Are credit cards the next collapse?

[babylonsister]

* Posted on Tuesday, October 28, 2008

Are credit cards the next collapse?

By Christina Rexrode | Charlotte Observer


First came trouble with mortgages, then home equity loans and commercial real estate. Now, banks are starting to worry about credit cards.

As the economy slows and unemployment rises, consumers are defaulting on credit-card payments more often. And though that trend is unlikely to create a crisis in line with the mortgage fallout, it's still a headache for banks that are already hurting.

U.S. banks charged off 5.47 percent of all credit card loans in the second quarter, according to the Federal Reserve, representing some $50 billion that they'll likely never collect. That's up from 3.85 percent the year before, and that is a movement that's on the radar of Ken Lewis, chief executive of Charlotte's Bank of America Corp.

Asked in a recent TV interview if credit-card debt would be “the next shoe to drop” for the banking industry, Lewis replied: "It, in some ways, already is," adding that such losses have risen "pretty substantially."

Laura Nishikawa, an analyst at the Innovest ratings agency, predicts that banks such as Bank of America and New York's Citigroup Inc. could be hit especially hard by credit-card defaults. That's because those banks, which offer both consumer and investment services, have been depending more heavily on money made on consumer services such as credit cards as the returns in investment banking grow increasingly unpredictable.

To be sure, credit cards don't represent a huge portion of assets for most banks. For example, they comprise about 14 percent of all consumer loans and leases at Bank of America, the country's largest credit-card issuer. The main problem, Nishikawa said, is that "everyone is so weak after what happened with mortgages that another blow to a consumer product would be hard to handle."

more...

http://www.mcclatchydc.com/226/story/54880.html

[Hydra]

1. There IS a logical end here

You can't borrow your way out of debt, and the gov't is now tapping us to pay their Wall St. buddies.

The money WILL end somewhere. They know it, and yet they keep driving the economy into the ground. It should be interesting to see why they're doing it...though I doubt we'll like the answer.

[Mike 03]

2. Good article. I take issue with one statement.

The credit card default issue is very big, no doubt. But I don't agree that the commercial real estate mortgage issue has even begun to have the impact it will in the coming months. I see that as the next shoe to drop--it hasn't dropped yet. IMO, that is a much bigger issue than credit card debt. Also, there are trillions of dollars of derivatives and institutions leveraged 30:1 that are still in deep doo-doo. The unwinding of this debt is not over yet.

[Ezlivin]

3. Credit card defaults should skyrocket

Particularly since people can no longer treat their homes as ATMs.

The so-called spending frenzy of the past several years was backed by the constant refinancing of home loans, not because of rising wages and increased prosperity.

[TalkingDog]

9. by line and location are important points

Charlotte is on the verge of becoming the banking capital of North America.

A couple more weebly banks in NY will put the ball squarely in Charlotte's court. As a result they are very concerned with anything that might impact their largest business providers.

Welcome to DU, Mike 03, glad you could join us for the fun!

[Tierra_y_Libertad]

4. It's one part of the tsunami still to be felt.

The ripple effect is just starting to reach the public. People are starting to cut their purchases, which means that the people who produce the merchandise will be out of work because it won't sell. Which means that they won't be making purchases, which means that more people will be out of work. Not just the manufacturers but all the people between the product and the purchasers. Truck drivers, people who produce the parts that make up the merchandise, the store employees who will be laid off, etc, etc, etc.

Jobs of any kind will become valuable, meaning the employers can cut wages (or, at least, withhold raises), which means that their employees won't buy products.

It's going to be a long, dreary, recession...at best.

[yodoobo]

5. Maybe.

But when they repo your credit card, you still have a place to sleep.

[Coyote_Bandit]

6. Delete

[quidam56]

7. Of course they are

Then the retail chains will start closing stores and so on in a domino effect. Can't understand why Fox News asks almost every day have we hit bottom yet ? We aren't going to hit bottom for another three - four years. http://www.wisecountyissues.com

[babylonsister]

8. I don't watch Faux, so I wouldn't know. And stores are already closing.

http://www.google.com/search?hl=en&q=stores+closing+%2B+economy&btnG=Google+Search&aq=f&oq=

[aquart]

10. So glad not to be in retailing this year.

Every time I see a sale circular right now, I want to cry. I can feel the desperation in my bones.

[lelgt60]

11. AFAIK, credit card debt is unleveraged...

And, I don't think it has been bundled and resold. That will make a big difference compared to mortgage debt. Anyone who knows for sure should chime in here...

[SOS]

12. According to Business Week, 70% bundled and sold

http://www.businessweek.com/magazine/content/08_42/b4104024799703.htm?chan=rss_topEmailedStories_ssi_5

The next devastation will mostly be the collapse of emerging market nations due to the yen carry trade.
Then the credit cards will implode next year.
As Robert Reich recently said, "We should be OK in 7-10 years"