First housing, now Credit Card debt...

Discussion in 'Wall St. News' started by S2007S, Oct 30, 2007.

  1. S2007S


    Does anyone see the pattern that is devolping here....How can this be great for the economy, how can the already tapped out consumer continue to spend, 2/3 of the GDP is made up of consumer spending. If anyone thinks the consumer can continue spending at this rapid pace has to be foolish. This world is in one big Credit Bubble, but it seems to be ignored, well it cant be ignored forever..............


    The $915B bomb in consumers' wallets
    Americans have record credit-card debt and banks are starting to sweat an uptick in default rates, reports Fortune's Peter Gumbel. Why some fear this could be the next subprime.
    FORTUNE Magazine
    By Peter Gumbel, Fortune
    October 30 2007: 6:59 AM EDT

    (Fortune Magazine) -- This past summer's subprime meltdown involved about $900 billion in now-suspect securitized debt, reckless lending, and consumers who buckled under the weight of loans they couldn't afford. Now another link in the consumer debt chain - credit cards - is starting to show signs of strain. And the fear that the $915 billion in U.S. credit card debt (an uncannily similar figure) may blow up has major financial institutions like Citigroup, American Express, and Bank of America strapping on their Kevlar vests.

    Last month, as banks reported their worst quarterly results since 2001, concerns about rising credit card delinquencies began to make their way onto earnings announcements alongside mentions of subprime woes.

    First Citigroup (Charts, Fortune 500), reporting a 57% decline in earnings, cited higher consumer credit costs and said it would put aside $2.24 billion in loan-loss reserves to cover future defaults.

    In describing the situation to analysts, CFO Gary Crittenden said Citi's credit card holders were beginning to increase the balance on their cards or take cash advances on those cards for the first time - behavior that, in his experience (which includes seven years as CFO of American Express), can translate into future trouble. Citi said the change in loan losses was "inherent in the portfolio but not yet visible in delinquencies."

    Then American Express (Charts, Fortune 500) said that it too was seeing "signs of stress" and would boost its loss reserves in its core U.S. card unit by 44%. Capital One (Charts, Fortune 500), Bank of America (Charts, Fortune 500), and Washington Mutual (Charts, Fortune 500) all said they are bracing for a 20% or higher increase in credit card losses over the near and medium term.

    So are U.S. credit cards going to be the catalyst for the next seizing up of the global credit markets? It depends on whom you ask.

    "We are in a heightened state of alert to monitor a potential domino effect," says Michael Mayo, Deutsche Bank's U.S. banking analyst.

    Dennis Moroney, an analyst at TowerGroup, expects credit card delinquencies will rise as consumers, who have until now used home-equity lines of credit to pay off their cards, start ratcheting up higher card debt. When housing prices were rising, it was easy for consumers to tap the escalating values of their homes to keep borrowing. With the home-equity spigot turned off, over-leveraged consumers may have trouble keeping up with payments.

    The doomsday scenario would play out something like this: Just like CDOs and other asset-backed securities, credit card debt is sliced, diced, and sold off again as packages of securities. Rising delinquencies would hurt not only the banks involved but the securities backed by the credit card receivables. Those securities would decline in value as consumers defaulted, leading to bank losses as well as portfolio losses in the hedge funds, institutions, and pensions that own the securities. If the damage is widespread enough, it could wreak havoc on the economy much as the subprime crisis has done.
    The new rules of the credit crunch

    To be sure, there are key differences between the subprime market and the problems brewing with credit cards. The first is that while rising mortgage delinquencies were apparent for months before the subprime market blew up, credit card delinquencies are actually coming off unusually low levels.

    "This is absolutely not the next one to blow," says Meredith Whitney, banking analyst at CIBC. Christopher Marshall, CFO of Fifth Third Bancorp in Cincinnati, points out that the U.S. has a long history of credit card securitization, "so it's fairly well understood." The securitization of the subprime sector, by comparison, "got blurry, and people didn't focus on what it meant."

    Credit agencies that monitor credit cards in the asset-backed securities market share that confidence. "The performance in the core consumer [asset-backed securities] sectors is expected to deteriorate modestly, but not enough to cause substantial downgrades," says Kevin Duignan, managing director at Fitch.

    But credit card debt is different from subprime debt in another way: Unlike mortgages, credit card debt is unsecured, so a default means a total loss. And while missed payments are at a historical low, they show signs of an uptick: The quarterly delinquency rate for Capital One, Washington Mutual, Citigroup, J.P. Morgan Chase, and Bank of America rose an average of 13% in the third quarter, compared with a 2% drop in the previous quarter.

    What's more, consumers and the people who market financial services to them may not have learned their lesson. Klaus-Peter Müller, CEO of Germany's Commerzbank, told Fortune he was stunned on a recent trip to the U.S. to see TV ads still aggressively touting no-questions-asked credit. In Germany he's calling for tighter standards.

    "I'm speaking out on the ethical questions about consumer lending," he says.

    If there is an international precedent the U.S. should be watching, it's actually that of the U.K. British consumers are just as overstretched as Americans, but since the real estate market there rose faster and fell earlier, they're about 18 months ahead in the credit cycle. Since the last quarter of 2005, credit card delinquencies and charge-off rates in Britain have risen as much as 50%, forcing banks to take huge write-offs.

    It's a sign of the times that, according to one survey last month, 6% of British homeowners have been using their credit cards to pay their mortgages. That's suicidal, of course, given that credit card interest rates are more than double even the heftiest mortgage. Keep your fingers crossed that it's not a trend that crosses the Atlantic. Top of page
  2. Yes, but they are going to TRY to ignore it forever.

    The alternative is to "save the currency and take our medicine". They won't do that because it likely means recession, and the politicos don't want to run for re-election during a recession.

    What we will get instead is extreme money-pump inflation and lower rates. This will postpone the day of reckoning while doing SERIOUS damage to nearly all of Americans' finances.

    My guess is that they will never back off from the inflation until the weight of our credit system implodes and the currency is completely trashed. (All along, of course, they will be telling us how it's for our own good.)
  3. cstfx


    They have been ignoring it forever.

    Back in the early 90's the same laments were made about the US consumer's credit spending and lack of savings rate. Here it is 15 yrs later and the consumer is still being nudged to continue their spending thru financing. It was better a few yrs ago when the consumer used the credit line on their home equity which carried an interest rate at 1/2 what the current credit cards apply, even for those with good to better credit. Now that the equity is starting to shrink and people are forced to use the more standard credit forms for purchasing this overall debt will continue to rise.

    I am curious tho to see how it will affect these same individuals when the economy inevitably declines and recession sets in; there is no bankrupcy protection like there was during the last recession. People won't be able to walk away from their debts like they used to in the past so those debts can't be forgiven or forgotten as easily.