Letters to Tom 6

-----Original Message-----
From: Thomas
To: Patrick
Sent: Tue, 28 Oct 2008 3:19 pm
Subject: impatient White House

Pat, here a headline from recent article that is kind of shocking:

"AP - An impatient White House served notice Tuesday on banks and other
financial companies receiving billions of dollars in federal help to quit hoarding the money and start making more loans."

What the hell is that all about? Telling banks to make loans? Americans are bankrupt, are they not? They, republican/neo-cons, already ran the middle and lower class to the hilt with sub-prime, so who can actually afford credit right now? Wouldn't the banks loan it if they saw any chance of getting some interest on it, plus their money back? I also read that there's trouble on the horizon because of credit card debt. How is that gonna play out in the coming months?

t


Hi Tom,

Yes this is the cry from the White House and their cronies. As it happens, the big bad bail out of $700 billion was originally to buy worthless derivative paper based on just about everything. Then the UK had this bright idea of just parking the money in the bank's coffers to shore up their balance sheets (of course by buying some kind of newly created "preferred shares" in the US). The idea was if banks have healthy balance sheets they would be willing to lend again right?

Thing is, the banks don't have healthy balance sheets. They are looking at a really tough economy and as you reference in the second part of your email, increasing delinquencies in their consumer credit divisions. These delinquencies are already approaching 7% or more at some institutions. This is astronomical when you consider the costs and need for extra reserves to cover these losses on top of recently delinquent home equity loans (the borrowed cash that gave Bush his debt financed "growth" for the past 5 years).

Yes the banks and credit card companies like Amex and Cap One are looking at shrinking margins on their cards, increasing delinquencies and an almost evaporated credit market where they normally sell the credit card "receivables" as debt to the credit markets (mainly purchased by money market funds, an area I think should disappear as I believe money market funds have fueled the extraordinary expansion of short term debt from the consumer side of the equation over the past 20, yes 20 years, as I bitched about this with my professors back in 1990 at UM when consumer debt was approaching $800 billion, a small number in hindsight).

Anyway, with the banks bleeding money from write downs on their bad "investments" over the past few years and vastly expanded "assets" of garbage loans to consumers who are all tapped out and loosing their jobs, once they got their hands on the Fed money they just want to sit on it or start scheming up ways to gobble up their competition and gain deposits on the cheap. Well, wouldn't you? With bank shares down 70% or more why not take advantage of that and just buy your way out of your troubles using "cheap" government handouts?

But the government in all its brilliant ideas just doesn’t understand all this. They look at some economic model and say "Hey, if the banks have capital they will want to lend it and expand their assets and make more money right?" Well Tom, you are right this time. Hell no! They have no interest in lending to a tapped out consumer who may loose their job and there are few businesses with enough cash to lend to (remember, in tough times banks only lend to those who don't need it).

Patrick