Op-Ed: Another plague descends on America: Revenge of the Credit Cards

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According to Yahoo! News, its source, AP, did a bit of digging around in the credit figures, and came up with this information:

“The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors — similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.”


Meaning about $450 billion is now in the blender.

This doesn’t mean that all of that money is about to follow the subprimes down the drain. But delinquencies are rising in clusters around the areas worst hit by the subprimes. So a percentage of that money is in trouble.

Which, inevitably, means that securities issued to people investing in credit card debt are also in trouble, and the lenders, those jolly little pixies, have found yet another way to screw up both themselves and the US economy.

Just as an added irony, the credit cards are also valuable cash cows for credit providers. They give the convenience of double digit charges with the added attraction of creating paper debt as an asset for its own credit.

What do investors in delinquent credit card trusts get? They get to look at the nice letterheads, unless there’s an uncharacteristic outbreak of sanity and their assets get transferred to other securities.

If American finance issued securities made of solid platinum, they’d turn into locusts.

This is the same methodology as for the subprimes, and it could well produce the same results.

One quote reads like some sort of Biblical warning:

“Investors also are backing away from buying securitized credit-card debt, said Moshe Orenbuch, managing director at Credit Suisse. But that probably has more to do with concerns about the overall health of the U.S. economy, he said.

"It's been getting tougher to finance any kind of structured finance — mortgages, automobile loans, credit cards, student loans," said Orenbuch, who specializes in the credit industry.”

So even financing the finance isn’t looking very healthy. This isn’t quite happening across the board, Chase has reported a decline in delinquencies, but another firm, Capital One, expects to write off $4.9 billion in 2008, based on forward projections.

That’s one company.

It’s also only about one percent of that nominal $450 billion affected by securities issues.

(Note: Capital One has not indicated that it has issued any securities related to the existing or projected delinquencies. The stated percentage relates to volumes of loans affected, not specific companies.)

The subprime mortgages have been hitting much higher levels of defaults. If that pattern repeats itself, the net loss is both the value of the credit card debts and any securities issued on that debt. If the mortgages are accurate benchmarks of how the defaults work, this is another major mess.

The finance sector is scraping its bottom line here. It might get away with one grotesquerie like the subprime situation, but two? Add non-investment in securities, and things are looking pretty shaky.

“Securities” are supposed to have some sort of status, and be real investments. The only really secure securities are debentures, long out of fashion, and bonds, which are about as exciting as a coma, and not usually great payers.

So the finance industry has lost or misplaced two of its best capital inputs. Meaning that cash for lending is likely to be reducing, and their interest rates will have to rise. The Fed cutting its discount rate mainly affects financiers, not consumers. It doesn’t really matter what the Fed’s rate is, if the banks and others have to charge more just to get out of their own morass of failed loans and liabilities.

The alternative would be that they start writing a lot more business, and try to generate more liquidity that way, making money by volumes, but that’s evidently not being done.

Current betting on my odds, would be:

2-1 on: “Revelations” about the state of the finance industry force changes to credit laws.

Evens: Mergers and a lot of rewriting of assets and credit rules.
2-1, the banks and lenders quarantine as many of those trusts as they can, buying them from themselves to retain some nominal asset values.

3-1: Fed kicks a few heads, threatens to raise interest rates if the industry doesn’t get the lead out. This is based on the well known economic principle that idiots can always be replaced, and if a few go out of business, it’s fewer to clean up after.

4-1: New presidency comes up with clean slate policy and does tax deal to minimize damage to financial sector.

5-1: Banks and credit providers take losses to a bearable degree, don’t try to get blood out of corpses.

10-1: Banks and credit providers stage losses over period of years, reducing immediate impacts. Still not popular, but realistic.

20-1: Funds and major stockholders hold corporate lynching parties, demand action to rectify gaping holes in balance sheets. They should have done this five years ago, but what the hey?

1000-1: One of the unknown geniuses who started this Repo Rapture figures out a way of getting the cash flowing again, and rebuilding the books related to the subprimes, credit cards and mortgages.

That last bet is at those odds because I’ve noticed the Mensa Society and NASA aren’t doing a lot of headhunting in the finance sector.