Further Deterioration of U.S. Finance Companies Expected - S&P

It’s not a pretty picture. Of the 31 U.S. finance companies rated by Standard & Poor’s Ratings Services, four have applied to become bank holding companies and 16 have been downgraded over the past two months.

Deteriorating asset quality and increased funding costs weakened earnings, resulting in negative rating actions on several consumer finance companies during the third quarter. Given the economy’s current trajectory, we expect these trends to continue.

S&P warns the sector is likely to continue to struggle, but said that to the extent finance companies can take advantage of government actions aimed at stabilizing them, the outlook might improve.

American Express Co. (NYSE: AXP), CIT Group Inc. (NYSE: CIT) , CapitalSource Inc. (NYSE:CSE), and GMAC LLC (GMA) have all taken steps to become bank holding companies to gain access to cheaper funding and government debt guarantees.

Losses are expected to accelerate for commercial lenders, S & P said, especially in commercial real estate. In addition,

• Asset quality continues to weigh down finance companies involved in residential mortgage, credit cards and auto loans.
• Some business development companies may struggle to meet minimum net-worth covenants after taking large write-downs on their investment portfolios.
• Asset-backed securities and commercial paper markets remain virtually frozen, leaving businesses to rely on banks.

For details, see “U.S. Finance Companies Seek Shelter from the Storm in the Third Quarter.”

Comments

[tshk1221:]

You're very correct. The biggest black holes in US history punctured in the US financial systems created through the unprecedented credit defaults are devouring all the dollars now, drying up dollars that should otherwise be circulating in the market. My guess is that until all the black holes are filled up with gold-backed US dollars, prices of goods will decelerate further and further. We might soon see a gallon of gas drop to fifty cents. We never know. If the US government depletes all the gold-backed US dollars to fill up these black holes and cannot find alternative resources to fill in the black holes (worthless paper dollars cannot be used, as you know), that's when the real problems kick in.

2008 Dec 09 12:43 PM

[StonePony03:]

Gold backed? Dollars?

2008 Dec 30 11:15 AM