Despite Trump’s benefits and a Fed in unlimited support mode, banks are cutting loans. The Spac bubble is scary

 Despite Trump's benefits and a Fed in unlimited support mode, banks are cutting loans. The Spac bubble is scary

US President Donald Trump - Chip Somodevilla / Getty Images

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US President Donald Trump – Chip Somodevilla / Getty Images

With a move typical of those looking for the political blow to sensation, Donald Trump took the bull of the congressional impasse by the horns and announced an executive order relating to the renewal of stimulus measures for businesses and households expired on 1 August: elimination of payroll deductions, extension of the unemployment benefit to $ 400 per week from the previous 600, deferral and postponement of all school expenses until the end of the year and extension of protections against evictions.

In conclusion, a declaration of love towards the middle class that the White House must have studied and calibrated with painstaking attention in recent days, especially in terms of timing. Many analysts, in fact, gave the presidential renewal package already ready before the natural deadline of 1 August, even net of the 1.8 trillion dollar financing reserve on which the Treasury lay and to be spent by October. But on Pennsylvania Avenue they thought it wise to offer public opinion a week of opposition between Democrats and Republicans “on the skin” of citizens, thus guaranteeing the white knight effect in the middle of the first real August holiday weekend.

And, above all, in order to make the record of people infected with Covid in the US, over 5 million. But in Washington they have well thought of using the fireworks of an extension until the end of 2020 of the protection measures also for silence another phenomenon which is beginning to show its most troubling face: as this graph shows, today in the ubiquitous Fed US it is virtually impossible to obtain a bank loan, net of the almost unprecedented stiffening of all loan standards in place.

In order to find a dynamic that is only fractionally more stringent than the current one regarding the disbursement of credit, in fact, it is necessary to return to the two-year period horribilis of 2008-2009 and it seems that no category is saved from the cleaver that US banks have put in place on assets, clear sign of a more than precautionary measure waiting for adverse winds in the autumn.

All this, then, in the light of this second graph, which shows plastically how since the beginning of the year, the US credit institutions had embraced the line of extreme caution in terms of forecast buffers on the losses linked to loans in progress, even with JP Morgan alone which in the first quarter had increased its defensive buffer by 5 times to 8.2 billion dollars.

And as the next graph shows no loan category seems safe from the wave of credit austerity put in place: from the so-called C&I (Commercial and Industrial) to CRE (Commercial Real Estate), from consumer credit (credit cards and loans for the purchase of cars) to RRE (Residential Real Estate).

Only i Jumbo Loans, billionaire loans with equally nine-zero guarantees, have experienced a stabilizing trend, while for the others it is now a deep red and an all time low.

And even before the current, further crackdown, American banks had begun to take precautions: if indeed a FICO credit rating of 620 was required prior to the lockdown for a new home loan and 5% the value of the property, in late spring the average standard had already risen to 700 credit rating and 20% immediate deposit.

All this, while the Fed operated as an ATM and dispensed liquidity in an almost continuous cycle.

But what for, then? This is shown by this graph, which shows how after ten months of ever-increasing operations, the US Central Bank has finally won its battle against the financing stress in the interbank market triggered on September 17, 2019 by the unprecedented jump in repo rates.

Wall Street thanks, Main Street a little less. And he relies on the White House. In short, net of what has been entered into the system, US banks still need to tighten the purse strings heavily, in view of a possible tail risk linked to the presidential elections of next November or to the evolution of the Covid pandemic.

In the first place, the risk of a second large-scale lockdown that freezes operations and inevitably leads to higher default rates and a continuation of federal moratoriums on practices directly linked to financing, such as repossessions or property evictions. All without forgetting the main critical issues, the main fear: that is, the risk of a drastic correction in share prices, similar if not worse than last March.

A to scare the banks in this regard, in addition to always new Nasdaq records now only supported by multiples expansion and buybacks, the dynamics shown by this last graph take care of it, typical of the highs at the end of the cycle.

The exponential rise of so-called blank check IPOs (Blank check IPO), or the the so-called Spacs appeared in style on the market (Special-purpose acquisition company), companies that operate as empty shells without real operations but with the sole purpose of going public to acquire or merge with another company, using the proceeds of the IPO for this purpose.

The last time the Spac bubble burst was in 2007, a little reassuring precedent. As indeed the numbers relating to the phenomenon of empty-shell companies created ad hoc by a team of financial advisors and sponsors: since the beginning of the year, 51 listing offers have been completed by Spac for a value of 21.5 billion dollars, + 145% compared to the same time span a year ago and a number that already today was equal to the agreements completed throughout 2019, while in 2018 they even stopped at 35 in total.

For Goldman Sachs, the bank that oversaw the study, a clear market top indicator. Yet another. It may be for this reason that, despite a Fed in support mode still without limits and a White House in the mood for benefits for all, at least until November 3, the US banks are already operating today in the same way put in place during the crisis period. systemics of the post-Lehman two-year period?


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