Tuesday, November 11, 2008

Are the Treasury loans to Banks backed by Commercial Paper or the Banks' Credit Card Receivables?

The claim is that the banks are not lending out the bailout money.  But they are.  All the credit card debt-backed 30-60 day paper usually packaged and sold and all the Sallie May loans usually bundled sold are now  stuck on the banks'  books.

With Christmas coming and consumer confidence in the tank, the U.S. government is rightly trying to keep the ball rolling.  .  Two weeks ago it was reported that credit card debt had gone up 1.9% in one week, or a rate of 100%/yr.  Such rapid growth of credit card use at a time like this hints at truly desperate people.  These credit card debts will have a very high default rate, but cutting off the borrowers, which is what the banks should rationally do, is an impossibility, as is a sudden cutoff of the student loans flows.

If my analysis is correct, this might explain the Treasury's unwillingness to release details of the commercial paper taken as security from the banks and also the sudden conversion of  AMEX into a bank; it can now  turn the American Express card receivables into paper, pledge the paper for Treasury loans and keep issuing more credit.   With AMEX included, the list of banks up for loans now precisely matches the list of the largest credit card issuers. 

At a time like this the banks would not allow a new  wave of probably low-grade borrowing without some sort of implicit government guarantee, which hints at more Treasury borrowing down the road, awhile the extraordinary secrecy about the nature of the commercial paper backing the banks' Treasury loans hints at real fear about how the markets would react. If the scale is as large as I suspect, then real consumer spending (by rational consumers who will be able to pay for what they purchase) is even weaker that we thought.  

I'd like to see a response from someone who knows the scale and quality issues associated with the credit card commercial paper rollovers and the Sallie May debt numbers.

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