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August 9, 2011 by Michael Croal Michael Croal

Speaking of… … …

080811aSpeaking of the debt debate, I had an interesting call the other day. Equifax rang me up and the conversation went something like this:

EFX:  Good afternoon, Mr. Croal Dude. We see you have maxed out your credit cards and your home equity line of credit. We are putting you on notice that if you don’t call Chase and get those limits increased, we will have no choice but to drop your credit score.

CroalDude:  Yeah, yeah, I know. I am in the process of cancelling my yardman, my bug guy, the alarm monitoring that I never set, and cuttin’ off my no-good brother-in-law. Therefore I will be reducing my expenses so paying those bills won’t be a problem.

EFX:  With all due respect, Mr. Croal Dude sir, that’s just not good enough. We need you to increase your lines so you can spend more. We’ll be watching you and don’t make us lower your credit score even if you can pay your bills.

It kind of reminded me of S&P’s warning on the U.S. debt ceiling.

Speaking of S&P, now there’s a crackerjack bunch of bean counters! Don’t you wish you had those guys on your credit admin team underwriting C&I loans? Totally missed the subprime housing bust, had Lehman at triple-A before they failed and now gave the good ole’ US of A the AA+ finger.

Speaking of Chase, I thought it was quite hypocritical that the one and same Mr. Jamie Dimon who sent me a letter in 2009 lowering my credit limit would now send a letter to Obama and crew demanding the debt limit be raised. And I wasn’t borrowing anywhere near 40 cents of every dollar I was spending.

080811bSo how are we GonzoBankers to prepare for the possibility of the September Deal-or-No-Deal briefcase coming up empty and introducing more carnage into the markets? If you haven’t seen this coming like a 200-car Union Pacific transport on an Old Faithful schedule, unlike waiting until the Cat 5 is kissing the shores of Old Mexico to develop a hurricane plan, it’s not too late to put a contingency plan together. Heck, even if you start tomorrow you’ll still beat the OCC out the door with a plan.

First, the good news. If the price of Treasuries drops because of a flight-FROM-junk as a result of a credit grade lowering, then the yields would go up so the variable rate loan portfolio tied to Treasuries will contribute to a nice little bump in margin. Of course, those creative and out-of-the-box Treasury-indexed CD and savings programs created by that rookie M.B.A. marketing hired last summer will also increase, offsetting some of the better margin. But, hey, you can’t have everything go your way.

Second, more good news. If granny’s social security check ever gets delayed by a couple of days the next time the well runs dry, that ought to cause some increased overdraft fees. Hip, hip, hooray for the return of non-interest income! And if you have a big exposure to a customer segment highly dependent on government checks like the military or federal contractors, they might also see a slowdown in payments, resulting in more NSF/OD income. Man, this just keeps getting better the more I think about it – if you don’t consider the loan losses or delinquencies that will come back in force.

080811cThird, more good advice from the federalies. I expect some “left-leaning be nice” guidance to all the “big mean nasty banks” to be forthcoming should the feds ever really run out of cash. Once you whip out the Little Orphan Annie secret decoder ring the gist of the message will be, “Just because Congress has proven time and again that they can’t manage their own personal checkbooks and are totally inept at managing the checkbooks of the U.S.A., as a result of their inability to get granny’s social security check to her on time we expect the big mean nasty banks to take on more risk and pay her worthless checks and don’t charge her any fees.” Lovely, huh?

For real, here are some key actions to take now.

  1. Fix the paperwork. Fed guidance over the weekend said U.S. Treasuries are still risk weighted as they were before. But with the other S&P downgrades for munis and other corporate bonds, if your ALCO and Investment Policy states that only triple-A rated investments will be in the portfolio, edit the policy and have the board approve it ASAP. If you have a lot of Treasuries and the U.S. gets downgraded to below AA+, I wouldn’t expect a lot of sympathy for violating your own policy. Just change the darn thing.
  2. Plan for negative interest. Speaking of ALCO, as investors cash out of the market they will be bringing wheelbarrows full of greenbacks to your door. Knowing that loan demand is soft, investment options are minimal, and deposits are hot, it may be time to follow BONY and charge new large depositors for keeping their money safe. Figuring out that pricing strategy will take some wrangling, so start now.
  3. ID accounts on the dole. Based on recent regulations regarding not garnishing government benefits, you should already be able to identify accounts that receive these government payments. If not, have a programmer identify an available user code and scan your ACH files for government deposits and flag those accounts. Use this flag when determining what checks to pay and not fee, or at least fee less, when Uncle Sam can’t get the benefits ACH file out on time.
  4. Evaluate margin pops. While a long term rising rate environment as a direct result of this “crisis” is not a realistic scenario (Greece has been bailed out twice and their rates are high but stable with every bailout and downgrade, and we have a much better chance to recover), you do want to know what your rate posture and communication will be for a three to six month spike. Ride the wave on the assets and hold the line on the liabilities.
  5. Ramp up the refis. Even with an AA+ grade, the global community still sees Treasuries as the safest bet when compared to powerhouse economies like Greece, Italy, Spain and Brazil. This will have the temporary effect of driving down long-term mortgage rates so that last group of refi-ers will be ready to move. Get you some of that.

080811dSpeaking of underwriting credits, I figured out why some banks have been failing. It appears that their underwriting standards for new commercial loans were fairly sound to begin with but when doing annual reviews for large clients, they noticed a high expense number getting higher in the forecasts. Being professional financial counselors, the banks suggested to the clients that to have the line renewed the company should lower expenses. The company came back with new financials that indicated future expenses would decrease by 20% because they would only increase spending by 80% instead of the planned 100%. The banks bought the logic and now those credits are part of an FDIC assisted transaction.  

-Croal Dude

 

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