So the stress tests have been delayed, because the banks and the Fed are arguing furiously over the results. Actually, the problem isn’t so much that the Fed will publicly tell them they need more capital — the problem is that the banks can’t easily raise it. If they could raise it, they would’ve by now (dilution be damned) and this whole thing wouldn’t be an issue.
So what point are they arguing over.
Well apparently a big one is that Citigroup (C) somehow claims that higher unemployment won’t lead to higher credit card defaults. Seriously. Or at least CFO Ned Kelly has been arguing that the Fed’s correlation of unemployment and credit card defaults is too negative.
There are several problems with this. One is that the connection is totally intuitive. Another is that the bank’s own executives, as Felix Salmon points out, have said the opposite.
From the recent Milken Global Conference
As people have read in the newspapers, credit losses are at somewhat of an all-time high, and they go tracking directly with unemployment. So as unemployment goes, so go credit card payments. And since this is all based on statistical models, you don’t have the opportunity to look a person in the eye and say “let me help you”.
Other banking executives have said it, too.
On JPmorgan’s (JPM) quarterly call, CEO Jamie Dimon put it bluntly:
When unemployment goes up, so do chargeoffs for credit cards. When house prices decline, chargeoffs go up. When both happen, it gets even worse.
Unless CFO Ned Kelly knows something we (and the Fed and Jamie Dimon and his own executives) don’t know, then it’s hard to see the bank winning this fight.
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