Back to the letter from yesterday that I posted.... (click for an easier-to-read copy):
http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=114x71325To recap what this says (this is the second page of the letter that was posted in The Ticker yesterday:)
* Standard "purchase" interest rate is going to 29.99%.
* The "default rate" is also now 29.99%.
* The cash advance fee rate is now 5% (most were 2% previously, but I do not have the previous value for this account or for Citibank in general.)
Citibank's average yield year-to-date (consumer and plastic) was about 12%. But they're suffering 10% defaults, making their true margin about 2%. That's still a positive number.... if it's accurate.
This spread, of course, has a lot to do with previously-issued fixed-rate 12.99% cards (they and everyone else had a lot) that were handed out like candy to everyone and their brother, frequently with $10,000, $20,000 or even $50,000 credit lines.
Huge numbers of small business owners - especially sole proprietors - use these cards as a means of financing operations. They relied on that 10 or 12% interest rate, and most of them have huge balances outstanding.
I have since confirmed that this letter is not just going to people who have had credit "challenges". Indeed, this appears to be a blanket change on the part of Citibank. I now have multiple copies from people who assert that they have 750+ FICOs and have never missed a payment on this or any other obligation - the "paragon" of so-called "responsible" credit use. All of the letters are identical.
The problem should be obvious - for someone with one of the 12.99% cards that is now 30%, this is a radical change that more than doubles monthly interest expense. Of those who have sent me copies of this letter and disclosed their previous rate, none were over 20%, meaning that these changes represent 50% or greater interest rate increases. If you're anywhere near the edge of being unable to pay, this will shove you off the bridge and into the deep, shark-infested water of bankruptcy.
But more important, I believe, is what this says about what's really going on in these banks. Many simply put this out there as a "response" to the pending credit-card legislation, and note with irony that the bank that is most-owned by taxpayers (Citibank) is the one doing the worst screwing of the consumer.
But is it that simple? After all, given the extraordinary support that the taxpayer has put into Citibank (they would be literally out of business several times over but for our support) would not Treasury stomp on this sort of abuse? Remember, Barack Obama is supposedly "for the people" and "change in Washington and on Wall Street", right?
Perhaps there something more dangerous - and hidden thus far - going on here? Perhaps what we're really seeing is a business reacting to hidden deterioration of asset bases that are not known by investors and the public due to the legitimation of bogus accounting that happened this last March, but which is known by company executives!
Why do I believe this is a plausible, even likely explanation for this behavior by Citibank? That's simple: This sort of "terms change", which is an effective declaration of default even against those who haven't defaulted (see above; the same 30% rate is being applied to defaulted and non-defaulted accounts!), will drive two consumer behaviors that could ultimately destroy Citibank's credit card business and perhaps the bank as a whole:
1. Those who can transfer balances out somewhere else and/or pay them off will immediately do so. Nobody is going to pay a 30% interest rate and an imposition of default rates on non-defaulted balances willingly and on purpose unless they have no other choice.
2. A significant number of people, on receipt of this notice and understanding what it means (a declaration that non-defaulted accounts are being charged the same penalty rate as a defaulted account!) will immediately go out and charge up the entire unused balance on their card and then intentionally default.
While the latter is technically illegal there's not much that can be done about it, especially if you're unemployed (and 20% of America's workforce is!) You can't get blood from a stone, no matter how hard you squeeze. Indeed, while I do not and will not advocate unlawful behavior there comes a time when one must recognize and understand it, even if one can't condone it. This would be one of those times.
Both of these "results" have a high probability of decimating Citibank's card business and the latter behavior could literally blow them up. That the firm is willing to risk this outcome - an outcome that, to me at least, appears to have a very high probability - means that Citibank has to be crazily-desperate and willing to place an "all-in" bet that they will be able to either (1) book unpaid "interest" as "earnings" and "assets" (much as banks did with negative amortization loans) prior to final disposition via bankruptcy for those consumers or (2) there are enough people who both can't pay off or transfer the balance AND can continue to pay to make this strategy worthwhile even given the intensely negative public opinion reaction this move is guaranteed to generate.
In short, this looks to me like a "Hail Mary" pass. So long as this remains a Citibank-only story my interpretation is that Citibank is in a lot worse financial shape than is being let on - perhaps poor enough that they're at risk of imploding anyway, "too big to fail" or not.
Needless to say such an event would be extraordinarily ugly for the economy and markets.
If readers get these sorts of notices from other banks, and a pattern is established, that would be even more ominous. If you, as a reader, get one of these from other institutions I would love to have a copy, as a correlated pattern with other institutions would, quite possibly, point to imminent systemic trouble.
Disclosure: No position.
http://market-ticker.denninger.net/archives/1537-Hisssss-Citibank-Overpressure-Warning.html
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