Today's Goldman Sachs Global Investment Research paper on U.S. banks is five kinds of fascinating-spelling out as it does that banks are currently cash-rich, yet still fairly lending-averse. (Consumer loans were, however, up slightly in December, which is a yearly bump.) While sitting on $1.2 trillion in cash-$1.2 trillion is also the total value of China's exports in 2009, by the way!-GS notes that, in the fourth quarter, "Loans were down slightly after 3Q's 4% decline." How are they filling this big kiddie pool up with cash? A good chunk of it is your card use fees, various "late" and service fees, and, natch, that old standby, credit card interest. In case you speak bank, then you can understand this, and can translate in the comments: "Credit card early delinquencies have turned, and consumer is 40% of provisions for large banks. We think the next product to turn in 2010 will be commercial (C&I) with improving corporate defaults."
Monday, January 11, 2010
11
I wish banks were loaning money. That being said, if I had lent money to someone or many people (even friends) and they screwed up, for whatever reason, I would wait until I FELT they were ready (in every way important to me) to loan them money again. I'm sure Goldman Sachs, etc.'s share holders feel the same.
At least I know my money is safe - please, take more.
If I may, for the newcomer to global finance this translates loosely as:
"Today's Goldman Sachs blah blah banks is five kinds of fascinating-spelling out blah blah are currently blah, yet still fairly blah. Blah, however, up blah in December, which is a blah.) While sitting on $1.2 blah in cash-$1.2 blah is also the blah China's blah in 2009, by the way!-GS notes blah, "Blah blah blah blah blah blah blah blah." How are they filling this big kiddie pool up with cash? A good chunk of it is blah, blah and blah, and, natch, that old standby, blah. Credit card blah have turned, and blah is 40 blah for blah. We think the next blah to blah in 2010 will be blah with improving what in the fuck-all is this gibberish?" Blah.
Consumer credit cards represent a large liability for banks, given that the default rate is the same as the unemployment rate (10%). So if you have $200 billion in credit card debt that you have loaned out to Americans, that is $20 BILLION in losses every year. Any future liability is estimated and a certain amount of cash is reserved on the bank's balance sheet.
The note points out that credit card defaults have started to come down, so that liability will decrease over time as the economy recovers and more people pay off their credit card bills. There is a trillion-plus in reserve, mainly because of all the anticipated losses on consumer credit card. However, with those defaults expected to subside, less of those reserves will be necessary and more cash will be available for operating expenses, dividends to shareholders or other.
Then the note predicts that corporate defaults will also start to subside, with the same effect on reserves, freeing up cash for other expenses.
Here, let me try:
The number of people who fall behind on their payments almost immediately after racking up credit card debt is dropping, probably because people are scared shitless of using their credit cards, or because those kinds of deadbeats have been flushed from the credit card pool by the depression.
"Since 40% of the money banks have to set aside to cover losses is due to such dwindling deadbeat consumers, banks will be able to set aside less money, thereby boosting their profits.
"Maybe finally commercial and industrial loand will stop defaulting sometime soon, too, and we can get back to generating some serious fees from loans we can securitize, then turn around and dump on China or whoever again."
loans
"We're hoping for a tax cut so people have more money to spend on higher interest rates."
If the banks think commercial/industrial loans are going to stop defaulting anytime sooner, they're either kidding themselves or lying to you.
Tens of billions of dollars in CRE loans are coming up for renegotiation, refinancing or other landmarks within the next three years. But the banks, as previously noted, aren't lending. Simple Newtonian physics says the only other thing that can happen is default.
The banks know it, too. They know they're carrying a ton of CRE loans on their books at market value that don't have a hope in hell of being repaid. At least they got the government to lift the cap on what Fannie and Freddie can pay to buy worthless residential mortgages, so the banks can offload those and use the money to help cover their CRE losses, but I don't think even that will be enough to help.
anytime SOON, not "sooner."
Preview is my friend.
The fun will start once the banks begin lending the money since a huge portion of it is new. The fed increased the monetary base by more than a trillion dollars and that is what represents the lions share of what the banks are sitting on. That trillion plus increase the monetary base has the theoretical potential to produce a 10 trillion plus increase in M2 once it gets into the system.
Most economists seem to be confident that the fed can avert an explosion in M2 and the attending massive inflation but the source of their confidence is a mystery to me. The fed has more than doubled the monetary base in around 18 months. There has never been anything like such in an increase in so short a time period. There is no way they can sell the assets they have for anything close to one trillion and that assumes they act promptly. I'd guess they wont do shit until inflation starts showing up in the price indices and by that time they'd need suck out considerably more than a trillion in order to bring inflation under control.
Scum, I think they believe that precisely BECAUSE there are so many assets being carried on so many entities' books right now at values much greater than fair market. Some of the largest banks, likely including Citi, BofA and WF, would probably be insolvent if all their assets were marked at fair-market value, a step the feds so far have tenderly refused to make them take.
But the markdown has to happen at some point. That nonexistent "wealth" has to be SEEN to disappear. (As it were.) Then and only then will we have hit bottom, and until we do, inflation, though always possible, is less likely than pure money-supply numbers would suggest.
At least, that's my hypothesis, but I am by no means an expert.