Can Someone Explain this to Me?

Can someone with more knowledge of financial and credit markets please explain something to me?

If the credit markets are in such a crisis situation, with banks no longer lending to each other, and millions of small businesses are in danger of losing their vital credit lines, why is my mailbox still jammed every day with credit card offers?

Just today, I got an offer from one of my current credit card companies, offering me thousands of dollars in cash advance convenience checks at a really low interest rate and no fee. And I got another offer from another company, for a whole new credit card account. And this is just a typical day. Sometimes I get even more offers than that — particularly since I own a small business, I seem to get several offers a week for small business credit cards and lines of credit.

Granted, Mrs. Yeoman Farmer and I have good credit ratings, have lived within our means for many years, and pay our bills on time. But we don’t have a particularly large income. And these new credit lines they’re offering us are completely unsecured, with no collateral needed.

I realize we’ve proven ourselves to be good credit risks. But the local shoestore is probably just as good of a credit risk. Why are they in danger of losing their credit, while we’re still getting all this new credit thrown at us?

One thought on “Can Someone Explain this to Me?

  1. Division of labor.Company A is paid to recruit customers. Company B services the transactions. Company C actually underwrites the credit card. Company D markets the customer information to Company A. Company E takes over the card if you become delinquent.The fact that Company C is (theoretically) in dire straits, doesn’t mean that Company A has to quit working. Really, Company C is not in any kind of trouble with it’s credit card operations. Those are always extremely profitable.The real problem in the credit markets is the proliferation of debt instruments that are no longer worth what the banks want them to be. There is a ready and waiting market for the mortgage loans, at 40% of their face value. The banks don’t want to sell them at that, because it would mean that they no longer meet the FDIC reserve requirements. They’ve used the SIVs as a cash substitute in their regulatory reports. Which should be against the law, since holding debt is the exact opposite of holding cash.The banks are in a hard place. If they mark the SIVs at the market rate in their books, they are immediately bankrupt. If they “mark to model”, as they have been up to now, they can’t sell the assets they need to unload, without crashing the market and essentially admitting that they’ve been carrying the paper on their books at twice or more of it’s value. They’re too complex to extract individual loans or even groups of loans out of (one bank might own as little as 5% of any particular loan in an SIV), so they can’t just get rid of the bad loans, they have to do them in “tranches”, good with the bad.That’s what the $700bbn is for, to buy the SIVs at a considerable premium to what they’re actually worth, so the banks can get them off their books. This is insanely stupid, but Uncle Sucker always act the patsy when Wall Street comes to call.

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