America must keep consumer liquidity flowing by Meredith Whitney
- Thread starter Anonymous_IHB
- Start date
NEW -> Contingent Buyer Assistance Program
OK, I'll take the bait. More borrowing CAN help. It just needs to be different borrowing. I have a plan for credit card debt which will help everyone involved.
1. Have the Federal Govt provide either liquidity or guarantees for for asset backed commercial paper, and other similar asset backed paper which supports credit cards.
2. If your firm participates in the program, there is a maximum interest rate you can charge for your credit card customers. I suggest the number start at 15% and decline to some index of the cost of the asset backed commercial paper + a spread of ~500 basis points. You don't want to follow these kinds of rules? Fine. Issue your own commercial paper or find new deposits and have a good time. Good luck.
3. The interest rate on credit cards can't be adjusted with less than 90 days notice.
4. There will be a facility for taking over or transferring credit card customer's accounts. Let's say you are Citicorp, who has been in the news lately for cutting of cards and reducing credit lines to lots of customers. This is surprisingly inefficient. Those people will go hunting for new cards. Many of them have fine credit. The facility would do several things. A. It would allow other banks to say "Yes, I'll take that account under its existing terms. If Citi doesn't want this cardholder, I'll take them, and I'll guarantee the cardholder the same terms for at least a year." Do you know how much money is spent in marketing to try to get new account holders? Do you know how much of a paiin it is to try to close out an account? B. People who have gotten notices could go to the site and ask for replacement banks under the same or better terms. C. The banks participating in the facility would be mercilessly policed regarding any deceptive practices, abuses, or failure to follow the rules.
That's the tradeoff. Be nice to your customers, don't charge exorbitant rates. Make it easier to find a new bank if you want to dump them. In return, the banks get consistent access to low cost capital for a while until the regular commercial paper market or asset backed securities markets behave more normally. Or perhaps, some different method of financing credit cards will arise.
The media has not had much emphasis on how banks are afraid that they will not have the money to lend, because they will not be able to rollover the debt the banks use in order to lend on credit cards.
IrvineRenter_IHB
New member
Here are some easily adoptable changes that would make a difference.
First, re-regionalise lending. Since the early 1990s, key bank products, mortgages and credit card lending were rapidly consolidated nationally. Banking went from “knowing your customer” or local lending, to relying on what have proven to be unreliable FICO credit scores and centralised underwriting. The government should now motivate local lenders (many of which have clean balance sheets) to re-widen their product offering to include credit cards and encourage the mega banks to provide servicing and processing facilities to banks that sold off these capabilities years ago.
Second, expand the Federal Deposit Insurance Corporation’s guarantee for bank debt. Banks need to know they can access reasonably priced credit for an extended period to continue to extend new credit lines. Any semi-conscious bank management team knows that capital and liquidity are precious and therefore is hoarding both.
Third, delay the introduction of accounting rule FAS 140 until 2011 or 2012. These moves to bring off-balance-sheet assets back on balance sheet for the sake of transparency are a mirage. The primary assets that will come back on to balance sheets are credit card loans. Frankly, there is more transparency in off-balance-sheet master trust data than in on-balance-sheet accrual accounting. Banks cannot afford it now and it will further constrain credit.
Fourth, amend the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010. The proposal includes one major change that will lead to a severe unintended consequence – pulling credit from consumers. Restricting lenders’ ability to reprice an unsecured loan will cause them to stop lending or to lend less. This change could cut over $2,000bn in unused credit card lines, or over 40 per cent of unused credit lines. With so many Americans relying on their credit cards as a major source of liquidity, it would be equivalent to a major pay cut.
The first two I agree with. Number 3 I don't know enough about, but it seems to me that off-balance-sheet SIVs are part of the problem. Four seems like more of the same problem.
If we have overborrowed as a society, how is more borrowing going to help?
First, re-regionalise lending. Since the early 1990s, key bank products, mortgages and credit card lending were rapidly consolidated nationally. Banking went from “knowing your customer” or local lending, to relying on what have proven to be unreliable FICO credit scores and centralised underwriting. The government should now motivate local lenders (many of which have clean balance sheets) to re-widen their product offering to include credit cards and encourage the mega banks to provide servicing and processing facilities to banks that sold off these capabilities years ago.
Second, expand the Federal Deposit Insurance Corporation’s guarantee for bank debt. Banks need to know they can access reasonably priced credit for an extended period to continue to extend new credit lines. Any semi-conscious bank management team knows that capital and liquidity are precious and therefore is hoarding both.
Third, delay the introduction of accounting rule FAS 140 until 2011 or 2012. These moves to bring off-balance-sheet assets back on balance sheet for the sake of transparency are a mirage. The primary assets that will come back on to balance sheets are credit card loans. Frankly, there is more transparency in off-balance-sheet master trust data than in on-balance-sheet accrual accounting. Banks cannot afford it now and it will further constrain credit.
Fourth, amend the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010. The proposal includes one major change that will lead to a severe unintended consequence – pulling credit from consumers. Restricting lenders’ ability to reprice an unsecured loan will cause them to stop lending or to lend less. This change could cut over $2,000bn in unused credit card lines, or over 40 per cent of unused credit lines. With so many Americans relying on their credit cards as a major source of liquidity, it would be equivalent to a major pay cut.
The first two I agree with. Number 3 I don't know enough about, but it seems to me that off-balance-sheet SIVs are part of the problem. Four seems like more of the same problem.
If we have overborrowed as a society, how is more borrowing going to help?
MalibuRenter_IHB
New member
IrvineRenter said:
OK, I'll take the bait. More borrowing CAN help. It just needs to be different borrowing. I have a plan for credit card debt which will help everyone involved.
1. Have the Federal Govt provide either liquidity or guarantees for for asset backed commercial paper, and other similar asset backed paper which supports credit cards.
2. If your firm participates in the program, there is a maximum interest rate you can charge for your credit card customers. I suggest the number start at 15% and decline to some index of the cost of the asset backed commercial paper + a spread of ~500 basis points. You don't want to follow these kinds of rules? Fine. Issue your own commercial paper or find new deposits and have a good time. Good luck.
3. The interest rate on credit cards can't be adjusted with less than 90 days notice.
4. There will be a facility for taking over or transferring credit card customer's accounts. Let's say you are Citicorp, who has been in the news lately for cutting of cards and reducing credit lines to lots of customers. This is surprisingly inefficient. Those people will go hunting for new cards. Many of them have fine credit. The facility would do several things. A. It would allow other banks to say "Yes, I'll take that account under its existing terms. If Citi doesn't want this cardholder, I'll take them, and I'll guarantee the cardholder the same terms for at least a year." Do you know how much money is spent in marketing to try to get new account holders? Do you know how much of a paiin it is to try to close out an account? B. People who have gotten notices could go to the site and ask for replacement banks under the same or better terms. C. The banks participating in the facility would be mercilessly policed regarding any deceptive practices, abuses, or failure to follow the rules.
That's the tradeoff. Be nice to your customers, don't charge exorbitant rates. Make it easier to find a new bank if you want to dump them. In return, the banks get consistent access to low cost capital for a while until the regular commercial paper market or asset backed securities markets behave more normally. Or perhaps, some different method of financing credit cards will arise.
The media has not had much emphasis on how banks are afraid that they will not have the money to lend, because they will not be able to rollover the debt the banks use in order to lend on credit cards.
IrvineRenter_IHB
New member
I like your ideas. I hope they do something like that when the credit card industry starts looking for their handout.
awgee_IHB
New member
MalibuRenter_IHB
New member
The CDS collateral requirements are one reason for the demand for short term treasuries. For a number of OTC swaps, including a lot of CDS, it is one of a few acceptible forms of collateral.
IrvineRenter_IHB
New member
Financial crisis: what no one wants to admit
While there is no doubt that a lot of unscrupulous lenders indulged in predatory lending practices by making loans available to people who clearly could not afford them, it is also fair to point out that no one forced those people to take the loans in the first place.
While there is no doubt that a lot of unscrupulous lenders indulged in predatory lending practices by making loans available to people who clearly could not afford them, it is also fair to point out that no one forced those people to take the loans in the first place.