Debtors Revolt in the Offing - Check Local Listings

A debtors revolt is coming and, ironically, the dozen or so Too Big Too Fail (TBTF), systemically important financial institutions which control the bulk of about a trillion dollars of unsecured credit card lending, and which so generously received and in many cases still show on their balance sheets copious amounts of taxpayer capital borrowed from China, are now enacting the very policies which will be the cause of said revolt.

JPM Chase is leading the way, sending letters to cardholders who have locked in low "teaser/promotional" interest rates of 3.99% or 4.99%, mostly through balance transfers from other higher-rate credit cards which promise these low rates for the life of the loan unless you default (the technical term for doing something really bad) by making a late payment, going overlimit, missing a payment, paying less than the required minimum payment, forgetting to call your Mom on Mother's Day, and so on. Chase, and other debt-pushers, now the beneficiaries of the lowest interest rate environment since ever (they can borrow from Uncle Ben at the Fed for about a half percent, p.a.), aren't squeezing enough profits from these promo-rate cardholders, but now they've found a way.

Chase recently notified tens of thousands of cardholders it is raising the minimum monthly payment to 5 percent from the old industry-standard we'll-make-you-a-debt-slave-for-life-and-since-we-rewrote-the-bankruptcy-rules-good-luck-with-that minimum monthly payment of only 2 percent. Starting August 1, Chase cardholders who received these letters (see this link at Consumer Affairs and this link at Daily Kos for some real-life examples of the impact of this change), now will need to pony up 150 percent more each month to keep the low, low teaser/promotional rate. So if you just did a balance transfer for $20,000.00 (!) and were starting to feel pretty good about consolidating your debts into a manageable $400.00 minimum montly payment, surprise!, your convenient new minimum monthly payment jumps to$1,000.00.

Chase, of course, which recently did repay its $25-large Uncle Sugar equity infusion (and therefor never should be eligible to receive another bailout, TBTF or not), says it's merely following recommended federal (Office of the Comptroller of the Currency) guidelines in hiking the minimum monthly payments to 5 percent, but it (and probably all other card issuers who will follow) is rushing to change any and all credit card terms while it can before new regulations prohibiting such changes go into effect next year. The Clearly Intended Effect, of course, is, by making the new minimum monthly payments two-and-a-half times higher in one fell swoop, carholders unable to comply with the new $1,000.00 payment will default, which then gives Chase the ability to jack a cardholder's interest rate into the stratosphere, or at least 25 percent to, yes, incredibly, 39.99 percent, from the low, low, life of the loan 3.99 percent the cardholder was deceived into accepting. (And, insult-to-injury-wise, the cardholder probably paid a 5 percent balance transfer "fee" to boot - another grand for a $20,000.00 transfer.)



Marshall Auerback raises the same issue of a debtors revolt in his new deal 2.0 piece "Risk of Major Social Upheaval Likely if Bank Bonanza Continues," albeit triggered by different circumstances, and as the only remaining form of protest available to citizens of a new and dangerously armed police state (forget marching, as in Iran), but the effect will be the same.

When most of the home owning voters cannot pay their major debt or have no
incentive to pay their mortgage debt, there will either be a debtors revolt that
society will sanction or there will be a bailout of such a magnitude that mega
moral hazard will affect private lending forever. Once these things happen, you
will no longer have the social rules for private risk based lending. In other
words, financial markets will be unlike anything ever seen before in private
economies. Is this really what Wall Street wants, let alone American society as
a whole? (emphasis mine.)

When U.S. debt-slaves decide they have nothing left to lose, when neither marching in the streets nor bankruptcy is an option, the former due to personal status/safety issues and the latter because that game is already rigged in favor of the lenders, when minimum monthly payments are more than doubled specifically to create an opportunity-by-default to spew interest rates into the 30 percent range, the time will be at hand. Maybe not this year, but soon. Naturally no one in the finance-captured main-stream-media has picked up on this story, much less the widespread implications in a consumer-driven economy (Update One, 06/30/2009 Via Bloomberg: JPMorgan Raises Minimum Monthly Payments on Credit Cards to 5%).

In the meantime, Chase's action (and likely all other cardholders which will follow suit) will KILL what remains of the withering, green-shootless retail economy, no question, as cardholders are forced to shut down any and all discretionary spending to divert funds to credit card payments. Either way, kiddies, it'll be a lean Christmas (or Hanukkah or Kwanza or whatever) this year, so don't expect much under the tree (or menorah or whatever).

Your tax dollars at work. (Well, not Chase, but for BofA and Citi and Wells Fargo and...)

TARP Repayment Terms MUST Preclude Future Support

The "Gang of 19" and other U.S. banks which accepted hundreds of billions of TARP recapitalization funds - taxpayer money borrowed from our BFF China - since October 2008 now are growing impatient to return the money to Uncle Sugar. Stress tests were graded Pass-Pass last month after fantasy Q1 earnings were reported and accommodating capital markets have allowed the largest of the "Too Big to Fails," (TBTFs) with a couple notable exceptions, to bring debt and equity offerings fast and furious to a newly eager investor crowd. Even the much-heralded PPIP (really, MLEC 3.0) designed Rube-Goldberg-like to extract toxic waste from bank balance sheets and fob it off on an unsuspecting public, replete with more-than-generous fee comps for the "managers" now is DOA, having recently been euthanized by the FDIC as no longer necessary.

The Anecdotal Economist is all in favor of now-healthy financial institutions, courtesy of bogus Q1 earnings (huge wind assists from AIG derivatives unwinds, trading profits, mark-to-make-believe and the best, right Citi?, theoretical discounted debt buy-back gains), repaying the government and getting on with the business of fleecing credit card customers and mortgage refinancers and a rapid resumption of unrestricted, astronomical pay and bonus plans, but the fine print of the TARP repayment term sheet must contain one vital provision:

Any bank repaying TARP funds must forever be barred from receiving any and all similar government aid in the future.

TARP, if repaid, has to be an one-off for the TBTFs. When If the economy continues to head down the crapper, if the green shoots turn out to be weeds, if the green shoots get scorched, if home foreclosures double - again, if credit card default rates hit 20 percent, if personal and business bankruptcies double - again, if unemployment reaches 12 percent, if states, counties and municipalities go broke and tax revenues at all levels evaporate, well...boo-frigging-hoo, too bad for you.

Are you listening, Government Sachs? Did you catch that, Jamie? Taking notes, Kenny? If you pay back the TARP - THAT'S IT. No more government rescues again, ever.

So if, in future quarters, your metrics go south and you begin to report crappy results - again - and the shorts come after you with a vengeance - again - and it turns out 2009 earnings really were make-believe, do not demand expect another gift from Timmy, Ben and Sheila (and Larry and Bob).

If there needs to be a next time, to again save the TBTFs, the U.S. economy and the world from financial armageddon and meltdown, we respectively request it be done the old-fashioned way: Failing banks must be seized, management and boards must be dismissed, common and preferred stockholders and unsecured bondholders wiped out, toxic waste removed and new, solvent institutions re-opened. The FDIC has done this for billions of years. It can do it again.

Global Recession World Series

Game One of the Global Recession World Series finally is over, probably ending in early March. Team America notched a narrow victory against a worthy opponent –– Liquidity Crisis –– though not without some tense and thrilling moments, and not before bringing in its ace closer Timmy Geithner who, following his game-winning save, immediately demanded to be traded to Treasury.

Team America manager “Helicopter” Ben Bernanke, now 1-0 in his professional career after decades studying and theorizing how the game was played during The Great Depression (1929-1941) and more recently in Japan's Lost Decades (1990-Present), was pleased with the win despite needing numerous extra innings to conclude the game. “I thought it was gonna get away from us last September when we got shelled in the top of the twelfth,” Helicopter Ben said. “Geesh, bases loaded with Fannie, Freddie and Lehman, and who stalks up to the plate – AIG! – and there it goes, out of the park for a grand slam,” Ben recounted.

“So the bases get cleared, but then a Money Market Mutual Fund broke its buck trying to field an easy pop fly and the go-ahead run gets to third. Good thing it started raining,” Ben noted. “We got the TARP out and that helped cool things off during the delay, although not as quickly as Team America CFO Hank Paulson would have liked.” Paulson's TARP-use instructions seemed simple and easy for the grounds crew to understand – all contained in a three-page memo. How difficult could it be? When it starts raining, drag out the TARP, get it on the field and don't ask any questions.

But League Commissioners Pelosi, Reid, Frank and Dodd, would have none of it. If a TARP was to be deployed, there had to be specific rules and circumstances and a minimum number of grounds crew available to drag out the TARP and others available in case any TARP-draggers got hurt, and so on, until the TARP deployment instructions comprised more than a thousand pages and specified a new TARP be purchased with optional fittings, moisture sensors and other gizmos which cost $100 billion more than the original $700 billion estimate.

The Commissioners, and their 531 assistants, were forcibly ejected from the stands at the request of Team America manager Bernanke and CFO Paulson, relegated to watching from a small hole in the fence mostly left-of-center. Later, team CFO Paulson retired and arranged an acquisition of the club by a former League Commissioner and his friends shortly after the rain delay concluded. For some reason, however, what was left of the TARP remained on the field. We really would rather have not even played this contest,” said Bernanke. “Team America's record should have been good enough to exempt us from all this post-season nonsense, but apparently others didn't think we demonstrated enough skill and proficiency during the regular season, most of which, by the way, was managed by my predecessor, Alan “the Maestro” Greenspan. But a win is a win, and I'm pleased there will be countless Ph.D. dissertations written about Game One in the future.”

Fresh off its grueling, yet satisfying, first victory, Team America took its 1-0 record in the series and swaggered into an adjacent stadium to face its next opponent – Credit Crisis.

Game Two – which also went into extra innings – only recently has concluded following the universal sightings of green shoots. Again, Team America narrowly won a hotly contested battle against Credit Crisis, this time with invaluable assistance from game MVP Sheila Bair of the Federal Deposit Insurance Corporation. League Commissioners and their 531 assistants who set the rules and regulations of the sport, and also generously fund it, again were ejected from the game, forced to watch from a small hole in the fence mostly left-of-center, while they conspired with new Team America owners to spend another $800 billion to create a spin-off, Shovel-Ready Farm League.

“With the lucrative broadcast rights we sold to China, Japan, Brazil and others we can pay for at least half of the cost of this new league, and we have options to make them fund us for at least the next four years, as well,” one of the League Commissioners was overheard to say. Which was good, of course, as the TARP had shrunk so much after the rain in Game One there was little left. That and because the new Team America owners had cut away a big chunk of the TARP and used it to pitch a hospitality tent in the parking lot for their vehicles and the makers of those vehicles.

“Give us your tired, your poor, your wretched assets longing to be marked-to-par,” Bernanke implored the nation's systemically important financial institutions, industrial companies, insurance giants, mutual funds and hedge funds, “and with Sheila's help we will turn that toxic waste into shiny new Treasury bonds,” as Team America beat back the Credit Crisis foes.

With 26 letters in the alphabet, Team America manager Bernanke was able to create nearly 456,976 different Federal Reserve Credit Facilities, using four-letter acronyms like TALF and CPFF and PDCF and such (although some notable four-letter acronyms were avoided, despite the urgent need for as many credit facilities as possible), an offensive barrage the likes of which no opponent could surmount. (Everyone had a personal favorite Fed credit facility. Ours was the BARF: the Boat Anchor Refinancing Facility, under which the Fed would accept gently used moorings as collateral for needed credit extension.)

In doing so, the Fed lofted its staid balance sheet from mere billions, mostly U.S. Treasury obligations carrying the full faith and credit of the federal government, to trillions backed by who-knows-what, but the gambit worked like a late-inning squeeze play, credit markets thawed like a melting glacier in Greenland and Credit Crisis went down. And when the results of the Stress Test, which everyone passed with flying colors, were posted on the JumboTron during the seventh-inning stretch last month, the crowd went wild. Credit Crisis never was in the game from that point on as it became Team America's turn to shell its opponent.

In a post-Game-Two interview Bernanke said, “Green shoots clearly are sprouting everywhere and rivers of credit, at least in bond and equity markets, now flow which only months ago were locked in ice, and while fooling with our credit facility 4-letter acronym generator was fun, we really would rather have not even played this contest. But a win is a win, and I'm pleased there will be countless Ph.D. dissertations written about Game Two in the future.”

That recaps the action so far in this now 24-month-long Global Recession World Series. Fresh off its equally grueling, yet equally satisfying, second victory, Team America takes a 2-0 record and girds for its next, perhaps most difficult opponent – Deflationary/Solvency Crisis.

Game Three promises even more drama and action, as Deflation/Solvency Crisis certainly could be a formidable opponent. They have that big guy from California, the governor, who still can bench press about 500 pounds, the team's designated hitter and a fearsome intimidator (terminator?) of opposing pitchers, as well as an equally deep bench of individuals, businesses, industries, cities and states lined up for their crack at Team America.

With unemployment approaching 10 percent, and whole industries, cities and states teetering on the solvency brink, green shoots easily could get scorched and there promises to be some real curveballs in this match. For starters, it's possible the new Team America owners may fire Helicopter Ben and bring in a new manager. From what we hear, there's a short list with one name on it. And, the League Commissioners are debating whether to allow the Federal Reserve, which plays on Team America, to also be designated Chief Umpire. Not sure how that would work, but they write the rules.

Hard to say how long this game will last, as the opening pitches only now are being thrown, but the first batters, General Motors and Chrysler, went down swinging against some seriously good bankruptcy court fastballs, although a number of secured bondholders and common stock holders were injured in the stands from some errant foul balls.

After that, it's Game Four against Massive Government Debt Bubble as Team America's all-stars – the Fed, the Treasury and the FDIC – suit up against the League Commissioners' pet team, nicknamed the “CUBES” (Congressionally Unrestrained Budget and Entitlement Spenders). This could be the decisive contest in this winner-takes-all Global Recession World Series, although Game Five, if necessary, against the Forces of Hyper-Inflation, tentatively is scheduled for 2011 or 2012. Check local listings.