bluff...

[Jen23514]

*shrug* and this is news why? There are no surprises here. economy down...unemployment up....of course the default rate is going to be rising.

 

All the more reason to pay down balances and dig in since it's only going to get worse before it gets better.

 

agreed

[TennisGalnAL]

Sorry about the city confusion. The banksters have been leaning on Montgomery, whispering that if the state doesn't pick up the tab nobody anywhere in Alabama will ever be able to float a bond on Wall Street again.

 

I hope the statehouse calls their bluff...

 

Gov Riley has tried to strong-arm them because they have turned down basically all the offers he's put on the table. Of course, all of the offers he's given requires them to open the books and they know once they do that they will all be out of a job and never work in the business again. Unfortunately, Alabama has been ridden with crooks for far too long. Do a quick google on Richard Arrington, Bernard Kinkaid, Richard Scrushy, Don Sieglman, Bill Blount, Al LaPiere, Larry Langford - the whole lot of them are crooks and have had a play in the County's debt issues.

 

The State needs to stay out of it and let them take the fall themselves. I believe that is just what Gov Riley is steadfast to do.