Are Big Banks Committing Suicide?

We were chatting with a friend the other day, who holds a middling commercial loan from a major bank. He's a very good client of this major bank, and he has been with this bank for quite some time. He told us this bank was going to charge him a fee equal to about 5% of the value of his loan. Apparently, this 'fee' was do to an error on the bank's part, but they were going to charge him, anyway!

Another friend has held a line of credit from another major bank for over a decade. Just recently his interest rate on his card's balance was doubled to 20%. He, too, had been a good client, and always paid his bills on time.

Earlier we wrote about Citigroup backing mortgage cram-downs, and how we felt there was something fishy about the whole thing. Then we saw articles like this one from Bloomberg, or human-interest pieces like this from WiseBread.com... and we really started to wonder. Are these major banks actually queuing up on a roof, waiting for the opportune moment to jump to their death?

Lending is the bread and butter of these major banks. They are alienating their borrowers, but they can't make money without lending... so they must have something else up their sleeve. Personally, we think it's our beloved Synthetic CDOs. Bear with us for a moment, dear Reader.

With AIG, Fannie Mae, Freddie Mac and the Big Three on the government dole, their collapse has been pushed off into the future. That means the SCDOs won't be triggered by the deaths of those companies. However, SCDOs typically have money center banks as a default trigger on the trillions waiting offshore.

The management of these major banks know they can't kill the car companies... but they can destroy their own banks. Then, the SCDO dollars will flow bank into the United States. Where to, you wonder? Well, with the big banks presumably shut down, where else can the money go but into the pockets of the management? We would wager the managers have set up private investment vehicles which have taken the benefit of the SCDO payout off of the banks' books. Think of it as the ultimate golden parachute.

Read the Handwriting on the Wall

One of the things we find amazing, at least in the area of economic depression, is how easily things can be explained away. The pieces are all there, but the dog ate the box and no one wants to put the pieces together. We can sympathise -- it looks pretty scary -- but we can't help but feel that seems like sticking one's head in the sand and hoping the volcano isn't, in fact, erupting.

For instance, in the Autumn of 2007 we were driving through a good chunk of the United States. At one point, we remarked to our partner that the number of cars in the road had fallen off a cliff. A few weeks later, the owner of a coffee shop we frequented said to us, that business was doing okay... even though the country was in a recession. We nodded sagely in agreement; we had seen evidence of the truth of his words. But guess what we didn't do, dear Reader? Even though we thought we saw the writing on the wall, we didn't start planning for recession.

Now, however, we're paying a bit more attention, especially to articles like this one from Reuters U.K., which paints a grim picture of a 55% drop in commercial loan issuance. Although good data seems to be impossible to find, we feel confident in saying that bank lending strongly supports the U.S. economy. How much, we can't say, but with a 55% drop-off in commercial loan issuance by banks... even the Wizard of Oz couldn't prevent the United States economy from contracting significantly this year.

How much, we don't know. Singapore has slid 12.5% year-over-year, but we have a suspicion it will be worse in the United States, and other economically weak nations. How are we responding to the signs now? We're preparing.