The Economy

That's not Dan's problem as of Wednesday.

 

Most people will read this and say, "Yeah, well the restaurants were shut down, so. ..."

But is a company that had amassed more than $1 billion in debt prior to the pandemic. This company should have been bankrupt a long time ago, but in the survival-of-the-unfittest environment the Fed has kept propped up for the last decade and a half, companies like this, which would never have been able to keep borrowing and refinancing their debt, have been able to borrow relatively cheaply compared to what the loansharks who would have been the only lenders left would have charged them. The company was effectively bankrupt in 2017, but it was able to refinance about $750 billion in debt with loans that are now in default.

 

It's the pandemic, but only in as much as the pandemic was the equivalent of the tide going out and it exposing everyone who was swimming naked. There are a bunch of these franchisee / restaurant companies that were zombie companies already, existing on insane amounts of debt. The pandemic put them into bankrupcy. Others have been CEC Entertainment (Chuck E Cheese), which had somehow managed to amass a billion dollars in debt it can't repay, and the U.S. operations of Le Pain Quotidian.

There is so much of this out there, and a lot of these zombie companies are still being propped up by all of the asset buying the Fed is doing to keep their debt viable and the servicing costs from rising. Every day it goes on, it means the eventual deleveraging is going to be worse than it would be today (or if it had been allowed to happen years ago or never get to this point in the first place).

 

The issuing banks are really struggling right now because they can't determine who is credit worthy and who isn't. So they are tightening their lending standards -- things were super loose for a long time, a lot like prior to the bubble that popped in 2007/08/09 on the Fed doing things to run up debt levels, including among consumers.

Right now, thanks to Covid regulations, there is no way for the banks to tell who is in trouble.

‘Flying Blind Into a Credit Storm’: Widespread Deferrals Mean Banks Can’t Tell Who’s Creditworthy

The regulations make it so you can't report to the reporting agencies who has made forebearance plans on their debt. So banks are hamstrung, and as a result they immediately puckered up on lending tighter than a snare drum. American Express has reportedly stopped offering balance transfer deals to try to attract balances, and the other banks have dramatically reduced what and to whom they are offering. Months back, they were actively trying to steal those balances from each other.

I have a bunch of cards in my pocket and I run everything I can through cards, including month bills, to get cash back deals.

Chase is the issuing bank for one of my cards. I have some insane credit limit on the card where I could charge a sports car, but I rarely run more than a couple of hundred bucks through the card in a month. I got a letter from them a month ago saying, "In reviewing your card account, we saw you spent far below your available credit limit in the last 12 months. Because of your limited usage, we're cutting your limit in half in 30 days from the date of this letter."

I called up and had a 2 minute conversation with the rep, who I am guessing did an instant FICO check, and they kept the limit where it was. I don't know what the calculus was in sending a letter like that, but if X percent of people like me don't call and their credit limit gets cut, I guess that is less potential trouble the bank could be facing in the depression they know we are looking at.