The metaview

Banks Brace for Credit Card Write-Offs - NYTimes.com:

"But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. At American Express and Capital One Financial, around 20 percent of the credit card balances are expected to go bad over this year and next, according to stress test results. At Bank of America, Citigroup and JPMorgan Chase, about 23 percent of card loans are expected to sour.

Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. It could top $186 billion for the entire credit card industry."

I have a zillion links I collected over the last few days about the bogus stress test results, but I have settled with the link above to the New York Times.

The main points for all of those links I saved up are as follows:

  • The stress test scenario was not negative enough.
  • The banks argued back about the results and the results were changed!
  • Assumptions for individual banks were wrong; BofA, which has huge credit card exposure, was assumed to have defaults below the national average.
  • The stress tests say the banks need as much as $600 billion dollars in additional equity; but they are only required to find an extra $75 billion. For BofA, that's a dilution of almost 50% of it's current market value.

For most people, the financial meltdown is happening in an alternate universe. I remember when the run on the money market funds was first announced. I wandered over at lunch time to get some money out of the ATM machine. It was located at a busy mall and everyone was carrying on as if nothing significant was happening.

The end has been expected ever since we went off the gold standard in 1971. The value of a dollar is about 5% of what it was when FDR confiscated everyone's gold. If the value of a dollar has dropped so much, then why aren't things much worse?

I say it's because the efficiency of American business has outstripped the ability of the government (so far) to print money. Computers are a million times faster than they were a few decades ago. That has had a huge impact on everything from communication to transportation.

I would like to believe that American ingenuity will outstrip the government's money printing operation but I don't think so this time. The world has changed. China is a huge world power and holds a lot of our debt. Consumer spending has been tapped out. The value of home mortgages (and by implication a lot of retirement money) has been tapped out. The baby boomers managed to contribute more to the Social Security Ponzi scheme than was taken out but those times are changing too. The leverage of the banking system is higher than it has ever been. Corruption is at amazing highs. Who thought a government agent could lose $50 billion and not even get a slap on the wrist?

I sound like my Dad sounded in the 70's. I personally have never worried about the state of our financial system before now. I always had confidence that American ingenuity would outpace government stupidity. Now I don't think so.

Am I a nutjob? (Don't answer that.)

Well, time will tell. I certainly don't think the level of concern I have makes me a nutjob. What's not to be concerned about?

  • China doubles its holdings of gold;
  • The balance sheet of the federal reserve is insanely out of control;
  • Record deficit spending;
  • Expected credit card defaults out the wazoo;
  • A prime mortgages are defaulting at increasing rates;

and most importantly:

  • Nobody knows what the fuck is going on.

I will be amazed if Bank of America makes it through the end of the year as an independent concern (and I use the word independent loosely, since it's already on life support). I think it's gonna be the Bank of the United States of America.

I know what you're thinking ... big deal! So what if BofA is nationalized. Indeed. That is a very reasonable response. The idea of hyperinflation caused by all these bailouts (and most importantly the printing of money to keep the federal government from defaulting on its loans) is so hard to conceive. Surely we're not as dumb as those guys in Zimbabwe that printed $50 trillion bills. Are we?

And what if we are? What's a person to do? So why worry about it?

Indeed.

[Update 2015 05 25 - Well, 6 years later and BofA is still here.  I remain as diversified as humanly possible with minimal debt.  Better safe than sorry!]
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