What TLGP Expiration Will Mean To Credit Card Funding Costs; $1.5 Trillion In Bank Debt Maturing By End Of 2012

The most gratuitous government bailout program, in the face of the "Temporary" [Because temporary sounds just a little better than 'Permanent for Ever and Ever'] Liquidity Guarantee Program is now officially over as of October 30 (not so unofficially). Yet even as banks are now forced to wean off zero-interest government subsidies, the FDIC announced on October 20 an emergency guarantee facility, which would only be accessible on an application basis by banks that become unable to issue non-guaranteed debt "because of market disruptions or other circumstances beyond their control" so in essence the taxpayer is still on the hook and likely will be so over the next century as the government complex rolls up every bank, company and industry in America to prove that Marx was, in fact, absolutely right. Yet even those perpetual taxpayer moochers (aka banks) will now have to settle with debt that is likely going to be significantly more expensive. How will this impact banking operations in general, and credit card revenue in particular?

One perspective on the impact of TLGP phase out is provided by Moody's, which is rightfully concerned what a significant increase in the cost of funding (cause in space no one can hear you scream, and from 0% you can only go up) now that cephalopodic vampire zombies can no longer suck the free blood of taxpayers.

The TLGP was an attractive funding option for credit card issuers that are banking institutions, as the U.S. government Aaa-rated debt guarantee allowed them to fund credit cards on balance sheet more cheaply than via the issuance of credit card ABS. With the end of these low cost wholesale debt issuances, we have to expect a rise in banks’ funding costs, which should increasingly encourage banks to reconsider their credit card funding options, including issuing ABS under the Term Asset-Backed Securities Lending Facility (TALF) before this program also expires in March 2010.

Oh yeah, let's not forget that TALF is "supposed" to expire in less than six months. Not like it was used much courtesy of bubblemania 2009 and the Bernanke Heidelberger itch, but when you need it you will need it. And it won't be there. But even just looking at the TLGP cliff should send shivers down any vertebrate's (squids are a different phylum altogether) spine.

With over $600 billion in guaranteed debt issued by 118 entities, TLGP has been an important factor in restoring liquidity and confidence in the banking sector, and it significantly lowered bank funding cost during the crisis.

Although most banks that have issued debt under the TLGP continue to benefit from the low-cost funds they raised under the program ($300 billion of guaranteed debt is still outstanding and will mature through December 31, 2012, i.e., when the guarantee on already-issued debt expires), the ending of new issuances under the program last week marked the beginning of a new period where the government is beginning to exit the financial sector and where banks will be increasingly on their own when tapping the market for funds.

Thus the threats are as follows: i) the cost of new debt will spike, as by definition those who used the TLGP (and its implicit AAA-rating) the most, were the weakest banks, and ii) the same problem which is facing the entire US: the funding maturity mismatch - as TLGP is only sub 3 year issues, banks will be forced to not only roll but to extend tenors, as they already are straddled with extended short-term obligations. Moving further down the curve will end up being quite costly. The delta in funding costs once capital is paid for at the proper underlying risk will be quite staggering.

This should begin to explain why any consumer protection attempts focusing on curbing credit card abusive practices by banks is doomed to failure:

The major U.S. credit card issuers currently have about $850 billion in credit card assets, half of which are funded on balance sheet and will require refinancing at some point in the near future. At the same time, issuers also need to refinance $125 billion of credit card ABS scheduled to mature by the end of 20103. This is on top of banks’ other funding needs, which are significant in size and further expose banks to an overall increase in their cost of funds.

For the purpose of a new study that we will be releasing this week, we estimated that Moody’s-rated banks will face $1.5 trillion of maturing wholesale debt between now and the end of 2012. While banks have been able to issue such substantial amounts of debt in the boom years prior to the crisis, the current environment is fundamentally different and it may be substantially more difficult to raise similar amounts of funds in a cost-neutral way nowadays.

Which is why the administration is, to say it politely, #&$^ed. On one hand banks need to roll well over $1 trillion in debt, on the other hand, in order to be able to do so, the credit card "apparatus" has to be able to afford not only ongoing increasing delinquencies, but the avoidance of governmental meddling in its affairs. Yet it appears that credit cards are the primary focus of political interventionists who want to come off as consumer friendly. As the government squeezes one side of the question, even as it removes cheap funding crutches, it is quite possible that the next six sigma event will arise precisely out of the very same balance sheet that so far has been responsible for unprecedented bank profits. Now that the cheap funding days are over, the pain for the banks is starting to appear. And when TALF expires in March, look for the massive chorus of Wall Street voices to begin screeching in earnest as it hopes to repeat its record 2009 bonus seasons at least once more before everything goes to hell. Obama will, of course, glafly oblige, at the expense of the usual scapegoat - America's destroyed middle class.

Comments

[Anonymous]

Speaking of credit cards:

CONSUMER BORROWING FALLS 8th STRAIGHT MONTH, THE MOST SINCE 1943 WHEN THE FED BEGAN RECORD KEEPING

NEW YORK (CNNMoney.com) -- Consumer credit fell in September for the eighth straight month, the longest streak of declines since the Federal Reserve started keeping records in 1943.

Total consumer borrowing fell a seasonally adjusted $14.8 billion, or 7.2%, to $2.456 trillion in September, according to the Federal Reserve.

Economists predicted a decline in total borrowing of $10 billion in September, according to a consensus survey from Briefing.com. August saw a downwardly revised $9.9 billion decrease in total consumer borrowing.

September's total borrowing is down 7.3% from last year.

Revolving credit, which includes credit card debt, tumbled $9.9 billion, or 13.3%, to $898.9 billion. That's a 10% decrease from the previous year.

Nonrevolving credit, which includes car and student loans, fell by $4.9 billion, or 3.7%, to $1.567 trillion. That's a 3.8% drop from last year.

As the economy continues to shed jobs by the thousands, the credit crunch is being compounded. Cash-strapped consumers have a tough time paying their bills and are more reluctant to take on additional debt.

Meanwhile, banks have tightened lending standards because of a heightened default risk, so consumers see less credit available to them.

Earlier Friday, a separate report showed the national unemployment rate rose much more than expected in October, to 10.2%. Economists had predicted 9.9%, and the October data marked the first time since 1983 that the rate crossed 10%.

Last August, consumer credit contracted for the first time since January 1998.

[Anonymous]

At least the world would have already ended by then...a la Mayan calendar and all

[Stevm30]

Sheila - I didn't wake up on time today, and was late for work because of "circumstances beyond my control" (i.e. I was really tired from staying up late last night)... my boss says that if it happens again, I'll be fired.  Provided that happens, I'd like to issue AAA government backed debt so I don't have to stop living "The High Life". 

Thanks.

[Anonymous]

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