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Two Trillion Dollar Reduction In Credit Card Lines Coming Up, by Mish Shedlock
Credit is drying up everywhere. Banks are now concerned (finally), about rising
credit card debt. They have every reason to be. The bankruptcy reform act of
2005, which encouraged such reckless lending is now blowing up in lenders'
faces.
Banks and credit card companies wrote that bill. They got everything they wanted.
It goes to show you two things:
1.) Be careful of what you ask, you might get it.
2.) Greed kills.
Furthermore, I expect many of the debt slave provisions of the bill to be undone
after Obama is elected. That will increase defaults. Even if an unwinding of
that "reform" does not happen, the writing is on the wall for lenders
for the simple reason "You cannot get blood out of a turnip".
Regardless of what the law says, unemployed people are not going to be paying
credit card bills. A second point is that someone unemployed, with no income,
will meet the strict guidelines for wiping away all their debt.
I talked about this in Bankruptcy
Reform Act Finally Blows Sky High.
Banks have finally beginning to get the bleak message that credit card defaults
are going to soar. In response, Banks
are Trimming Limits for Many on Credit Cards.
The easy money that led Americans to depend on credit cards to pay their
bills is starting to dry up. After fostering the explosive growth of consumer
debt in recent years, financial companies are reducing the credit limits
on cards held by millions of Americans, often without warning.
Washington Mutual (WM) cut back the total credit lines available to its cardholders
by nearly 10 percent in the first quarter of the year, according to an analysis
of bank regulatory data. HSBC Holdings, Target (TGT) and Wells Fargo (WFC)
each trimmed their credit card lines by about 3 percent.
Among those four lenders, that amounts to a reduction of about $15 billion
in three months. Over all, the amount of available credit for the industry
appears to be about flat, with the three biggest issuers - Bank of America
(BAC), JPMorgan Chase (JPM) and Citigroup (C) - slightly increasing their
overall credit lines. But even they are trying to rein in risky individual
accounts.
“This downturn is the perfect storm where the consumer is getting squeezed
from all levels,” said Michael Taiano, a credit card industry analyst at
Sandler O’Neill. He projects that credit card loss rates for lenders, now
around 5.7 percent, could go as high as 10 percent in next 18 months. That would
be higher than the peak levels reached after the 2001 technology bust.
Meredith Whitney, an Oppenheimer banking analyst, said the impact of the
recent regulatory proposals on lender profits could be so severe that she
expected the industry to pull back $2 trillion in outstanding credit lines
by 2010. That would be a 45 percent reduction in credit currently available
to consumers. Risky borrowers would be squeezed the most.
Direct Bottom Line Hit
Every default is a direct hit to the bottom line. And 10% chargeoffs would
not be surprising in the least.
Furthermore, a reduction in credit lines by $2 trillion is not peanuts. Credit
is contracting folks. Yes, this is deflation regardless of what energy and
food prices are doing.
FDIC Bank Examiner Audits
From a source I consider reliable, I received this email the other day: A good
friend of mine has a friend who is a Bank Examiner(BE) for the FDIC. The BE
says the message he takes into every exam is "You must raise your loan
loss reserves". This is delivered directly to the Chairman, President
and CFO of every bank visit, every time. No Exceptions!
I asked for clarification and was told no exceptions, literally means no exceptions.
Note that an increase in loan loss provisions means capital will need to be
raised or fewer loans will be issued, or both.
Zombification of Banks Accelerates
As I said in Regional
Banks Spiral Towards Zero, I suspected Bank United (BKUNA) was raising
money at $1.90 because it was told to. BKUNA was down another 11.58% on Friday,
to $1.68. I do not see how it can survive even if it raises
the $400 million it is seeking.
Much of the credit on the books of banks is worthless. It will be written off.
There is nothing inflationary about this at all. The zombification of banks
that I mentioned in Night
of the Living Fed is now picking up steam. Consumers are being increasingly
zombified as well. - Mike "Mish" Shedlock
