March 20, 2009
by Vinod Dar
Managing Director, Dar&Company
Consumers and small businesses are seeing no improvement in credit markets. Indeed, credit availability is worsening and the cost of credit is actually rising. The Administration and Congress have willfully contributed to these worsening credit conditions by continued socialization of capital markets, assaults on success , coddling of large but incompetent worthless but politically favored enterprises and shameless feeding of special interests. If stimulating failure, pessimism and anxiety are the objectives then The Stimulus is working very well indeed.
There are several signs that credit markets are continuing to deteriorate:
1. Insurance companies saw a decline of $32 billion in statutory capital in 2008. The decline continues in 2009. Credit downgrades for several insurers lie ahead which will raise their cost of capita, reduce the sales and underwriting of new policies and force a further shrinking of the balance sheets via asset sales to reduce their risk profile. Hartford, Prudential and MetLife have all sought regulatory approval to obtain treasury capital infusions.
2. American Express disclosed that past due payments in February rose again, following increases in January and December 2008. Following this disclosure, the cost of protecting European corporate bonds from default went up.
3. A survey by the National Small Business Association revealed that almost 75% of businesses with less than 500 employees (these businesses rely on corporate credit cards and lines of credit for short term, inventory and seasonal financing) are experiencing a deterioration in credit availability and an increase in credit card and credit line interest rates. Banks are sharply curtailing credit limits and lines of credit yet raising interest rates, sharply. In the last decade such businesses created 60% to 80% of net new jobs in the US.
4. Consumers are defaulting on all credit card payments in unprecedented numbers. Charge -offs rose to 7.1% in January 2009 compared with a year ago and the worst is still ahead. Citigroup may cut credit lines by $600 billion, Bank of America by $500 billion, JP Morgan by $300billion and American Express by $100billion......a total of $1.5 trillion in 2009.
5. The FDIC's Deposit Insurance Fund is approaching complete depletion. At the beginning of 2008, the fund had $52billion.At the beginning of 2009 the fund had $19 billion. The FDIC projects an additional $65 billion in losses thru end 2013.Insurance companies saw a decline of $32 billion in statutory capital in 2008. The decline continues in 2009. Credit downgrades for several insurers lie ahead which will raise their cost of capital , reduce the sales and underwriting of new policies and force a further shrinking of the balance sheets via asset sales to reduce their risk profile. Hartford, Prudential and MetLife have all sought regulatory approval to obtain treasury capital infusions.
6. A large wave of commercial real estate shopping/shopping mall bankruptcies is coming. This year about 75,000 stores have already closed(the evidence is clear in every town and city0 The retail industry thinks that, at least, 4 times as many more stores will close in 2009. Entire malls will shut down.
7. By early March 2009, junk bonds were yielding 19% more than Treasuries of comparable maturity. A yield spread of more than 10% is termed distressed. This means that the interest rate on a 10 year junk bond is now around 21%( 19% plus very close to 3% on 10 year Treasury bonds). In effect, credit markets are now effectively closed to thousands of fairly large companies whose debt is rated below investment grade .As the current debt of these companies matures they will not be able to refinance. The only recourse is to massively shed costs by reducing business activity and firing scores of thousands of people in the second half of 2009.
8. The cost of protecting investors against a default of US Government debt has risen sharply. This cost is 60% higher in Mid March 2009 than at the end of 2008 and 7 times higher than a year ago. The credit worthiness of the US is now about the same as France.
Unless these credit conditions are reversed and consumers and real businesses doing real things can get affordable credit in required amounts, the US economy will continue to shrink. The prospects, at present, are that the Administration and Congress have embarked on a course that will cost another 2 million jobs in 2009.
