When even Moody's chimes in and notes that the Fed's Adverse Case assumptions are in line with their Base Case assumptions, one can't help but wonder in what parallel universe the Federal Reserve is expecting to see its optimistic outcome realized, especially since many of its macro worst case parameters have already been trampled by real economic data.

In this particular case, Moody's focuses on credit-card charge offs; however the same principle can easily be applied to any other axis in the Supervisory Capital Assessment Program. As Moody's says:

SCAP loss rates for credit card assets range from 12%-17% in the Baseline scenario, and 18%-20% in the More Adverse one. We currently expect industry charge-offs to peak at 12% in the second quarter of 2010, which translates, roughly, to 22% on a two-year cumulative basis [TD: their base case]

Therefore, the Fed's More Adverse charge-off rate assumptions for issuers' managed credit card portfolios are consistent with our expected range of charge-off rates for related credit card trusts. Our current assumptions are predicated on the observance of surging delinquency trends and also the expectation that the unemployment rate will peak at about 10% in early 2010. Changes in the trajectory of unemployment will have the greatest influence on the actual magnitude and timing of peak charge-off rates.

As for specific differences which can account for the rose-colored tint on Bernanke's contact lenses, the rating agency provides the following color:

Differences exist between trust data and managed portfolios, making a direct comparison of Fed's and our estimates difficult. For example, Chase's credit card trust (CHAIT) does not include receivables from the recently acquired Washington Mutual credit card portfolio, which has comparatively much higher charge-offs.

Although the Fed's More Adverse charge-off rate assumption is much higher than our base case expectation, some of that disparity is explained by the absence of the high-loss Washington Mutual portfolio in CHAIT. Other disconnects between managed and trust data may be explained by differences in accounting for recoveries (i.e., the reporting of net or gross charge-offs) and assumptions regarding balance growth/attrition rates.

Of course, it is not possible to engineer a short squeeze if retail investors are fully aware of just how bad things are going to get, and the last thing one needs is for Capital One and other credit card companies to be unable to raise equity at this critical market inflection point, so everything ends up in proper perspective. For a good observation of how one man's Adverse Case is another man's Base Case, see the table below.

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What all this means of course, is that American Express better pull of its equity follow on offering pretty damn quick, before all its credit card holders decide to draw down their Centurions and use the cash as collateral against which to short the credit card company.