Are Financial Conglomerates in a Position to Lend?

Are financial conglomerates in a position to increase lending? Do they still have too many "toxic assets" on the books plus a lot of their own debt on the books which in turn is causing them to not be able to provide any no loans? Are we (households) in a position to incur more debt? If the trillions of dollars that Federal Reserve and Treasury pumped into the financial system to keep interest rates low is not jump starting new lending, did we just waste trillions of dollars? These are the questions that came to mind after reading this Bloomberg article and the Federal Reserve Bank's April 2009 Senior Loan Officer Opinion Survey.

The Fed and Treasury have pumped an estimated $12.8 trillion into the financial system to increase liquidity. In part, the theory was that flushing the market with cash would 1) keep interest rates low and 2) provide an avenue or market for financial conglomerates to securitize any new loans. This strategy worked in keeping interest rates low, at least in the short term, and provided a "thaw" in the credit markets (remember credit markets were frozen). Several indicators, such as the Libor-OIS spread which is assumed to a be a measure of the health of banks because it reflects what banks believe is the risk of default associated with lending to other banks, have shown improvement recently.

Libor-OIS, which indicates banks’ reluctance to lend, fell to 0.45 percentage point today, the lowest level since February 2008. Still, futures indicate the measure is about two years away from shrinking to 0.25 percentage point. That’s the level former Fed Chairman Alan Greenspan has said would be considered “normal.”

So, what is the problem? How about this:

“A lot of banks are just trying to hold on to what they have and not really make loans.”

If banks are not willing to lend to one another does that mean they are even less likely to lend to businesses or us. According to April 2009 Senior Loan Officer Opinion Survey it doesn't appear that banks are willing to loosen those purse strings despite receiving trillions of dollars from Fed and Treasury:

Commercial and industrial lending. On net, about 40 percent of domestic respondents, compared with around 65 percent in the January survey, reported having tightened their credit standards on commercial and industrial (C&I) loans to firms of all sizes over the previous three months. On balance, domestic banks have reported tightening their credit standards on C&I loans to large and middle-market firms for eight consecutive surveys and to small firms for ten consecutive surveys.

Commercial real estate lending. About 65 percent of domestic banks, on net, reported tightening their lending standards on commercial real estate (CRE) loans over the previous three months, compared with about 80 percent in the January survey. On balance, domestic banks have been tightening credit standards on CRE loans for 14 consecutive surveys, and the April survey marks the first time since October 2007 that the net proportion of banks reporting such tightening fell below 70 percent.

Residential real estate lending. In the April survey, somewhat larger fractions of domestic respondents than in the January survey reported having tightened their lending standards on prime and nontraditional residential mortgages. About 50 percent of domestic respondents indicated that they had tightened their lending standards on prime mortgages over the previous three months, and about 65 percent of the 25 banks that originated nontraditional residential mortgage loans over the survey period reported having tightened their lending standards on such loans.

Consumer lending. Large percentages of domestic banks again reported a tightening of standards and terms on both credit card loans and other consumer loans over the previous three months. Nearly 60 percent of respondents indicated that they had tightened lending standards on credit card loans, about the same proportion as in the January survey. About 50 percent of respondents, down from 60 percent in the January survey, reported tightening standards on other consumer loans. About 50 percent of respondents reported having reduced the extent to which credit card accounts were granted to customers who did not meet their bank's credit-scoring thresholds, and a similar fraction reported pulling back from granting other kinds of consumer loans to such customers.

Despite the credit "thaw" could it be that financial conglomerates cannot produce more loans because their balance sheets - loan portfolios and debt obligations - are still too risky.

There is another side to this equation: the demand side for credit/debt. According to the April 2009 Senior Loan Officer Opinion Survey, there is some demand for new residential and consumer loans is there:

Residential real estate lendingAbout 35 percent of domestic respondents saw stronger demand, on net, for prime residential mortgage loans over the previous three months, a substantial change from the roughly 10 percent that reported weaker demand in the January survey. About 10 percent of respondents reported having experienced weaker demand for nontraditional mortgage loans over the previous three months-a substantially lower proportion than in the January survey.

Consumer Lending.Regarding demand, about 20 percent of respondents, on net, indicated that they had experienced weaker demand for consumer loans of all types over the previous three months-substantially less that the percentage so reporting in the January survey.

It appears that financial conglomerates are tightening credit. Does this defeat the purpose of $12.8 trillion barrel dump that Fed and Treasury did for the financial sector? According to Alan Greespan (I am uncomfortable quoting him):

“There is still a very large unfunded capital requirement in the commercial banking system in the United States and that’s got to be funded,”

Wow, we still have the potential of having zombie banks. The Fed and Treasury have done nothing to address the potential insolvency of some of the financial conglomerates. If this lack of capital means that financial conglomerates will not lend to us or businesses then they will continue to be a drag on our economy.

Has the Fed and Treasury wasted $12.8 trillion? It maybe too early to tell but things don't look good: 1) home prices continue to drop; 2) mortgage foreclosure rates are not improving; 2) inventory (on the market) for existing homes is still too high; and 2) unemployment is not improving and possibly getting worse.

It is time to break-up the zombie financial conglomerates.



tightening credit

What does that mean exactly? Seriously we had liar loans, absurd predatory loans, even mortgages to dead people, people with stolen identities obtained loans....

So, does tightening credit mean that middle class family x who got themselves into a bad mortgage but can afford a reasonable one cannot get a loan or does it mean that the dead guy trying to buy a house cannot get a loan with no money down?

I believe it is the middle class family.

We were told that $12.8 trillion would encourage lending but it doesn't appear it has done that. So, that middle class family who is struggling and wants to refinance may not be able to do so.

BoA - 64k loans

I read BoA, through the acquisition of Countrywide, about 10% of their new portfolio, refinanced 64k of the loans and there is high demand. Now the new terms of those loans or the percentage left to go into foreclosure, etc. the article did not say.

So, I think we need to find out the current statistics...

I mean when people are broke, out of a job and not getting one, or never had the income in the first place to support the mortgage payments or the home price...well, ya know and I believe a lot of America is sliding into poverty right now. So maybe we can do more digging and find out some real statistics and specifics.

Many of the financial conglomerates are underestimating

loan losses. Calculated Risk has an article about how JP Morgan may have underestimated loan losses in WaMu acquisition.

There was talk that Wells Fargo maybe underestimating loan losses and setting aside loan loss reserves.

Towards a more realistic economic model

I'd rather phrase it like this: all the TARP money, bailout money (both banks and the insurance industry), and a large portion of that "simulus" fund, appears to be exponentially increasing the offshoring of American jobs.

I believe Corporate America has reached critical mass in this regard, with 7% or less of the federal tax base derived from corporate (non-)payment of taxes, and the bulk coming from "working" Americans, which is dramatically shrinking, thanks to all that offshore, etc.

And since that shrinking fed tax revenue base will be used as an excuse to further reduce the New Deal programs which have slowed down the absolute collapse of the American pseudo-economy (that is, Unemployment Insurance, food stamps, etc.) it's beginning to appear more and more like Team Bush was unable to "privatize" social security (that is, actually corporatize it) so now they've sent in Team Obama to complete the job (sort of like when Bush didn't pass NAFTA, so Clinton comes in and passes NAFTA, GATT, China's entrance into the WTO, the National Telecommunications Act, the Financial Services Modernization Act and the Commodity Futures Modernization Act).

It means we need a Brawny Recovery ...

... recovery has to be led by wage growth, rather than by credit expansion, which implies a long, slow, sweaty process, if we ever elect a Congress with the cajones to pursue it.

Congress has no power to lead a wage growth recovery

And exactly how do you see Congress leading a wage growth recovery? Minimum wages don't work, maximum wages are outside of their bailiwick.

Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.

That's fiction, they do have the power, so does the Pres.

Firstly they could tie the Stimulus to U.S. citizens, U.S. workers and domestic production. They refused. Secondly, they could tackle some major problems in trade policy that promote labor arbitrage. Take for example China's currency manipulation. Thirdly, they could enact policies to stop the offshore outsourcing of any Federal and State contract. They could change the corporate tax code to give incentives hiring U.S. citizens. They can act or enable a private Venture capital system, which promotes domestic investment and again, the hiring of U.S. citizens for the resulting jobs. They can invest heavily in areas of innovation, but again, tying the R&D jobs to U.S. citizens.

They refuse to do any of this due to corporate lobbyists as well as other nations lobbying our government.

They can spend money on employing people.

Indeed, in a context where no prudent financial institution is eager to lend and all the reckless financial institutions are incapable of doing much lending, business investment, residential investment, and debt-financed consumption are all out as income generators. That leaves government spending and exports.

And unless Congress acts to take us off the suicidal Energy Dependency path that Reagan insisted we remain on, the current account is going to get hammered into deficits from oil price shock should a recovery get going overseas.

Without Congress, its not going to happen. And with the Congress we have now, its not going to happen. So if we want it to happen, we need a new Congress.

Naked Capitalism, Bloomberg

NC is also covering the Bloomberg article, but you are going into much more analysis.

Anyone else notice that Bloomberg as a MSM financial outlet seems to be doing a better job than most and won't necessarily just reword some corporate press release or even government press release? I don't understand why cable packages cough up CNBC and you can only get Bloomerg on the "full" package...anyone else notice this?

Blooberg rocks

Most of my trader pals utilize their services (which are REALLY good) and generally have a better respect for them than say CNBC. Most have Bloomberg on their televisions in the background more than CNBC (no one has Fox Business News). I just wish they were in HD. :P


seems like

One thing that CNBC does which I find despicable is they have these sandbaggin' non-debate "debates" on things like H-1B guest worker Visas. They are clearly biased, promoting whatever corporate lobbyist wants them to, not even hiding this fact, while pretending to be "moderators" and they allow the most absurd accusations and just complete falsehoods spewed as fact when it is completely inaccurate.

They are a joke.

Wait just a minute. You

Wait just a minute. You can't be serious. CNBC's word is gospel...GOSPEL! (Besides, Erin w/Squak on the Street & Melissa w/Fast Money...hey, they're too hot to be shills, right?)

But Bloomberg plays fast and loose, also

As far as MSM goes - but that's not saying much. Didn't Bloomberg file that FOIA against the Fed Reserve recently?

Now everybody knows that one can only file an FOIA lawsuit against a government agency, and the Fed is private!

I think that was legitimate

and I think they might have gone to the Treasury as well.

It also prompted Bernie Sanders and others in Congress to start focusing in on Fed transparency...

so, ya know, I think it was a legit move by Bloomberg.

Fitch (?) - 65% of refinanced will end up in default in 12 month

The Big Picture has an interesting blurb:

Fitch is forecastingthat between 65-75% of mortgage loans that are modified will redefault after 12 mo’s.

Who is Fitch and up to 3/4th of all refinancing deals? Yoozer.

Here is an interesting working paper

on loan modifications and redefault risk: Link

I think the problem is that mortgage system cannot afford to truly make the modifications affordable for people. This would require reduction of principal and that is just on the ones that are in danger of default. The people with home mortgages are underwater may require a more dramatic restructuring which again the mortgage system probably can't afford.

I say can't afford because it will expose the true level of insolvency of the financial conglomerates.

And yet, they can't afford the loans going bust either ...

... which explains why student college loan people are so eager to offer instant, over the phone, 3-month deferments. Then the loans are in the books as on deferment, and they charge the interest back to the loan, so the borrower is further in debt, but at least its not in the "non-performing loan" account.

Respectfully, but strongly, disagree

I fully believe that the most profit (albeit unethical and illegitimate) is only realized WHEN THE LOANS GO BUST - although the "front office" may not be in the know, and appears to be acting in a contradictory fashion.

With the individual takedowns of Lehman Bros., Bear Stearns,WaMu and others, yielding the optimum profit -- the takedown of the entire economy (regardless of how outlandish it sounds to rational people) yields the absolute optimum in profit to those who have gamed the economy via credit derivatives (CDOs, CBOs, CMOs, CFOs, CLOs, CDS, etc.).

I think that goes for a lot of things

And may well explain why the elites seem to be running this country into the ground- because it's short term profit positive.
Executive compensation is inversely proportional to morality and ethics.

Maximum jobs, not maximum profits.

the "mortgage system cannot

the "mortgage system cannot afford to truly make the modifications affordable for people." just totally nailed it, dude. That's why we haven't been able to evolve a simple no frills fixed mortgage. Also, it's why we haven't been able to share a market float on the debt side of the mortgage. What if the debt also floated with the market...nothing would be under water.

Oh, but that would be so European. As in

Denmark. Denmark's mortgage system, one of the oldest, practically eliminates the problem of "negative equity".