MHP Asset

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Bank unraveling

November 6, 2007

Mark on the markets

Bank unraveling

Last Sunday, the board of Citigroup, a major U.S. bank, in fact the largest, held an emergency meeting to in effect to retire Charles Prince, the CEO. They also announced that they would take between an 8 -11 billion dollar loss in credit related instruments or mortgages.
There is still much anxiety in the banking sector with regard to the credit markets. As the mortgage markets unravel and banks disclose possible losses to the public, there is another problem looming for the banks that could be just as harmful as the sub-prime mortgage market. That problem is consumer debt, or credit cards that are unsecured loans issued by various banks and credit card companies.
Many People in the U.S. live on the equity in their homes. They refinance the mortgage and take money out of the appreciated equity in the house and often times pay off credit card debt that has been accruing at a very high interest rate. When the house no longer is appreciating or that easy mortgage money is no longer available, then there is no where to go for money if you have no cash. You could go to your retirement accounts if you have any, but not without penalty and taxes if you are not 59 and a half. Credit cards are quick capital available to most Americans, but not without a very high price.
So, without fail at this point of the economic cycle, consumer debt and delinquency rise sharply. Bankruptcy and foreclosure also rise.
When a bank or mortgage company forecloses on a mortgage, there is an asset that can be liquidated to recoup some of the money. When unsecured debt goes bad there is often nothing for the banks to get, and that is a problem facing banks now that could be at least as bad of a problem as the sub-prime mortgage market.
Many banks and lending institutions do not get involved with high risk lending; we have a couple of good examples in the valley that should barely feel the effects of the continuing storm in the credit markets.
This problem is not going to disappear overnight. It could take a couple of years to work its way through the economy and the markets.
In conclusion, now is the time to adjust your investment portfolio towards securities that are not influenced by these markets.

Mark Patterson is a registered investment advisor with MHP Asset Management LLC, and can reached at 447-1978 or Mark@MHP-Asset.c