The Bad Cs of Credit

Before the era of Frankenstein Finance and the fanatical focus on fee-based income, lenders tried to hold themselves out as models of probity (for the skeptics out there, I did say "try."). Those responsible for making credit-granting decisions and looking after the interests of shareholders also demanded that borrowers meet certain standards before they would see even a dime of their employers' money. These criteria are known as the "5 Cs of Credit," which are the key elements a borrower should have to obtain credit: character (integrity), capacity (sufficient cash flow to service the obligation), capital (net worth), collateral (assets to secure the debt), and conditions (of the borrower and the overall economy).

In an interesting twist of fate, the firms that have traditionally decided who should get credit have been put in the position of needing extraordinary amounts of other people's money just to stay alive. Unfortunately, based on what we've seen so far, including reports like those that follow, it's doubtful whether most, if not all, of today's troubled financial institutions would even qualify for a loan based on traditional measures of suitability -- like "character," for example -- if their friends in high places weren't so intimately involved in the process.

"Wall Street’s Sham Profits" (Michael Corkery, Wall Street Journal Deal Journal blog)

My colleague Evan Newmark says that third-quarter economic growth is illusory–an economic confection created by heavily subsidized auto and home sales.

By that reasoning, what does this sham Main Street recovery say about Wall Street’s apparent rebirth? It isn’t hard to find a sham there, too.

While it is hard to unpack the nature of every profitable dollar at Goldman Sachs Group (GS) and J.P. Morgan Chase (JPM), for instance, one can make a compelling case that–like cars-for-clunkers–our Wall Street institutions are in one way or the other, also on the government dole.

"Do Banks Have Something to Hide?" (Colin Barr, Fortune)

Even experts have a hard time getting a handle on how bad losses might get as the commercial real estate market implodes.

The banks have taken some lumps since the economy went bad. But some believe their biggest headaches are yet to come.

The pace at which U.S. commercial banks are adding to their loan loss reserves has slowed this year, while loans continue to go bad at a brisk pace.

"You Cheat, I Cheat, as Wall Street Acts as Model" (Bloomberg News commentary by columnist Susan Antila)

Trickle down really does work. Consider these inspired words, from an online reader of USA Today, reacting last week to news that Americans were lying, cheating and law-breaking to get their hands on an $8,000 tax credit for first-time homebuyers:

“The system is scamming you, so why not scam back a little,” wrote the reader, using the name “None in 08.” “You’ve seen what crooks in Washington and on Wall Street can get away with.” So “it’s time to get yours.”

Amen, brother. What are role models for, anyway?

Comments

[Gary A:]

I don't think we should scam back. But if the housing bubble was based upon a scam, then we have the right to extricate ourselves from the scam, through walking away from loans that were toxic.

If the credit card security market freezes,and the banks can't pass their cheap lending on to me to lower my financial obligation, it isn't my problem. I will walk away from credit card debt in a heartbeat. I am at the age where I just don't care. I lost 10k in the stock market because of the ponzi housing scam. If I walk away from credit card debt that is a bit higher than that, I fix my balance sheet at home, and I teach the banks never to mess with me again. Capitche?

And if we all get our balance sheets in order and spend a little, the recession may not be so bad. I even think the government gives tacit approval to this line of reasoning: hubpages.com/hub/It-Is...

Nov 01 03:14 PM

[einstein p ...:]

Goldman Sachs used TARP to put wipe out their competition, which was obviously beneficial based on the proposed bonus payments for 2009. Now it appears that GS peddled more than 40 billion dollars that were promoted as triple-A rated investments that were really closer to junk. So they bet on a meltdown and won big, then lined up at the government trough and fed with the rest of the pigs.

The American taxpayer bailed out these institutions. In return they horded our money, raised interest rates, cut credit lines, installed outrageous penalties, and generally profited from cheap money while Americans lost their jobs and their homes.

Now they expect people to stand by and watch them get paid millions in bonus money while the country is still reeling? Let them use the money to help fix the problems that were created and start putting these criminals behind bars. At some point, enough is enough.

Nov 01 04:02 PM

[PastTense:]

"our Wall Street institutions are in one way or the other, also on the government dole."

Nonsense. People on the dole are in a subservient position. In contrast Wall Street runs the Fed, the administration, the Democratic and Republican parties in Congress.

Nov 01 11:07 PM

[sacredharp:]

Everyone that values democracy must step back and think hard for the next few years. It will take that long for the picture to clear. Capitalism as we have known it these past few years is gone. The military uses a very distinct signal to mark an emergency. The term is "Broken Arrow." It is an apt term to describe the experiences that are faced by people across the entire spectrum regardless of their social position. The forces and events taking place are unknown. We are feeling our way through the dark.

Nov 01 11:28 PM