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It’s a Simple Problem, Really: Borrowers Aren’t Repaying Loans

Regular HW readers know that for the past six months I’ve been hounding the concept of “underlying assets” — the idea here is that for all of the ways aggregated cash flow tied to debt can be sliced and diced, performance still rests on a set of basic assumptions regarding payment of those debts. (And when those assumptions prove to be wrong, all hell can break loose.) American Banker’s Todd Davenport looks to be singing the same tune:

The most pressing problem in the industry is the same as it ever was, and a simple one, at that: Borrowers are not repaying loans. An examination of third-quarter financial statements released in the past two weeks by 16 of the nation’s largest banking companies indicates that, whatever the liquidity and systemic risks the largest banks and investment banks face from complex structured investments, rising loan delinquencies and their attendant costs constitute the most immediate threat to earnings. In the third quarter these 16 commercial banking companies — from the $2.4 trillion-asset Citigroup Inc. to the $59.8 billion-asset Comerica Inc. — provided an aggregate of $11.8 billion for bad loans. That’s more than the $11.5 billion that all insured banking and thrift companies provided in the second quarter. In fact, the median provision for loan losses among the top 16 rose 120% from the third quarter of last year.

Subscribers can read the full article — and I do recommend American Banker. You can talk about market dislocation, CDOs, CLOs, subprime RMBS, a sieze-up in the asset-backed commercial paper market — these are all symptoms of a much more basic problem. Glad to see some of the industry rags out there start to put two and two together here on this.

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