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.
Good explanation except the part of jp morgan
Is he serious? I don’t think the Citicorp credit card letters have gone out to all customers, for starters. Capital One seems upbeat in its outlook. So, maybe this is not as bad as Karl thinks. (Fingers crossed)
PING for later reading.
Isn’t that where the problem lies? We are told banks are siting on Billions of dollars cash, just not lending it.
So what happened to all those Billions?
And a lot that should have been foreclosed on, haven’t been. Simply living in them free, for now.
I called this week - we have a stellar rating and the rate is still going up - the operator blamed it on the govt...though couldnt cite anything specific. Fortunately, we pay off our balance each month in full.... but will be cancelling soon
This is magnitudes worse than anything else.
Got FRNs under the mattress?
I understand what the author of the article is stating about J.P. Morgan, I just think he doesn’t fully comprehend the banking industry.
Repurchasing agreements were a major source of liquidity for the markets (which he acknowledges) and the fact that it has been largely runoff has caused the M-multipliers to drop (which is why the Federal Reserve is printing so much money but it hasn’t yet led to inflation - the printing has yet to exceed the amount of money created through the debt markets and activities such as repurchase agreements).
When Lehman Brothers failed, counterparty risk became the prime concern of most investors and institutions. When trust fails, the repurchase market is going to fail even most cases when the collateral covers the full 100% of the “loan” because a receivership would still cause issues and most people, rationally, don’t want to deal with those problems. As a result of the credit market freeze, I currently utilize ZERO repurchase agreements, maintain cash in 30-day T-Bills only or FDIC insured bank accounts at regional banks with excessive tangible equity ratios, and we don’t even lend out our securities, as we did in the past, to short sellers because we want fully custody, paid for in cash, in a third-party custodian in the off-chance that another brokerage fails. This is a rational response for me and those who have an investment in my companies.
Ten years from now, history will show that J.P. Morgan Chase used this time, and very cheap government money, to put together a collection of businesses that will make it one of the most profitable firms in history. The analysis of the cash problem isn’t indicative of a problem in its cash flow, it merely represents the reality that the auction rate securities business, repurchase agreements, and a host of other commonly used financial instruments and securities, have yet to return to the level they were before the crisis (and it’s not certain that they ever will). JPM is still solvent. It’s a non-issue.
The only banks I liked better were Wells Fargo at any price below $15 per share and USB at the same valuation. In the interest of full discloure: We own a lot of these two banks and some JPM but it is a much, much smaller position.
Feel free to disagree with me. If you do, there’s nothing more American than shorting the stock or selling put options on it =) I’m happy to take people’s money.
If they had to liquidate today, you are absolutely correct, they would be bankrupt regardless of what the government says.
The paradox here is that by pretending, for the sake of the country, that they are solvent, in as little as 12-36 months, the profits generated every day that passes will be enough to plug the capital hole on the balance sheets, making up for the losses.
In other words, it’s like a teenager who has trashed his parent’s house. If the parents show up and lay down the law, there will be consequences. If, instead, they go spend the night at a hotel, show up the next morning like nothing happened and the house is put back together, the problem is solved (well ... the house problem is solved - you still won’t trust the teenager, or bank, because you know they’re prone to misbehaving).
Every day, more dollars are getting pored back into the balance sheets. It is merely a matter of time before the capital has been replaced and all is well with the world. Except for the dollar, which I maintain cannot stand the assault of $9+ trillion in deficits over the coming decade.
USB = US Bancorp
Not UBS = Union Bank of Switzerland, which is lucky it’s still functioning because it is a MESS. I’ve never seen such horrific capital losses.
Banks are getting back more than they can handle.
Now “holding on to” often means, the houses are vacant, but the lender has not transfered title. This defers associated costs, insurance, HOA dues, and taxes are still the responsibility of the debtor.
Thanks for catching that!
I personally think that five to ten years from now, cash is trash. The combination of $9,000,000,000,000 in projected deficits combined with the fact that the United States cannot maintain its reserve currency status with China and the European Union offering more attractive terms for many nations as we ruin our balance sheet is an assault the USD simply cannot take.
This isn’t a tragedy for individual investors. There are dozens of ways you can make obscene amounts of money off a declining dollar - from foreign real estate investments to holding stocks in other countries in the native currency with no hedging to issuing 30-year fixed-rate bonds (if you own a business that is large enough, which isn’t feasible for most people), to buying equity to multi-nationals such as KO, GE, JNJ, etc., which I mentioned earlier, a falling dollar can make you very, very rich if you are positioned to take advantage of it.
My philosophy is, and has been, there are always intelligent things to do. Whether you believe the dollar will increase, the dollar will decrease, or we’ll trade in the greenback for seashells, it doesn’t matter. You can structure your life and finances in a way that you are flexible, with resources to take advantage of whatever comes our way. It’s why capitalism works and why I love it.
If I were retired, I’d buy a Best Western or some other real estate holding in Canada, keep the money invested in Canadian currency in their banks (their debt as a percentage of GDP has drastically declined over the past 10 years), and then if and when the dollar fell, ship the money back to the states to live on as needed, enjoying extreme gains in real purchasing power. If the dollar appreciated, I could take more of my dollars and pour them into additional real estate holdings in Canada, using the power of the dollar as a “discount” on my acquisition price. Either way, I’d be protected.
Note: I’m not actually advocating someone do this, I’m merely pointing out that it is a practical application of my philosophy.
I have a friend who manages his family money. Very very wealth, multi jet family, yachts, in the financial papers. Anyways 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.
canned beans...lots of ‘em.
I would interpret this differently. This looks like the banks are desparate for cash NOW, rather than a moneymaking stream of cash flows (as they may not be in business to benefit from a long-term mortgage).....
If Bank A holds a property and gets multiple full-priced offers that are to be financed by Banks B or C, then it should not care about future income stream. At closing, Bank A would be paid in full. This is telling me that Bank A is not even confident that the buyer will be able to close. This is about taking cash today vs taking a promise of cash in 30 days or so.
I got my letter raising my rate from 5.99% to 29%. I couldn't close the account quickly enough. I seldom used the account and I have sterling credit.
The only question in my mind was, "What was all that consumer credit card legislation Congress passed?"
Don't bother asking me to open a new account when things are better, Citi. I no longer trust your judgment.
They did just announce a new stress test again today so that could very well be part of it too maybe they are worried they will not have adequate funds to cover? Though we all know what a joke that test was but maybe some who aren’t in on obamas payoff will get taken out otherwise.
That was the joke of it all fooling the masses they gave them plenty of time in that legislation so they could get their rates up the jokes on the people once again. The responsible are being made to pay for the irresponsible the legislators do not expect their meal tickets the banks who gave them so much campaign cash to foot the bill.
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.