Tuesday, January 20, 2009

Will a Thaw in Credit End the Crisis? TARP for the Good Banks... Stock to Watch...

The world economy in general, and the U.S. economy in particular relies on credit. Credit is the life source of much, if not all growth. However, we have all witnessed the negative impact of too much credit. According to Allbusiness.com, over-extension is defined as:
"A loan balance or total credit obligation beyond the borrower's ability to pay . In situations where the borrower has taken on more credit than he can handle, a debt consolidation loan (combining several obligations in a single loan repayable over a longer term) may be the only alternative to bankruptcy. As a rule of thumb, borrowers who pay more than one-third of their net income to repayment of consumer debt, excluding mortgage debt, may be over-extended in their ability to repay recurring household debt." (1)

As we noted, credit drives growth. The question is can the American consumer handle more credit at this point int he economic cycle? According to one Reuters report, "In spite of rising energy prices, a turbulent stock market and an
ongoing state of war, US consumers have continued to spend. While this
spending has prevented the economy from slipping, it has come at the
cost of decreased individual savings and increased personal debt." (2)
According to Reuters, one of the most influential groups driving consumer credit is aging baby boomers. This demographic has increased spending in a period when many have decreased it. This would suggest that many retailers would be best served by marketing services to this influential class.

Credit cards, which have been the key to consumer spending are adjusting their offers. According to creditmall.org, "The last year and one-half has been interesting in that banks are seeking the affluent, the credit worthy, and stable." (3) People who were able to qualify for cards several years ago cannot. Revolving credit at the corporate and individual level could well have run its course. A new "growth" engine must be found.

TARP for the Good Banks

Like most Americans, I am growing increasingly frustrated with the TARP Program. In general, there has been a lack of progress. Banks who received these funds have not begun to loan... There are a variety of reasons. 1. If you were a cash-poor bank, you would think twice about lending as well. 2. You are concerned about loaning money because you are uncertain about the counter-party's ability to repay the loan. 3. You would rather keep the dividend charade going for as long as possible to prop up the stock price.

There could well be a more modest proposal which would serve the good banks, punish the bad banks, and more importantly destroy the weak business models. If another TARP program were developed, and I am certain there will be a second TARP, then it should be done with the most solvent and well-run banks. The good banks should be given government loans to purchase the good assets of the bad banks, and allow the bad banks to fail. (4)

While I am certain this will create a great deal of turbulence in the world of finance, it could well be the only viable solution that truly saves the financial system. One thing is for certain, the government will not be able to bailout every group that needs it. Heck, instead of cooking the books to make them look good, there could well be a case of cooking the books for TARP funds. (5)

Stock Holdings

Options Holdings

1. http://www.allbusiness.com/glossaries/over-extension/4944338-1.html
2. http://www.reuters.com/article/pressRelease/idUS157743+09-Jan-2008+BW20080109
3. http://www.creditmall.org/
4. http://www.marketwatch.com/news/story/bloody-start-earnings-season-batters/story.aspx?guid={3746153F-B946-4C22-8870-66BC92C0B31B}&siteid=trackedcomment#comment1416992
5. http://beltwayblips.dailyradar.com/story/the_cook_the_books_financial_collapse/

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