Why Banks Have Become Schizophrenic
Its an understatement to say these are difficult times for banks. Between the mortgage collapse, the Treasury recapitalization, and the recession, they are trying to do business -- and that that involves some risk. But doing so without losing too much money involves doing less business.
They have become utterly schizophrenic. Whether its the TARP or the credit crisis or deleveraging or something else entirely, I cannot tell you. But damn, these guys have gotten weird.
Back in August, we noted that numerous banks and brokers were sending nastygrams to their HELOC clients telling them "Too Late!" Unused portions of equity lines were being withdrawn.
Our own Citibank HELOC, which was about half unused, was withdrawn 2 months ago. Yesterday, we received a letter offering us a new HELOC from Citi -- for the same amount that was withdrawn in August.
Our Visa via JPM/Chase went through the same process. A short while ago, I had a month of extensive business travel expenses. Before we even got the bill (which was paid off in full) came a sort-of-odd, borderline rude letter about our (high) credit use. It was "Thanks for the business, but please use credit responsibly, ya deadbeat."
It was a strange letter. Any review of the charges could see it wasn't frivolous, but were all business T&E. My solution was to switch to an Amex card, and not use the Visa for business expenses. That was September, and last week, we got a JPM letter -- We want your business! We are raising our credit limit on the Visa.
WTF?
I understand the fear that firms have when they are lending these days. As the NYTimes writes this morning (Consumers Feel the Next Crisis: Credit Cards), another credit crisis is on the horizon. But you guys better get a more coordinated message. You are confusing and self contradictory -- and its easy to see how you could alienate some, less understanding clients.
NY Times Ubiq-cerpt:™
"First came the mortgage crisis. Now comes the credit card crisis.
After years of flooding Americans with credit card offers and sky-high credit lines, lenders are sharply curtailing both, just as an eroding economy squeezes consumers.
The pullback is affecting even creditworthy consumers and threatens an already beleaguered banking industry with another wave of heavy losses after an era in which it reaped near record gains from the business of easy credit that it helped create.
Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001."
The mortgage collapse has changed my sense of what is a lot of money. $21 billion? That's chump change...
>>
graphic courtesy of NYT
>
Previously:
Morgan Stanley HELOCs: Don't Delay, Act Now! (August 06, 2008)
http://bigpicture.typepad.com/comments/2008/08/morgan-stanley.html
Source:
Consumers Feel the Next Crisis: Credit Cards
ERIC DASH
NYT, October 28, 2008
http://www.nytimes.com/2008/10/29/business/29credit.html
Wednesday, October 29, 2008 | 07:20 AM | Permalink
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The credit card was one of the first worst ideas foisted on people and created the slippery slope that ended with derivatives, ARMs etc. and the result is what we have today - global economic chaos.
Posted by: tom | Oct 29, 2008 7:27:14 AM
Personally, I think AMEX is the way to go, their Customer Service, for me, has always been top-notch and very pleasant to deal with. Visa's, even with their AMEX-imitation 'Signature' Card, Customer Service, through any 'bank' that I've experienced, bites.
http://www.thefreedictionary.com/notwithstanding
Posted by: Mark E Hoffer | Oct 29, 2008 7:46:28 AM
I have decided that what we need is the final program from the Treasury to halt the economic decline. Let's call it Bruce in Tennessee's Market Share Buy Back Program.
Instead of buying back shares like many established companies do from time to time, this time Hank gives money to a company for share buy backs to increase investor confidence in said company.
Company ABC announces to the world that a stock buy back program has been initiated. HOWEVER, this will work like a stop. ABC announces that we will only use the buy back plan to buy when the price falls to, say, 16 bucks. Establishes a floor, investors know the treasury has ABC's back, and we all go home happy and fat.
Probably would only cost a googleplex of money, therefore should make Hank happy.
Now back to our regularly scheduled depressing economic news..
Posted by: Bruce in Tennessee | Oct 29, 2008 7:50:18 AM
AmEx - the provider of those 2 horrible commercials
at airport check in, not AmEx goldcard, call for a body cavity search
at restaurant with spiderman card and the Germans laugh
more business side - didn't they cut 50% credit lines about a month ago with a dear Joe letter?
How about US Bank - a heartland bank
I asked Mayor Dailey for a Chicago region powerhouse for my interest payments to support; and the heartland developement
ps - PNC bad move with my National
Posted by: Greg0658 | Oct 29, 2008 7:55:05 AM
A month ago the feds weren't guaranteeing anything. Now that they have new play money, they can smile again!
Posted by: DANM | Oct 29, 2008 8:06:30 AM
There was a hilarious thread in Ferrari Chat under investments where people were railing on Amex cutting their Centurian(Black Card) lines in half or worse. A good read!
Posted by: Larry | Oct 29, 2008 8:08:59 AM
It's all in the eye of the beholder, you didn't think the charges were frivolous but maybe anything above a Motel 6 was red flagged.
Posted by: DANM | Oct 29, 2008 8:11:28 AM
Banks should give you tons of credit if you can pay it back and they can make money on you. It's your own responsibility to make sure you don't use more than you can afford.
One who is good with their debt will not use more than they can afford. That's why they have a good credit rating.
Posted by: John Borchers | Oct 29, 2008 8:13:50 AM
I got a Chase Continental card last year because they waived the annual fee and gave me 20,000 free miles. When it renews next month, I'm going to ask them to waive it again or close the account. It will be interesting to see what happens.
Posted by: cynicalgirl | Oct 29, 2008 8:20:02 AM
We are bailing out the banks so that the same people who drove us into this mess can now drive us out. I think you are seeing that in person.
I don't think it is a wise course to follow. I also think reality trumps government in the end.
Posted by: wally | Oct 29, 2008 8:22:35 AM
I concur on the AMEX having good customer service. It has been a real pleasure to use this card for business.
I have my own schizo-story. Citibank cancelled my card with a letter explaining how I was not using it it so they were "sorry it was not meeting my needs." Then a week later I get a letter asking me to open a checking account, with "special terms" because I am a card member in good standing!
Posted by: Alex | Oct 29, 2008 8:23:26 AM
I recently got offered a Discover Card. No interest on any purchases for 10 months. I signed up. $15K credit limit. I got a call from them a few days later saying, "we see you are self-employed, would you like a business card, too". No interest for 12 months on all purchases. I said that sounded great and signed up for that as well. I've got the money in a CD making 4%.
I wouldn't think handing out business cards to people who are "self employed" is a great move. But I guess my high FICO is enough.
Posted by: 12th Percentile | Oct 29, 2008 8:29:47 AM
Hmmm cutting the rate below 0 again XA XA XA only our domestic IDIOTS can step in the same pile of shit not once but twice. This country is done!!!
Posted by: sergtat | Oct 29, 2008 8:33:19 AM
Bruce in Tenn: don't make the sams mistake the government is making:
the decline of the economy and the decline of the stock market are two different things...
Posted by: Kid Dynamite | Oct 29, 2008 8:37:40 AM
My local community bank just sent me a letter offering me a $100,000.00 HELOC. Then, they made a personal follow-up call, which I was not home to take, otherwise I think I might have laughed at the woman. We are debt-free, thank you very much, and plan to stay that way!
Posted by: nearpass | Oct 29, 2008 8:38:33 AM
Arbitrage anyone...LOL! The vultures are circling about now. Let's see, I can borrow thru a facility at less than 3%, and buy into 18% which ain't a bad return on an arbitrage play especially if I lever up with taxpyer money...oh never mind.
Remember, the storyline goes that we are lending this money out...wink...wink, but Hell I ain't turning down the arb when I would have to loan it to a broke ass Joe Six Pack when I can kick ass playing the arb and saving my own ass with the IMF backstopping me. Shitfire, life is good.
Posted by: SPECTRE of Deflation | Oct 29, 2008 8:39:44 AM
Barry, I can't believe my eyes-do you really have a home equity loan? And, you're giving financial advise. I'm reminded of what Warren Buffet said about Wall Street being the place people drive Rolls Royce to to get advice from people that take the subway to work.
Posted by: russell Fuhrman | Oct 29, 2008 8:40:54 AM
way to go 12th
when you reap that reward, invest in America please. cause thats where this supply sider to your benny lives.
no problem with capitalism that recycles properly
Posted by: Greg0658 | Oct 29, 2008 8:44:08 AM
It's all contained, I swear:
click here:
http://bigpicture.typepad.com/comments/its-all-contained-i-swear.html
Posted by: SPECTRE of Deflation | Oct 29, 2008 8:47:17 AM
@Kid Dynamite:
Agreed. My sarcastic post was more or less intended to show that it appears to me the programs seem to be targeted to maintaining equity prices rather than the economy. I've posted before about my ideas on the wads of money being spent without cutting other non-essential programs, how real wages have been stagnant for years, etc.
But on a more serious note, stock buy back programs could be radically different in normal times. Instead of announcing a buy back and then buying whatever the price, companies could, if they do indeed have extra cash and no programs to spend them on, buy back at a floor, rather than the prevailing price. Mish has posted and been irked about GE's buyback earlier and now that they are in trouble, how the money could have been better spent. If GE had established a floor for the buy back, they would only have bought when the stock was a "bargain"...
Like Mish, not an economist. Undergraduate studies were in EE, so not all my thoughts make a circuit.
Posted by: Bruce in Tennessee | Oct 29, 2008 8:48:12 AM
Credit Card ABS is the next to go. These structured securtiries are kept in money market and enahnced cash funds around the world. As begin to get downgraded their will be more cash funds recognizing losses or trading further below par, when this happens cash funds need to increase liquidity to stop from selling impaired assets, hence there are less buyers in the market and liquidity will continue to be awful. This is one of the reason the govt ahs the CP program, we will see if it works.
darthBETA.typepad.com
Posted by: darthBETA | Oct 29, 2008 9:00:51 AM
And some still feel stocks are not cheap here...
http://www.minyanville.com/articles/dow-Credit-djia-equities-GNMA-spx/index/a/19711
Talk is Cheap, Stocks Aren't..
I am not a big fan of Minyanville..Todd Harrison needs an editor, but the world economy is indeed schizophrenic, and still very risky for an investor like me.
Schizophrenia: Charecterized by abnormalities in the perception of reality...
Posted by: Bruce in Tennessee | Oct 29, 2008 9:27:38 AM
Never had a HELOC. Didn't like the looks of them and didn't need it.
The secret of credit cards is not to use 'em :) I have cut back to two majors and seldom get above 10% of the limit, so they keep raising the limit. I could now buy a mid-size American car on each, which is pretty crazy. But, it's nice to have that in an emergency like Katrina.
I don't know if being prudent was in my interest though. Sounds like Paulson is going to buy all those bad accounts from the profligate issuers. I suppose next we'll be buying deliquent Sprint accounts.
Posted by: Mike in NOLa | Oct 29, 2008 9:38:42 AM
I opened a small 20k HELOC in June to do maintenance and improvements with a bank where I have accounts. I have near perfect credit. The housing market where i live is down just a small bit, but homes over $1M are still are selling here.
Didn't even get to touch the line of credit before they suspended. Consumer Reports says that this does have an impact on credit scores because though you are locked out of using the $20K it looks no different than if you were maxed out.
I confess its with E*Trade Bank and they are a poster child of the mortgage mess but what irks me now is they want BailOut money. Which they'll not lend out but just sit on to make their Bal.Sheet look good.
-They are rats
Posted by: raycharles_man | Oct 29, 2008 10:13:54 AM
Why deal with evil banks at all? My credit union HELOC is just fine, thanks, and there's absolutely never been a problem or withdrawn offer.
Citi and JP Morgan are simply evil, evil banks.
Posted by: donna | Oct 29, 2008 11:03:03 AM
