Wednesday, Aug 20, 2008
and it starts over from a new angle
CNN: The Next Credit Crunch
But a big crunch is coming - and here's why. Credit card debt, like mortgage debt, gets bundled, securitized, and sold off by banks. Citigroup (C, Fortune 500), one of America's largest credit card lenders, just reported that it lost $176 million in the second quarter through securitizing such debt. That happens when the buyers of those securities observe rising delinquency rates and rising interest rates, and decide the debt is worth less than Citi thought.
Posted by mark @ 10:19 AM (1290 views) Add Comment
22 Comments
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1. str 2007 said...
Yup, that could be another big one. Numbers aren't as huge as the mortgage market and the margins far higher (at least on an interest rate basis) but debt is all unsecured. I suppose these were all triple A rated aswell.
2. I'vealreadyleft said...
If someone has already trashed their credit record by posting their keys back, they're not likely to care too much about the balance on their Visa card. Might as well dump it too. Maybe it will be more of an issue in the UK in that case, as people will declare bankruptcy sooner than those in the US.
3. k said...
The impact could be the same since in a reposession the bank gets the house but can't get the drink you bought in a bar in 2005 back, or the holiday. So equally if a bank takes on a £20k loss on a £300k house, it would end up losing the same £20k through card debts. To become £20k richer, all you ever needed to do was fill in another form. I've known people with £35k debts in arrears on cards and still been able to get a few more.
This is more likely to impact the UK since our CC debt is much higher than the rest of Europe; but I've no idea how much of it has circulated. I'd estimate £4k - £5k per uk resident on CC's.
4. peter_2008 said...
Yes, numebrs aren't hugh, but it is also the last lifeline in this down turn, as a significant number of people are using credit cards to buy staple foods like potato, pasta, milk and bread. The same people also don't have savings. So when they can no longer rely on credit cards to ride out this, it is going to turn really ugry. We will see blood on street, we will see people kill for food. And then maybe it is really time to buy properties!!
5. landofconfusion said...
@ 10:55AM peter_2008 said...
> Yes, numebrs aren't hugh, but it is also the last lifeline in this down turn, as a significant number of people are using credit cards to buy staple foods like potato, pasta, milk and
> bread.
My thoughts exactly. What got me was that even after NR imploded people were STILL being offered credit cards... For many this really is the last line of credit; I know people who can no longer get personal loans (they have too many already) and are paying their mortgage on plastic.
Any guesses as to what will happen when unsecured lending finally dries up?
6. renting2 said...
Next stop after the pawn broker (who are now doing very nicely) is the back-street money lenders for those stupid enough (APR 1,000s%).
7. last_days_of_disco said...
What happens when the state nationalises a credit card company?
Do you get a benefits credit card?
8. Deadman said...
Ah. I always wondered why people of equal stature to me always seemed to live a better existence than me. That's going to change now and I have ZERO sympathy. Bed made. Lie in it suckers.
9. Keth said...
I don't think will have the same impact as mortgages. The credit card companies make far more profit that mortgages over the short term which will offset losses, and the debt is more manageable, and since it's unsecured unless you go bankrupt you're going to have to pay it... also the risk calculations are completely different, and there is no 'asset' to factor in.
10. Pundit said...
The easy credit party has ended and many now face the bad debt hangover. The government and the media have created a fairy tale world in which you can have what ever you wish for by using credit. For many people, all that will be left will be the (bitter) memory of those new cars, exotic holidays, designer cloths and other luxuries bought on credit. Unfortunately, this fairy tale is not going to have a happy ending.
11. mrmickey said...
As has been pointed out before cheap loans have acted as a form of welfare enabling people to live a middle class lifestyle although they are in fact working class. Now the cheap credit lifelines have been removed they will naturally look to the government to help support their dwindling standard of living so expect much higher taxes for those who still have a job or we could have civil unrest on our hands.
12. inbreda said...
Egg credit cards were, I think, amongst the first CC providers to start securitising debt - in fact their entire business model was built on it. This is why they had to get rid of 160,000 perfectly good customers - because in the credit crunch they weren't able to securitise any more debt, and therefore couldn't fund the balances. This is after spending millions on some of the most inefficient marketing to attract those customers. What a fantastic business model!!!
13. handle_it said...
We already have civil unrest and it's because of the credit not because it's running out. Most people would and will quite happily live within their means without showering the streets with blood. Rather alarmist stuff here once again. It's the end of a boom not the world..
14. k said...
I guess at 14% APR there is significantly more revenue collected per pound lent in the short term; ie itit costs less to fund. For a £14k return they'd have to lend £100k on CC's, whereas they'd be looking at lending 3 times that amount to make that on a mortgage.
15. plato said...
And what about those who finance their addictions on credit. What will they resort to in this 'must have' society?
16. mark said...
but look at the real figures, there are more credit cards than mortgages, students have them, etc, also the debt is not secure, what happens when you cant pay it and you dont own a house or live in rented accom? they have to write it off... Therefore the amounts lost could be much much higher than mortgages.. this is I think more dangerous than mortgage debt. Think of store cards, petrol cards, credit cards, the avergage person must have at least 3 cards, even council tenants have them.. the shear amount of cards and associated debt is huge.
17. James said...
Woah, woah people! Step away from the rivers of blood please. What caused the collapse in value of asset backed securities was *unexpected* losses. Models built on 5 years worth of data from an economic boom that led to AAA ratings were undermined, leading to loss of confidence in the rating, leading to price collapse and the rest is history.
The methodology for credit card securitisations is different. The models probably aren't perfect, but given that credit cards have been around a lot longer than 125% mortgages, I'm willing to bet they're better and should be more accurate in estimating the losses. If the models are better and we don't see so many *unexpected* losses (NB, not denying there could be a high rate of losses) then this won't knock on to the same extent as mortgage backed securities.
18. James said...
mark - the point is the banks *expect* to write off more credit card debt and will have taken reserves against these losses. The level of defaults seen on mortgages was unexpected, so wasn't provisioned or factored into ratings of securitised debt.
19. peter_2008 said...
Yea, my early comments were a bit of alarmist, but seriously, how can people, who can hardly afford their own basic food bills, pay back their CC? It will just snowball. What about all EAs gonna lose their jobs? How do they live? This is no job market for their precious skill. Surely, they can no longer going back to the normal hard working life (like ordinary people) after so many years of easy money. May be then they can form a new federation called "EAs turned Bank Robbers Association" with subtitle like "We will get our slice one way or the other".
20. renting2 said...
If it becomes mainstream knowledge that the vast majority of credit card debt and unsecured loans are totally unenforceable by the courts I think we'll see a huge rise in creditors (banks and debt collectors) being served with CCA requests. If they cannot respond properly they (the creditors) will never get the money back.
21. peter_2008 said...
CCA is not quite that straightforward. There have been court cases in which the judges ruled in favour of the lenders, which concluded "the lender can omit from this document any signature and/or signature box, so although the card carrier is the executed copy, it does not have to (and invariably will not) bear the parties signatures." So if you apply a card, say online without a signature; and use it, the case CAN stand and CAN still be enforced.
I am not saying that using CCA no longer works, but you need to be aware that it is not quite a "get out" clause as some people described.
Remember, "If it is too good to be true , it proably is." This is kind of mentality got people in debt in the first place!!
22. renting2 said...
Not as simple as that peter, unless the CCA request is complete in every respect the courts are not empowered to find for the claimant in a properly defended case. The only reason they do is because of ignorance of the law on the defendant's side.