It’s just a Ball of Infusion

I’m having a difficult time reconciling the new found bank profitability driving more executive bonuses to this article at the WSJ. It’s called “Troubles for ‘Prime Borrowers Intensify” and it has some startling data. First there’s these numbers on prime mortgages which are undoubtedly creating some of the problems at the FHA that’s fueling rumors of the need for yet another bailout.

The mortgage-delinquency rate among so-called subprime borrowers reached 25% in the first quarter but appears to be leveling off, rising only slightly in the second quarter. The pace of delinquencies for prime borrowers is accelerating. Since prime loans account for 80% of U.S. bank exposure to mortgages and credit cards, these losses could ultimately exceed those from weaker borrowers.

Losses are also mounting in that group for credit card debt. This is because of the increased duration of unemployment for many folks. They basically are tapped out and don’t even have their home equity as a source of potential liquidity. Since unemployment, and especially duration is not really on the mend, how long can this go on before bank capital takes a hit again?

In addition to cutting back on spending, strapped prime borrowers often can keep up with their bills longer than subprime borrowers by draining savings accounts, reducing contributions to retirement plans and turning to family members for money. They also are typically slower than subprime customers to seek help for financial problems because they are concerned about the stigma associated with such assistance, credit counselors say.

About 40% of the strapped consumers seeking help from the OnTrack Financial Education & Counseling center in Asheville, N.C., are prime borrowers, up from 15% last year, says Tom Luzon, director of counseling services at the United Way agency. Many of these clients already scaled back their lifestyles after losing their jobs or seeing their salaries slashed. Some are small-business owners whose companies foundered as a result of the recession.

“They have made adjustments and made adjustments, but then you get to a point where you can’t adjust anymore,” says Mr. Luzon, who is a former banker.

“People who are middle-class wage earners initially may have severance pay and think they have plenty of time to find a job, but then they start using credit cards to support living expenses,” he says.

So, my question is this. If some of the original bank profitability recently has been due the availability of cheap funds through the FED, TARP, and other government sources, if prime borrowers are now having increased difficulty paying their obligations, what happens to bank profitability if the government funds dry up? How long do we have to keep propping the banks up while they merrily repeat the same portfolio decisions that can’t work once the market rates are back at market levels? Also, how are they going to absorb these increasing level of loan losses?

I frankly can’t see the end to banks requiring cheap sources of funds like the Fed window. I can’t believe the economy is going to recover fast enough for this to change. How long will we have to infuse the banks with tax payer dollars and on-the-cheap loans through the discount window? I don’t think most of these institutions could function without it.

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