More Evidence of Panic Among Lenders

HOW A CREDIT 'WORK-SLOWDOWN' HAS CREATED ITS OWN PROBLEMS AT GM

More evidence of how credit-card and auto-finance lenders are creating the conditions that they fear the most, more than a mild recession, piled in today, as GM revealed that its auto sales were falling like a stone under the weight of it's non-finance "finance arm", owned by Cerberus-R-Us, who cut off the flow of credit a wile back, including leases.

GMAC said on Monday [Oct 13th] it would only lend to consumers with a credit score of 700 or above. Combined with an earlier decision to curtail leasing, that could cut GM's U.S. market share by up to 2.5 percentage points in 2009, Amaturo said.

GMAC, 51 percent owned by Cerberus Capital Management which also owns Chrysler LLC, financed 43 percent of GM's vehicle sales in the second quarter

TIME TO CUT OFF CERBERUS?

The bottomline is that something has to be done to counteract the realization that banks and other lending institutions were swimming naked, so to speak....

Lenders have since "panicked", raising those figures to 1.51% and 5.44%. Provisions for losses exceeded write-downs by $42 billion in 1H08.

Yet, net interest margin for credit cards is now a full 1% higher than it was in 2006 (and growing, quite possibly). The adverse response of the banks is arguably "behavioral", not "economic".

Unsecured lending, via CP, doesn't make much sense, if there is not also a plan to deal with serious business problems, to the extent that they are not just cyclical or financial restructuring related.

The government has to get the flow of capital back to the weak part of the credit economy or else monetary policy isn't going to do the trick, as lenders just pocket all the "help" from plunging rates while doing the odd-thing of trying to write the highest quality vintage of loans right when they should be drawing down on their reserves.

The government can offer to re-insure x% of the residual on leases, if those taking part in the program agree to offer financing for auto-leases. This is risky, but worth it, especially if combined with incentives to swap to greener technology sooner, rather than later.

TO THE TOP OF THE CREDIT CURVE, AS FAST AS WE CAN!

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The government can reverse the manufacturers having become captive to their financing arm(s).

The government (TARP?) could try some policies that favorably target an "average credit quality", so that lenders do not all rush to the top of the credit curve, at once.

The bottomline is that something has to be done to counteract the realization that banks and other lending institutions were swimming naked, so to speak. At the end of 2006, for instance, the FDIC reported that banks had just 2.65% reserved for credit-card losses and 0.26% reserved for losses against all their loans. For the near-top of the cycle, those numbers are near to absurd, given the long-held worries about the increasing debt-load in the American economy. Yet, managements were allowed to get away with estimates so low.

Lender institutions have since "panicked", raising those figures to 1.51% and 5.44% (so shareholders don't flog them in the upcoming periods?). Yet, net interest margin for credit cards is now a full 1% higher than it was in 2006 (and growing, quite possibly). The adverse response of the banks is arguably "behavioral", not "economic".

At their 2Q08 measure of 74% (or 2.01%/1.51%), the nonperforming assets-to-provisions ratio looks considerably worse than it has done, around the time of other slowdowns. But that difference, 0.53%, translates into $43 billion dollars. We just threw $250 billion to the banks! As a group, they have already "caught up" and then some, to cover the current non-performing problems... That's before you consider something like relaxing capital requirements or the fact that equity is up, year to year, despite the fall in 2Q08.

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