Credit Likely to Remain Crunched

So much isn't seen out there. Last week's conference call with Goldman Sachs (GS - commentary - Cramer's Take) told the story better than most. While it is possible to argue that, with gasoline and heating bills down (despite the frigid weather across the country) and with mortgage rates coming down, there are so many behind-the-scenes crises that it is difficult to believe anything good can happen.

David Viniar, the excellent CFO of Goldman, tried to put everything in context when reviewing just the last quarter alone. Some of it was just plain frightening to read. To wit:

1. In 90 days, the value of investment grade bonds fell so fast that that it implies one in five issues will default.
2. The commercial real estate index implies that 60% of commercial mortgages will default before they come due.
3. Credit indices in general fell 34% in the fourth quarter alone.

Those kinds of declines in one 90-day period are not only unprecedented; you could argue if unchecked they will simply destroy any banking system. Who can lend in that environment? If it is likely that you get those kinds of defaults, who can possibly lend out the money the government gave these banks? How can the money not be hoarded?

Now, the really difficult part of all of this is that you are only seeing the commercial side. Given the escalating unemployment you are going to see the same kind of collapse occurring in the consumer debt markets (credit cards, auto loans, student loans), so the asset-backed bonds in existence will crater, and there will be no new loans in those areas. The posted mortgage rates will be unrealistic for most people to attain unless the U.S. basically guarantees all debt or insures all debt.

Ironically, Goldman Sachs, which has no consumer debt to speak of but was hit hard this past quarter, should not have deepening problems in this environment. The firm's counseling business and its brokerage business will probably be strong as it was this past quarter. It will be the Main Street banks -- Bank of America (BAC - commentary - Cramer's Take) and JPMorgan Chase (JPM - commentary - Cramer's Take) in particular -- that will suffer unless President-elect Obama makes his stimulus plan so huge that it can stem unemployment.

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