Treasury will now buy credit cards and auto loans

November 12, 2008

As I have mentioned here before, the Tarp is not enough to resolve anything, and Paulson himself seems to have acknowledged this fact today. In a move that is prudent and proper, the Treasury has decided to use half of the authorized funds for bank rescues in buying securitized consumer loans, such as credit cards, auto loans, and others. Of course the causes that necessitated the use of those funds for the previous purposes have not evaporated, and  I believe that the Tarp will have to multiplied a number of times, before it is in any way able to alleviate any of the problems in the economy.

What we now see is really nothing other that the actualization of a process which I outlined in a series of articles right after the collapse of Lehman. The cascade effect of the collapse of the US economy will hit every nation in the world. Note that the implosion of the US consumer’s spending is only now beginning. It’s therefore a certainty that we’re going to see a lot more national and international bankruptcies in the coming year and beyond.

And finally, the dream of getting private buyers back to the  securitized credit markets, or having them assume some of the risks of the troubled mortgage paper is a dream, nothing more. It’s simply unthinkable than any investor will dip his feet into that inferno, and the speculators who had have already evaporated .

U.S. Treasury Secretary Henry Paulson plans to use the second half of the $700 billion financial rescue program to help relieve pressures on consumer credit, scrapping an effort to buy devalued mortgage assets.

“Illiquidity in this sector is raising the cost and reducing the availability of car loans, student loans and credit cards,” Paulson said today in a speech at the Treasury in Washington. “This is creating a heavy burden on the American people and reducing the number of jobs in our economy.”

Paulson’s remarks are an acknowledgement that the pitch he made to Congress for the bailout hasn’t delivered what was promised.

Treasury and Federal Reserve officials are exploring a new “facility” to bolster the market for securities backed by assets, Paulson said, adding that the program would be “significant in size.” Officials are considering using a portion of the bailout money to “encourage private investors to come back to this troubled market,” he said.

Private Capital

The Treasury chief said the department is also considering having companies that accept new taxpayer funding get matching private capital. Buying “illiquid” mortgage-related assets — the reason the program was established a month ago — is no longer being considered, he said.

Paulson has committed all but $60 billion of the initial $350 billion allocated by Congress to take equity stakes in banks and in insurer American International Group Inc. Lawmakers, who could reject Treasury requests for the remaining $350 billion, are pushing for aid to automakers including General Motors Corp. Paulson is resisting.

Paulson said he has no timeline for notifying Congress of his intent to use the remaining TARP funds, and reiterated that he’s “comfortable” that $700 billion is “what we need” to stabilize the financial system.

Paulson’s change in plans sent U.S. home-loan bonds without government backing down to new lows, credit default swap indexes suggest.

The ABX-HE-PENAAA 07-2 index of swaps tied to subprime-loan bonds rated AAA when created in the first half of 2007 dropped about 8 percent to a mid-price of 42, according to a note to clients today from Goldman Sachs Group Inc. The level suggests the bonds might fetch about 42 cents for each dollar of unpaid balances.

More on the credit card and auto-loan markets:

Currently, there is $356.3 billion in credit card asset- backed debt outstanding, with $256.3 billion in student-loan securities and $199 billion in auto loan borrowing,

`Broad Impact’

In the CPFF, which began last month and purchased $244.6 billion of the short-term debt through Nov. 5, the Fed set up a limited-liability company to buy the assets. The Fed is funding the facility at the target federal funds rate, currently 1 percent, and Treasury provided a $50 billion deposit. It is thought that the new facility will have a similar structure.

Seize Assets

Paulson said lending through the new consumer credit bailout  program would be on a non-recourse basis, meaning the government wouldn’t have rights to seize other assets should a borrower default.

The Fed’s program that lends to banks to buy asset-based commercial paper from money-market mutual funds had $85.1 billion in non-recourse loans outstanding as of Nov. 5.

Credit-card companies were shut out of the market for bonds backed by customer payments in October for the first time in more than 15 years, Wachovia Corp. data showed. Issuers sold $17.1 billion of the debt in October 2007. Top-rated credit card-backed securities maturing in three years traded at a premium of 500 basis points over Libor, last week, up 25 basis points over the previous week,. The debt was trading at 50 basis points more than Libor in January.

`Dramatic Fall’

I doubt that this is going to have a big offset to the really dramatic fall in consumer spending that we’re going to see over the coming year,” in part because of a $10 trillion slump in home values, Feldstein said of the new lending program.

Ford Motor Co., GMAC LLC and Chrysler LLC were shut out of the market for bonds backed by auto loans for the fifth straight month in October. Sales of auto bonds slumped to $500 million, compared with $9 billion in October 2007, according to Merrill Lynch & Co. data.

More Aid

House Financial Services Committee Chairman Barney Frank proposed giving $25 billion in additional aid to GM, Ford and Chrysler. He told reporters today that legislation is needed to authorize the Treasury to put money into the automakers.

Distressed sales of commerical real estate are going to increase dramatically, this article from Bloomberg says. Of course, 2006 and to a lesser extent 2007 were some of the laxest years of commercial real estate loan standards. What this means is that there will be a lot more writedowns for what remains of the US banking system:

Distressed sales of commercial real estate may rise in 2009 as about $36 billion in securitized loans written in 2006 and 2007 come due, an executive of Grubb & Ellis Co. said today.

That figure will grow to $55 billion of commercial mortgage- backed security debt due in 2012, triggering delinquencies, defaults and forced sales, said Glen Esnard, president of capital markets for the Santa Ana, California-based real estate services firm., citing research by JPMorgan Chase & Co.

“A lot of that debt is not refinanceable at its current level or current rate,” Esnard said at a briefing for reporters today in New York.

Sales of commercial properties in the U.S. have fallen 72 percent this year through October, Real Capital Analytics Inc., a property research firm, said last week, as the global credit crisis made financing for acquisitions scarce.

Loans made to be sold into the CMBS market were the predominant form of financing for commercial real estate buyers between 2004 and 2007, when U.S. commercial property prices rose almost 60 percent, according to the Moody’s/REAL Commercial Property Price Index. That index has fallen 13 percent since peaking in November 2007.

Qualcomm says it won’t hire anyone else:

Qualcomm Inc. Chief Executive Officer Paul Jacobs said he’s stopped hiring and is eliminating some research projects after a “dramatic” contraction in chip orders from mobile-phone makers.

“We have basically shut off our new hiring growth,” Jacobs said in an interview in New York today. “Before it was, `Let’s let a thousand flowers bloom,’ now we’re going to do a bit of pruning. We’ve shut down some projects.”

Jacobs, who heads the biggest maker of mobile-phone chips, said orders dropped off in October because handset manufacturers cut back on their stockpiles of unused parts, a reduction that will last for about two quarters. Consumer demand for mobile phones with Qualcomm chips is holding up, he said.

“The end-user market, while it’s slowing a little bit, isn’t that dramatic,” said Jacobs, 46. Still, there is “some uncertainty” in the company’s earnings projections.

Revenue this quarter may fall as much as 6 percent from a year earlier, the first decline in seven years, Qualcomm said last week. Annual sales increased 22 percent on average in the past six years as Qualcomm benefited from increasing use of its chips in mobile phones that provide high-speed Internet access.

Qualcomm, based in San Diego, fell $2.50, or 7.1 percent, to $32.57 at 4 p.m. New York time on the Nasdaq Stock Market. The stock has declined 17 percent this year.

While Jamie Dimon, head of JPMorgan says that the recession may be worse than the credit crisis:

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said the U.S. recession “could be worse” than the credit-market crisis that brought lending to a standstill.

Rising unemployment and the process of de-leveraging by financial companies may bring on a “deep” recession in the U.S., Dimon, 52, said today. “We are prepared for a difficult environment.”

JPMorgan, the largest U.S. bank by market value, will add about $2.4 billion in reserves to cover bad loans in the fourth quarter as losses on credit cards and home loans continue, Dimon said. The U.S. unemployment rate rose to 6.5 percent in October, the highest level since 1994, Auto sales plunged 32 percent, manufacturing contracted at its fastest pace in 26 years and consumer confidence fell by the most on record during the month.

Still, Dimon said there is reason for optimism about prospects for the economy. “We’re not running this company like we have a Great Depression,” he said. JPMorgan continues to invest in businesses that benefit clients, including advisory work and raising money for corporations, he said.

Shares Decline

Goldman Sachs Group Inc., where Paulson was CEO before joining the Bush administration, predicted the deepest economic contraction since 1982 for the fourth quarter. The New York- based firm said the jobless rate may jump to 8.5 percent by the end of next year.

Banks and securities firms worldwide have taken $929 billion in losses, writedowns and credit provisions since the beginning of 2007, according to Bloomberg data. Firms have raised $819 billion in capital to offset the losses.

“We think the economy could be worse than the capital- markets crisis,” Dimon said. “You really need to separate them because they have completely different effects on our businesses and on most businesses.”

Consumer Loans

Dimon said JPMorgan continues to lend money to consumers. Loans to some types of corporate clients and in the investment bank have increased by $8 billion since the end of the third quarter, he said. Loan balances across the business lines have climbed $24 billion.

The bank also expects to post a $500 million loss on private-equity investments during the quarter, Dimon said.

JPMorgan announced a plan last month to assist 400,000 families with $70 billion in troubled mortgages in the next two years. An additional 250,000 families with $40 billion in mortgages have already been helped under existing loan- modification programs.

JPMorgan is the third-largest mortgage originator in the country with 13.6 percent of the market as of Oct. 31, according to Inside Mortgage Finance data. The lender has reduced volume 17 percent compared with an industrywide contraction of 56 percent since the beginning of 2007.

Not even the so-called super-rich are immune anymore:

Exclusive ski and golf community Yellowstone Club, in Montana, has filed for bankruptcy protection, a sign that the financial crisis roiling the real estate and leisure industries is not limited to the low end of the market.

The club, in the pristine mountain area around Big Sky, Montana, not far from Yellowstone National Park, is part resort and part residential community for the super-rich.

It advertises housing lots on the sides of its ski slopes and golf course at prices ranging from $2 million to more than $6 million.

In a filing made in federal bankruptcy court in Montana on Monday, Yellowstone Mountain Club LLC filed for Chapter 11 bankruptcy protection, listing assets and liabilities in the range of $100 million to $500 million.


The news clips are from Bloomberg and Reuters




One Response to “Treasury will now buy credit cards and auto loans”

  1. Arzate said

    Interesting Read! Very detailed blog,thanks for sharing

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