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Meredith Whitney Most Pessimistic About Plummeting Credit Card Lines; Fed's Meddling In MBS And Agency Purchases
The full Meredith Whitney Bloomberg radio interview can be found here. Some of the gloomier observations by Meredith:
- Credit card lines have been cut by a whopping $1.5 trillion since the market peak, and M.W. expects this to go to $2.7 trillion: another $1.2 trillion in purchasing power will be removed from US consumers.
- Losses of credit access will reaccelerate in 2010
- Optimistic GDP estimates do not factor in this component: there is no chance to get a meaningful economic recovery in 2010
- Absent massive government support at the state level, there is no way states can provide their traditional 21% runrate contribution to US GDP
- The unintended consequence of the administration's populist approach is the "grinding" of the middle class. The middle class will not survive, while the lower and upper classes continue to benefit
MW is most worried about the termination of MBS purchases by the Fed in March 2010. She notes that the only natural buyer of "GSE" paper is the Fed, as Zero Hedge has been highlighting for months. This is worrisome for good reason: the Fed has skewed the natural market in MBS/agency (and in a parallel dimension, Treasury) paper to such a drastic degree that it is the only major market participant, which is why the Fed has no option but to extand and likely expand QE next year. We anticipate the announcement of QE 2.0 to be announced at some point in January/February 2010.
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Trying to keep up and commend ZH for the work you do, but I thought they scratch we were done buying MBS.
MW comments can get filed away with Paul Volcker and Lizzy Warren, under "who cares?" Sensible minds can look at the right side and left side of balance sheets and see that things are not adding up...but it won't matter until it matters. "Party on!" shout the bulls. I'll take my canned goods and head back to the bomb shelter now.
The current situation "gives the lie" to the charge of conspiracy theories, doesn't it? No secret cabal is required; it is a conspiracy of interests. There is no morning fax containing instructions, everyone who is amply rewarded by the status quo knows what to do and how important it is to keep the system running. Lie, cheat, sleat, kill, they will do whatever is required. The fact that economic fundamentals are insanely and historically bad is obvious, everyone knows it, yet a sufficient majority (hell, all of them) of the power brokers who are completely reliant on the system for their wealth, power, prestige, and the futures of their children will do absolutely anything to maintain it for as long as they can. This is the impetus for raising us to new heights of insanity before the ultimate crash we all know is coming. The people who are making these decisions are willing to kill us and are right now killing us in a very real sense.
Agreed.
By definition, a conspiracy doesn't need to be verbal or written in order to be a conspiracy. We just use a different word to describe it.
Culture.
As in a culture of corruption, a culture of dishonesty, a culture of spin the news and so on.
So true. The biggest lies are done out in the open for all to see.
The loudest complainers about government debt now are the same ones who happily took tax cuts at the start of the wars in 2001-2003. Why did we not question the insanity of not paying for the two wars at that time or all the changes to Medicare (this decade) that were unfunded. Suddenly we wake up NOW and think that these massive deficits were caused in the last 10 months?
These deficits are due to greed that has built up for 30 years of declining infrastructure and unwise tax policy and run away spending. While Fox News wants to "blame it on Acorn" I think we can all look in the mirror and know we had a hand in how this debt got to where it is today.
That MBS/Agency purchase situation reminds me of 4-ply toilet paper. It feels so good to wipe your ass with it, you forget all about how it's clogging up the pipes.
I agree with Tyler. QE 2.0 in Q1 '10 . No way around it.
"MW is most worried about the termination of MBS purchases by the Fed in March 2010. She notes that the only natural buyer of "GSE" paper is the Fed"
Not exactly true - the Fed is the only buyer - at these levels.
There would be buyers for Fannie/Freddie MBS, at about 100 - 150bps in spread wider than they are today, reflecting the counterparty risk from facing Fannie/Freddie for 10 years.
Of course, that happens, and we go to a 90% FHA mortgage market pretty much immediately.
Speaking of plummeting credit card lines...
My girlfriend and I both had credit cards with JPM. Neither of us carry balances, both of our credit scores are over 700... My rate was at 10 and hers was at 8.
We got notices today, they raised hers to 13% and they more than doubled mine to 22%.
Notice how I said HAD credit cards with JPM? They can kiss my ass if they want to double my interest rate without cause. I don't need their shitty card anyway.
And the people with an 800+ with assets and no debt are getting weekly pre-printed checks imploring them to simply fill a few checks out and enjoy zero APR for 6 months.
It's a symptom of the new sub normal.
They trip over themselves to lend money to people who don't need it and don't even ask for a loan. Everybody else is a suspect.
Correct. I'm starting to get new card applications. Not at the same rate as before, but they are showing up in my mail box. I'm one of the people who don't need and or want them.
With the checks, they just hope I'll stuff a couple into my wallet before a Vegas bender. Then drunkedly reach for them at 3 a.m. in a effort to chase more bad cards.
A five grand chaser check used to earn them a $ 150 vig........now it's $ 250.
They have us all figured out.
Very true. I keep getting my limits raised - perhaps they hope I spend enough that I can't pay off the monthly balance? I'm not sure what the interest rates are on my cards as I always pay the balance. Perhaps I should check (for a rainy day)?
And the people with an 800+ with assets and no debt are getting weekly pre-printed checks imploring them to simply fill a few checks out and enjoy zero APR for 6 months.
It's a symptom of the new sub normal.
They trip over themselves to lend money to people who don't need it and don't even ask for a loan. Everybody else is a suspect.
I can confirm that...BAC sends me the pre printed checks constantly.
Citi too, although i just cancelled it for raising my rate with perfect credit and no debt. I should have just run it up and walked away like everyone else. who wants to bet thta congress forces FICO to change there methods in a couple years b/c everyones scores are too low and no one can meet the requirements?
That is true. I get those in the mail all the time. I just shred them up when they come in.
I get those checks too, but not from JPM! And especially not now, since, well, I told them "well fuck you guys then" (quote).
not to brag or anything, but i have a 454 credit score and have defaulted on 255k in debt, JPM still has my rate at 6%... someone is getting bent over
I am definitely impressed!
Really? I'm at 730 and the girl is at 780!
I personally think that they're doing it to get people to cancel their credit lines, so that they can be less liable for outstanding credit.
After all, the only reason they need TARP is to back up all of their loans, and a revolving credit line is the same as a loan from a liabilities standpoint.
I will make sure to never do business with them again, even if they give me free blowjobs at 0% interest.
"The unintended consequence of the administration's populist approach is the "grinding" of the middle class."
"Unintended"?
I think not.
Without a middle class, the America we all know and love ceases to exist. I wonder if they've thought of that. I wonder if they've thought about who's gonna make them rich going forward, because they're killing the goose that laid the golden eggs.
They don't care, as far as they're concerned there is no future; they've looted as much as they possibly could. They're now off into the sunset with their hoarded cash, gold and out of work secretaries turned middle class hookers leaving behind their worn out trophy wives to drink away their heydays.
Ouch, I laughed at that one
The other end of the argument is that the Fed has given the banking system a year to bolster its balance sheet via cash reserves and raising capital.
Mortgage holders have had a similar window to modify their mortgages under a massively subsidized rate structure and a FHFA incentive program.
Perhaps this isn't designed to last into perpetuity. Given the recent rise in Soverign CDS spreads and dollar devalution risk, the Fed may not have much effective balance sheet flexibility.
As common sense would dictate, interest rates out-of-line with risks distort the markets and never-ever do they succeed. At best they delay and make adjustments more painful. The FED as well as others seem to lack that common sense but it is no more than a delay tactic.
They will try QE 2.0 and Stimulus 2.0 in Q1, and these will amount to none, other than further income redistribution to the oligarchs.
It is a quite Greek tragedy indeed.
IMHO, her remarks ahead of the day's events, e.g., the T-bill negative rates & TED spread increase, were quite remarkable. Her insights seem to be a step ahead of the group think on wall street. The initial remarks about John Mack re bank multiples and statement midway on "the banks are grossly overvalued" just set the alarm bells ringing after the downgrades today by Moodys on DB, UBS, & Assured Guaranty.
Thank you Meredith!
I'm frankly not as sure about the inevitability of QE 2 and Stimulus 2.
Despite all current appearances, people in the White House and Congress do understand that figures like $500 billion to $1 trillion are not chump change, and we can't really add that much to the deficit every year just because the economy is bad. At some point, even they have to balk.
I'm not sure when that point will arrive, but I think it will. Or maybe we'll just have a failed auction first and our willingness to borrow will be a moot point.
The Phalanxes of Andrew Jackson ID Card Printers will be printing, forget about tax increases or "real" debt increases. It's not really debt if it's traded for printed bills.
Close all of your credit card accounts. Move your banking accounts to a local credit union. Stop shoping at Walmart. We don't need credit cards. We don't need too-big-too-fail banks. We don't need low quality products from China. We are better off without these things.
I don't think QE and Porkulus 2.0 are certainties at this point going forward either. They can't be that stupid and we're not in the same place that we were last year. If the public has to payout another giant swindle for the banking pigmen with unemployment in double digits, it will very likely be the nails in the coffin of US government. I bet there would be riots.
I think this next time around, the money will be used for job creation and bailing out state government. The pigmen had first turn at the trough with the 'rally'.
I tend to agree with you, but Tyler (and I guess Meredith) is correct in not totally discounting the prospect of QE 2.0.
Another round of QE to purchase even more MBS will become politically more difficult, however, because there is still no active market for it-- and the Fed has been terribly opaque on what they've paid on MBS versus its proximate market value. Taxpayers are beginning to see this as just another form of blank check bailout of the banks, and the Fed may be best served in keeping at the banks in "extend and pretend mode" instead.
On the other hand, the Fed has not had any problem with moral hazard and monetizing debt to infinity. But doing so this time around will place real pressure on the dollar, and the devalution process risks going out of control this time around.
As for Porkulus 2.0, that will be even more difficult to passs politically based on how poorly Porkulus 1.0 was designed. Then there's that little issue about the debt ceiling.
Here's the hole in the argument that the Fed stops buying MBS - they stop buying MBS, and Fannie and Freddie are finished with new business, they go into runoff mode immediately, and the entire weight of the mortgage business falls to the FHA.
You see, there is no market for Fannie and Freddie MBS, not at today's prices, because it still does not carry full faith and credit, so someone buying a Fannie MBS faces Fannie counterparty risk for 10+ years. Despite supporting Fannie and Freddie today, who knows how long that will, or can, last? What if the next guy cuts them loose?
In a natural market, Fannie/Freddie MBS is spread much wider than Ginnie paper, which puts Fannie/Freddie at a pricing disadvantage, large enough that their volume will dry up almost entirely.
So, while the Fed MAY stop buying for a few weeks, eventually they will have to resume buying in order to save the business models of Fannie and Freddie.
I do understand your argument, but the real risk is that the business models of Freddie and Fannie are not worth saving now-- or five years (and trillions spent) from now. Any new loan issued under subsided rates and still inflated housing values in a high unmployment environment will be hard to market.
I'm not a huge fan of the FHA taking in all new mortgage business, but this is the kind of socialism that the Obama admisitration wouldn't mind seeing fall in their lap-- even at the expense of taxpayers. The reality is that we have about $23 trillion worth of securities that have potential blanket guarantees by the US government anyway, inlcuding MBS.
At some point the issue may be saving the Freddie and Frannie business models, or risking out of control dollar devaluation. Unwinding the exising agency business via default of collateral and haircuts on the derivatives while guaranteeing any new loans via the FHA may be preferable to keeping these zombies on life support, though I'm sure it will create its monumental problems down the road.
I think your conclusion may win out, but I also think there will be a period of significant hits on private sector balance sheets, as the Fed pauses MBS purchasing activities and allows the dollar and Treasury markets to repair and revcover.
And if Audit the Fed actually makes in through all this mess, there may well be a balance sheet cap imposed on Bernanke, anyway.
another 16b net this week.
http://www.ny.frb.org/markets/mbs/index.html
if you can even believe them, they say they bought some ginnie's this week, but i am not convinced that is true, not in the size they say. and why so many fannie 5.5s for Feb? rates are lower than that. something fishy this week, maybe to do with getting rid of the outside managers.
I got a letter from Capital One saying they were going to raise my credit card rate from 6.9% to 12.9%....That was like 5 months ago...Something weird then happened, they didn't raise them....in fact, I think they lowered my rate by 100 bps. The only thing I can point to is they discovered that my home is paid off and I have a credit line for emergencies at a dirt cheap rate. And yes, I am in the 800+ club.
it's the 800 + fico.
MW has ALWAYS been sounding the alarm over Credit Cards. So What! Tim Geithner and Ben Bernanke are much more intelligent than the this ridiculous woman. I mean, lets get real here. She's a bitch who goes to wrestling matches. A Goddamned female Glenn Beck!
I'm going to teach her the meaning of the word 'respect' as I whip out my JP Morgan/Chase card, newly enhanced with $5000 of buying power at only 2% more in interest charges and show the world that yes, me, the American consumer, can do whatever it takes because "I am the Lizard King and I can do Anything!"
LOL. That's the same credit card limit I told them to shove up their ass. Maybe you got my 5 grand from JPM
MW is right about the huge cut-back on credit card "credit" , that number is overstated. Much of the cut back is credit that was never used, just authorized. We all got approved for so much credit, most never used even close to that amount. I at times had authorization to use $70,000 on credit, etc....but maybe I might have a balance of $7,000. That is $63,000 never touch, of course my limits have been cut--so what I only need $10,000 not $70,000. I think this may be true for my Americans. Will. it be a slow down to the economy or retail? Yes---most definitely... But overstated!!
I think Christmas holidays are a time of credit card use, as cash-strapped Mom and Dad try to make the kiddies happy one more time. But this year, the cashier might keep saying "sorry sir, but your card was denied." I think most middle class Americans do rely to some extent on their credit cards as a cash flow "flattener" that enables them to meet emergency needs or holiday purchase demands. Without it, they stop spending. No safety net, and can't take the chance. No, to the extent this holiday season is for some reason a success, it will be because blood has been squeezed from stones one last time.
Most Americans do not have credit lines of $70,000. Time to climb out of the Jag and go visit a Walmart and see who we are.
Watch what happens as Americans go on Holidays season cerdit card spending benders, and then go BK on them in January and February. If you think the CC default rate is big now, where do you think it goes after Christmas?
they will spin the xmas shopping, as not as bad as expected. they just don't tell you they lowered the expectations right before the new adjusted figures come out. then they can start touting the starting a new year, and things have ----stabilized.more of the same. THE GOOD SHIP LOLLIPOP IS IN THE SHITTER
I do admire Meredith's research.
Will another meeting with Sheila Bair be forthcoming?
As I have talked about previously, my difficulty in trying to grasp the current FED model between credit and price for real estate. My conclusion is one of residential real estate price control, or as they like to say it, price stability. However, stable prices, in my mind implies achieving a natural equilibrium in the market through the judicious use of credit. Not to use FED power as an obvious prop for an over priced asset class.
To essentially go up against deleveraging debt in this way through QE is incredible. After spending all of this money to prop up Fannie and Freddy, they will be faced with the real possibility that these GSEs will collapse anyway. The GSEs should have just been allowed to reorganized under bankruptcy protection, and default on the bad debt.
So is it any wonder why the FED is the only buyer of bad debt.
I often ask myself how this stuff is priced when the FED buys it. What price do they pay? Existing book value?
What does the contract or certificate say at the top?
INSTA-LOSS, CRAP-ESTATE, WE-PRICE-UM-HI, FED-KISS-MY-FANNIE?
If you prop up the whole market, you put in jeopardy any other mis-priced real estate investment. So now you have also put FHA at risk. Incredible.
Mark Beck
"If you prop up the whole market, you put in jeopardy any other mis-priced real estate investment. So now you have also put FHA at risk."
Very good, subtle, point. If prices had been allowed to fall, the FHA, with very little legacy risk on its books, could be writing much more secure business now, and would be in much better shape, as the new loans would be backed by collateral that is priced more reasonably vis-a-vis rents and incomes. Instead, FHA-insured mortgages are backed by collateral that is still overpriced.
Anyone remember the Whitney/Tavakoli spat? ( http://www.economicpolicyjournal.com/2009/03/janet-tavakoli-versus-mered... ) So now everyone is in love with this woman. Perhaps people did not read Bairs daily planner well enough (http://static.reuters.com/resources/media/editorial/20090930/bairfiles.pdf), check out Thursday, July 9th at 9:00, Meredith met with Bair! I can only wonder what the Supergirl had to say. Let me guess, she agreed to pump the bank stocks as noted in the Monday, July 13th WSJ (http://online.wsj.com/article/SB124749111536032571.html ).
For those familiar with Machiavelli's The Prince, when a country tries to be neutral in a major conflict, the country is eventually destroyed by the victor. Trying to be both a cheerleader and a harbinger of doom is a cry for an intervention. If anyone bumps into Meredith, please give her a hug.
They should fight. That'd be hot. It'd be a hot old cougar wrestling match.
MW's husband could teach her how to wield the steel chair, and Tavakoli could teach MW financial analysis. It'd be awesome.
Meredith says this as though it's some sort of tragedy:
"People use their credit cards as a source of liquidity."
That's the problem, Meredith. At 20% interest, the banks eventually end up with all the money and public can't consume.
+1
Completely agree!
SP500 Financial Index daily chart is turning bearish - after it's March 2009 bear market rally.
http://www.zerohedge.com/forum/market-outlook-0
I wonder how long it will be before the politicians start to notice that tax receipts are not picking up as the middle classes get squashed.This to me is the elephant in the room with fiscal deficits, not whether foreigners will continue to buy.
Realistically the FED cannot switch off buying MBS until house prices start to pick up and the consumer can withstand a mortgage increase of a few percent. That this props up government debt is a nice side effect. Time and flexibity is running out for the FED.
Anyone with an american bank credit card might be better of talking to a chinese bank about a card. Competition (or the lack of currently) will bring those charges down.
Master Bates - yer goin' at it all wrong. If you pay off your card every month, yer a leach to them. You didnt burn them - they burned you.
Can someone explain why there is no natural market for agency MBS. Can't it be assumed that they are backstopped by the fed govt at this point. Isn't that why yields are so low?
Who cares if they charge me 200% interest? I pay it off every month. This allows me to make very small interest on my cash for 30 days and I get cash in the rewards program! If ya wanna fuck em over, make it work for you!
The politicians already know that tax receipts are going down. But there is a difference between federal and state governments. States need to balance their budgets; the U.S. gov't does not. That's why my school/property/sales taxes are going up. So in addition to throwing out most incumbents in Congress, we need to really look at our state reps too. They've had their hands in the till just as much as Congress. When everyone had extra money, and had jobs, we put up with it. Now that we are in another Great Depression, we can't come up with money to pay for their follies anymore.