The spike in 2005 below was bankruptcy cases rushing through the system before tougher legislation was enacted:

Source:  U.S. Courts

The number of filings still remains elevated and is a reflection of the structural problems in the economy.  We need to remember that when people file, the vast majority are at a point where they are no longer able to service their debts with their current cash flows.  In other words, they are insolvent.  It is interesting that the large banks reached this point in 2008 yet were able to muster unlimited access to taxpayer money through the U.S. Treasury and Federal Reserve.  Clearly individual Americans don’t have this luxury and must deal with the trappings of a system that is pushing many over the edge.  Many have brought this on but others have paid medical bills with credit cards.  Either way, there are major losses ahead.

Quarterly data may not show the exact changes or turns in the economy.  But if we break down the last fiscal year for bankruptcy filings we see that we end on an extremely high number of filings:

By far the last point was the highest on record.  It is likely that this reflects the courts rushing to close the year with later cases but whatever the reason may be, this spike is not a good sign for the financial health of average Americans.  The problems of bankruptcy are not limited to one part of the region.  Although it would seem that Nevada and the South have larger per capita case filings:

It is clear that bankruptcy hits every part of this country.  If we look at the latest data for May, we find the following:

May 2010 filings (personal filings):            136,142

May 2009 filings (personal filings):            124,838

This is a solid 9 percent increase over the last year.  Keep in mind this latest jump occurred under the notion that the economy is recovering.  It also reflects the unwillingness of banks to work with average Americans even though that is specifically what the bailouts were based on.  What is occurring unfortunately with banks is the hoarding of bailout funds to speculate on Wall Street while letting American families be crushed by their insurmountable debt.  The breathing room they have gotten from the taxpayers is not being given back.

It is a troubling case of do as I say, not as I do.  The bottom line with spikes in bankruptcy filings is that the real economy is still mired in deep systemic problems.  If we have people anxiously waiting for their food assistance debit cards to refill at midnight simply so they can go to Wal-Mart to buy food, this tells us the economy is anything but solid.  Bankruptcy is never the first option and is a long process.

To show you that this can hit everyone even those that appear to be rich a New Jersey “housewife” shows that spending too much can lead many into a precarious financial position:

(NY Post) Spendaholic ‘housewife of NJ’ owes a big-hair-raising $11M

Behind the bankruptcy filing

What the Giudices make a year:

$79,000 (plus $120,000 in “assistance” from family members)

What they owe: $10,853,648.04

Credit Cards
$104,000
including $20,000 to Bloomingdale’s, Neiman Marcus, Nordstrom

$1,280 monthly payment for Cadillac Escalade

Mortgages
$2.6M
for eight mortgages on three homes (two have been handed back to lenders)

$5.8M Joe’s business investments

$85,600 Home repairs

$12,000 Fertility treatments

$2,300 Phone bill

Now run those numbers.  $79,000 annual income and $11 million of debt!  Now I’m sure many other families are nowhere close to this but there are many families out in more high cost of living regions that took on say $1 million in debt with a $40,000 income.  This was easily done during the credit bubble days.  I’m sure the courts are seeing many of these cases as well.  In the end, the fact that bankruptcy filings are this high shows that the economy isn’t exactly on the mend.

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This must put the recent stock market rally into perspective.  The average American is still trying to negotiate the new economic landscape while the select few are able to increase their wealth at the expense of the many.  Let us look at bankruptcy filings per year:

Now you might be wondering why there was a big jump in 2005 in the midst of the “growing” economy.  In 2005 new rules and regulations were coming into effect that would make future bankruptcy filings more onerous and had clauses to gouge average Americans.  So many rushed to file before means testing and other criteria came into effect.  So this recent jump is more significant since it comes in light of the new tougher standards to file.  But the economy is aching and average Americans are trying all they can to get by, tougher rules or not.  How much money can you squeeze out of a family that just lost their job?

This enormous jump in bankruptcies came in a year that the stock market rallied by over 60 percent from the March lows in 2009.  Apparently, this stock market rally did very little to assist many average Americans in their economic struggles.  As you would expect this crisis is causing many people to file and not what you may expect.  Average Americans from all levels are having troubles servicing their mounting debt:

“(WSJ) during this recession, the housing crisis and high unemployment rate have prompted more people to file for bankruptcy who may never have considered the option before, experts said. Filings from 2008 showed more people with high income and high education levels resorting to bankruptcy petitions, according to an annual survey of consumer-bankruptcy filers’ demographics by the Institute for Financial Literacy, a nonprofit that provides bankruptcy-related counseling and education services. Those demographic trends appeared to continue last year.

Mr. Mann said he believes bankruptcies reached their peak sometime last year, but bankruptcy attorneys from across the country said there was no sign that business was slowing. The 113,274 filings in December alone were a third higher than the same month a year earlier.

“I can’t see over the top of the files on my desk,” said Cathleen Moran, a bankruptcy attorney at Moran Law Group in Mountain View, Calif., likening it to the rush of clients before the revised law went into effect. In a three-month period before those rules changed in 2005, her firm filed five times as many cases as usual.

Ms. Moran’s clients in 2008 typically were people who earned between $40,000 and $80,000. That changed last year when a rash of people who earned $100,000 to $300,000 began filing as well, she said.”

So of course, those that are in the trenches continue to see problems in the economy.  The 10 percent headline unemployment rate is misleading.  If we look at the underemployment and unemployment rate we find that 27 million Americans are without work or are working part-time hoping for full-time work.  And with this recession, it is looking like more and more of those jobs are not coming back:

As the unemployment situation struggles to improve, we may be seeing a permanent shift in the economy where high part-time employment is simply part of our economy.  Now this is only more reason to believe bankruptcies will remain elevated since debt is the major reason for bankruptcies.  Or better put, the ability to service the debt.  And as many bankruptcy attorneys are finding out many people with once high incomes may have had to take cuts in their wages while their debt is still elevated to the halcyon days of the bubble.  This brings us to a new austerity in the country that is probably something we have yet to go through since the post-World War II era.

Now if we look at the pool of those that are at risk for bankruptcy, we still see that many average Americans are still in massive amounts of debt:

Household debt obligations as a percent of personal income is still higher than it was in 2000 at the start of the bubble.  What that means is we can expect more de-leveraging of debt that people cannot pay with current incomes.  That is why there is little reason to believe foreclosures will slow down significantly in 2010 and also, bankruptcies will remain elevated.  It is also the case that credit card companies are putting on the clamps on households that are struggling even though credit card companies have received enormous amounts of bailouts.  It is a misnomer to label them “credit card companies” since the too big to fail banks issue the largest amount of credit cards.  This again shows how the corporatocracy is able to wield excellent profits while the economy is really struggling.

People forget that no one wants to file bankruptcy just as much as someone wants to go through foreclosure.  These are financial decisions made in stressful situations.  No one wakes up and says, “today seems like a good day to go into bankruptcy.”  Many bankruptcies hit even in the best of times as the chart above highlights.  Yet the double-edged sword of debt is that it maximizes pain in the bad times just as it amplifies bets in the good times.  A household that cannot pay their debts won’t.  It is that simple.  The rise in bankruptcies only reflects what we all know and that is the economy for the average American is still in tough shape.

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Bankruptcy isn’t a new concept.  In fact it has its roots in English law dating back to 1542 under the reign of Henry the VIII.  The first laws of bankruptcy were designed to protect the creditor, not the debtor.  The creditor had the right to seize all the possessions of the debtor and the debtor also lost his freedom by imprisonment if he failed to pay his debt.  Families were left struggling to pay for this debt over multi-generations.  Many in the 1700s that were released from debtors’ prison left England and immigrated to places like Georgia and Texas in what came to be known as debtors’ colonies.  We have come a long way from that point in history.

Bankruptcy happens for a variety of reasons including loss of job, divorce, medical, and simply being unable to meet the new terms of onerous debt.  Many credit card companies jacking rates up to 79.99 percent or suddenly setting up traps for consumers only help to accelerate the growing trend in bankruptcies.

In 2005, the bankruptcy code was redesigned by the banking oligarchs to stick it to the average American yet again.  That is why if we look at quarterly filings, we see an enormous spike in 2005 before the modern debtors’ prison made its way back:

The spike above is enormous because this happened in a supposedly booming economic time.  Since bankruptcy always involves debt, this bubble decade induced by debt was a perfect breeding ground for bankruptcy.  Many unable to pay their debts saw the writing on the wall and filed before the new law took effect in 2006. Even with the new stringent measures bankruptcy filings have been soaring and are now up 104 percent from 2007.  This is happening because 27 million Americans are unemployed or underemployed and it is hard to squeeze any payment out of someone with no income.

65 percent of all U.S. consumer filed bankruptcies are Chapter 7 cases.  In a Chapter 7, the individual surrenders their non-exempt property to a trustee that then liquidates the unsecured property.  Usually a home is protected in a Chapter 7 bankruptcy.  That is, unless a home is underwater and is the financial reason for bankruptcy.  In that case, many homeowners will simply allow the home to go into foreclosure and with 300,000 foreclosure filings a month this is what is happening.  After the unsecured property is liquidated, the debtor usually has much of the debt discharged.

But what happened in 2005 was a “means test” was added to the bankruptcy process.  Someone that failed to meet the means test would have their case dismissed and possibly have their case converted into a Chapter 13.  With Chapter 13, the debtor still holds onto the property but needs to allocate a portion of their income to debt repayment.  If you want to look at the HAMP program that is trying to rework hundreds of thousands of mortgages, this is a mini Chapter 13.  On the surface it sounds good.  But in reality, this is only a method of siphoning off more money from struggling debtors by the banking oligarchy.  The average American in many of these cases is simply unable to pay their debts.  A large reason for our economic problems stems from too much debt given to too many people.  On a yearly basis bankruptcy filings are still rolling up:

Now if things were recovering why would bankruptcies still be going up?  The fact of the matter is that many Americans are seeing nothing of the recovery.  The fact that many of the cases are Chapter 7 means that even with the more stringent means tests, many simply do not have the means to pay their debts.  A program like HAMP, in states where housing has fallen by 30, 40, or even 50 percent is a Chapter 13 for a home.  On the surface it looks like a helping hand to a homeowner in distress.  But in reality, it is a way for banks to protect their bottom line without confronting the massive onslaught of foreclosures that would result.  The borrower in many cases is still struggling but the banks at least have a little bit of cash flow from the place and can claim the home is still worth the inflated asset value they secured a note with.

Things are so tough, that you have people asking if they don’t have to pay bills to companies that have filed bankruptcy:

“(Cleveland) The fact that the retailer went broke does not mean that its credit customers get to keep the merchandise they have not yet fully paid for,” says Cleveland bankruptcy attorney Richard Nemeth.

He says that, if you haven’t already, you can expect to hear from the court-appointed trustee, who will request you pay the loan as agreed.

You should, however, be able to reduce the loan balance by the cost of the soon-to-be-worthless extended service plan.

These kinds of extended service plans usually involve simple maintenance like cleanings and prong-tightenings, and they may cover lost stones.”

I know some think that people that file for bankruptcy at times are trying to game the system.  This is just another myth perpetuated by the corporate welfare banking system.  In fact, according to the ABA over 85 percent of Chapter 7 filings are “no-asset filings” meaning there are no assets for creditors to go after to recover the debt.  Average Americans are still struggling with the real problems of the real economy.

So it should come as no surprise that bankruptcy filings are still trending up.  Without employers hiring and unemployment still high, we can expect more and more Americans to reach the end of their rope.  But also, with $3 trillion in commercial real estate coming due in the next five years starting in 2010 we will expect many businesses to also file for bankruptcy protection.  The real economy is telling us something very different from the stock ticker.

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Like the rating agencies labeling crap mortgage backed securities as “AAA” and turning out to be more like “FFF” people need to examine the entire system from the ground up.  The credit card industry is gouging the living daylights out of consumers as the unemployment and underemployment rate hits 17.5 percent. You would think that the banking sector that owes its life to the American taxpayer for bailing it out would have some sympathy.  Instead, the new Wall Street oligarchy is running the show and we have new feudal lords running this country.  The credit card is merely your key into the kingdom of serfdom.

The credit card industry with the mysterious FICO score would like you to believe that there is some enormous world of credit cards out in the market.  In reality, it is simply rebranding.  5 issuers make up over 60 percent of all credit card debt:

FICO stands for Fair Isaac Corporation and provides services to the world’s 10 largest banks.  No shocker there.  The FICO score is based on multiple factors and ranges from 300 to 850:

Source:  PBS

Fair Isaac Corporation doesn’t store the credit scores but provides the big three credit reporting agencies with the algorithm to compute the score.  It is a very tiny and selective world.  You would think that something as important as a credit score would be open to the public but it isn’t.  In our current market with bail outs and hidden agendas on Wall Street, transparency is of paramount importance.  But of course why would they give up the algorithm since so much money is based on this score?

Looking at the chart above, there are flaws in the way the system is based.  This is what we are told on the surface regarding the credit scoring model.  I’ll give you a personal experience where my score dropped a few points for an otherwise financially wise move.  The bottom feeders of the credit card industry have taken it upon their shoulders to now put clamps around good paying customers.  Since they can’t squeeze any more blood out of 27 million unemployed or underemployed Americans, many who were recruited from companies like Providian, credit card companies are now going after “good FICO score” customers.  On one card I had a line of $7,000.  I rarely used the card but it had a “fixed” rate of 8.99%.  Not bad for emergencies.  But during this crisis as they were sucking the taxpayer dry and uncle Ben has opened up the Fed for banks to borrow at practically zero percent, these kind criminals decided to hike my rate up to 19.99 percent.  No late payments.  A few years of history.  Since they were experiencing “unusual” changes in the economy (like screwing it up to being with) they had to raise my rate.  So I called them up and canceled the card.  What use is it raging against someone in India (I did ask my representative his location) when the true criminals are sitting on Wall Street?  He stated that the only option was accepting the 19.99 percent rate or closing my account.  I wonder if bailed out banks got ultimatums like that?

A few months later I noticed my overall FICO had dropped by 15 points.  Not a big deal but what kind of logic is this?  Is this the algorithm that is super top secret?  This is like penalizing a gymnast for landing too many perfect dismounts.  According to the system, the overall debt ratio increased because that $7,000 line is now vanished in thin air.  Yet any person heading on the path of financial independence realizes that less credit card debt is good.  The financial industry is fleecing the American public in so many ways they don’t even bother being careful about it anymore.

The Department of Justice did an interesting report a few years ago looking at Chapter 7 bankruptcy cases.  As you would expect, as people got older the debt simply spiraled out of control:

The chart above simply shows the damage being done over years.  Credit card debt is merely one factor in many bankruptcy cases.  So you might say “well stay away from any form of credit then!”  The problem is, even if you are looking to rent a home many people will simply run your credit score.  Looking for a decent mortgage?  Getting a good rate is largely based on your credit worthiness (at least now it is).  Even some employers (the two that are hiring) will run your credit report.  To function in our society the financial sector has largely forced people to comply like sheep.  Think of overdraft fees.  Why doesn’t the banking sector simply setup an opt-in policy instead of having everyone by default taking overdraft charges of $39 for a $5 cup of coffee?  Because they make billions from this:

“Nov. 24 (Bloomberg) — U.S. limits on overdraft fees may cost banks more than $15 billion in revenue and prompt lenders to impose charges to close the gap, said the head of consulting firm Oliver Wyman’s North American financial-services business.

“We’re talking about $15 billion of revenue that basically falls right to the bottom line, so to take that out of the banking system then that’s $15 billion of capital that is not being created,” Michael Poulos said in an interview yesterday. “For some of our clients, this is a very big deal and it’s not clear that regulators have thought everything through.”

You notice how they call this revenue?  PBS had a special on Frontline showing a banking industry lobby front man saying that the public wants overdraft access.  Really?  Show us the data.  I wonder how much the public can take from this industry.  It is literally bank robbery.  They hide behind phony data and a structure that traps many Americans.  Now that they can’t trap the poor, they are going after middle class Americans that are merely trying to make ends meet.

Of course, recent legislation is merely a token gesture.  It has been gutted and practically written by the industry.  The system is flawed.  Wall Street and the banking industry have become invalid just like the FICO credit score.  In California, we are seeing thousands of people default on mortgages strategically that had “excellent” credit scores.  Why?  Many don’t want to be paying for decades on an asset that has collapsed by 30, 40, or even 50 percent.

Until we reign in the financial sector, the average American is going to see their financial future sucked into the Wall Street vortex.  Wall Street wags their finger and says, “keep up your credit score you little consumer” while they gamble like ADHD maniacs funded by the U.S. taxpayer on the most speculative products on the planet.  Do as I say, not as I do.

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To understand commercial real estate, we first have to see the actual damage.  In 2007, commercial real estate values came in at approximately $6.5 trillion backed by $3.5 trillion in loans.  Today, the $3.5 trillion in loans are still on the books, but the values have fallen to about $3.575 trillion.  This is how it looks:

We should spend some time examining the chart above because $3 trillion in supposed equity has vanished.  As we now know, banks had questionable valuations on properties during the peak bubble years.  Most realize that if they had to mark to market the properties, they would yield 40 to 50 percent less if they are lucky.  Banks would like to play this game that all is fine but if all is fine, why don’t they liquidate the properties?  They won’t because they would have to realize the loss.  So instead, the U.S. Treasury and the Federal Reserve are monetizing this excessive debt and are going to destroy the U.S. dollar.  This is the bet.  They think, that at some point values will once again reach those peak valuations.  How will that happen?  Ideally through controlled inflation.  But this isn’t a guarantee.  If we face true demographic shifts in our nation and the baby boomer wave is one, then we may never see those peak valuations again.  What will happen is the average American is going to see a weaker currency and wonder why their once stronger dollar is so weak.  The reason for this is the Fed and U.S. Treasury have decide to bailout the entire banking industry on the backs of the average American with no benefit to them.

Walk through the logic however.  The pretense of all the bailouts has been that financial Armageddon would hit if the banks didn’t get exactly what they wanted and no loans would be made.  The actual destruction was really just with the banks because our economy is still hurting but apparently banks are back to record profits.  Banks got their money yet loans are still hard to find for average Americans.  Banks are holding back enormous reserves because in the reality based economy, they know that commercial real estate is imploding internally on their balance sheet.  Take a look at the excess reserves at banks:

Banks are now holding roughly $1 trillion in excess reserves.  This is up from $724 billion in March since the “recovery” has started.  Do banks know something we don’t?  Of course.  They know that many of the commercial real estate borrowers are now insolvent.  In many cases, banks are simply rolling over loans and giving six month extensions playing kick the can down the road.  Why?  Because banks can still claim high valuations even though the current borrower is basically a non-payer.  This is the kind of game we are currently in.  Commercial real estate is imploding on the balance sheet of banks.  Banks and Wall Street have completely disconnected from economic reality that even SNL is cracking jokes about this.

In a recent Deutsche Bank presentation, the delinquency rate on commercial loans is at 4 percent.  Deutsche Bank expects 70 percent of CRE loans to not qualify for refinancing.  That comes out to about $2 trillion in commercial real estate that will mature from now until 2013.

The Fed through TALF has tried to take some of this debt out of the system but now their books are over burdened.  Also, many of the commercial real estate loans are junior and don’t even qualify for TALF and these are the real problems.  Either way, the reality of the situation is many of these commercial loans are now imploding and many banks are failing on Friday’s like flies running into the light.  Unlike the residential real estate bubble, most commercial real estate loans are backed by shorter term financing that is based on 5 to 7 year terms.  If prices have fallen by 40 to 45 percent, refinancing becomes impossible:

If we look at the above, some of the more distressed properties are down by a stunning 56 percent.  In other words, banks are insolvent.  Unlike the average American, they have Wall Street and the proxy of Wall Street, the U.S. government as their life line.  While most Americans deal with the realities of a crashing economy via unemployment or disappearing wages, these banks are playing games with their balance sheet and claiming to put out wicked profits quarter after quarter.  Where are these profits coming from?  Well if you can claim that you have $6.5 trillion in CRE values when in reality, it is closer to $3.5 trillion then you are embellishing the books by $3 trillion.  To be more concise, the banking sector is largely insolvent if it had to reflect reality.  Instead, it is preparing for clandestine bailouts that will be shouldered by the American public.

The commercial real estate disaster reflects a deeper problem in our economy.  The strip mall and perma-growth world.  People started believing that we could basically cut each other’s hair and flip houses to one another and this was somehow a good diversified economy.  As it turns out, we do need to make things.  If you look at the recent CPI, rents have fallen by over 1 percent but food and other necessities have gone up.  Imported items have also increased.  Expect this to happen over and over.

The Fed is vigorously fighting any audit because we are going to see empty strip malls and failed condo projects on their books.  Lender of last resort was probably not designed to bailout late night infomercial tanned gurus that bombed out on their dream of everyone owning a Florida condo.  Is this really what our central bank has become?

And to highlight how good the economy is, foreclosures keep growing:

“(Yahoo!) About 4 million homeowners were either in foreclosure or at least three months behind on their mortgage payments as of September, according to the mortgage bankers group. Even if a quarter of those borrowers are able to stay in their homes, “there’s a lot of potential inventory coming into the market next year,” said Jay Brinkmann, chief economist with the Mortgage Bankers Association.”

Homeowners that can’t even pay their mortgage or find work are not going to be spending money.  Condos, hotels, and reality based businesses are already seeing this play out but don’t look to Wall Street for what is really happening in our economy.  That $3 trillion in CRE values is long gone like smoke in the wind.

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The problem we currently face is even after the global economy was brought to its knees by the current Wall Street banking structure, things still haven’t changed at the core of their mission.  The same banks are back taking inordinate amounts of risk with the now explicit backing of the U.S. Taxpayer.  It is no surprise then that our U.S. dollar has been pummeled by the policies of the Federal Reserve and U.S. Treasury.

Let us examine each component of the misery index.

Bankruptcies

Source:  Credit Slips

It shouldn’t come as a surprise that bankruptcy filings are now approaching their pre-2005 levels.  Keep in mind that in 2005, tough bankruptcy legislation came into effect thus spurring a massive wave of bankruptcies from people seeking to avoid the new tougher standards.  Even with these new standards in place, there is only so much blood that you can squeeze out of a turnip.  Some will be quick to point out that bankruptcy filings hurt big corporate giants mostly.  On the contrary, 98.5% of all bankruptcy filings come from individuals at the end of their rope.  Most people don’t file for bankruptcy with a smile on their face.

We will see a slowing or moderating pace for the fourth quarter since there is a bit of seasonality with filings.  But Q1 of 2010 should give us a better indicator of where things are heading.  But one thing is irrefutable, bankruptcy filings are going up.  In this category, the recovery is not taking place.

Food Stamps

Over 35,800,000 people are currently receiving food stamps in the U.S.  That is 11 percent of our entire population is receiving government assistance through the SNAP program (i.e., food stamps).  As the chart above can attest to, the number of people is still booming.  Obviously in any economic down turn, this rate will increase but this percentage is one of the highest on record.  It is also clear that the growth is currently exponential.

Here is the government expenditure per year on food stamps:

2006:     $30.6 billion

2007:     $30.3 billion

2008:     $34.6 billion

2009:  $40 billion (still need August and September data – average out we are approaching $50 billion for 2009)

Just think of how quickly this number is jumping.  The problem with the current system is that some people are still governed by the trickle down school of economics.  They believe that if Wall Street is up 60 percent (thanks to government bailouts) that somehow crumbs will trickle down to working and middle class Americans.  Clearly it isn’t happening right now.  The recovery is looking more like a minor depression to many.

Long-term unemployed

It is telling that the biggest category of our currently unemployed population is those classified as long-term unemployed.  These are people that have been out of work for 27 weeks or more.  Think of how grueling it is to be out of work for half a year in this economic climate.  The issue at the core of long-term unemployment is that it reflects potential permanent job losses.  That is, many of the 8,000,000 jobs lost since the recession started are never coming back.  For every one job opening you have six able bodied workers competing for it.

It is hard to see what industry is going to pick up the slack for these long-term unemployed.  Many are now coming to the end of their unemployment insurance and in many cases, in some states this can be as long as 90+ weeks.  The long-term unemployment trend tells us that we have yet to see any economic recovery as well.  Sure the stock market may be up but what use is that to the average American that pays most of their bills through a job?

Foreclosures

At the root of most of this is the housing market.  Take a long and close look at the chart above.  Q3 of 2009 was the worst foreclosure quarter on record.  Clearly foreclosures are not a sign of economic recovery but here we are, two years into the crisis and foreclosures are still at record levels.  Much of this comes from the decade long housing bubble.  But keep in mind each additional foreclosure is another home on the market, another family looking for different shelter, and an economic loss to the system.  It is hard to see any of the government stop-gap measures fixing this in the short-term.  The loan modification programs have yet to yield any significant change.

It is also the case that the government has gotten more risky with tax credits and allowing lax lending standards with FHA insured loans in getting more people to buy.  In the short run this may offer the appearance of growth but over the long haul, this will only add to future defaults.

The foreclosure numbers show us a very different picture from the current recovery rhetoric.

Credit Card Defaults

For the first time in data tracking history, has total revolving credit contracted on a year over year basis.  At a time when the above data shows that more Americans need more support, the credit card companies are yanking lines of credit.  They are also charging higher fees on good standing customers to make up for their rising defaults for years of easy financing.  Here is some sobering data:

Credit card direct mail offers:

Q3 of 2006:         2.1 billion

Q3 of 2009:         391 million

Now you know why your daily mail is much lighter.  Credit card companies who are giant receivers of taxpayer bailout money are actually closing their doors on the same people who are bailing them out.  They are hiking up fees and closing down credit lines unless consumers give in to their onerous ways.

The bottom line is the misery index shows no solid economic recovery.  I suppose it depends on what we are looking at if we want to say we are in a recovery.  If we are looking at banking profits and Wall Street then yes, the recovery is here.  If we are looking at other data like bankruptcies, unemployment or foreclosures then the story is very different.

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Take for example a report that NBC San Diego did.  They found a credit card that was offering a 79.9% annual rate.  Not bad enough?  They also charge an annual fee:

Source:  The Consumerist

Even the recent historic equities rally is in the 60 percent range.  Yet these are common tactics.  Some more troubling trends are going after customers that pay their bills on time:

“(USA Today) You floss regularly, yield to oncoming traffic and use your credit cards judiciously, dutifully paying off your balance every month.

You may believe that your exemplary behavior shields you from unexpected credit card fees. Sadly, that is no longer the case.

Starting next year, Bank of America will charge a small number of customers an annual fee, ranging from $29 to $99. The bank has characterized the fee as experimental. But card holders who have never carried a balance or paid late fees could be among those affected.”

To show you how rampant this is, take a look at changes customers are seeing to their credit cards over the last few months even though the Fed and U.S. Treasury have rescued many of these companies:

Much of this is coming in a hurry trying to beat the 2010 new credit card legislation that will make it harder for credit card companies to milk consumers like nationwide loan sharks.  At this point, they can’t squeeze blood out of a turnip or break kneecaps so they are now going after good paying customers since it would seem they are the only folks with money left.  Even if you pay off your balance every month, you can expect some credit card companies to start charging an annual fee just for having the account.  I would imagine that many accounts that have been open with no usage will also be shut down or have their lines decreased.  This has occurred personally to me and I can verify the rate increases as well (nothing like 79.9% however).

So why is this happening right now aside from the legislation?  Credit card companies are bleeding money.  Let us look at Capital One and Discover:

The current net charge off rate for Capital One is 9.24%. An astounding number that puts it into a historical level.  This is up from the 6.1% of last year.  A 30 percent increase in charge offs will hurt your bottom line.  The average American is dealing with the realities of the recession and many have simply stopped paying.  Others have gone through bankruptcy and credit card debt is wiped away during bankruptcy.

Discover is also seeing a similar trend:

I think you get an understanding of why credit card companies are starting to look at “innovative” ways to raise revenue.  So much for asking “what’s in your wallet?”

Yet why are Americans having such a hard time paying their debts?  In a few words, people have less money.  For the first time in 60 years has disposable income fallen on a year over year basis into negative territory:

Now think of all the recession since the 1950s.  Not once did we see a negative year, until now that is.  So with the deep recession, many are unable to keep the debt musical chairs going any longer.  The trend of paying one credit card with another is coming to an end.  How many 0 percent 12 month balance transfer offers have you seen in 2009? I used to get about 5 of these a week during the debt boom.  Now?  Zero.

This isn’t just anecdotal.  The credit card industry has yanked over 10 million credit cards from the market and overall revolving debt is declining:

The trouble here is that revolving debt has fallen while disposable income has also fallen.  Since Americans have relied on credit cards so heavily, this is being felt in profound ways.  The credit card companies are getting a chance to remedy their balance sheets on the back of consumers.  The U.S. Treasury and Federal Reserve have extended what seems to be unlimited life lines to these companies, paid by the taxpayers, yet these companies are doing nothing to help the overall average American.

At a certain point people will wake up and realize that there is a war going on in our country in the financial world.  A battle that threatens the financial security of millions.  In fact, it may be the biggest battle we face.  Yet many Americans seem okay with this or have become apathetic to the new financial serfdom.  Why take to the streets for a few million bonus when we have trillions of dollars being yanked by our own government and Wall Street?  We need to channel our energy to where the real money is at.  Wall Street and the government are all too happy to slap a few hands with mid-level players while the top rung keeps on sucking the American taxpayer dry.

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Source: New York Times

And banks are not lending more as they stated initially with the request for bailout funds.  The premise was that trillions were needed or lending would completely dry up.  Lending has dried up.  Take the mortgage market for example.  Loans that are FHA insured now make up the bulk of the market.  For non-FHA loans, banks seek to have loans backed by Fannie Mae, Freddie Mac, or Ginnie Mae.  In other words, banks are unwilling to lend their own money and will only lend funds backed by the government (aka the American taxpayer).

This behavior is most pronounced with credit cards.  With rising defaults companies are using bailout funds to plug up additional losses.  Yet they are also combining the easy money to play their hand on Wall Street.  The mix of retail and commercial banking is still occurring even after our economy nearly tanked and we are still in recession nearly 2 years later.

I had an experience with the credit card companies recently that shows what is occurring.  One of my cards had a line of $10,000 but I rarely use it. If I did use it, I would pay it off every month.  Credit card companies look at people that pay off their balance every month as deadbeats.  So last month, I receive a letter stating my balance was lowered to $3,000 simply because my lack of use.  Keep in mind that this line had been open for 7 years.  So I call up the bank and they tell me I can either stay with the new terms or close my account.  This is how banks are playing the system and stealing money from taxpayers.

Don’t be fooled, they are pulling credit back:

Banks are still pulling credit cards out of the system on top of the 8 million that were pulled in the first quarter of 2009.  Let us look at how JP Morgan turned a $3.6 billion profit in the third quarter more carefully.

“New York, October 14, 2009 - JPMorgan Chase & Co. (NYSE: JPM) today reported third-quarter 2009 net income of $3.6 billion, compared with net income of $527 million in the third quarter of 2008. Earnings per share were $0.82, compared with $0.09 in the prior year.

Jamie Dimon, Chairman and Chief Executive Officer, commented: “Our net income of $3.6 billion in the quarter reflected the strong earnings power of the company, with broad-based growth across the Investment Bank, Asset Management, Commercial Banking and Retail Banking. However, credit costs remain high and are expected to stay elevated for the foreseeable future in the Consumer Lending and Card Services loan portfolios. Accordingly, we have added $2.0 billion to our consumer credit reserves, bringing the firmwide total to $31.5 billion, or 5.3%¹ of total loans. Tier 1 Common Capital, another key element of our fortress balance sheet, was also strengthened through capital generation during the quarter, to $101 billion, or 8.2%.”

In other words, JP Morgan made a bulk of its profits in sectors that pre-1999 (Glass-Steagall) would not have been allowed for commercial banks.  They are operating as a gigantic hybrid of old school banking with casino style investment banking on Wall Street.  Keep in mind JP Morgan is one of the too big to fail darlings.  Instead of opening consumer credit, they are pulling back on it to the tune of $2 billion in reserves for future losses.

The below comes from their 8-K filing.  How much of that $3.6 billion came from their i-bank division?  Over 50 percent of it:

A large chunk of it came from the investment banking division.  I don’t think the American public had in mind when they handed trillions to the banks that they would be using the money to gamble on Wall Street.  Surely they are doing something through their retail side?

Nope.  In fact, this is where they are adding loss provisions to the continued deterioration of the Washington Mutual loans.  Average total deposits decreased over the quarter by 2 percent.  Branch sale of credit cards were down 18 percent.  As you would imagine, they are losing money through their credit card division:

So much for the average American.  But where else did the big money come in for the $3.6 billion in profits if it wasn’t through the average Joe and Mary on the street?  Corporate and private equity:

And there it is.  You might as well label JP Morgan the new Lehman Brothers because they are operating like an investment bank.  So much for those bailouts helping the average American.  The media really needs to scrutinize how these companies make their earnings.  They are simply using hot and easy money to double down in the Wall Street casino on the taxpayer dime.  No reform has happened since the collapse of Wall Street because these banks own our politicians.

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Bankruptcy data doesn’t hide this.  Since new legislation went into law in 2005, bankruptcy has been harder to file.  So the recent increase in filings makes it all the more troubling:

Since 2005 the rise in quarterly bankruptcy filings has been steady.  This is indicative of the nature of the current deep recession.  The average American is feeling the strain of the high unemployment rate and the country is combating a market that is not willing to hire (i.e., Alcoa cutting jobs).  And recent bankruptcy filing data is showing the trend still moving up.  The latest data that we have is for August and it showed 119,874 consumer bankruptcy filings and that is a jump of 24 percent from last year.

You would think that with the massive amount of capital in banks, that lending would be easier so that would mitigate filings in the short-term but banks are not lending to consumers.  Early this week we saw the continuing contraction in consumer credit:

Now these data points are important because they show what is really happening on Main Street.  Wall Street is being pumped up by easy credit provided by the U.S. Treasury and Federal Reserve but most Americans don’t pay their monthly bills because the S&P 500 went up 10 points.  Bankruptcy is the ultimate sign of distress.  That is, someone has reached the point of financially being unable to meet obligations.  This isn’t like missing one bill payment.  This is someone sitting and looking at all their obligations and throwing in the towel.

Keep in mind that this new change comes in light of the 2005 tougher bankruptcy laws.  That is why in the above, the chart shows a dramatic spike.  What changed in 2005?  A wide group of consumer advocates, legal scholars, and retired bankruptcy judges questioned the soundness of the legislation and recommended against it. The credit card industry lobbied hard.  The contention was that bankruptcy was wrought with fraud.  There wasn’t much data backing up that assertion but remember that in 2005 the good times were going on so hardly anyone was paying attention and the legislation was jammed through.  The major changes included means testing but also shifting people into Chapter 13 instead of Chapter 7.  The big difference here is with Chapter 13 people filing have to work out some kind of agreement to rework their obligations while in Chapter 7, current debts are paid from current assets.  Of course this shifts the burden completely on the consumer instead of lenders actually spending the time to be more diligent.  This worked perfectly in a mega housing bubble world.  Take a look at Chapter 7 even in light of the tougher legislation:

The biggest proponents of the bill were the credit card industry.  In fact, the credit card industry spent 8 years and $100 million in lobbying for this effort.  If you look at the legislation, it actually enforces a means test by looking at your state median income.  If you are at your state median income, you will not be able to qualify for Chapter 7 if you can pay 25 percent of the unsecured debt.  What it does is that it allowed for credit card companies to give anyone and anything credit while shifting the burden to the states and consumers.  Once things go bad as they are right now, credit is yanked from the system and now debtors are being forced to pay any penny they have to the credit card companies.

In the new legislation counseling is also required.  Yet what about counseling for the credit card companies?  The bill is a lobbyist dream and we are seeing the ramifications of this bill today.  In fact, if it wasn’t for the bill we would be seeing tens of thousands more filing for Chapter 7 today but people are holding off because what use would it be to go into Chapter 13 and still need to pay off your debts?

What many of the credit card companies didn’t see however was the massive rise in unemployment.  In fact, with 26 million unemployed and underemployed I’m sure many will be falling below the state median income test thus allowing people to file for Chapter 7 and liquidate.  Unsecured debt like credit card loans are usually washed away in court hence the big lobbying by the credit card industry.  So this is becoming a more likely option and as the chart shows above, more are opting for this.  Take a look at brief breakdown of how this plays out:

Source:  Bankruptcyaction

Only in some bizarre universe is spiking bankruptcies, foreclosures, and unemployment some sign of a rebounding economy.

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Take a look at the unemployment rate and construction employment for California:

In the span of approximately two decades, growth in construction has gone up nonstop.  You might ask what is that drop from the late 1980s to early 1990s.  That had to do with another housing bubble in California.  That drop cost 25 percent of all California construction jobs.  These are typically good paying jobs.  Certainly higher paying than retail work.  But you’ll notice something in this chart.  First, the unemployment rate overall is the highest in record keeping history for the state coming in at 11.6 percent.  But you’ll notice that already the contraction in construction employment is deeper than that of the late 1980s (we’ve lost already 32 percent of construction jobs).  And this is only the start of the contraction.  As we know, the California housing market is contracting massively.  But now we are starting to see the massive commercial real estate bust that will hit the nation with $3 trillion in uncertain loans.

For example, there is a retail area in Corona, California called Promenade Shops at Dos Lagos that defaulted on a $125 million loan.  These projects take years to build and they were built at the peak:

Source:  MyCityCorona.com

Now why would a place like this default?  Well first, Corona is located in Riverside County that has seen home prices drop for the entire county by over 50 percent from its peak.  The unemployment rate in Riverside County is 13.9 percent.  So any retail spaces are going to have a tough time making it especially when many were basing business models on peak housing valuations.  The problem with California is that it also relied too heavily on construction on the way up with valuations that were never realistic:

It shouldn’t be a surprise that construction employment collapsed at the same time prices did for the state.  The only problem is from our 18 million labor force some 1 million people depended on the construction industry.  And that doesn’t include those working in the finance industry that relied heavily on housing as well:

With these two industries alone, you will find the bulk of layoffs and these are high paying jobs.  That is why commercial real estate will be an albatross for California for years to come, not a leading source of recovery.  Take a look at the early 1990s recession above.  It took nearly 4 years for construction spending to even move up after it hit a trough!  We have yet to hit a trough in either the finance or construction industry.  Given the magnitude of the California housing bubble, it may be the case that these jobs are not coming back.  Certainly you don’t need construction jobs when the vacancy rate is still rising:

Now some are pointing to an increase in permits that things are getting better.  Let us look at that increase:

Does that look like a massive increase?  We are looking at new private construction permits.  At the peak of this bubble, we had some 20,000 permits flying out there.  We hit a low at approximately 2,000.  In 3 decades of data we have never been that low.  I mean how much lower were people expecting this to go?  Zero?  So this isn’t a sign of a recovery (certainly not by the two industries that rely on real estate the most) so this is more of a bottom but we can see permits squeak up and balance out for over a decade.

If you think of this equation, you can understand why the U.S. Treasury is secretly considering options like “Plan C” to preemptively bailout the commercial real estate market.  The problem with that of course is that there are some $3 trillion in commercial real estate loans in the country.  You like that $125 million for a mall in Corona?  You can multiply that scenario out hundreds of times over in Nevada, Arizona, and Florida as well.  There really is no economic reason to bailout these loans.  As much as I cringe about bailing out homeowners, at least you can make an argument that you can keep people in their homes.  How do you feel about bailing out 5-star luxury hotels?
“(Costar) Hotel owners are under enormous economic pressure, especially those carrying a lot of maturing debt. The St. Regis Monarch Beach Resort in Orange County, CA, this week became the latest luxury hospitality property to be taken over by its lender when Citigroup Inc. seized the 400-room hotel after it fell into default on a $70 million mezzanine loan.”

This place is probably better known nationwide for the $440,000 party thrown for AIG executives.  Keep your eyes peeled on that CRE bailout because this has the potential for being a gigantic boondoggle for the American taxpayer.  And you know the U.S. Treasury and Federal Reserve love those bailouts.

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