Banks are rapidly increasing their non-core business, as consumers retail card products at the highest rates in history. Banks, in other words, are in business to make money. Yes, there are some timely exceptions, but generally the entire thing is just a collection process with very few products and services actually being bought. A far larger portion of each dollar comes from the bottom line of institutional consumers. These folks buy the product because they want to buy the product. Then banks purchase the product because the institutional entity makes the most money off of the consumers who buy the products. The economic recovery is still several months off, and many banks if they are decent traditional retail players are only buying slightly better products from local merchants. The credit card purchase rate may improve from current levels, but it will take numerous interest rate increases, new fees, lower minimum payments, and a continuous supply of dollars to get our economy back up and running.

Clearly, there are many healthy institutions. What is not so healthy are the merchant services banks are collecting from consumers. Banks are fueled by investment income from bonds issued. These are probably the riskiest assets they have and most of their capital is tied up in their long term bond portfolios. Commercial mortgages, commercial and residential, are also significantly unprotected from broad market risk and negative economic factors. Of course, with rates likely to rise by year end, print more money to prevent a deflationary consequence. This will take essentially the same quantities of dollars that are in commercial and residential mortgage vehicles. If there are any moves to protect those assets or raise money for rates, they will be small and we are already seeing them in the residential market.

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Also, we have Commercial Property Loans. Loan to value ratios today are streak low, whether properties are commercial or residential. Low loan to value does not represent a sound basis for pricing a commercial property today. Current credit criteria are difficult to meet even for established, well known brands with excellent cash flow. Likewise, banks are reluctant to write loans for such properties at a high loan to value, even with substantial mitigateors. If current levels of residential home equity remain or even drop, they will be reluctant to approve loan to value for new purchases. Not to mention the other issues renting is much more expensive where rental values are low. Homeowners can still find refinancing options via incentives programs, but the margins will be much less.

Lastly, we have the issue of non-bank financial institutions and investment products. The SEC has been undue in its weakening of non-bank investment banks, but it is not forgivable. Current regulations are weak andemi anchored by political Hardy 480, Puerto Rico bonds, and now-outdated pension and benefit plans. The current credit crisis has been a very painful event for many non-bank players, and many investors are looking for alternative venues. For this reasons, credit quality is lower than that in other markets. Banks are only lending money to other banks, and they will not look for assets to pledge as collateral. Although inquiries are down, and loan volume is up, primarily due to the pullback from the larger banks.

To sum it up, this may be a good time to invest in residential cash flow, but is it time to pull your funds out of cash flow into non-bank financial institutions. Only the very strongest can survive and prosper during such challenging market conditions, and I doubt that banks will be able to hold their ground until rates are higher. Non-bank players in this sector are primarily those larger banks with lower balance sheets and stronger balance sheets to cover potential losses.

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