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.
That must be driving you nuts! What (if any) reasons are they giving you for this?
I missed the fact that you had already posted this article and posted it myself. Here is a link to the same article that was posted by me.
Think about what you do and be careful.
This looks like a very speculative forecast in IMO. (He's making forecasts based on what he thinks someone else is thinking?)
Present yourself to the lender as an illegal alien with no verifiable income and a criminal record in your country of origen.
Make sure they know that you’ve contacted ACORN to register to vote (as many times as possible) and you’ll be approved post haste.
It might also help if you announced your plans to run a brothel/meth lab out of your residence.
So putting a small amount out does drive up the price. The problem is, unless it is a cash sale and the buyer is will ing to forego the appraisal, the homes are not appraising at the inflated over bids.
In some neighborhoods, the banks are now only take offers that people are going to move into, and not rent out.
IN other situations, the bank lets the deal fall through, because they won't lower to the appraisal price, which was more than likely the listed price.
I think it is costing the bank something like .005% every month they don't sell these homes.
We get calls all day long from people seeing the foreclosures in neighborhoods with the yellow signs on them that the banks haven't put on the market. There are a bunch!
In our area, it would serve the banks better just to get them out there and let people buy them now, before the homeless move in or the vandals destroy them!
I showed a house a few weeks ago, a short sale,that was very nice,about 2300sq ft with a pool nice gated neighborhood. It was priced at $225k.
I went back the other day and "someone" had taken all the copper pipe , along with the toilets sinks built in oven, and there were holes in all the walls. It was very sad!
I guess the owners saw they weren't going to be able to short it and just took anything of value!
“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.”
People like that should be wiped out!!!!
Bring back thq 18% prime rate!!!!
“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.”
Foreclosed property isn’t carried on their books as an asset, it isn’t carried anywhere, it’s just there.
They can only hold it for 18 months.
One thing they can do is sell thr forclosures between themselves, bank to bank, and get another 18 months they can hold them.
“we have a stellar rating and the rate is still going up “
If you pay your credit card bill every month why do you care what interest rate they charge?
I usually charge around $4,000/month on mine but pay it off as soon as the statement is available on line.
I have no idea what mine charges and don’t give a damn!
I’ve never paid interest for anything in my life including my airplane except for the mortgage on my first home that has been paid off for over 20 years.
“I asked him what he has been doing this last year with his part of the money and he said buying farms, mineral rights in western Canada.”
Funny since Canadian money has been buying mining properties here and in Mexico for the last 30 years.
A friend of mine sold 12 silver claims in New Mexico to a canadian mining company 25 years ago.
What a mess... and the poor neighbors who try to actually keep their homes and once lived in a nicely kept neighborhood... we’ve been fairly lucky over here that the snowbirds from Canada keep buying up the properties and they usually pay to keep them up when they are gone in the summer.
That was a different Canada and a different America ago.
likewise - we pay ours off every month
with enough cash the banks can repay their tarp money. and the exec’s can get their bonuses
lol It doesn’t bother me a bit. True he is speaking without too much back up.
Just got my Citicard letter today. Apparently they still like me because they are upping it to 26.99 instead of up to 29.99. I'll be reassesing the situation Monday.
Good grief. That’s loan sharking by any measure. This is the result of tampering by Congress with its stupid credit card bill, more than anything else. To hell with Barney Frank and all the other G-D Communists. And, might I add, Citicorp has for decades been run by a series of doofuses. It should have been shut down in the early 1990s when it was already technically insolvent.
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