One point I'd like to make before we completely dismiss it and put in new orders to bid credit card companies to 20, 30, 40x 2011 earnings estimates... we brought up in late 2007 and early 2008 the little observed fact that many consumers who have both house and credit cards, have changed their behavior. In the old days they protected their house at all costs - paying the mortgage off each month, and then sacrificing other things. In this era - many have been paying credit cards FIRST rather than their mortgages so the losses thus far are better than usual for credit card companies; this is a new phenomenon seen only in this recession as many people have almost no monetary attachment to their homes due to zero down (or nearly so) mortgages. Hence in times predating "bubble mortgages" people would fail on their cards first and try to save their homes - not in our current (and future based on recent government initiatives) eras. Easy to walk away from 0, 1, 2, 3.5% down - a lot harder when you actually have to act like a homeowner rather than renter and plunk down 10%+.
But feel free to chuckle about that sort of commentary above, and let's present another in a litany of stories that matters not at all... I'll just add it to the list at the bottom of this post.
- It used to be easy to guess how many Americans would have problems paying their credit card bills. Banks just looked at unemployment: Fewer jobs meant more trouble ahead. The unemployment rate has long mirrored banks’ loss rates on card balances. But Eddie Ward, 32 and jobless, may be one reason that rule of thumb no longer holds. For many lenders, losses are now starting to outpace layoffs.
- Mr. Ward, of Arkansas, lost his job at a retail warehouse in April and so far has managed to make minimum payments on his credit card debt, which he estimates at $15,000 to $20,000. Asked whether he thinks he will be able to pay off his balance, he said, “Not unless I win the lottery.”
- Experts predict that millions of Americans will not be able to pay off their debts, leaving a gaping hole at ailing banks still trying to recover from the housing bust. The bank stress test results, released Thursday, suggested that the nation’s 19 biggest banks could expect nearly $82.4 billion in credit card losses by the end of 2010 under what federal regulators called a “worst case” economic situation. (that would be the stress test that banks were able to negotiate) But if unemployment breaches 10 percent, as many economists predict, the rate of uncollectible balances at some banks could far exceed that level. (that would be the unemployment rate, that if measured as it was pre early 1990s is already approaching 13%)
- Even the government’s grim projections may vastly understate the size of the banks’ credit card troubles. According to estimates by Oliver Wyman, a management consulting firm, card losses at the nation’s biggest banks could reach $141.5 billion by 2010 if the regulators’ loss rate was applied to their entire credit card business. (no problemo - that's where our tireless sucker, errr... hero - comes in, the US taxpayer. Any loss, no matter how immense must be covered. We cannot force losses on bondholders or liquidate very important political donors.... err, banks and sell off their pieces to managers who did not get us to this stage)
- In the official stress test results, regulators published losses only on credit cards held on bank balance sheets. The $82.4 billion figure did not reflect another element in their analysis: tens of billions of dollars in losses tied to credit card loans that the banks packaged into bonds and held off their balance sheets. (ah, good ole FASB... what allowed Enron to play their little games was off balance sheet accounting. Now, instead of learning from that - we institutionalized it throughout many major banks later in the decade. We have the same level of ill transparency - in fact Paulson wanted to create a SUPER SIV back in late 2007 as the first of his many solutions... when in doubt about off balance sheet accounting - which should not be allowed in the first place - create a super one. Because as we all know, having a parallel balance sheet in some far off universe where things can be hidden... is the right way to run an accounting system. It pretty much sums up a nation in denial)
- Experts predict that the rate of credit-card losses could eventually surpass the jobless rate because of the compounding effects of the housing crisis and lackluster consumer confidence.
- Unlike in prior recessions, cardholders who recently lost their jobs are unlikely to be able to extract equity from their homes or draw down retirement accounts to help pay off their debts. That means borrowers who fall behind on their bills are more likely to default, leading to higher losses.
- For the banks, the economics of the credit card business are increasingly troubling. As the recession has dragged on, cardholders have sharply reduced spending. New customers with strong credit histories are increasingly hard to find.
- Every major credit card issuer has been approving fewer new applicants, reining in credit lines and canceling unused accounts. And Meredith A. Whitney, a prominent banking analyst, expects credit card lenders to cut the lines of credit they extend to borrowers by a total of $2.7 trillion through 2010. That is equivalent to a 57 percent reduction in the credit they made available two years ago at the height of the boom.
- At Citigroup, executives noted that the company’s 10.2 percent credit card charge-off rate for the first quarter had broken its “historic correlation with unemployment” and showed no sign of letting up.
- American Express, Bank of America and Capital One Financial showed first-quarter loss rates that hovered around 8.5 percent, roughly tracking the unemployment rate. All three said they expected higher losses in the coming months.
- Cindy Schneider of Connecticut, 53, is a long way from being confident about her finances. When her credit card company recently raised her interest rates, saying she was three days late with a payment, Ms. Schneider transferred the balance to another card with a lower rate. “We are borrowing from Peter to pay Paul,” she said.
Worst case scenario - if your printing press runs out of ink, simply walk away and claim the credit card company (or your mortgage servicer) made you buy product (or your home) with a gun to head, and the fine print was confusing. Then, you get a bailout. The other taxpayers who were able to read fine print, and did not see the gun will pay for your debts that the banks are writing off and you keep your merchandise and now keep your house with 1% mortgage rates. We all win here Cindy. Now do your job and shop - see you at Best Buy next weekend!
[Sep 15 '07: Consumer Spending Continues, Where is the Money Coming From? Credit Cards]
[Dec 10, 07 - Consumers Increasingly Turning to Credit Cards]
[Dec 23, 07 - Unpaid Credit Cards Bedevil Americans]
[Jan 10, '08: Credit Card Warnings Here, Credit Card Warnings There]
[Apr 10, '08: Americans Keep Piling on Debt]
[Apr 4, '08: Late Payments on Consumer Loans at 16 Year Highs]
[Jun 3, '08: Credit Card Usage is Surging, Risking Another Debt Crisis]
[Jun 22, '08: Americans Running Out of Places to Hide Debt - Now Credit Cards Go]
[Sep 23, '08: Loan Delinquencies Continue their Path Upward]
[Oct 21, '08: Moody's - Credit Card Chargeoffs Rising Rapidly]
[Dec 15, 2008: Capital One (COF) Updated us on Delinquency Rates]
[Apr 7, 2009: Moody's Credit Card Charge Offs Hit Record; While 8.2% of All Type of Loans are Delinquent or in Default]
