Insider report: Lenders are eating eachother

Recently, I've been writing about macro issues in the economy which cover broader aspects about the conditions we're all facing. Today I thought it would be helpful to share some of my insider perspective with my business owner friends; it's not pretty but it's better to know what's really going on if you want to have perspective. The banking crisis isn't over by a long shot, in fact it's just getting started. The papered-over solutions aren't nearly enough but yet many of the principal players are simply pretending it's all OK. They can't pretend forever however as the pressure keeps blowing through the cracks and we're seeing it manifest in the board rooms and back office operations in the commercial lending industry where I operate.
The Fed keeps parading the banking system around like "Weekend at Bernies"

Commercial lending has always been competitive but lately it's has gotten downright cannibalistic! As the availability of capital to make new loans shrinks and the "pie" of total loans gets smaller, lenders and (brokers, OMG BROKERS!) are clearly missing the pie completely and eating each other.

One example in Auto loans is that lenders will now initiate new car loans to people who already have a new car loan! That used to be a deal killer; if you were already paying down an existing car loan you couldn't qualify for another, new car loan on top of it. Now you can - obviously the first loan of the two loans (cars) the borrower carries will probably be the first one to default if things get tight because the second one is for the newest car. We call that "stacking".

Another thing I'm seeing lately is approvals which used to breeze through are now being heavily scrutinized or declined altogether. Industries that didn't used to have revenue guidelines now do like Trucking which has to show $50k average monthly revenue and at least three trucks minimum.

There have been a lot more incidents of "bait-and-switch" lending scams that seek to manipulate business owners that find themselves in need of capital. Their normalcy bias makes them particularly vulnerable to any offer which "seems" normal such as LOC, unsecured working capital at 6% annual APR - That doesn't exist, it's a unicorn. Even the SBA doesn't do that anymore and they have the money printer for crying out loud!

What happens is, the owners sign a bunch of paperwork and just before they close the broker calls to tell them they need to do a short term (usually 30 day deal) just to gain the confidence of the lender. Those deals are horrible, extremely high rate loans like $10k pays back $15k in 30 days. Of course, once the owner completes that, the unicorn never materializes as usual.

What is happening behind the curtain (inside the banks) isn't being shared to the public and I suppose that makes sense; if the public were to see the chaos they might flee. In today's world, depositors' money is a mouse-click or phone tap away from being transferred and that is scaring the bejezus out of most lenders right now. On the one hand they have to make loans but on the other they don't know if they'll have enough to pay depositors if/when they leave.

Right now, my banking associates aren't telling their business owners they can't lend, they're just taking applications as if they can and hoping/praying things will change fast enough that no one notices.

"As defaults rise, lenders are forced to tighten credit further. The first tumbling rocks are ignored but eventually the defaults trigger a landslide, and the credit-inflated bubble in asset valuations collapses.
As valuations plummet, so too does the collateral backing all the new debt. Debt that appeared “safe” is soon exposed as a potential push into insolvency. When the bungalow doubled in value from $500,000 to $1 million, the trajectory of valuation gains looked predictably rosy:"

As things progress I'm predicting more tightning until the Fed finally reverses course and starts to drop interest rates. They need to pick their poison because, although that will help the banks lend more without fear, it will also stoke scorching inflation which is already a problem.

What about another global financial crisis? We know that a banking crisis has already begun. Here’s the casualty list from just this month:

  • Silvergate Bank – Announced its bankruptcy on March 8
  • Silicon Valley Bank – Taken over by the FDIC on March 10
  • Signature Bank – Taken over by the FDIC on March 12
  • First Republic Bank – $30 billion liquidity rescue by 11 banks on March 16
  • Credit Suisse – Swiss government shotgun wedding with UBS on March 19

These and other factors have made for tight conditions. If you are thinking about taking on new debt right now I suggest you do so soon.

"These failures and rescues were accompanied by extraordinary regulatory actions. The FDIC abandoned its $250,000 deposit insurance limit and effectively guaranteed all the depositors in Silicon Valley Bank and Signature Bank, a guarantee of over $200 billion in deposits. This will deplete the FDIC insurance fund and require higher insurance premiums from solvent banks, the cost of which will ultimately be borne by consumers.

The Federal Reserve went further and offered to lend money at par for any government securities tendered as collateral by member banks even if the collateral was worth only 80% or 90% of par. These collateralized loans will be financed with newly printed money, which might exceed $1 trillion.

These actions have thrown the U.S. banking system and bank depositors into utter confusion. Are all bank deposits now insured or just the ones Janet Yellen decides are “systemically important?” What’s the basis for that decision? What about the fact that unrealized losses on U.S. bank portfolios of government securities now exceed $700 billion?

If those losses are realized to provide cash to fleeing depositors, it could wipe out much of the capital of the banking system.

The most important question is: Is the crisis over? Has the Fed done enough to reassure depositors that the system is sound? Has the panic subsided?

The answer is, no. The panic is just getting started"

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nick@mycapaccess.com
+1 727-863-1950