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National City News Highlights Consumer Credit Issues


Company paying home equity customers to walk away.

A couple of random thoughts from the financial services space:

First, at least to these eyes, the ECB's decisions to keep rates flat and haircut Asset-Backed Securities (ABS) collateral is like putting a plastic bag over the mouth of the person you're trying to resuscitate. Both actions are significantly negative for European banks and at a time that the ECB should be cutting short term rates and adding liquidity, it's doing just the opposite. Yes, the actions will address the ECB's single focus enemy - inflation - but at what price?

The ECB has been receiving a lot of "private" ABS securities which European banks put together to give the AAA pieces to the ECB for collateral. What the ECB is in essence saying is that they may be AAA raetd by someone, but that may not ultimately act like it - either due to credit or liquidity reasons.

Second, I would strongly urge Minyans to pay attention to this morning's news that National City (NCC) is paying home equity customers to walk away from their unused available lines. While NCC may the first to get attention on this, it won't be the last. And I would highlight that while bank balance sheets have received a lot of attention, to date, few bank analysts fully grasp the enormous volume of undrawn commercial and consumer lines of credit.

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So long as they remain open, I would suggest that they represent an even greater threat to bank liquidity and capital than the hundreds of billions of dollars of maturing debt that everyone seems to be focused. For example, as the FDIC reported last week, unused available credit card lines alone total $4.0 trillion!

Finally, earlier this week First Horizon (FHN) issued the first of what I anticipate will become a flurry of earnings warnings from regional banks for the quarter. Of particular note, I would highlight that having issued a revised loss forecast when they released 2nd quarter earnings, FHN is now increasing their estimate for 2008 by $100 million, or over 20%. Further, to help support its capital ratios, it's now planning to shrink its balance sheet in 2009 by $4.0 billion, or more than 10%.

Position in SKF and FHN.
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