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The Credit Crunch Is Back: Banks Scramble To Collateralize Loans To Record Levels
One of the biggest quandaries of this cycle for the US economy has been the amount and growth of commercial bank loans. Virtually non-existent for the first three years of the centrally-planned new normal, something changed in 2012 at which point US bank loans, led by Commercial and Industrial or C&I lending growing at a double-digit pop, started to rise at an impressive pace, asking many to wonder: maybe the biggest driver for a sustainable economic recovery is in fact present, because where there is loan demand, there is velocity of money.

A few years later, as the loan growth persisted with virtually no flow through to GDP growth, we - and others - wondered: we know there is a "source of funds", but what about the "use of funds" - how can banks be creating tens of billions in loans if virtually nothing was ending up in the broader economy?
The first flashing red flag appeared last July, when we reported that companies were using secured bank debt to repurchase stock: a stunning, foolhardy development, comparable to taking out a mortgage on one's house and using the proceeds to buy deep out of the money calls on the S&P 500. This is what the FT said at the time:
For the top 25 US commercial banks by assets, C & I lending grew by 10.5 per cent in the quarter to June 25 from the previous quarter, according to annualised weekly data from the Federal Reserve.
This type of lending is an important source of business for the largest US banks, representing about a fifth of all loans made by the likes of Bank of America, JPMorgan Chase and Wells Fargo, according to Citigroup research. While low interest rates have made business lending less lucrative, the relationships it forges open doors for the banks to sell other services such as treasury management, hedging and leasing.
A second corporate banking executive at a large regional lender said: “The larger part of the usage in the market right now are loan refinancings where companies are paying dividends back out.” He added: "They’re requesting increased loans or usage under a lien in order to pay a dividend or equity holders of a company. Traditionally banks have been very cautious of that."
After scratching our heads for a few weeks afterward, we let the subject go: after all there is no way banks would be lending companies secured loans to use the proceeds to cash out existing stakeholders, in the process asset-stripping the corporation. This would mean that the loan officers at these banks are either criminally stupid, or corrupt and have been bribed by the borrower to close their eyes when signing the dotted line and wiring the funds.
But then, in mid-October it all came back with a bang when CLSA's Chris Wood spotted something very dramatic when looking at the several most recent loan officer surveys:
... American banks, in terms of the quite impressive pickup seen in commercial and industrial (C&I) loan growth (see Figure 10), have been financing financial engineering, be it M&A or share buybacks, not capex. Thus, C&I loans rose by 10.7% YoY in September. Yet in the Fed’s July Senior Loan Officer Survey, 26% and 18% respectively of US banks reporting stronger C&I loan demand stated that the ‘very important’ reason for stronger loan demand over the past three months were financing needs for M&A and debt refinancing, compared with only 6% for capital investment (see Figure 11). Meanwhile, the lack of healthy creative destruction associated with zero rates has long been associated with the Japanese experience of so-called zombie borrowers.
With this data in hand, the circle was almost closed, however one major question remained unanswered: how are banks so eager to lend out billions not for asset-backed growth projects but for the worst possible form of financial engineering: uncollateralized cashing out of existing investors, either through prefunding buybacks, or M&A? In other words, banks were the de facto sponsors of management teams and shareholders.
And more importantly, now with the credit cycle rolling over and the default cycle about to see a spike higher, when would banks wake up to the huge threat that their loans would end up being wiped out as a result of funding such terrible investments as the Bed Bath and Beyond stock buybacks, which as we showed recently, has resulted in a -27% return over the past 5 years.
Now we have the final answer, because according to the latest "Survey of Terms of Business Lending", the banks have finally woken up to the risk their billions in C&I loans issued to fund "financial engineering" are exposed to.
The reaction: an unprecedented surge in loan collateralization demands - as the chart below shows, the percent of total loans secured by collateral has soared by nearly 50% in the past quarter to a record 55.9% from 37.9%, the highest ever, surpassing even the loan collateralization demands hit after the financial crisis, which peaked at 52.3%.
Where does this sudden demand for collateral come from? While one can see a surge in collateral requirements across virtually every product, particularly at large domestic banks, where this ratio soared from 39.2% to 64.4% (small domestic banks have traditionally been prudent and here the collateralization ratio rose only from 86.6% to 88.9%), where the sudden risk appreciation was most obvious, was in "Commercial and industrial loans made under participation or syndication." Here, the ratio of collateralization of C&I loans made by large domestic banks has tripled from 23.8% to 74.9%, leading to an almost as dramatic jump across all domestic banks, where it soared from 26.5% to 75.7%.
What is the explanation?
Since syndication involves bank balance sheet retention risk (anything not sold remains on the bank books), and since loan funds have been recently slammed with near record outflows...

... leading to a historic plunge in the price of the leveraged loan index, as all of a sudden nobody wants any loan exposure and is selling anything that is not nailed down ...
... suddenly banks don't want any risk from residual loan exposure which they can't offload, and as a result are demanding companies pledge assets and otherwise collateralize whatever loans they issue (via bank syndication) "just in case."
Said simply, the credit crunch is back.
And the kicker: all this took place when ZIRP was still around. Now that both LIBOR and Prime have jumped following the Fed's rate hike, and now that financial conditions are far tighter than they were even back in October, expect collateralization demands to approach 100%, as a result of which C&A loan issuance will fall off a cliff as corporations, delighted to issue loans when collateral demands were at 25%, suddenly realize they have an all too real risk of seeing their assets "repoed" if and when the cash flow to satisfy interest payments suddenly dries up.
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capture all assets through boom and bust it creates from paper created out of thin air. they have stolen america.
Who is 'they' and what is this "America" you speak of?
Lizards and the former country that ceased to exist on 22nd November 1963.
22nd November, 1963...........8th grade, remember it well............
At our store...we have a gauge that has been very accurate in the past. When the economy as well as consumer sentiment is really good, we tend to see over 50% of the days sales in cash. When the economy is lacking and consumers seem distracted, or not as happy we see cash sales vaporise. Well...since Black Friday, our sales have been very good, but the cash sales are running consistantly at 30% with 70% Credit Card Sales. So from just one electronics store here in the Northwest...is this a canary in the coal mine, or just a seasonal fluke? This gauge has always been accurate for 30 years, so we shall see. Have a great day.
I've been meaning to say. I greatly admire you for running an independent electronics store in the face of best buy and amazon. Must be tougher than shit.
"capture all assets through boom and bust it creates from paper created out of thin air. they have stolen america."
But probably about half of its is worthless junk. For instances Banks funded Shale (LTO) drilling when Oil was above $100, now Oil sells at about $35. On top of the assets are likely liabilities since it costs money to plug a spend well and pay for the clean up costs. Any business in the commodities business has gotten crushed. Same thing applies to other industries. There is now a glut of commerical property as business have downsized (automation, outsourcing, etc). so a commerical building that use cost about $300M, now has a market valve of ~75M. The guys that made off with the Jewels are the Board members of these bankrupt companies, that collected large salaries by loading up companies with debt.
The only way these banks can be made whole again is another TARP/Fed Junk Asset Purchasing.
when you can steal all the hard assets for free, enslave the people to debt and addict a government to debt you cant lose. ah the jewish money system, its nothing if not brilliant.
"so a commerical building that use cost about $300M, now has a market valve of ~75M."
aGuy, wondering about that statement... as far as I know, commercial real estate is still trading at historicallly low cap rates, such that that $300MM building is still valued at $300MM...so, simplified, a property generating $15MM annual cash flow valued at 5% cap is valued at $15MM/.05=$300MM, where in years past it might have been valued at a 10% cap producing a value of $15MM/.10=$150MM.... now, whether it would sell for $300MM or $75MM in a forced sale is another issue....but I haven't heard of assets generally selling at a 75% discount over prior recent valuations...source?
i dont know what he was referring to specifically, but a) assuming flat occupancy and rental income (ie, the numerator) is one issue with your analysis... and b) if occupancy or expected occupancy does indeed fall off precipitously, then you get hit with the double whammy of a higher cap rate.
This should have been entitled, "We NEVER Saw it Coming!"
'They" haven't stolen it.
"You guys" have given it away. And now that it's all gone and destroyed, it's to late to complain about it. You had over 3 decades to do something about it. And all "you guys" did was cheer to the billionaires who destroyed the country.
Whatever happens, "we" have it comming.
The tide is going out bitchez.
Indeed it is.
When stawks still had room to run the big banks were only too happy to loan money for M&A and stock buybacks. They made money closing the loan, they made money on the interest, and they made a shit-ton of money frontrunning the upcoming M&A and stock buybacks they were privy to as the financiers.
Many, many corporations were buying their own stocks while the CEOs and board members were selling their shares on the resulting upswing.
Now that stawk valuations are at nosebleed levels and corporate credit lines are tapped out the game is over. The tide is going out and many have been swimming naked (extremely profitably naked). The banks are now hustling to get some clothes on (collateral).
The situation is not isolated to a single sector like Oil & Gas or Tech. It's rampant throughout all sectors in all the major stawk exchanges.
Hard to see how the banks are getting those company's to increase the collateral %.
Most of those loans were without the traditional covenants.
Or are we just talking new loans here ?
Must be a little dense today, but I want to try to pin down the timing here.
New loans. No more covenant-light loans for stock buyback schemes now that the "guaranteed profits" from the game are gone.
That causes a credit crunch that's especially painful for corporations that have accumulated a lot of debt on the books by using financed stock buybacks to maintain "earnings per share" ratios. Exacerbating the situation is that much of the unencumbered assets they do have left are valued at fantasy prices on their books (patents, commercial real estate, oil drilling equipment, "good will", etc.).
The timing of the coming credit crunch is hard to pin down because of government & central bank interventions. "Old math" no longer works. I'm flabbergasted at how long Japan Inc. has been able to keep their zombie corporations and financial institutions afloat. But when the credit crunch hits it'll be 2008 Global Financial Crisis redux. 50% stock market correction over a 6 month time span.
Here come the pink slips..
One way to pay this back is to get moar production out of your employees. That level of production is impossible.
I wonder if corporations will have more secondary offerings of their stock..you know "share dillution."
When solution one fails solution two will be their answer.
Okay, I'll take a stab at that.
First, when cash flow dries up due to slowing sales, supply disruptions or just poor planning, these companies turn to the banks for another dip in the punch bowl. Only this time around the banks want more skin in the game, as they know there is nothing left in the vault but empty promises (I.e. over inflated stock). Thus, enter the covenants.
Or secondly, when the first default occurs the bank gets a perfect opportunity to add covenants and strip out whatever remaining physical assets of value they passed on before.
As for new lending, I can tell you for a fact the banks are clamping down big-time on credit and are demanding not just primary collateral, but secondary collateral too (i.e. liquidity pledges, springing guarantees, etc.)
The is the classic example of a negative feedback loop all caused because the FED and CONgress refused to let the toilet flush properly the first time around back in 2008.
Sooner or later gravity always wins. Hedge accordingly.
Tsunami coming in
Perhaps it's because I'm awake. But 2015 feels much much worse than 2008. I just feel it in the air.
Having taken the red pill, you no longer internalize via self-abuse, rationalize away, or are desensitized to the 8 year rinse-repeat sector-sucking cycle generated by the centralized world currency monopole. You know when the switch is flipped off, now. You read it on people's faces, especially those who struggle to grasp why they did everything "right" yet everything is "wrong". You see it in the linguistic mind-implants of the general media that are designed specifically to confuse, obfuscate, and muddle truth and simplicity. You comprehend the manifold legion form of the parasite. You see profundity replaced by complexity, value-add replaced by price-increasing, structural integrity replaced by orthodoxy.
You bring to mind a very prolific speech from the MATRIX!
It's an old premise, that one may trust another with one's wealth. As old as the hills themselves. Accept no substitute for self-empowerment. The first thing they claim, is the exclusive right to draw blood through violence. AFter that power is secure, all else is a matter of course.
illigitimi non carborundum
Your perception of proximity has changed. There were always boogeymen under the bed. It is your acute awareness of them now which drives your feelings of greater risk.
That.......and the danger/risk IS exponentially higher than in 2008. :-)
You can almost taste it, can't you.
Most people I know know something is up but they haven't a clue what. The MSM is still telling them we are in a recovery and keep buying. It's like watching a three year old child running around with a foot long kitchen knife, waiting for the trip.
Pretty much all of the signs are there, if one know how to read them or knows what to look for.
The magickal markets may rise into orbit, but it may not mean a damn thing when one is not allowed to sell, due to "gating" or whatever euphemism is in play.
Not really, 2008 was terrible.
Back then, I worked for a big international company and my office was next to the HR department and on a daily basis, collegues I knew for years passed by to get fired.
Every day was stress for the turnover that dropped like a brick and everything in the economy just stopped.
That's not the case yet but thinking about it, when that return it will be even more bad because a lot of people still remember those days.
Wait for 2016!
It's a trap!
for whom?
ultimately the assets are worth some PV of the cash flow - unfortunately the cash flow is a function primarily of volume and price
both variables will be hammered but especially volume - capex support not there - discretionary income consumers not there enough - which leaves government: state, city, county, authorities of various kinds - all are going away big time - most especially the employees - right after the election.
which leaves the federal government and the federal reserve for support - maybe enough but ??
Plus ça change, plus c'est la même chose
For a long-deceased, albeit famous racehorse, your French is excelllent!
I was interested in re-learning spanish. As it is a romance language, a great deal of english is already in the language. Spanish has accent marks. French has all kinds of accent marks. I am thinking my days of learning french are pretty far off. I tip my hat to anyone (like Tim Ferriss) who can read and converse in multiple languages.
I like the idea of learning a romance language but I just can't handle everything needing a gender. A chair is neither feminine or masculine it is simply a chair.
Merci
This is the kind of analysis I love to read on Zero Hedge. You won't see this in the Wall Street Journal or the Financial Times until after things blow up.
and nobody ever sees it coming
let's see.....didn't this collateral scheme work out for the EU banks? They now own most of Greece.
Maybe banks loaning out-of-air money will end up owning a substantial equity position in many of our Dow/S&P companies. Might be pennies on the dollar to begin with, but after a bail-out (by taxpayers), recapitalization with more funny money, and guaranteed gov contracts, the amount of stock the banks end up with will leave them in control of what's left.
When Obama and Jack Lew get on TV to discuss this, it will be a week too late to get out.
This administration, the Treasury department, Porn addicted other agencies and the Federal Reserve "Never saw this coming.".
So... greed has destroyed the stockmarket yet again... who could have known...
Due the the Climate ponzi change scam, they forget we already know about Scalar weather war technology. We have the Katrina recordings. El Nino was created back in late 1990's.
El Nino is being created again to change the weather stream pattern. What is never mentioned, what percentage is the earth axis to the sun? 10,15,23%? We also have a epidemic called earth axis tilt.
The yahoo's can't support this phenomenon with the Sun not firing enough CME'S.
Thank God our new Pope is a village idiot in Climate Change godly payroll collection dish and becoming a movies critic for the masses. He's a communist piece of shit. Not the POPE we grew up with.
"This would mean that the loan officers at these banks are either criminally stupid, or corrupt and have been bribed by the borrower to close their eyes when signing the dotted line and wiring the funds."...(?).< this, AND who in the hell is "quantifying & qualifying" the fucking COLLATERAL on the loans!? (?) SHARE BUYBACKS = BANK OFFICER BONUSE$/OPTION ENRICHMENT$! (?) and WHEN ALL ELSE FAILS IN THIS CLUSTERFUCK RATS NEST, CALL ON THE AMERICAN TAXPAYER TO BAIL THEM OUT, AGAIN!......AGAIN!.........and AGAIN!..................WE NEED A REVOLUTION IN THIS COUNTRY, NOW!!....UNFUCK AMERICA!
That would be a great slogan to put on a 2016 Presidential Campaign cap:
Unfuck America!
well, commercial banks are regulated by da gubmint....da gubmint is supposed to prevent banks from effing up too badly...
is the FDIC ramping up on hiring? I ask, because if a 2007/8-style credit crunch is just getting underway, they're gonna be closing down some banks...
You can say all you want, but the stock market is still gonna go up.
No wonder the government has to keep the stock market inflated, and at the same time, had such an agonizing time raising interst rates a measely .25%!
On one hand , for corporations servicing the new bond debt (buying up shares to keep stock prices inflated) becomes more costly with the rate increase, even as existing bond prices drop as yields on new bonds increase. Some companies have to borrow more to overcome the drop in old bond prices. Pension and insurance funds need stock and bond prices elevated to maintain their "8%" return projections.
But now we see that it also costs even more to borrow because the banks are demanding more collateral, i.e., stock. If stocks decline, a daisy chain of defaults, born of declining stock prices, is set in motion.
Fine mud soup we have.
A company that borrows money to buy its own stock is a company that has intended to downsize. Downsizing can be a wise decision if the company has correctly identified that its field of business is shrinking, especially if there is cash on hand to buyback stock.
Even if there is not cash on hand to buyback stock it can still be wise if it is recognized that the market for the company's products is rapidly shrinking. In this case the plan is to borrow money to buyback stock while assets are being sold off to repay the loan. In effect the bank is financing asset stripping.
The opposite of the above is when a company issues more stock, typically through a rights issue, and uses to money raised by the sale of stock to finance expansion. A wise thing if the market is thought to be expanding profitably.
Make no mistake - stock buybacks equate to downsizing and a shrinking business. When lots of companies do it then it equates to sober realization that we are in a depression. Or at least a long recession.
Ask Tim Cook who was portrayed by the media to become the first $100 trillion dollar company.
His gay closet exposure nose dived the company under PC. Customers don't put up with that shit. Not a Apple fanboy. BlackBerry 10 OS supporter. QNX and security.
I don't think many peolpe care that he drives on the Hershey Highway. The only ones oohing and ahhing were the gays and lame stream media.
What about a company that borrows money to buy back stock to boost the stock price so that the CEO can cash out healthier stock options? That's not downsizing. It canabalism, isn't it?
Theft. Tax code, low interest rate induced theft.
Buying stocks at historic highs = proof of being in a depression? More like peak exuberance which PRECEDES recessions or depressions.
Stick with your basic principles of teaching christianity and our bible. You don't belong in Geopolitical discussions. Those idiots are public servants who work for us. We fire them when they don't represent the taxpayer. The church and state is separate. Go read the law you fucking imbecile Maxrist POPE.
If you were a DJ, you'd be mashing up NWA and Vivaldi.
Not sure. Don't remember either bands. Was never a DJ.
Edit: just looked up NWA. It wasn't my scene. Again, don't even no this band. I came from the punk, goth, grudge, metal era. Late 70's to 2007. Sorry to disappoint you.
Bauhaus - Stigmata Martyr - YouTube
I'd listen to that.
You crack me up!
Should I ever be in a position to request a cell-mate...
daniel ash and peter murphy, fantastic! tones on tail, love and rockets, bauhaus wow so much great stuff there.
Vivaldi had a band? Oh that's right. They were called the Four Seasons.
Did you get that one in a Christmas cracker? ;)
Just one question. How much longer do we have to wait before banks begin selling 100 year mortgages? The final last gasp of our society will be heard when people are signing no-money down, 100 year mortgages on mold riddled "mid-century" shitbox houses. Can't wait. Cuz it's all about affordability and stuff like that right?
Non-amortizing mortgages are already quite common. They're called HELOCs.
WOuldn't the properties have to be held within a trust?
The 'last gasp' is the ongoing QE that allowing the US to pilfer world wide dollar holdings. Dead man walking.
yeah, they SAY collateralized but collateralized with what, overpriced company stock? BWA AH AH! share-er-bag-holders have no idea what's coming.
Thats why it used to be illegal to use stock you were purchasing as collateral for the loan
to buy them.
if the price craters a billion shares wouldn't be enough
The most irresponsible companies were rewarded the most last time. It is now a race to become the most irresponsible.
So, for the finacially unsophisticted like me, it basically boils down to corporations who have borrowed too much and now with their stock prices falling, have to start pledging more and more of their shares to insurers, and this sets in a chain reaction of furtehr stock price declines?
Yep, a vicious spiral.
ZIRP is a means for the banks to capture more of the economy. Anyone who borrows faster than their income increases is selling themselves/their company to the lender. ZIRP was/is a siren song for borrowers to act foolishly. Counterfeit sucker bait.
1. Cash
2. Stock
3. Gulf War Trading Cards
4. BitCoin
After that, you are flat busted and then you go to congress for free money.
...or else tanks in the streets?
You mean..you mean setting interest rates artificially low at nearly nothing created an environment for malinvestment to take place? Your lying! I won't believe it! /sarcasm.
Joke from the '80s oil crash -- Oilman calls up banker and wants loan against his drilling rigs. Bnaker replies, "How much do they weigh?"
I could see where banks might have been engaging in C&I lending to finance financial engineering rather than growth, if management of said banks suspected that if it all went to hell like in 2008, they'd be again bailed out by money-printing and ultimately by the taxpayer
If there is a severe credit-crunch just getting underway, it'll be interesting to see if the taxpayer is again on the hook
If the taxpayer is put on the hook again, 2 things may happen. A taxpayer revolt followed by a bond market rout. Or, if not, then a massive QE followed by a bond rout. Either way looks golden.
first of all you have to get your mind right, TBTF is the law.
yes the TBTF's job is to see america fail, and make the most money they can for their owners, mostly non-americans.
I have one question what kind of stocks were put up as collateral for the buy-backs, were they the same as buffet's gs, bofa stocks he bought.
could in the backroom of the co's board designate the buy-back stocks, as preferred, and maybe in the same backroom with full agreement of the board designate these as "A" stocks?
the bbby chart is a perfect example of whats happened, whatever class of stock they bought as collateral was put into lock-box, the numbers were handed of off to the ppt, and their hft dept, which ran naked shorts, or longs on the way up, and down, for 5yrs. of course draining the average investor of billions of dollars, now 5yrs later the TBTF"S still have all the stocks they bought in the lock-box, and in reality has bbby's in their control, and have aleady had ppt make money on the buybacks, and can ride bbby to zero.
if their preferred stocks, the personal investor will get zero.
if my way of thinking is correct, the other graph will be correct in 2yrs, only the red line, the leveraged loan 100 index will be the green line, and the sp green line will the redline.
Ummmm. No.
The Banksters didn't "just wakeup" to the risk of billions in C&I loans.
The correct answer is that the Banksters have been Crack Cocaine Dealers.
And Corporations the Willingly Addicted Whores.
The Banksters have just been gradually Cutting The Opiate Of Choice with increasing collateral requirements.
Simple.
You really didn't think the banks were that stupid did you?
The systematically unimportant banks are behind the curve. What collaterals are they beguiled into taking ? Still lending because they have no talents to trade with the piranhas in the shadow banking system. Their business models floundering on not even "hope" to have puts on their Central Banks. These are no longer parasites but weeds. Too late their inventories (loans) are getting more rotten each day with no churns. Perfect places for liquidity squeeze that will roll into insolvencies. The juice is not even there to take the risk of bail outs by liquidity providers; there are more juices elsewhere to take similar risks. They still have depositors at this terminal stage, so you are going to cry fro these depositors who have not yanked out.
Buybacks, mergers to fuel $450 billion worth of stock demand in 2016 http://www.marketwatch.com/story/buybacks-mergers-to-fuel-450-billion-worth-of-stock-demand-in-2016-2015-12-10
Buyback Bloodbath & Beyond: How BBBY Lost $1.7 Billion Buying Back Its Own Stock http://www.zerohedge.com/news/2015-12-23/buyback-bloodbath-beyond-how-bbby-lost-17-billion-buying-back-its-own-stock
Buybacks enrich the bosses even when business sags http://www.reuters.com/article/us-usa-buybacks-pay-specialreport-idUSKBN0TT2AH20151211
Boeing raises share buyback authorization to $14 billion http://www.reuters.com/article/us-boeing-buyback-idUSKBN0TX2I520151214
Short-Termist America – Value-Extraction Has Replaced Value-Creation http://www.zerohedge.com/news/2015-12-01/short-termist-america-value-extraction-has-replaced-value-creation
19 December 2014 – Record $Trillion 2015 Stock Buybacks Announced, Bigger Than Peak QE! http://forum.prisonplanet.com/index.php?topic=264289.0