Posts Tagged ‘IAT’

Too little too late for the banks

By: ispeculatornew | Date posted: 11.21.2008 (4:00 am)

The credit crunch, we’ve heard about it time and time again right? And the main problem of it all has been generally put on the collapse of the US housing prices. You would think that could have a major impact on the US consumers. For over a decade now, a major part of the growth of the US economy has been coming from the important sums of money that the US consumer has taken off from their house as they took more and more debt. While the values of their houses (and thus assets) increased, it was not a problem. But it’s been a rising problem for some time now.

Yes, it’s all obvious, I know. But then explain to me one thing. How is it possible that Reuters is reporting now, in mid-November, that US banks are tightening credit card lending..? Really? Did it take this long for banks to notice that a major part of their clients would be unable to pay back their credit card debt? How is it that a bank will give a credit card to clients that already have over 10 cards with each of them having nearly 2K on them? Seems incredible to me and yet that is exactly what happened. They are now cutting back but it’s probably a little late to start doing this as they probably have quite a few clients that have been living on their credit cards for months now.

American Express(AXP.N), perhaps the lender with the highest earnings clients, was hit hard in its latest earnings as profits fell 37%. American Express chief executive Kenneth Chenault said last month that defaults in June had worsened beyond his expectations. And as you go from the American Express’ high end clients to clients that are less “wealthy”, the impact becomes even more important. JP Morgan said: “Given the potential stress on the consumer from rising unemployment, the continued downward pressure on housing prices and the elevated national inventory of unsold homes, management remains extremely cautious,” the bank said in the filing.

It seems as though the banks will have some trouble in this area for months to come and if they are currently starting to set more controls or to limit credit lines for some clients, you would tend to think that there will be some bad surprises for at lease a couple of quarters in this field, which gives us one more reason to be wary of investing in the financials.

One way to play this might be to be long regional banks (who are not as involved in consumer credit generally) against the established and general finance sector (XLF).

Any thoughts?