Skip to comments.Possible Credit Dislocation: Be Warned
Posted on 10/23/2009 12:40:41 PM PDT by FromLori
I have reason to suspect that the "monetary transmission mechanism" is full of rocks (again), and we are about to have another instance of what could colloquially be called "fun." (Yes, that's sarcasm.)
Here's what we know and what I can deduce from it:
JP Morgan's "cash position" was analyzed by a writer who published on SCRIBD, which showed that actual cash held has deteriorated radically. By more than half in the last year. The deterioration is continuing, not slowing.
I am hearing repeated anecdotes from multiple areas that foreclosed property held by banks with multiple full-price offers that include a financing requirement are being sold instead to people with actual cash at radical reductions from that price. This implies that these financing contingencies are regarded as not only potentially no good but factually no good, as if the banks know for a fact that the credit pipeline will (not might), within weeks or months (in the time required to close), disappear. There is no other rational explanation for this behavior.
Citibank's credit-card terms change implies a willingness to accept and even provoke a complete and intentional destruction of their credit card business as a very high probability outcome, given that nobody in their right mind will accept a 30% interest rate who has an alternative. The obvious implication is that only those who can't transfer balances out will remain and if your credit is that impaired there's a good chance you will default - either intentionally or otherwise. This too implies foreknowledge of a near-complete impending freeze in the credit markets.
The change in terms on credit accounts is NOT confined to Citibank. I have received a fax from a customer of Infibank with substantially identical terms, in which both the standard and penalty rate was adjusted to 29.99%. This strongly implies that whatever Citibank smells the problem is not confined to them.
Both of these credit card "adjustment" letters are of course marginal rate changes. That is, they are both based off the PRIME rate. The importance of that is missed by many. Don't be one of them (more on that below.)
I recently received a back channel communication indicating that The Fed is aware that this has been and still is a solvency problem and has so briefed certain members of Congress. This from a source believed reliable, but which cannot be independently confirmed. This data is not conclusive. But - if you are dependent on credit access and these anecdotes are in fact indicative of actual knowledge of an impending lock-up you are at grave financial risk.
Note that "margin" type rates that are based on the PRIME rate could hurt you far worse than you believe. With PRIME at historic lows should any such dislocation spike the prime rate your interest rate could go much higher with little or no notice or ability to do anything about it.
IF this is going to manifest as a dislocation of some sort it will probably occur within the normal closing window for real estate transactions, since the anecdotes related to that have the best-defined "reach", and the discounts being accepted to avoid this risk are massive to the point of denoting near-certainty of this event in the minds of the market participants who are electing to accept these cash-discounted offers.
Therefore, if you are dependent on such credit access I would take immediate action to do whatever is necessary to mitigate, to the extent you are able, the consequences of such a dislocation.
Consider how you survive returning to what essentially amounts to a cash economic posture in your business and personal life.
Note that the indications above are far stronger than what we saw going into last fall before the wheels came off. As a consequence if these actions are those of people with real knowledge (and this is not a guess on their part) I would expect the outcome to be worse than what we saw last fall in terms of economic impact.
Those who are short dollars (synthetically or in the actual market) need to beware - if I am reading this correctly you're about to get a really ugly surprise.
If you want to speculate on this outcome levered bets on radical dollar appreciation look like one of the best choices out there, followed closely by bearish levered bets on commodities. I would not consider such a speculative play that is not characterized by defined risk, as this analysis is based on nothing more than observation of behavior by market participants that all point toward their foreknowledge of an event that might happen in the reasonably-near future and is not, at present, backed up with actual significant credit-spread widening or other objective criteria.
Just finished readng this.
I’m going to be on pins and needles for the next three weeks, praying my buyer’s financing doesn’t fall apart so I can get the hell out of this house.
Now, you’ll please excuse me while I head down to the bank to make a withdrawal. ;-)
The posters replying to Denninger’s tickers are a pretty bright bunch most of the time:
Anyone out there speak-ie the Finance language fluently who might interpret this report for Freepers not in business?
How about this. "WE'RE DOOMED!"
I’m a buyer here waiting to see if my application is going to be denied for the 4th time based on several new gov’t and bank regulations hitting right now. I would never have believed that I’d be denied a loan with good credit, cash in hand for down payment, having owned a house before for 9 years, no late payments, no high credit card debt, same job for 13 years.
After two months of this full financial investigation of me, I’m about to pull the plug and say forget it. It’s getting to be more stress than it’s worth.
Most of the banks that I am talking to are holding onto their foreclosed properties...not selling them...not financing them...nothing.
Probably going back into a bear fund Monday. Prepared for a couple more weeks of chop before a downleg in earnest.
Mostly that's because if they hold on they can still pretend it's still worth $250,000. If they sell, they'll have to admit it's only worth $150,000 and take the loss.
Uncle Billy lost the $8,000 and will need another bailout soon.
Banks are desperate for cash, and contrary to public statements( lies ) of Treasury Secretary Geithner, Bernanke, Obama and others, these banks/firms are bankrupt. Toast. Tapioca.
They are selling anything on their books for anything they can get because they desperately need it now....and...they think that prices will crash in the future. It is a race for the door before the whole thing crashes, only they all know it, and we are being spoon fed big bowls of shinola and told it is sunshine. ( I know it’s hard to believe that our political and financial elites would do such a thing, but what can I say? )
I’m no financial guru but here’s something that made me go hmmm. I work in the insurance industry and Travelers (which was merged with citicorp) suddenly laid off HALF of their underwriters. Even though Travelers has shown consistent growth. My first thought was “What do they know that I don’t?”
I disagree with this premise. IMO this happened because the Dem's credit card 'reforms' were trigger that week.
I read the reason they are doing that is it would totally crash the housing market it they put them all on the market at one time, so as they sell some off they put some more out there.
Credit terms are being unilaterally tightened as to be completely untenable. The very customers banks need in the credit market - credit card holders with high balances and reliable payments - are, or will be, squeezed out as interest rates skyrocket and penalties (for even minor transgressions like making payments a day late) become untenable. Customers will either bail out of the cards entirely and choose to not go back (hello), or be crushed out and be unable to return. Goose, golden egg, greed, no goose.
lol I reply on there from time to time myself. I think they are too for the most part.
That is most likely because of mark to market that way they do not have to show the crap on their books and if they did show it many of them would be shut down.
If you have a lot of credit card debt it is going to be a disaster or if you have a business and use the cards same thing.
Sure. I’ll try to boil it down to the important stuff and keep it simple. Some of the points made in the article are right, others a bit off but I’ll explain those.
1.) As the nation deleverages and lowers its overall debt levels, credit card companies are getting hit hard by rising defaults as people lose their job. Seeing this, the credit card companies can’t issue enough commercial paper and other short term debt to fund all of the outstanding credit lines (Capital One, for example, doesn’t actually have tens of billions of dollars in paper cash sitting around in bank vaults - it issues 24 hour IOU’s to insurance companies, banks, and investors to fund its day-to-day operations). Without the ability to raise these short-term funds in the market, they are “unwinding” a substantial part of their business because they couldn’t actually come up with the cash to fund credit card purchases if customers were to suddenly begin using cards as they lost their job. Their response is to do one of a two things:
A.) Cut credit limits or close accounts
B.) Drastically increase interest rates to attempt to get sane consumers to move their account elsewhere (in effect, getting the consumer to close the account)
In layman’s terms: Imagine if you had promised to loan $1,000,000 to your friends, family, and coworkers. Suddenly, you find yourself only having $600,000 in available cash and borrowing. That means if everyone approached you about the loan you had promised, you would be $400,000 short. To fix the situation, you would either cancel your loan promises, or raise the interest rate drastically so your friends and family would cancel on you, getting you off the hook. Your goal would be lower your total potential exposure to no more than the $600,000 you had available to you.
2.) There are still a lot of foreclosures in the pipeline and no one is certain what that will mean when they hit the market. Will they lower comparable sales and cause another round of write-offs? (The answer: It depends on your community. In places like Texas, where unemployment is at a 20+ year LOW or Missouri where the average home price has fallen only 9% from peak to trough, it’s not going to do a lot of damage.)
3.) J.P. Morgan’s cash position isn’t a problem. Buried several hundred pages into the most recent filing to the Securities and Exchange commission, you see that the reason they’ve blown through $25 billion in cash is because they paid back ALL of the money they borrowed from the government bailout, in full, plus interest and dividends EARLY.
Here’s the actual text if you are interested:
***Pursuant to the Capital Purchase Program, on October 28, 2008, the Firm issued to the U.S. Treasury, for total proceeds of $25.0 billion, (i) 2.5 million shares of Series K preferred stock, and (ii) a warrant to purchase up to 88,401,697 shares of the Firms common stock, at the exercise price of $42.42 per share, subject to certain antidilution and other adjustments. On June 17, 2009, the Firm redeemed all of the outstanding shares of Series K preferred stock, and repaid the full $25.0 billion principal amount together with accrued dividends. Following discussions with the U.S. Treasury regarding the warrant, on July 7, 2009, JPMorgan Chase notified the U.S. Treasury that it had revoked its warrant repurchase notice. JPMorgan Chase understands, based on the U.S. Treasurys public statements, that the U.S. Treasury intends to pursue a public auction of the warrant. The U.S. Treasury has advised JPMorgan Chase that the Firm will be permitted to participate in any such auction.***
In other words: They were so confident in their profitability and the position they are in for the recovery, they parted with $25 billion in cash so they are no longer part of the bailout. The government MADE money off JP Morgan and, as tax payers, we should be proud of how they handled the situation.
4.) The dollar is going to trash. The article is correct on that - with $9+ trillion in projected deficits, the United States cannot maintain its status as the reserve currency of the world.
This doesn’t have to be bad for you. Companies such as General Electric, Coca-Cola, and Johnson & Johnson make 50% or more of their profits from overseas. A falling dollar could make them BILLIONs in earnings, and their stockholders rich.
It also means there’s a good chance gold and some other limited commodities could do well, as well as distressed real estate.
There are ALWAYS intelligent things to do. Even in the apocalypse, you can do right by your family and make money.
I kind of agree that is why they are doing it but then the effect is the same no matter the reason.