Increasing nemployment and underemployment are making consumers reluctant to borrow and spend money.

The reason for rising delinquencies, and the reluctance to borrow more, is growing unemployment and, as a falling work week demonstrates, underemployment. Joseph Lavorgna, Deutsche Bank's chief U.S. economist, points to a pattern of increasingly "jobless" recoveries starting in the 1980s. Furthermore, he says, the last upswing, which ended officially in December 2007, was weighted disproportionately to the construction and financial sectors. Jobs lost there won't return soon.

Restrained incomes and higher saving promise a grinding recovery with the threat of deflation and a lackluster outlook for the country's banks and cyclical industries. The wild card is whether authorities push aggressively for a politically more palatable but ultimately dangerous alternative: Inflating those debts away.

Inflation! Yay! Good news for Americans who have next to no savings but plenty of debt. We're in trouble when none of the possibilities for recovery are particularly palatable.

Don't Count on Consumers [Wall Street Journal]

(Photo: Great Beyond)

Dear Customer,

Your Advanta Business Card account is funded by an independent trust which owns the balances you owe on your account and provides funding for new transactions. We expect the trust to stop funding activity on our accounts. The trust also restricts our flexibility to fund activity on your account. Unfortunately, as a result, effective May 30th all Advanta Business Credit Card accounts, including your account, will be closed.

This means that you will not be able to use your card or account for new transactions, including purchases, checks and balance transfers beginning on May 30th. We understand that you may have written checks on your account before May 30th and we will make every effort to honor those checks that are presented to us for payment by June 3rd. If you use your Advanta card to make automatic recurring bill payments, you will need to make alternative arrangements for those payments promptly.

It is important to understand that you are not required to pay your entire balance at this time. You may continue to pay down your account balance over time, as allowed under your Advanta Business Card Agreement.

You will not lose the rewards that you have earned. If you participate in a Cash Back program, you will receive a check for the amount of any accrued rewards more than $1.00 as long as you make the required minimum payments and your account remains in good standing. If you participate in a Business Rewards program, you will have at least 60 days to redeem your points as long as you make the required minimum payments and your account remains in good standing.

We deeply regret the impact this action will have on your business and very much wish it was not necessary.

We are committed to assist you through this process. Additional information will be available at www.advanta.com/notice. If you have any other questions or concerns, or if we can assist you in any other way, please feel free to contact our Customer Service Center. You can email us your questions 24 hours a day at www.advanta.com/secure or call us toll free at (800) 705-7255, Monday - Friday 8:00 am to 8:00 pm and Saturday 8:00 am to 5:00 pm Eastern Time.

Sincerely,
John F. Moore President, Adavta Bank Corp.

Yes, the business name typo was in the original.

PREVIOUSLY:
Advanta Moves Up Credit Freeze Deadline, Still Doesn't Notify Customers
Advanta Shuts Down Small Business Credit Card Accounts

We previously reported that small business credit card issuer Advanta is shutting down all customers' credit cards on June 10th, without giving customers much notice to find alternative cards. Now, the situation is even worse. On Friday, Advanta abruptly announced that they will be cutting off credit lines on May 30. That's this coming Saturday.

Which is interesting and just a bit scary, considering what an Advanta rep told Consumerist commenter doctormoondog:

I just got off the phone with Advanta. They confirmed the story and told me that notices had been sent out to all cardholders, but due to "postal problems" we will not get them until the end of the month. That gives cardholders just 10 days to get new credit cards for their employees and make changes to any automatic payments which may be attached their Advanta cards. I suggested they post a notice on the website, but was told they don't plan on doing that because they are not required by law to do so. My business isn't carrying a balance, and this is only a small inconvenience for me, but it's just bad business to leave their customers in the dark until the very last minute. I hope Advanta Bank Corp. painfully dissolves like a slug in a salt bath.

Other customers wrote in to tell us that they, too, first heard about the impending loss of their credit cards from Consumerist. There's still no hint of the situation on Advanta's home page, so let's hope that they have a backup plan for contacting cardholders before the deadline. I wouldn't bet on it.

Nobody is questioning the company's need to take drastic measures. Advanta is in trouble, the Philadephia Inquirer reports:

Advanta's customers defaulted last month at a rate of 20.15 percent, compared with 17.31 percent in March, the company said Monday in a regulatory filing related to the Advanta Business Card Master Trust, which bundles Advanta's small-business loans for sale to investors.

Outstanding credit-card balances at the end of April were $4.5 billion. The company hopes customers will pay off their balances, but it is not clear what business Advanta will have after that.

Still, doing the bare minimum required by law to notify customers of a change that could potentially damage their businesses? Not a good way to cultivate relationships with customers you hope to keep.

Advanta moves up card-freeze date [Philadelphia Inquirer] (Thanks, JCA!)
PREVIOUSLY: Advanta Shuts Down Small Business Credit Card Accounts

(Photo: loopzilla)

Advanta, based in Spring House, Pa., is a company that provides credit cards to small businesses. A week ago, they announced that they are shutting down all credit cards to new charges on June 10—less than a month from the announcement. The reasons why, and an internal memo, inside.

According to a Philadelphia Inquirer article published on Sunday, Advanta has an interesting history:

Under Dennis Alter's leadership since the early 1970s, the company shifted its focus from its original business of making installment loans to consumer credit cards, then to subprime mortgages, and then to small-business credit cards, growing aggressively each time and having to reinvent itself amid tough losses.

Facing a high default rate in a tough economic climate for all businesses, Advanta was in trouble. Last year, the company declined to apply for TARP funds, claiming that their capital and liquidity were just fine, thanks.

Back in the real world, this means that Advanta no longer has new investors' money to turn around and lend to small business owners, and those small business owners are now left scrambling for a new credit card provider. "Shutting down the accounts will not accelerate payments required from cardholders on existing balances," the press release helpfully explains. Isn't that nice of them?

What's in Advanta's future? Re-invention in some form, if the past is any precedent. Here's the memo that broke the news to company employees—I'm sorry, "Advantans"—provided by an anonymous source.

Has your business been affected by this? Let us know at tips@consumerist.com.

RELATED:
Video: How Credit Cards Become Bonds
Oh Noes It's The "Shadow" Banking System

Advanta faces having to reinvent itself [Philadelphia Inquirer]
Advanta Announces Plan to Maximize Capital and Dramatically Reduce Risk [Press Release]
Credit Card Securitization Manual [FDIC]

That's why engine shut-off devices, or car disablers, are a hot new trend in car accessories. Less useful than a GPS and way less fun than a DVD player, the devices allow lenders to disable a car's engine remotely when payments are overdue. Yes, it's legal.

According to an article about the devices in the Kansas City Star, drivers have a few days' warning before the ignition is disabled.

With brand names On Time, PassTime and PayTeck, car disablers are wired to the ignition and typically provide motorists three or four days' warning, with flashing lights (green to amber to red) and quickening chirps as drop-dead payment dates near.

They will not shut down a moving car, manufacturers note, but will render starters silent the morning after the warning light turns red.

For now, disablers are limited to the subprime auto market—mainly dealerships that handle their own financing and court customers with bad or no credit. One small dealer notes in the Star article that since most of his customers are credit risks, "[f]or 90 percent of the cars [he] sell[s], [he] wouldn't without these."

AOL Autos reports that bigger lenders are looking into car disablers as the U.S. credit situation worsens, so the devices could become more common very soon. Provided that consumer protection laws don't catch up first.

No remittance, no ignition: Auto 'electronic repo' in action [Kansas City Star]
Car Payment Or Else: Engine Shut Off Systems [AOL Autos] Thanks, Roy!

(Photo: BunnyStudios)

Sadly, it does seem that a growing pattern of defaults within the store card market may be indicative of a larger more troubling trend.

From the NYT:

The cards, known in the industry as private label credit cards, tend to be held by riskier borrowers with fewer credit options. Losses on the cards are rising at a faster pace than the broader credit card market - reaching a three-year high of 10.51 percent in January, according to Fitch Ratings, up 44 percent from a year ago. That compares with general credit card losses of 7.5 percent, up 40 percent from the year before.

While private label cards account for only about 11 percent of all credit card loans outstanding, their troubles offer a window into the deteriorating finances of some of the most distressed Americans. And the losses may prove to be a warning of deeper problems ahead for general cards as the economy weakens and unemployment climbs.

G.E., the largest provider of private label cards, is looking to quit the business altogether. G.E.'s operation provides cards for such giants as Walmart and Lowe's, but was unsuccessful when it attempted to sell the division in 2007.

Losses Mount on Credit Cards for Retailers [NYT]
(Photo:Da Nes)

Take reader Kevin for example. The interest rate on his Bank of America credit card just doubled.

My interest rate doubled from 7.99% to 16.49% and my minimum payment increased from 1.5% to 2.5%. When I asked a rather rude customer service representative about this, she didn't have an answer for why they're doing this. I have never missed a single payment of any type in my life and I have good credit.

According to CNN, Bank of America received $15 billion in bailout money and they're turning around and sticking it to struggling consumers such as myself. I don't mind the higher minimum payment, but the interest rate increase is wrong and unfair. I hope you can help make this public so people know what's going on.

Sure thing, Kevin.

Our board game pits players against each other and encourages them to pick on the weakest, kick opponents when they are down and generally manifest all the characteristics that bring success in the financial world. Winner takes all!!

"Credit Crunch" [The Economist]

One of the main goals of the Bush Administration has always been to increase homeownership among Americans — a fantastic goal — but there was apparently one small flaw in the plan...

From the New York Times:

“The Bush administration took a lot of pride that homeownership had reached historic highs,” Mr. Snow said in an interview. “But what we forgot in the process was that it has to be done in the context of people being able to afford their house. We now realize there was a high cost.”

This seems like an odd thing to forget... especially for someone as accomplished as Mr. Snow. From 2003 - 2006, he served as the 73rd United States Secretary of the Treasury. Previous to that appointment he worked in the Reagan Administration and earned a Ph.D. in Economics from the University of Virginia. He's currently serving as chairman of Cerberus Capital Management, which among other things, owns 80% of Chrysler.

White House Philosophy Stoked Mortgage Bonfire [NYT]
(Photo:Rich Addicks/Atlanta Journal-Constitution)

CNNMoney says that all 30 of the company's plants will shut down and employees will not return until January 19th. Ordinarily, the company shuts down production for about two weeks — from Dec 24 - Jan 5. The employees will not receive their full paychecks.

The company said that there are many willing buyers out there — but no available credit.

"Chrysler dealers confirmed to the company at a recent meeting at its headquarters, that they have many willing buyers for Chrysler, Jeep and Dodge vehicles but are unable to close the deals, due to lack of financing," the carmaker said in an announcement. "The dealers have stated that they have lost an estimated 20% to 25% of their volume because of this credit situation."

Chrysler shuts down all production [CNNMoney]
(Photo: dooleymtv )

Credit card defaults are rising quickly, and the banks are rushing to keep ahead of the game — but by raising payments for already strapped consumers they may be adding to the wave of foreclosures.

USAToday says:

The growing problem is reflected in cases such as that of Dennis Spaulding, of Corona, Calif. He bought two last-minute plane tickets for his father's funeral in 2006, a purchase that increased the amount of credit he was using and made him appear riskier to banks. The result: Banks raised the interest rates on four of his credit cards — to 24% and higher — doubling his monthly payments to about $2,000.

That led to a financial spiral that has put him on the verge of losing his home and filing for bankruptcy. "I see no light at the end of the tunnel," says Spaulding, a cabinet designer.

USAToday says that according to the bankruptcy lawyers and housing counselors that they interviewed, many people are coming in for help with good mortgages — and bad credit cards.

"There's a misconception that everybody who comes in the door has a bad mortgage," says Doris Latorre, national director of quality assurance for Acorn Housing, which counsels troubled homeowners. "There are people who have good" mortgages but get into trouble with other loans when their banks change card terms, she says.

Rate increases and dramatic reductions in credit limits can push borrowers deeper into financial distress, rather than encourage them to pay their bills, says Robert McKinley, chief executive of CardTrak.com, a card research site.

The Federal Reserve is expected to issue a new rule about credit card rate increases and other aspects of the industry — but some critics are still pushing for a law that would protect consumers from rate increases on existing balances.

For those of you concerned about this trend, it seems clear that your overall debt utilization ratio (how much credit you use compared to how much available credit you have) seems to be the main thing that banks are looking at right now.

What do you think?

Changing credit card terms squeeze consumers [USAToday]
(Photo: Nrbelex )

Reader Nick says he is opening a new business and has been charging his expenses to his Platinum AMEX — and paying on time — or he was... until what has been happening to so many people happened to him. AMEX randomly cut him off.

Nick says:

I read the consumerist all the time. I also see that, over all, American Express is the best credit card company to deal with. I have just experienced the worst customer service I've ever received, and I STILL haven't gotten my problem resolved, even after calling Executive Customer Service.

I normally spend approximately 7-8k per month on my Platinum Card. I have an additional card holder that does about 50-60% of the spending. I always pay on time, and haven't ever been late or missed a payment. I amcurrently opening a new business, have been under construction, so I have been using both of our cards for construction runs to Lowes and other big purchases. Last month, our bill was 12,500. The bill closed on December 1. December 4, I got a call from American Express informing me that, "Until you pay us, you can't use your card." The bill was due on December 15th. I submit our bill to our investor, who in turn, pays me, normally by the 8th or 9th of the month. So I took care of paying the bill, and thought everything was fine.

I got a plane to Los Angeles yesterday, and thought that I would have a great trip and that everything would be great. I couldn't be more wrong. I went to make a purchase this morning on Delta.com for trip in a few weeks, and it wasn't taking my card. I called AMEX and was referred to the "financial review" team. I got a person in India that I could barely hear or understand, and after a 45 minute call, was told that "basically, we don't think you can pay your bills."

This after I've never missed a payment or been late in any way across any credit line. I called back again, got someone in the US finally, explained what was going on, and that I was stuck in Los Angeles on vacation, and that I don't carry another card. I carry my AMEX because it's the card I use for everything. I told them that I was 3000 miles from home, and that I couldn't even go out and have a good time while I was here. I asked why American Express didn't inform me of this, didn't send an email, or a letter asking me to provide financial documentation. No answer, no explanation.

They didn't seem to care. So I did what any consumerist reader would do... got in touch with executive customer service. Christine, the executive assistant got me in touch with someone that "could help me." I got in touch with the executive customer service agent, and they said that they could help out, and understood my situation. They sent me the form that they said I needed to fill out. It was a form AUTHORIZING THEM TO LOOK AT MY TAX RETURNS. I asked if they could turn my card back on for small purchases. She said they wouldn't. So I am in Los Angeles, with no purchasing power, and after faxing back the form immediately, she called back and told me that she wouldn't have an answer for 3-5 business days.

So no call, no letter, no call. They let me get 3000 miles from home, and now the "card that never leaves you stranded" has done just that.

Be careful, it will be the last time that I recommend the Platinum Card. Time to start carrying the other cards that I have that don't want to see tax returns just to let you use their cards.

A few quick Google searches will turn up quite a few other similar stories of consumer credit being slashed as banks try to manage their risk. Even with macroeconomic circumstances being what they are — leaving someone hanging 3000 miles from home is pretty inconsiderate — especially for a card that carries a $450 annual fee and supposedly has excellent travel benefits.

The Federal Reserve will provide the money used to purchase the assets. The Fed says (PDF) that the loans in the asset backed securities must be "auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration," though the program may be expanded to include "commercial mortgage-backed securities, non-Agency residential mortgage backed securities, or other asset classes."

The New York Times explains:

The new fund would, in effect, close the circle in the chaotic evolution of the Treasury rescue effort, officially known as the Troubled Asset Relief Program, or TARP. Under the new version, the government would once again plan to buy assets, including some troubled ones. The Fed would provide most of the money and buy comparatively healthy debt, like bundles of car loans, that private investors have stopped buying in recent weeks.

The Fed further announced that it would purchase up to $100 billion dollars of mortgage-backed securities backed by GSEs (Fannie and Freddie, etc.) The Wall Street Journal says that the stock market is pleased as can be about this new development. Stocks are up again this morning after soaring 12% in two days — the largest jump in stock prices since the crash of 1987.

The Dow Jones Industrial Average was recently up 62 points, or 0.7%, trading at 8505.11. The blue-chip measure is off to a promising start as it attempts to extend a two-day winning streak in which it has soared 12%, the biggest gain since the two days following the 1987 market crash.

U.S. Unveils $800 Billion Credit Program [NYT]
Term Asset-Backed Securities Loan Facility (TALF) Terms and Conditions1 (PDF) [Federal Reserve]
Stocks Continue Rise as Fed Unveils New Program [WSJ]
(Photo: afagen )

As I understand it, security escorted each ex-worker back to his/her desk, where they collected their keys and pocketbook, etc. They were not allowed to get anything else, and must return at a later time when the building is primarily empty to collect the rest of their belongings.

We suppose that's how it goes when you work in a huge vat of jewelry.

The layoffs are being blamed on QVC's credit card division, which is experiencing more defaults.

In late October, Liberty Media said third-quarter profits dropped at its QVC home-shopping unit as the credit crunch slowed consumer spending and more customers missed payments on QVC-issued credit cards.

Some 27 percent of QVC sales are paid for with the company-issued credit cards, George said.

"People are struggling," [Mike George, QVC's president and CEO] said. "QVC will be more careful, more conservative when opening up new Q-Card accounts."

QVC to lay off 910 [Daily Local]

From the Wall Street Journal:

While retailers, car companies and others hit by the slowdown in consumer spending haven't gotten the government money, financial firms of all kinds are getting federal bailouts.

It isn't clear if the application under the Troubled Asset Relief Program came before or after the credit- and charge-card giant got Federal Reserve approval Monday to become a bank-holding company.

Amex's shares are down 57% this year as even affluent consumers keep their plastic in their wallets. The WSJ says that it is unclear how Amex would use the money — and that it's clear that $3.5 billion won't help with the consumer spending slump.

Notoriously slime-filled credit card issuer Capital One has already received approval for $3.5 billion in bailout cash.

AmEx Said to Request $3.5 Billion in U.S. Aid [WSJ] (Thanks, Jameson!)
American Express Wins Fed Approval to Become Bank (Update1) [Bloomberg]

Check this out. It's Auto-Armageddon! From BusinessWeek:

"It was like somebody turned the lights off in October," said GM sales and marketing chief Mark LaNeve. According to GM, October, after adjusting according to sales per capita, was the worst month for sales in the post-World War II era. It was worse even than sales in September and October after the Sept. 11 terrorist attacks against New York and Washington in 2001. "In my 27 years in the business, I've never seen a month like this," said an exasperated LaNeve.

The declines aren't limited to U.S. brands. "The carnage was completely widespread," said GM's LaNeve. Toyota (TM), despite huge ad spending and zero-percent financing, reported a sales drop of 23%. Nissan (NSANY) was off 33%. Hyundai was down 31%. Suzuki was down 44%. Luxury makes weren't spared. Mercedes-Benz (DAI) was down 26% and BMW was off 10%.

We find it just shocking that that annoying-as-hell "Saved By Zero" commercial that Toyota is mercilessly force-feeding hapless football fans isn't working. Don't you?

Auto Sales Worst Since 1983 [BusinessWeek]
Stop Playing Toyota's "Saved By Zero" Commercial [Facebook]
Toyota Won't Stop Saved By Zero Ads Despite Pleas From Thousands Of Facebookers [Jalopnik]

In recent months, Moody's and S&P have been forced to downgrade the ratings of mortgage-backed securities as delinquencies soared and the housing market crashed. But why were they so highly rated in the first place? According to Bloomberg, the SEC found that "credit-rating companies improperly managed conflicts of interest and violated internal procedures in granting top rankings to mortgage bonds."

An e-mail that a S&P employee wrote to a co-worker in 2006, obtained by committee investigators, said, ``Let's hope we are all wealthy and retired by the time this house of cards falters.''

The New York Times says that one former S&P executive, with the all-too-perfect name of Mr. Raiter, claimed that old, outdated models were used to rate the bonds and that newer more accurate estimates were avoided due to "budgetary concerns."

Mr. Raiter said that the residential mortgage rating group at S.& P. had captured the largest market share among its main competitors — 92 percent or better — “and improving the model would not add to S.& P.’s revenues.”
...
Mr. Waxman’s committee also cited an internal e-mail exchange between Mr. Raiter, who had been asked to rate a collateralized debt obligation called “Pinstripe,” and Richard Gugliada, an S.& P. managing director. Mr. Raiter had requested highly detailed data about each individual loan, known as loan level tapes, to assess the creditworthiness of the loans in the security, but Mr. Gugliada wrote: “Any request for loan level tapes is totally unreasonable!!! It is your responsibility to provide those credit estimates and your responsibility to devise some method for doing so.”

Another former credit-rating company employee told the committee that the companies pushing these mortgage-backed securities "typically chose the agency with the lowest standards, engendering a race to the bottom in terms of rating quality.'' Credit ratings are paid for by the companies that are offering the securities — a system that causes a conflict of interest.

Still, others blame the investors for listening to the credit rating companies when they understand the nature of the relationship:

Asked how to fix the problem of potential conflicts among rating agencies, Mr. Egan, of Egan-Jones, said change would come only if institutional investors no longer made investment decisions based on ratings produced by agencies that take money from issuers. “Institutional investors know darn well that ratings are paid for by the issuers,” he said, “so why do they have all their investment guidelines geared to conflicted ratings?”

Credit Rating Agency Heads Grilled by Lawmakers [NYT]
Credit-Rating Companies `Sold Soul,' Employees Said (Correct) [Bloomberg]
(AP Photo/Lawrence Jackson)

“But when presented with the evidence that the financial crisis about to hit the United States would affect every single American up and down the economic food chain, this president decided that it was important that the government take robust action. That’s why we worked with Congress to establish the rescue package.”

Ms. Perino said the “capital injections” into the banks would involve “an equity stake” for the federal government but would not amount to a takeover.

“Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each,” Ms. Perino said, referring to Treasury Secretary Henry M. Paulson Jr.

The plan allows the government to take an ownership stake in banks — even healthy ones. In exchange, the banks would get an injection of cash that (in theory) would strengthen their balance sheets and convince them to start lending again.

The Times also says that the recent coordinated global rate cut hasn't seemed to help much:

Never before has the Fed issued an announcement on interest rates jointly with another central bank, let alone five other central banks, including the People’s Bank of China.

Yet the world’s markets hardly seemed comforted. Credit markets on Wednesday remained almost as stalled as the day before. Stock prices, which had plunged in Europe and Asia before the announcement, continued to plummet afterward. And stock prices in the United States went on a roller-coaster ride, at the end of which the Dow Jones industrial average was down 189 points, or 2 percent.

Even serious free-market type Republicans are starting to warm to the "cash injection" idea:

“The problem is the uncertainty that people have about doing business with banks, and banks have about doing business with each other,” said William Poole, a staunchly free-market Republican who stepped down as president of the Federal Reserve Bank of St. Louis on Aug. 31. “We need to eliminate that uncertainty as fast as we can, and one way to do that is by injecting capital directly into banks. I think it could be done very quickly.”

Administration Is Considering Cash Injections Into Banks
(Photo: Getty)

MSNBC says that a consumer whose spending limit on his Platinum Card was reduced shared the letter that Amex sent explaining their decision. Here were their reasons:

“Our credit experience with customers who have made purchases at establishments where you have recently used your card.”
“Our analysis of the credit risk associated with customers who have residential loans from the creditor(s) indicated in your credit report.”

MSNBC says the the experts they contacted confirmed that this is the first time they've seen these criteria as justification for a limit reduction. An American Express spokesperson said:

“We are looking at some other factors, too, in light of the economy. We are looking at consumers holding subprime mortgages (and) those living in areas where there has been a greater deterioration in home prices.”

The consumer profiled in the story says his mortgage is a fixed rate loan from Countrywide (now Bank of America) and that he uses the card to to charge travel expenses that are then billed to the clients of his consulting firm.

AmEx rates credit risk by where you live, shop [MSNBC](Thanks, Andrew!)
(Photo: damageinc86 )

Fuld testified before the House Oversight Committee yesterday, blaming everyone but himself for Lehman's collapse, an attitude that prompted Ward to confirm reports that he'd been punched in the face and to side with the attacker:

“From two very senior sources – one incredibly senior source – that he went to the gym after … Lehman was announced as going under. He was on a treadmill with a heart monitor on. Someone was in the corner, pumping iron and he walked over and he knocked him out cold. And frankly after having watched this, I’d have done the same too.”

Knock Out: CNBC Confirms Lehman CEO Punched at Gym [Business And Media]
Lehman CEO Fuld Blames Everyone But Not Himself [Gothamist]
(AP Photo/Susan Walsh)

To put it simply, the commercial paper market works like a credit card for big companies. Some days they have money, and some days they do not. So if they need money Tuesday, but will have money Friday, they'll go to the commercial paper market and borrow some money. Then on Friday they will pay back the money, plus interest. It's usually all very calm and safe — but when large well-respected companies started failing and the people who had lent them money on the commercial paper market (money market mutual funds, for example) actually lost money on these "safe" investments — the pool of lenders dried up.

Now the Federal Reserve is stepping in to "inject liquidity" into this market.

Here's how the Federal Reserve explains:

The commercial paper market has been under considerable strain in recent weeks as money market mutual funds and other investors, themselves often facing liquidity pressures, have become increasingly reluctant to purchase commercial paper, especially at longer-dated maturities. As a result, the volume of outstanding commercial paper has shrunk, interest rates on longer-term commercial paper have increased significantly, and an increasingly high percentage of outstanding paper must now be refinanced each day. A large share of outstanding commercial paper is issued or sponsored by financial intermediaries, and their difficulties placing commercial paper have made it more difficult for those intermediaries to play their vital role in meeting the credit needs of businesses and households.

The fact that the Federal Reserve has resorted to this move, which is of questionable legality and requires the use of a SPV (Special Purpose Vehicle), which is a separate legal entity that does the buying and selling on the Fed's behalf, is well, scary — and could be a "broader" undertaking than the $700 billion bailout.

Under its plan, the central bank would buy unsecured commercial paper, essentially short-term i.o.u.’s issued by banks, businesses and municipalities.

The market for that kind of debt has all but shut down in the last week, with many major corporations unable to borrow for longer than a day at a time, as banks become more fearful of giving out cash. The volume of such debt totaled about $1.6 trillion as of Oct. 1, down 11 percent from three weeks earlier.

These credit fears persisted over the weekend despite the $700 billion bailout package that Congress approved last week.

The cost of borrowing from banks and corporations remained high on Monday, increased in part by a series of high-profile bank bailouts in Europe, where governments scrambled to save several major lenders from collapse.

The United States government appears to be pressing ahead with other radical efforts to shore up the financial system, even wading into corners of the markets where it has rarely interfered.

One thing seems clear, the "credit crunch" is not going away and it is spreading beyond the mortgage issue.

Press Release [FED]
Fed Announces Plan to Buy Short-Term Debt [NYT]
(AP Photo/Miguel Villagran)

Here's a quick summary of the article, which can be found here:

1. A much less leveraged economy — Cash will be the thing to have.

2. More modest rewards — Less risk-taking means slower growth, slower appreciation of property value, etc.

3. A feast for bottom fishers — If you've got patience and cash, there will be a feast for you amongst the wreckage.

4. Fewer financial firms — Big banks are swallowing the smaller ones.

5. More government oversight of financial markets. — They're gonna be watching.

6. But a revival of private financial firms — Kiplinger's doesn't think that investment banks are gone for good.

7. Simpler forms of securitizing debt — Nor do they think that the secondary mortgage market is gone for good. They say it will be back, but it won't be as 'exotic'

8. Greater scrutiny of executive compensation — Shareholders are annoyed. Very annoyed.

9. Higher taxes and/or a bigger federal deficit — Someone has to pay to run the bilge pump.

10. Higher long-term interest rates — You saw that one coming, didn't you?

Hey, it turns out that the new post-apocalyptic economy is pretty much just the old traditional economy — but with a debt hangover.

10 Things That Will Change [Kiplinger's]
(Photo: Joy of the Mundane )

Pierre says:

I just received a shocking call from American Express.

My small business has had an American Express Business Account for the past two years. Our credit limit was around $25,000 and our average bill was approximately $12,000/month.

We have NEVER had a single late payment and, according to Amex's customer service reps, our spotless payment history is considered "perfect." In fact, most of the time, we pay our full bill prior to the date it is due.

So imagine our surprise when Amex called us today to inform us that our new credit limit on the account was $1,800. When pressed for details, the Amex rep made some vague references to a credit report.

However, our credit report is spotless. The only possible factor could be the fact that, since we are a private company, we do not share our financial information with Dun & Bradstreet.

Our company has bank lines worth several millions of dollars. We have been a loyal Amex customer. In an era where defaults are soaring through the roof, we have consistently paid our bill in full and prior to its due date. Doesn't that count for anything anymore?

Maybe not. The Wall Street Journal says:

Credit-card issuers have been decreasing credit limits in the wake of the subprime meltdown. Folks with good credit scores and solid credit histories are now getting caught in the fray.

"Most banks are cutting their credit limits," says Carol Kaplan, spokeswoman for the American Bankers Association. "They're doing it to everyone."

(Photo: Getty)

1. Don't panic/worry. It's not going to do you any good at best and at worst it can lead you to make some very poor financial moves.

2. Learn from what's going on. How would you have liked to have had all your retirement savings in Lehman Brothers stock? Key learning: diversify. If you have a large percentage of your portfolio in any single company, especially your employer's stock, you're taking on a big risk. Spread your money out and you'll be much better protected.

3. Focus on your career. Your career is your single biggest financial asset. As long as it's going strong, you have a very reliable safety net in your earning potential. Take some opportunities to improve your earning power/marketability/job security by attending a seminar or two, volunteering for a new project that adds to your experience base and delivers needed results for your employer, and networking with others just in case a change is needed. Making yourself a better, more marketable employee is never a bad decision — and these days it's one solid investment you can bank on.

4. Increase your emergency fund. Having a bit more financial cushion is a good idea these days. To save more, consider cutting spending where you can. Funny how a simple, innocent purchase in good times seems very frivolous these days. It's a cliché, but that twice-daily latte that runs you $8 total adds up to almost $3,000 a year. Is coffee really that important to you or would you rather be a bit more financially secure? Maybe it's not coffee for you and there's certainly no reason to eliminate all of life's pleasures, but there are areas of spending we all have that can be cut back a bit and not really cramp our styles much.

5. Keep investing. Yes, the stock market has been brutal of late. That's the bad news. The good news is that stocks are as low as they have been in some time. It's a great buying opportunity if you have ten or more years before you need the money. Prices may go down further in weeks and months to come (no one knows for sure), but if history is any indication, you'll do very well if you can hold out for a decade or two. 401(k)s are especially good investments. Look at it this way: even with the big losses in the stock market, you're still ahead of the game if you get free money from your employers' 401(k) match.

Those are a few of our tips. What would you add to the list?

— FREE MONEY FINANCE

(Photo: Kevin Dean)

IN THE rolling credit crisis, more than £46 billion of the bank's shareholder value has evaporated into thin air. The collapse has hit pension funds, wiped out the nest-eggs of many investors – and added to the misery of staff, many of whom had built up substantial holdings of HBOS shares.

The bank is going to be rescued by a merger with another UK bank, Lloyds TSB. [Scotsman & MarketWatch]

Wall Street is preparing for one of the largest bankruptcies in U.S. history as it becomes apparent that nobody wants to buy Lehman Brothers. Government officials are keeping the public's overextended credit card sheathed as they race to keep the fourth-largest U.S. investment bank from failing before the start of trading tomorrow.

Both Bank of America and Barclays rebuffed the Fed's entreaties to scoop up Lehman's profitable parts.

Barclays said it was approached by the U.S. Treasury at the end of last week, and saw in Lehman ``a potential opportunity to significantly enhance our investment banking and investment management franchise in key areas.''

`The proposed transaction required a guarantee for the trading obligations of Lehman Brothers which was potentially open-ended,'' Barclays said in a statement. ` Barclays wasn't willing to assume such an open-ended obligation.''

The US government had hoped to arrange a bailout under which other US investments banks - such as Citigroup, JPMorgan Chase, Morgan Stanley and Goldman Sachs - would finance a "bad bank" that would hold the most "toxic" investments of Lehman in the property and mortgage market.

The "good bank" or rest of the firm, including its investment and wealth management arms, would then be sold to another financial institution, for example Bank of America or the UK's Barclays.

Although such a deal would have cost the other investment banks millions, it might have restored confidence in the sector and avoided a sharp drop in the share price of all banks.

However, it appears that this plan is falling apart.

Lehman's lawyers are writing up the Chapter 11 papers as Wall Street and the Fed officials continue with their emergency meetings.

If nothing else, Bloomberg reports that the bankers and regulators were at least able to agree on a comprehensive mid-afternoon snack break:

At 11:30 a.m., five delivery-men arrived at the Fed building with carts of sandwiches, as the talks continued.

Lehman edges closer to insolvency [BBC]
Barclays Abandons Talks to Buy Lehman Over Guarantees [Bloomberg]
Lehman’s Fate Is in Doubt as Barclays Pulls Out of Talks [The New York Times]
(AP Photo/Mark Lennihan)

He was replaced by Alan Fishman, former president and COO of Sovereign Bank. The company has also entered a "memorandum of understanding" with the Office of Thrift Supervision, which is like probation for banks, requiring it to disclose lots of info to regulators throughout the year. Killinger built WaMu into one of the nation's largest thrift banks, but then got the bank into too much of the sub-prime mortgage business and over-aggressively expanded its retail outlets. His rolling head joins a line of other recently executed banks CEOs, Wachovia's Ken Thompson, Merrill Lynch's Stanley O'Neal and Citigroup's Charles Prince.

How much severance is he getting? WSJ says:

People close to the situation said Mr. Killnger would retire under the terms of his employment contract with no extra severance benefits. According to the most recent Securities and Exchange Commission filing related to Mr. Killinger's compensation, he held 1.2 million shares of common stock as of Dec. 31, 2007, currently worth about $5.2 million. He also has $14.9 million in deferred compensation and $3.5 million in pension benefits, according to the filing.

WaMu Placed On Probation As It Ousts CEO Killinger [Dow Jones] (Thanks to Dariush!)

A Mailbox With Fewer Credit Offers [NYT] (Photo: largeprime. p.s. the cc#'s are photoshopped)

From the LA Times:

"It has the potential to be an epidemic," Chris Swecker, the FBI official in charge of criminal investigations, told reporters in September 2004. But, he added reassuringly, the FBI was on the case. "We think we can prevent a problem that could have as much impact as the S&L crisis," he said.

Of course, we all know how well they prevented the (still on-going) mortgage meltdown. What happened?

Most observers have declared the mess a gross failure of regulation. To be sure, in the run-up to the crisis, market-oriented federal regulators bragged about their hands-off treatment of banks and other savings institutions and their executives. But it wasn't just regulators who were looking the other way. The FBI and its parent agency, the Justice Department, are supposed to act as the cops on the beat for potentially illegal activities by bankers and others. But they were focused on national security and other priorities, and paid scant attention to white-collar crimes that may have contributed to the lending and securities debacle.

Now that the problems are out in the open, the government's response strikes some veteran regulators as too little, too late.

Swecker, who retired from the FBI in 2006, declined to comment for this article.

But sources familiar with the FBI budget process, who were not authorized to speak publicly about the growing fraud problem, say that he and other FBI criminal investigators sought additional assistance to take on the mortgage scoundrels.

They ended up with fewer resources, rather than more.

FBI saw threat of mortgage crisis [LA Times]
(Photo: meghannmarco )

Stan Humphries, Zillow’s vice president of data and analytics, said in a statement that the gap between what consumers believe their homes are worth and actual values is due to “a combination of inattention and a fair bit of denial that causes people to believe their home is insulated from the woes of the market that affect others, but not them.”

“Although many homeowners may believe the worst is over, we think this level of optimism is out of sync with actual market performance,” Dr. Humphries said.

The survey also found that more than 90 percent of homeowners report that foreclosures have occurred in their local market already.

Are you in denial about the value of your home?

Zillow Finds Homeowners Confident in Own Home Value [Wall Street Journal Development Blog]
(Photo: Joy of the Mundane )

The Indiana Association of Mortgage Brokers worked with Rokita's office and lawmakers in drafting the new law, said the group's president, Mike Monaco of Merrillville.

"Make no mistake about it, we had one of the easiest entrance barriers in the country," Monaco said. He said many of the brokers who have lost their licenses likely already had left the business because of the housing industry downturn.

The low standards likely were among the factors leading to Indiana consistently having one of the 10 highest foreclosure rates in the nation, Monaco said.

When you add in the 143 brokerages who voluntarily gave up their licenses, the total number of mortgage brokerages in Indiana has shrunk by half since July 1st.

If you're interested in seeing a list of all the brokerages whose licenses have been revoked, you can click here (PDF).

40 percent of Ind. mortgage brokers lose licenses [BusinessWeek]
(Photo: stirwise )

What does this mean for you? Bank seizures, the final "worst case scenario" of the foreclosure process, depress the values of surrounding properties. One analyst quoted by Bloomberg estimates that 25 million homeowners have properties that are in danger of being worth less than they owe on them.

Bank seizures in the first half of the year increased by 154 percent to 370,179 from the same period in 2007, RealtyTrac said. Last year's second-quarter data on bank repossessions was not available, according to RealtyTrac.

Forty-eight of 50 states and 95 of the 100 largest U.S. metropolitan areas had year-over-year increases in foreclosure filings in the second quarter, RealtyTrac said.

U.S. Foreclosures Double as House Prices Decline [Bloomberg]
(Photo: Getty)

"The Board believes new leadership will help to revitalize and reenergize Wachovia and enable it to realize its potential," said the excellently-named interim CEO Lanty Smith.

Ken will now join Citibank's Charles Prince, and Merrill Lynch's Stanley O'Neal at the failed CEO pool party.

From CNNMoney:

Wachovia's woes, however, have only surfaced recently. In mid-April, the nation's fourth-largest bank reported a surprising first-quarter loss of $350 million - hurt, in part, by its ill-timed 2006 acquisition of California mortgage lender Golden West Financial Corp.

Shortly thereafter, the company drew the ire of its shareholders by announcing plans to raise $7 billion in capital through a stock offering and to slash its quarterly dividend by 41%.

Thompson defended the actions at the time, saying the capital raising was done to gird the company's balance sheet against a protracted downturn in the housing market.

The news only got worse last month when Wachovia restated its losses. The company said its losses were, in fact, closer to $708 million following a review of its life insurance portfolio.

Meanwhile, it looks like Kerry Killinger, WaMu's CEO, is gonna need a bigger boat. The company said it would split the role of chairman and chief executive...which is exactly what Wachovia did to Thompson before dropping him.

Wachovia CEO out at board's request [CNNMoney](Thanks, Evan!)

The fuel and engine for the sub-prime mortgage meltdown and the credit crunch was Allen Greenspan and the doubling of the global monetary supply, according to the This American Life episode "The Giant Pool of Money" I just got around to listening to. Basically, a bunch of poor countries got rich all of a sudden selling TVs and the like, and in 6 years, doubled the worldwide supply of money. The giant pool of money was hungry for places to invest itself.

At the same point, Greenspan told them that the interest rate on Treasury bonds was going to stay low for a long-ass time. The giant pool of money went to Wall Street to buy mortgages and there just weren't enough mortgages to go around, unless, somehow, more mortgages could be created... Plug this nugget into everything you learned from the Stickfigure Powerpoint Explanation Of The Subprime Mortgage Meltdown, and now you nearly know it all. The This American Life also does a good job of filling in the rest of the blanks of the bad decisions made by each person in the toxic money chain.

The Giant Pool of Money [This American Life]

(Photo: Getty)

I found this Citi email funny because it is the CEO making me "among the first to know about the bold steps" that Citi is taking. He then goes on to not tell me anything at all about the bold steps. At least in my opinion.

-Ben

Citi writes:

Dear BENJAMIN [redacted],

I want you to be among the first to know about the bold steps we are taking at Citi to be the premier, global, fully integrated financial services firm.

Our objective is to create for our customers an experience in which services are seamless, payments and transfers effortless, and distances meaningless. My commitment - and the commitment of everyone at Citi - is to work tirelessly around the world and around the clock to deliver outstanding value and service as we continue to earn your trust.

We are proud of our enduring strength as a global financial institution, striving to successfully meet the needs of clients like you in more than 100 countries. As always, we look forward to continuing to serve you - wherever you are and wherever you need to be.

Sincerely,

Vikram Pandit
CEO, Citi

Ben, your problem is that you don't speak CEO. Thankfully, we do. What Mr. Pandit really means to say is this:

An Oppenheimer analyst was quoted in the media as saying ""We wish [Citi's] management team all the best in their ambitious endeavors, but we fear [it] is past the point of fixing," so we think you might fire us as your bank... and so we thought we'd email you. Hi there! Please ignore the fact that people are saying we are "so deep in a black hole that even renown physicist Stephen Hawking could not help the ailing company." Kisses, -Vikram

CITI IS BEYOND REPAIR [NYP]
(Photo: cmorran123 )

"It was really every sleazy move in the book," says NPR's tipster, an economic analyst turned stay-at-home Mom who has owned several homes in the past and who is married to a mathematician.

NPR's tipster says that when she told the Countrywide loan officer that her income was low because she was a stay at home mom, he told her that she could lie about husband's income because he had "manager" in his job title.

"He said he could change it and if it was a manager then the underwriters wouldn't be as questioning. And I said but our taxes don't reflect it and his boss will not verify that that is indeed his income, and basically he said: 'Don't worry about it. I'll deal with it.'" She also says that the loan officer asked her to create an entirely fraudulent document claiming that she made $60,000 a year when in fact she was not working.

"I told him that I was extremely uncomfortable doing it, and I didn't want to," she said.

Countrywide says it is looking into the incident.

Woman: Countrywide Proposed Fibbing to Get Loan [NPR] (Thanks, Tmoney02!)

"He made a mathematical decision and just let it go," said Gregory Emerson, Mr. Canseco's lawyer.

Mr. Canseco bought the 7,300-square-foot home in Encino, Calif., for nearly $2.8 million in 2005, according to public records. He transferred partial ownership to a trust last year, according to Mr. Emerson. That trust defaulted on mortgage payments in October, and foreclosure was recorded in February, public records show.

The house already had at least one lien placed on it, from the Internal Revenue Service, and a judgment stemming from a 2005 court ruling in which Mr. Canseco and his brother Ozzie were found liable for a 2001 brawl in a Miami Beach nightclub. Together, the liens and judgment totaled some $1.3 million, according to Mr. Emerson and Tina Cameron, Mr. Canseco's real-estate agent.

"Given that there were liens on the house and the market had gone down, he made the decision to let it go," Mr. Emerson said. He said that the decline in property values alone meant that Mr. Canseco's equity in the house had fallen by about $1 million.

Mr. Canseco is currently promoting his second tell-all about steroid-use in Major League Baseball, and continues to assist federal agents who are investigating Roger Clemens for perjury, etc. Canseco told Inside Edition:

“I do have a judgment on my home and it to me is very strange because it didn’t make financial sense for me to keep paying a mortgage on a home that was basically owned by someone else."

“I decided to just let it go, but in most cases and most families, they have nowhere else to go,” he said

Home Run: Canseco Lets House Go Into Foreclosure [WSJ]
Jose Canseco: Walking Away from His Mortgage ‘Not Difficult Emotionally’ [WSJ]
(AP Photo/Luis M. Alvarez)