Rising jobless rate adds to banks' woes
As unemployment rates creep higher, banks are worried that more loans will have to be written off. Because if prime borrowers find themselves jobless, they may not be able to pay their mortgages. Ashley Milne-Tyte reports.
Job seekers look at a job board at a career center in Oakland, Calif. (Justin Sullivan/Getty Images)
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KAI RYSSDAL: When the January unemployment report comes out at the end of next week, remember today. Because this Monday is when a big chunk of the jobs that disappeared from the economy in January went missing.
As pharmaceutical giant Pfizer completes its acquisition of its smaller rival, New Jersey-based Wyeth, that was announced today, it's going to cut as many as 27,000 people. Caterpillar announced it's going to lay off 20,000. Sprint Nextel and Home Depot say they'll be axing 15,000 between them. General Motors is going to lay off another 2,000 -- 64,000 job in all.
That puts the unemployment rate on a trajectory toward double digits as the year goes by. And the prospect of that has banks worried their fortunes could take yet another turn for the worse.
From New York, Ashley Milne-Tyte reports.
Ashley Milne-Tyte: As the unemployment rate creeps up, banks are holding their breath. Cary Leahey is a senior economist with Decision Economics.
Cary Leahey: When the unemployment rate moves to 8.5 or 9 percent, banks will just encounter increasing problems and, uh, I assume their delinquency and default rates just go through the roof.
Banks are concerned about just that. The reason? Once unemployment hits 9 percent, banks are afraid the number of loans they have to write off will increase much faster than usual. That's because the ranks of the unemployed will include plenty of prime borrowers.
Diane Swonk is chief economist with Mesirow Financial.
Diane Swonk: Your best borrower today could be your biggest write-off tomorrow. Your best borrower today could be a borrower who could not keep up with the payments in just three to six months time if they lose their job.
And as James Brock of Miami University explains, prime borrowers in trouble can mean a huge blow for banks.
James Brock: If you get prime borrowers who seem to be credit worthy, then they're going to have more borrowings because they look like they can pay it back, and they have.
At least until they lose their job. But then . . .
Brock: They might be sitting on bigger credit lines and bigger credit limits on their credit cards. And they may run over those and become problems for the banks.
Brock says if banks have to absorb these extra losses, it'll be even harder to obey the government's mandate to start lending again.
In New York I'm Ashley Milne-Tyte for Marketplace.
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