PrefBlog

Amidst all the shock and horror about American lending practices, the Boston Fed has published an examination of credit availability to recent bankrupts by Ethan Cohen-Cole, Burcu Duygan-Bump, and Judit Montoriol-Garriga: Forgive and Forget: Who Gets Credit after Bankruptcy and Why?:

Conventional wisdom about individuals who have gone bankrupt is that they find it very difficult to get credit for at least some time after their bankruptcy. However, there is very little non-survey based empirical evidence on the availability of credit post-bankruptcy. This paper makes two contributions using data from one of the largest credit bureaus in the US. First, we show that individuals who file for bankruptcy can indeed get credit very quickly after they file. Indeed, 90% of individuals have access to some sort of credit within the 18 months after filing for bankruptcy, and 66% have unsecured credit. Second, we show that those individuals who are effectively the least punished and can get the easiest access to credit after bankruptcy tend to be the ones who have shown the least ability and propensity to repay their debt prior to declaring bankruptcy. In fact, a significant fraction of individuals at the bottom of the credit quality spectrum seem to receive more credit after filing than before. We interpret the widespread credit access and the difference in credit provision across borrower types as evidence that lenders target at-risk borrowers. By means of a simple stylized model we show that this observation is consistent with a profit maximizing lender whose optimal strategy involves segmenting borrowers by observable credit quality and bankruptcy status and that offers credit contracts to each group. This interpretation is also in line with survey evidence that shows that lenders repeatedly solicit debtors to borrow after bankruptcy, with unsecured credit card being the easiest one to obtain.

Holy smokes, the preferred share market is on fire! Up strongly again today, continuing the two week rally highlighted yesterday, with volume still above normal levels.

PerpetualDiscounts now yield 6.87%, equivalent to 9.62% interest at the standard equivalency factor of 1.4x, compared to Long Corporates which continue mired in their range of 7.50% … this time, maybe a hair below, but no more than a hair. The pre-tax interest-equivalent spread has thus narrowed to about 212bp, which is starting to look normal … normal, at least, by Credit Crunch standards, still well above the un-stressedl range of 100-150bp.

It is noteworthy that the Median Duration (YTW) of the HIMIPref™ Fixed-Reset index is now a mere 4.59 Years.

This entry was posted on Wednesday, April 15th, 2009 at 7:25 pm and is filed under Market Action. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.