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Monday, February 23, 2009


credit contracts as government dissembles

tim duy notes the continuing collapse of consumer credit in the face of all efforts to halt it.

American Express Co., the largest U.S. credit-card company by purchases, is paying some cardholders $300 each to close accounts so the lender can reduce the risk of defaults as the recession deepens. ...

“What AmEx is trying to do is move to the front of the line in terms of getting paid back” by customers who owe debts to multiple lenders, said Michael Taiano, an analyst at Sandler O’Neill & Partners with a “hold” rating on the company. “They clearly grew loans faster than their competitors in the years leading up to this financial crisis.”

American Express was a recipient of TARP funding, albeit a "nominal" $3.39 billion. What makes this interesting is that not only is American Express not expanding lending - the selling point of the original TARP proposal - they are using the funds (money is fungible) to explicitly contract lending. Such a vivid illustration of the industry's challenges.

but the really critical commentary illustrates the massive change in conditions that is now evident in the economy.

And those challenges are only building. As the US government is goading investors with a line in the sand, consumer defaults are swelling:

Consumers are falling behind on credit-card payments as U.S. unemployment reached 7.6 percent last month, the highest rate since 1992.

This is just consumer debt; commerical debt pressures, including real estate, are building as well. With the situation rapidly deteriorating, the anticipated stress tests look like a smoke screen to buy time in yet another emphemeral effort to restore the elusive confidence that policymakers hope will magically restore the system.

Whatever news comes out of Washington regarding the plan of the day for the banking system, I hope one thing is soon made clear to the public - fixing the financial system is not the same thing as expanding lending. We are way past that point; you can't fix the system with more bad loans. If Treasury Secretary Geithner tries to sell his plans as the solution that will revive credit growth, I suspect he will further test the already strained credibility of the government. A more honest approach: We are simply trying to prevent the financial system from outright collapse.

indeed the government looks increasingly ineffectual before the scale of the disaster underway. bank stress tests are, as yves smith says again, more information dissemination than information gathering -- the government along with everyone else well knows these banks are as fucked as the day is long. the only point of conducting conspicuous but obviously sham tests would seem to be to set the stage for some remotely credible propaganda. the ever-less credible variety is flooding out of treasury on a daily basis now -- here's today's dose -- as it becomes ever more apparent that the government is just exactly the deer in the headlights that michael pettis describes.

Not only am I pessimistic, then, about Chinese policymakers’ willingness to confront reality, but my trip to Washington also left me very worried about US policymakers. ... my great hope has been that the new US administration surges forward and begins to design not just a short term solution that addresses the current collapse ... but also a longer term plan about what the new institutional framework will look like. But I don’t think this is happening.

Many people I spoke to last week were really bewildered by China’s role, and although many of them were extremely sophisticated in their understanding, they gave me the impression that policymakers are going through an almost existential crisis and have lost all confidence. The world needs US leadership more than ever, and the US is in a very strong position to provide it ... [but] This seems to be something that not many people in Washington believe. The lack of confidence is so deep that several times I heard people refer knowingly to the Chinese fiscal stimulus (yes, that vague, risky, and hard-to-understand stimulus package) as the “gold standard” of economic stimulus packages. Gold standard? Really? The only way this can be true is if every other stimulus package in the world is total garbage. Perhaps it is.

with government paralyzed and credit outfits on to very desperate measures, it seems ever more certain that the financial system will spiral lower and with it the economy.

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