The Next Meltdown: Credit-Card Blowup Ahead

Discussion in 'Economics' started by SouthAmerica, Oct 12, 2008.

  1. .
    October 12, 2008

    SouthAmerica: The stages of a complete global financial meltdown:

    1) Real Estate Meltdown

    2) Derivatives market nuclear explosion and devastation.

    3) Credit-Card Blowup Ahead

    4) Complete Global Financial PANIC and STAMPEDE

    5) The First Great Depression of the New Millennium


    The last issue of Business Week had a special report about the next meltdown: credit cards.

    The article also had a picture of 4 bankers sitting on top of a nuclear bomb and you can see a picture of a credit card on the side of the device. You can see that the bomb is already falling and the bank executives are in Panic.

    They had another chart saying: Who’s at risk?

    The credit-card issuers that stand to lose the most if the industry stumbles.

    Amount of credit-card debt in Billions

    JP Morgan = $ 155 billion
    Bank of America = $ 153 billion
    Citigroup = $ 151 billion
    Capital One = $ 68 billion
    American Express = $ 65 billion
    Discover = $ 47 billion

    Percentage of Revenue from Credit-Cards

    JP Morgan = 21 %
    Bank of America = 22 %
    Citigroup = 16 %
    Capital One = 62 %
    American Express = 25 %
    Discover = 98 %

    They also had another chart showing Bad Debt.

    The pile of rotten credit-card debt is mounting from $ 25 billion as of end of 2007 to about $ 100 billion in October 2007 and rising very fast.


    Business Week

    October 20, 2008

    The Next Meltdown: Credit-Card Debt

    “Credit-Card Blowup Ahead”

    Rising rates are accelerating credit-card defaults and soured debt could further undermine the financial system

    By: Jessica Silver-Greenberg

    The troubles sound familiar. Borrowers falling behind on their payments. Defaults rising. Huge swaths of loans souring. Investors getting burned. But forget the now-familiar tales of mortgages gone bad. The next horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.

    That's bad news for players like JPMorgan Chase and Bank of America that have largely sidestepped—and even benefited from—the mortgage mess but have major credit-card operations. They're hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, further weakening the U.S. economy. "The next meltdown will be in credit cards," says Gregory Larkin, senior analyst at research firm Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody's Investors Service's structured finance team: "We still haven't hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get better." What's more, the U.S. Treasury Dept.'s $700 billion mortgage bailout won't be a lifeline for credit-card issuers.

    The big firms say they're prepared for the storm. Early last year JP Morgan started reaching out to troubled borrowers, setting up payment programs and making other adjustments to accounts. "We have seen higher credit-card losses," acknowledges JPMorgan spokeswoman Tanya M. Madison. "We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk."

    But some banks and credit-card companies may be exacerbating their problems. To boost profits and get ahead of coming regulation, they're hiking interest rates. But that's making it harder for consumers to keep up. That'll only make tomorrow's pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.

    Those losses, in turn, will wend their way through the $365 billion market for securities backed by credit-card debt. As with mortgages, banks bundle groups of so-called credit-card receivables, essentially consumers' outstanding balances, and sell them to big investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card debt.

    But it's getting harder for banks to find buyers for that debt. Interest rates have been rising on credit-card securities, a sign that investor appetite is waning. To help entice buyers, credit-card companies are having to put up more money as collateral, a guarantee in case something goes wrong with the securities.

    Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That's because most credit-card debt is unsecured, meaning consumers don't have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.


    Making matters worse, the subprime threat is also greater in credit-card land. Risky borrowers with low credit scores account for roughly 30% of outstanding credit-card debt, compared with 11% of mortgage debt. More than 45% of Washington Mutual's credit-card portfolio is subprime, according to Innovest. That could become a headache for JP Morgan Chase, which agreed on Sept. 25 to buy the troubled thrift's credit-card business and other assets for $1.9 billion. Says a JP Morgan spokeswoman: "

    We are aware of the credit quality of [WaMu's] portfolios and will manage risk appropriately."

    Credit-card losses are already taking a bite out of lenders' balance sheets. Bank of America, the nation's second-largest issuer behind JPMorgan, revealed on Oct. 6 that roughly $3 billion of its $184 billion credit-card portfolio has soured, a 50% increase from a year ago. At the same time the bank, which is also dealing with the broader financial tumult, said it would have to cut its dividend by 50% and raise $10 billion in fresh capital. The stock stumbled more than 25% the next day when investors largely scoffed at the new shares BofA was offering. "The good news for us is that we have the strength to get through this, but the bad news is that the earnings recovery does take a while," says BofA spokesman Bob Stickler. "We are prudently adjusting our underwriting standards to adapt to changing economic conditions."

    Likewise, American Express, which caters to wealthier borrowers, upped its provisions for credit-card losses from $810 million to $1.5 billion in the latest quarter, a sign that even upscale consumers are having trouble. "We have enhanced our credit models and continue to prudently manage our risk by scaling back some card acquisition efforts and reducing credit lines where appropriate," says an AmEx spokeswoman.

    The industry's practices during the lending boom are coming back to haunt many credit-card lenders now. Cate Colombo, a former call center staffer at MBNA, the big issuer bought by Bank of America in 2005, says her job was to develop a rapport with credit-card customers and advise them to use more of their available credit. Colleagues would often gather around her chair when she was on the phone with a consumer and chant: "Sell, sell." "It was like Boiler Room," says Colombo, referring to the 2000 movie about unscrupulous stock brokers. "I knew that they would probably be in debt for the rest of their lives." Unless, of course they default. Responds BofA spokeswoman Betty Riess: "The allegations do not reflect our practices. The bank has nothing to gain by extending credit to people who do not have the ability to pay us back."

    Now regulators and politicians are trying to curb some of the industry's abusive practices by limiting interest rate hikes, abolishing certain fees, and cracking down on questionable billing practices. Under rules proposed by the Federal Reserve, a borrower would have a 21-day grace period before being hit with a late fee, instead of the few days offered by some firms now. A similar plan working its way through Congress would allow banks to increase rates only on consumers' future purchases—not existing balances. And under both proposals, credit-card companies would have to allocate account holders' payments equally to balances with different interest rates. Currently, firms first apply payments to the debt with the lowest rate, which means it takes longer and makes it costlier for consumers to pay off their debt.


    The Senate isn't expected to vote on the matter until early next year. The Fed's rules, currently being reviewed by the industry, could take effect around that same time. But lenders seem to be preparing for the worst-case scenario: an outright ban on some practices.

    To get ahead of rules that would hamper their ability to reprice accounts, for example, many firms are jacking up interest rates. A survey of major issuers by consumer advocacy group Consumer Action found that 37% of firms have raised rates across the board, even for borrowers with relatively pristine credit records. "In anticipation of a federal crackdown, card companies are scouring their portfolios and tightening credit," says Tower Group's Moroney.

    Even consumers like Michael Polemeni, who miss only a single payment, can find themselves in the crosshairs of credit-card companies. The independent computer specialist relied heavily on his credit cards for child support payments and business expenses. Polemeni generally made more than the minimum payment each month, carrying a $2,000-or-so balance. But in July he missed a payment, and Providian, owned by Washington Mutual, jacked up his rate from 9% to 30%.

    Not everyone will be able to pay down their debts like Polemeni. And that could make for a vicious cycle: As credit-card companies raise rates, more consumers fall behind on their payments, which then hurts the ssuers. Says Innovest's Larkin: "We are going to see the banks massively hit."

  2. Keep in mind the mortgage fiasco was caused by the sub-prime mortgages, low interest. Credit Cards are in the 20% range.

    I don't think they will be hurt to much.
  3. mike007


    Not if people are unable to pay them off like their other debt.
  4. mokwit


    Surprised they were allowed to publish that [unpatriotic].
  5. Oh they will. They will.
  6. toc


    In the case of even severe recession with high unemployment rates, any type of lending or loans made, even to good customers can quickly turn sour with the other party declaring inability to payback full portion or even going fully bankrupt and walking away from it all.....clean!

    Temporary socialism like governments owning the banks and injecting cash directly should be able to save the system from going totally illiquid and belly up. Once things improve, the shares held by the government can always be sold back to private parties and individuals.

    Ever heard of martial law..........well this is financial martial law and is acceptable in order to bring some sensibility to the system. Knowing the US mindset, it is more likely that they will work very hard to return to free economics rather than be a slave to stagnant socialism. :cool:
  7. ammo


    they have been collecting 21% compounded since early '80s on their loans,they may be able to withstand a drawdown,no one mentions the billions these companies have been making for decades
  8. .

    October 12, 2008

    SouthAmerica: Reply to Forex-Forex

    1) There are various disasters that are in the pipeline such as the demise of Morgan Stanley.

    Don’t forget Morgan Stanley has $ 7.1 trillion dollars in derivatives contracts with their name on it - In comparison to Lehman Brothers that had only $ 738 billion dollars in derivatives contracts.

    2) We are going to start to find out the impact that the derivatives market meltdown is having around the world in the coming months as people from all over the place starts reporting their losses, and also the losses in collateral that went up in smoke instead of being in a secure account. We might see a domino effect in company failures from these massive global losses. These massive losses are going to destroy the capital base of thousands of companies.

    3) Don’t forget that as the financial PANIC spreads around the globe we are going to see massive layoffs here in the United States where most workers have no protection and are living from paycheck to paycheck. As the unemployment goes up by the millions of people – a lot of people will not have money to pay their credit-card debts.

    Many banks are going to go out of business, and when GM, Ford, and Chrysler merge into one company they are going to layoff a lot of people and they are also going to have a major impact all along the food chain of that industry.

    4) Illegal immigrants are abandoning everything behind, including real estate, and all kinds of credit-card debt and are returning to their countries. During the year of 2007 it is estimated that 1.3 illegal immigrants left the United States, and in 2008 that number is going to be even larger as the economic situation in the US deteriorates very fast. During the years of 2007 and 2008 the United States economy probably is going to find out that they lost over 2. 5 million illegal immigrants during that period in contrast with adding millions of new illegal immigrants every year for the last 25 years. This is a major reversal of a trend that has major implications to the US economy.

    The other day a Congressman from California said on CNN News that on his district alone there were over 10,000 houses in foreclosure that used to belong to illegal immigrants. Many of these illegal immigrants could not pay their mortgage or find a new job in the US and most of them went back to the country from where they came from.

    The downward spiral of the US economy is picking up speed and one problem feeds on the other and helping in the economic implosion process.

    The United States government has no way to stop all this implosion process, because there are too many things imploding at the same time and spiraling out of control.

    On top of that we might have Panic and a run on the banks when people realizes that the FDIC fund is empty at the same time that the US government decided to extend deposit insurance from $ 4.4 trillion dollars to an estimated $ 10 trillion dollars. And if the US government is forced to insure every dollar that people have on their bank accounts then the total of money insured can grow even further by trillions of dollars – and the fund insuring all these trillions of dollars by the end of 2008 would not have enough money on the FDIC fund to even handle the failure of a small bank such as Indi Mac; that bank failure alone is costing the FDIC about $ 9 billion dollars to clean up that mess.

    No wonder people are buying all kinds of safes in the US and also in Europe. I don’t know to store what on these safes since after the collapse of the US dollar the US currency would be good to be used only as Confetti and nothing else.

    You don’t wake up one day and the newspaper announces that your country is in a Great Depression. Most people don’t understand how a country descend into a Great Depression, but it is a slow implosion just like what we have today – you go down one day at the time and a lot people think that you have reached the bottom just to find out that there is more bad news underway, and the implosion process continues to the next level.

  9. NoDoji


  10. you are saying that if one goes into bankruptcy due to mortgage problems, he/she will still honor cc payments? lol. all issues are tied together here. some will lag, but it's coming....
    #10     Oct 13, 2008