A Loan Wolf

The residential mortgage marketplace produced large bundles of individual loans that were swallowed up mostly by the largest banks in the nations. These mortgage-backed securities – a substantial part of the derivatives marketplace – were a “sub”-prime mover leading the country, and eventually the world, into this horrific financial meltdown. Over-leveraging in general suddenly came out from behind the curtain of unregulated economic frenzy to bring us where we are today. Unemployment, consumers’ stopping or delaying spending, credit card defaults… all part of this mess.

But the massive “derivative” horribles were absorbed by the big financial institutions that got the big bailout money. Now comes part two, providing one of the biggest reasons why seasoned economists seem to have no real clue when this managed depression (or serial recessions) will end. As big banks accelerated their write-offs of bad debt (still not enough to suit my tastes) – quadrupling their taking bad debt off their books – local banks only took such write-downs off their books as a bit more than double their previous level of bad-debt-recognition. But guess where local banks are likely to suffer the most? They’ve laid off their residential mortgage bundles to the big boys, but what they’ve kept in their portfolios may kill a lot more banks… and keep the credit freeze as solid as ice for the foreseeable future.

Commercial real estate loans! Here comes the litany of bad debt, part two, and the government doesn’t seem incline to bailout any more banks. The locals appear to be very much on their own. According to the July 20^th DailyFinance.com, commercial real estate represents 13% of our gross domestic product ($6.7 trillion). We’ve see 57 banks fail so far this year, but that statistic may be a drop in the bucket since thousands of local banks are mired in commercial real estate loans.

DailyFinance.com: “Estimates are that banks will charge off $30 billion in bad commercial loans this year. This is the highest rate in 20 years. The data for this estimate were taken from reports submitted by 8000 banks. These are loans for offices, shopping malls, hotels, apartments and other commercial property…. Foresight Analytics estimates that commercial delinquencies will double to about 4.3% in the second quarter.”

As the government has refused to help CIT, a commercial lender to thousands of businesses, forcing the bank to a very expensive $3 billion private bailout that may or may not work, it does not augur well for any federal assistance for even smaller banks that might find themselves in trouble. Look at what AOL’s Money (July 20^th) tells us CIT’s failure could mean: “CIT's failure could pose a major threat to the economy, industry representatives have warned. A collapse of CIT could cut off financing just as businesses need it most during the ongoing recession. Its failure could force thousands of companies to drastically cut costs or shut down — driving up unemployment and dashing hopes for a swift economic recovery… CIT serves as short-term financier to about 2,000 vendors that supply merchandise to 300,000 stores, according to the National Retail Federation. Analysts say 60 percent of the apparel industry depends on CIT for financing, so other lenders taking up all the slack would pose a big financial strain.”

The absence of local lending, a necessary corollary to local banks’ dealing with failed commercial real estate loans, has a disastrous impact on local business, which so desperately need working capital and receivable financing to survive. This credit freeze has a most unfortunate impact on such businesses’ ability to keep going and sustain jobs. Tight credit suggests sustained unemployment for the foreseeable future.

And it’s not like the TARP loans generated any significant expansion in bank lending even among banks that got the money. A report released and summarized by the Washington Post on July 20^th by shows how TARP money was used for other purposes: “Many of the banks that got federal aid to support increased lending have instead used some of the money to make investments, repay debts or buy other banks, according to a new report from the special inspector general overseeing the government's financial rescue program.”

What does all of this mean for you and me? Longer and higher unemployment. Fewer small businesses expanding and many more failing. A housing market sitting in the doldrums caught between fewer qualified buyers and a decline in available loan financing. In short, this economic meltdown is like to extend even beyond the 2010 “bottoming out/turning around” expectations.

I’m Peter Dekom, and please don’t shoot the messenger.