Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. The Looming Disaster of Credit Card DebtFrom The Financial Times:How the cards are cut By Patrick Jenkins,Francesco Guerrera and Saskia Scholtes Financial Times Published: July 27 2009 03:00 | Last updated: July 27 2009 03:00 Mick Longfellow is teetering on the edge of financial chaos. A dedicated teacher married to an equally hard-working nurse, living in a modest house in Newcastle in the north-east of England, the pair spent the past decade treating themselves to gadgets, gizmos and home upgrades. They put in new windows. They bought the biggest television and sound system their living room could accommodate. They changed their cars every year or two. With two children to spoil as well, they were living on credit - lots of it. There were store cards, car loans, personal loans and credit cards. Now, amid the recession, those lenders want their money back. "The bank just closed down our overdraft. That was the killer blow," says Mr Longfellow. But with the family's debts running to 30,000 pounds ($49,200, 34,600 euros), far more than their annual disposable income, repayment is going to take a very long time. It is a sad blow for the Longfellows. But multiply one family's debts by the millions of people across the world who are in an even worse state, losing jobs and homes, and the scale of the problem is clear. Estimates from the International Monetary Fund say that of US consumer debt totalling $1,914bn (1,166bn pounds, 1,346bn euros), 14 per cent will turn bad. For Europe, it expects 7 per cent of the $2,467bn of consumer debt will be lost, with much of that falling in the UK, the continent's biggest nation of borrowers. In the US, the carnage is well under way. For nearly two years, banks ranging from giants such as Citigroup to small community lenders have been bleeding as the economic downturn caused "maxed out" consumers to fall behind on their repayments of credit cards, automotive loans, student loans and other once-plentiful forms of credit. In recent months, what started as a debacle has turned into a nightmare. As unemployment continued to rise and house prices kept falling, the rate of defaults has surpassed historic norms, rendering many of the computer models used by US banks to predict losses useless. In this phase of the crisis, lenders are flying blind. "We are asking boards of financial institutions to sit down, think about plausible nightmare scenarios and then take measures to deal with them," says Peter Niculescu, a former executive at Fannie Mae, the US mortgage institution, who is now a partner at Capital Market Risk Advisors, a financial consultancy. Read the rest of the article Labels: baillout, banking crisis, banking industry, Credit card industry, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Behind Banks' Credit Card MovesAnother FT article goes deeper into the increasing danger credit cards are putting banks into, and what they're doing about it. Some scary stuff here.Record credit card losses force banks into action By Saskia Scholtes in New York Financial Times Published: July 1 2009 03:00 | Last updated: July 1 2009 03:00 Losses on US credit cards hit a record 10.44 per cent in June, squeezing profit margins for credit card securitisations to a 10-year low, according to Fitch Ratings. Profits from off-balance sheet vehicles backed by credit loans in June fell below the 5 per cent threshold for the first time since November 1998, said Fitch. Credit card securitisations have built-in triggers that force early repayment when profits fall below zero. Such triggers are designed to protect investors from prolonged exposure to bad credit card loans. Rising losses on credit cards have in recent months pushed US banks to come to the rescue of the off-balance sheet vehicles they use to transform hundreds of billions of dollars of consumer loans into securities sold to investors. Banks have also raised interest rates on credit cards to counter rising borrower defaults, late payments and boost profitability, underlining how the deteriorating health of US consumers is opening new fronts in the financial crisis. Read the rest of the article Labels: bailout, banking system, Credit card industry, financial crisis, securitization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Citi Raises Rates on CardholdersThis is before new regulations come into effect that prevent them from doing this very thing come into effect in a few months. From The Financial Times:Citi raises card rates on millions By Francesco Guerrera Saskia Scholtes Tom Braithwaite Financial Times Published: June 30 2009 23:59 | Last updated: June 30 2009 23:59 Citigroup has sharply increased interest rates on up to 15m US credit card accounts just months before curbs on such rises come into effect, in a move that could fuel political anger at the treatment of consumers by bailed-out banks. People close to the situation said that Citi, which is about to cede a 34 per cent stake to the US government as part of its latest rescue, had upped rates on between 13m and 15m credit cards it co-brands with retailers such as Sears. Citi's rate increases emerged on the day the government proposed legislation to create a new regulator with sweeping powers on consumer protection and a week after the bank was attacked by some politicians for raising employees’ salaries. Holders of co-branded cards who failed to pay their balance in full at the end of the month saw their rates rise by an average 24 per cent--or nearly 3 percentage points--between January and April, according to a Credit Suisse analysis of data from the consultancy Lightspeed Research. Read the rest of the article Labels: bailout, Citibank, Credit card industry, financial crisis, financial regulation Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank's $180 Billion Credit Card Time BombIf the economy stays on its present dismal course, banks can expect to lose $180 billion, according to analysts quoted in the New York Times. The figure is much higher than the government's so-called "stress test" scenario of $82.4 billion in losses because the Fed presumed no increase from current unemployment rates, and because they didn't count the losses from securitization of credit card debt. Yes, the banks bundled up credit card debt just like it did bad mortgages, selling and reselling it to investors and creating liabilities far in excess of value of the underlying loans.The average US household has over $8,400 in credit card and other revolving debt. With unemployment rising, housing prices unlikely to climb back to bubble elevations, and consumers saving more, and Congress considering curbing the most egregious predatory practices of the industry, the glory days of credit card profits for banks appears to be over. The banks are also slashing the credit available to consumers. According to Meredith Whitney, lenders are cutting back credit lines by $2.7 trillion over the next year, a 57% reduction of available credit from just two years ago. As consumers cut back their spending, the negative feedback loop will only accelerate. --d.f. Labels: bankruptcy, Credit card industry, credit crisis, Daniel Fireside, Meredith Whitney, unemployment Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). AMEX Takes Bailout, Boots CustomersLike other credit card companies that have received bailout billions, AMEX is hiking fees, penalties, and interest rates. Now the company, which received over $3 billion in TARP money, is taking the added step of offering $300 vouchers if customers cancel their accounts. Most financial analysts caution that it is a bad deal for cardholders.From the Wall Street Journal: It used to be that credit-card companies lured customers with cash rewards. Now American Express Co. is paying to get rid of them. The card issuer is offering selected customers a $300 AmEx prepaid gift card if they pay off their balances and close their accounts. Full story here. Labels: American Express, AMEX, Credit card industry, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Meredith Whitney: $2 trn credit lines to be cut?From Reuters. This is especially disturbing, inasmuch as the Obama administration, in the words of Analole Kaletsky, decided last week that "the Fed could refinance essentially the whole of the US mortgage and consumer credit market..."Credit card industry may cut $2 trillion of lines: analyst Mon Dec 1, 2008 6:29am EST Reuters (Reuters) The U.S. credit card industry may pull back well over $2 trillion of lines over the next 18 months due to risk aversion and regulatory changes, leading to sharp declines in consumer spending, prominent banking analyst Meredith Whitney said. The credit card is the second key source of consumer liquidity, the first being jobs, the Oppenheimer & Co analyst noted. "In other words, we expect available consumer liquidity in the form or credit-card lines to decline by 45 percent." Bank of America Corp, Citigroup Inc and JPMorgan Chase & Co represent over half of the estimated U.S. card outstandings as of September 30, and each company has discussed reducing card exposure or slowing growth, Whitney said. A consolidated U.S. lending market that is pulling back on credit is also posing a risk to the overall consumer liquidity, Whitney said. Mortgages and credit cards are now dominated by five players who are all pulling back liquidity, making reductions in consumer liquidity seem unavoidable, she said. "...We are now beginning to see evidence of broad-based declines in overall consumer liquidity." "In a country that offers hundreds of cereal and soda pop choices, the banking industry has become one that offers very few choices," Whitney wrote in a note dated November 30. She also said credit lines to consumers through home equity and credit cards had been cut back from the second-quarter levels. "Pulling credit when job losses are increasing by over 50 percent year-over-year in most key states is a dangerous and unprecedented combination, in our view," the analyst said. (Reporting by Neha Singh in Bangalore; Editing by Vinu Pilakkott) Labels: bailout, Credit card industry, financial crisis, JP Morgan Chase, Meredith Whitney, Reuters Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
