highalpine

C&I Loans Are Starting to Unravel

Good work! The charts, as they say, are better than a thousand words. Unfortunately, most of the press (and hype) has been focused on the political ramifications of the collapse of the "shadow banking system", and all of the sturm & drang around mark-to-market of toxic structured debt instruments. The collapse of Lehman, and the resulting seizing of the financial system brought a speedy halt to spending last fall. Now, as the charts show, we are entering into a classic business cycle credit contraction. The banks are already wounded, and the climbing asset problems will cause them to husband their capital. Any other response, like making new business loans into the teeth of a downturn, is irresponsible. This will play out over the next 9 -18 months, as it allways does. Pretty soon we will hear the inevitible talking heads expound on the recovery being delayed.

Mark-to-Market Marches Towards Extinction

Interesting discusssion, but: 2 points

1. Banks are geneally levered at least 8:1 and most about 12:1 (8%tangible capital). The big ones more. If 29% of the asset base is subject to mark-to-market accounting, it doesnt take much of a move to impair tangible capital.

2. Watch out for TRUPs (trust preferred securities) in the smaller bank's investment portfolios. These are essentially bank holding company loans with no market and with a provision in them that lets the issuing banks PIK the dividend payment. IF PIK'd the impairment is going to hurt. But they only go PIK if the bank's in trouble. The smaller banks that hold these things are only in trouble if the security is PIK'd. Catch 22.