billddrummer

Credit Card Defaults Down in July

On Aug 18 12:38 PM Mark Bern wrote:

> Let's consider, for a moment, the accounting aspect of the reported
> numbers. Now, I may be a little rusty but this is how I believe it
> works.
>
> Step 1. First a customer (account) becomes delinquent (falls behind
> in payments). Each bank maintains their own proprietary metrics (rules)
> for determining when to set asside reserves to cover potential future
> losses if the account defaults. Not all accounts that become delinquent
> actually defalut completely. Each bank has its own process to keep
> this from happening and applies their own methodology gained from
> experience to determine which delinquent accounts (or what % of delinquent
> accounts) are likely to default. This entry is really a contra asset
> account that reduces the value of the asset. Tthe full value of the
> account is still a receivable at this point, while the offsetting
> contra account (or reserve for bad debt) does not specifically identify
> any accounts.
>
> Step 2. Once an account defaults completely and every internal effort
> is made to collect all or even a portion of the balance, the bank
> may take one of two actions. In many cases, they sell the account
> for pennies on the dollar to a collection firm (these represent many
> of the companies that advertise that they can help you reduce your
> debt). Or, the bank may just write off the account and close it.
> In either case, the account is closed and written off and the bank
> no longer carries it as an asset. An adjustment to the reserve (contra
> account) should occur at this time, since the previous write down
> of assets has already hit the income statement. Generally, the reserve
> for bad debts (contra account) account balance is adjusted by regular
> updates to an analysis performed on all credit card accounts in aggregate.
>
>
> Step 3. If a significant number of accounts are sold and/or closed
> and the associated balances written off, the total percentage of
> bad debts to the total can decrease, thereby requiring less additional
> reserves to decrease, respectively. Every bank goes through this
> process at their own speed and they each make decisions that are
> specific to their internal needs at each step along the way. Some
> are more conservative and write down bad debts more quickly, while
> others will drag their feet.
>
> Also, each bank can modify their metrics for evaluating these assets
> at any time and when they do those changes can affect the results
> dramatically or in small incremental ways. This may be called "managing
> the income statement" or some other such name. But the point is that
> we can't always put a lot of faith in any specific report coming
> out of any specific bank. We must look at the overall trends over
> time to get a clearer picture. The picture can be distorted much
> more easily in a snapshot than in a series.
> to present a united front to the public. And they would never do
> anything to distort the truth, even if it might imperil their stock
> prices. So, go ahead and believe whatever the banks tell us, >because they can be trusted. Do banks sell used cars?

To Mark Bern,

Right on the money as far as the accounting goes. (I work in commercial banking.) And since most banks will classify credit card loans as a 'pool' rather than specifically reserve against individual credit lines, the delinquency metric is a lagging indicator for higher reserves.

I believe there's more pain to come as the employment picture remains clouded. The banks now reporting lower delinquency rates had stricter credit criteria to begin with, and they are now reaping the benefits of tightening up qualifications 12-18 months ago.

On the other hand, the banks that are experiencing higher default rates now are the ones who didn't tighten soon enough.

Another interesting dynamic to this: Many banks are reducing or closing credit cards unilaterally, even on performing lines. The good news for the banks is that they can reduce the 'general reserve' if less credit is made available, thus increasing profits.

Banks Not Buying FDIC Line on California IOUs

I escaped from CA in 1979 and moved to NV. Until recently, I felt like I made a good choice. Political climate was reasonable, taxes were low, cost of living a fraction of CA, and not at all crowded.

Apparently, lots of people had the same idea.

Now, NV politicians are racked with scandals (why not go to a brothel? They're legal here!), taxes have soared, services cut (furloughs, anyone?) and there's traffic.

Where to, next?

Weekly Unemployment: Lying with Numbers

Thank you for this article. It's too bad that most people won't go past the headlines and presume things are actually improving.

Except for the ones that just got laid off, are looking for work and watching their savings fall, or just got their benefits cut off.

Those folks understand the pain behind the headlines.

The Scandal of Overdraft Fees

Or you can just unplug from banks altogether and avoid the fees. The temporary hassle of paying bills in person or with a 25 cent money order is well worth not having to pay hundreds of dollars a year for overdraft fees, checks, and the like.

It has greatly simplified my life.

Do You Believe Borrowing Leads to Prosperity? (Part 2)

Mr. Quinn--

Another brilliant piece, and helps to explain why sales of 'consumer discretionary' products are moribund. It's not just because home equity lines have been tapped, not just because people are concerned about keeping their jobs.

It's because the American consumer has accumulated too much debt chasing irrelevant 'things.' Until the debt is repaid, don't expect people to spend.

I've seen this in my own situation. "Lived Large last year. Living Small now."

Living small means paying off the debt you racked up when you were living large. Because people lived beyond their means, they must now live beneath them to come back to equilibrium.

The problem is that debt can appear almost instantly, but it takes years to repay.

Look for moribund consumer spending for years.

Thanks again for a thought-provoking, timely, succinct and prescient piece.

In Honor of Earth Day: How Lehman Killed Recycling (in Financials)

To Jasper M,

He's probably just a mouse click away.

Bank of America Punishes Customers Who Dare to Have a Balance

I don't have a credit card, or a bank account. I live out of my wallet, and pay cash for everything.

Unplugging from the system has saved me a lot of money, aggravation, and time.

Some Dogs of the Dow Need Replacing

To babyray,

I understand your anger. But if the government gives GM the additional $16 billion it's asking for, then the company will have $110 in debt for every $1 in capital.

Manufacturing companies aren't supposed to carry that much debt.

Financial services companies can, because their assets are negotiable instruments that can be bought and sold (in normal times). Clearly, these aren't normal times.

But it's not productive to compare a manufacturing concern to a financial services company. The operating parameters and analytical benchmarks are markedly different.

My question to you is this--Would anyone else loan to GM besides the government?

I submit that no other lender would take the risk.

Some Dogs of the Dow Need Replacing

To Jeff Pierce,

I agree with you that constant government manipulation is skewing the prospects of companies like GM. That one, in particular, deserves to be removed from the DJIA. Market cap has been crushed, debt levels are astronomical, operating performance is horrific, and the company would be liquidated without government aid.

It violates the spirit of the Dow components--leaders in their industries with broad market appeal and dominant operating shares in their respective markets.

In my opinion, GM flunks all those tests, and has for the past 4 years.

Some Dogs of the Dow Need Replacing

To john s. gordon,

That would be appropriate if the economy were still industrial-based. But with the growth of the biotech, financial services, retail, software development and telecommunications sectors, the index is more representative of the US economy than a purely industrial index would be.

The industrial base in this country has been shrinking steadily for 2 generations, and it's not likely that reversal of that trend will occur. By contrast, retail (MCD, HD, WMT), banking and financial services (AXP, BAC, C, JPM), telecommunications (ATT, VZ), software and technology (IBM, INTC, MSFT) and medical products and services (JNJ, MRK, PFE) have expanded dramtically in recent years, and despite the recent challenges, represent the best places for future growth.

These industries foster innovation, new product introduction, and provide the best place for a highly educated workforce to be globally competitive--which is what's required for survival today.

Wachovia Hints at What's in Store for Wells Fargo

To sickofthehype,

The amount of Option ARMs isn't the problem, in my view. It's the amount of leverage created when those loans were made (typically at much higher leverage multiples than subprime). The securities issuers liked to bundle Option ARMs with lower quality credits to equalize the risk profile for the newly issued securities, figuring that the loss profile would be much less than on subprime loans. And then, the entire issue would be graded AAA.

Trouble is, with just a small number of ARMs in the mix, if those began to default at higher-than-expected rates, the impact would be magnified because of the increased leverage.

Sort of like the rotten apple spoiling the whole barrel.

Wachovia Hints at What's in Store for Wells Fargo

Hi Judy,

Thanks for reading my posts. I appreciate the opportunity to share my opinions with you, and with others.

I believe that's absolutely right. There have been signs of recovery in the Inland Empire (Riverside County and its environs) over the past 2 months, as prices have fallen to the point where median homeowners can purchase. Now, in my view, there's still an inventory overhang, but the good news is that fewer homes are coming on the market than are being sold. As the inventory gets worked off, prices will stabilize.

As we've seen, the 'bottom' is defined differently, based on where you're looking. Las Vegas and Phoenix seem to be closer to it than southern CA. However, the signs are encouraging there as well.

But I am concerned about the volume of Option ARMs written in those areas, which may result in a 'double-dip' of new foreclosures as rates reset and borrowers find they can't afford the new payments or refinance out of them (because values have dropped so much).

If the government wanted to keep that from happening, it could target Option ARM borrowers who could afford fixed rate payments, but not the newly indexed ones. Issue guarantees on the overadvanced portion of the loans, and rewrite the mortgages at fixed rates. That way, those borrowers could remain in their homes and continue with affordable mortgage payments while the market recovers.

Otherwise, there will be another glut of neglected, abandoned properties, foreclosures, and more homes entering the market, just when inventories get 'balanced.'

More pain for another 2-3 years.

All the best,

Bill

Wachovia Hints at What's in Store for Wells Fargo

Hi, Judy,

A followup comment:

As we noted previously, Las Vegas sales are skyrocketing as prices have fallen. The rate of foreclosures there hasn't slowed down yet, but I expect it to by early next year.

If the government keeps talking about saving the housing market, they might find that by the time something comes out of Capitol Hill, the market will have corrected itself.

Just a thought.

Bill

Wachovia Hints at What's in Store for Wells Fargo

Hi Judy,

Great job as always. Thanks!

I found a link you might be interested in. Apparently, foreclosures in the Sacramento area have declined since last month, possibly signaling a bottom in that market:

www.bizjournals.com/sa...

Now, that doesn't mean to me that everything is automatically rosy. But it points to a trend that may be developing in the harder hit states--the worst may be over.

All the best,

Bill

Mortgage Rates Falling [Housing Tracker]

Hi Judy, great stuff!!

I think BAC is postponing the pain on those borrowers. Let's hope they get really good jobs and can afford higher payments down the road.