Credit Card Crunch

by: Felix Salmon December 01, 2008 | about stocks: AXP / BAC / C / DFS / MA / V    
Felix Salmon

Felix Salmon

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Meredith Whitney has a piece in the FT which is full of extremely large numbers:

Capital destruction has been so intense that multi-trillions in capital raised by institutions through both private and public capital has gone to plug holes and not stabilise the effects of shrinking liquidity to corporations and consumers. More than $3,000bn of available credit has been expunged from the markets and therefore corporate and consumer borrowers so far this year...

Expect more broad-based credit contractions but, specifically, more than $2,000bn in credit lines to be cut in reaction to risk aversion, constrained capital and regulatory change...

Amend the proposal on Unfair and Deceptive Lending Practices that is set to be adopted in 2010. The proposal includes one major change that will lead to a severe unintended consequence - pulling credit from consumers. Restricting lenders' ability to reprice an unsecured loan will cause them to stop lending or to lend less. This change could cut over $2,000bn in unused credit card lines, or over 40 per cent of unused credit lines.

Where do these numbers all come from? What does Whitney mean when she talks about $3 trillion of credit as having "been expunged from the markets"? And faced with $4 trillion in extra losses over and above that figure, how on earth does she expect re-regionalized lending and delayed implementation of new accounting rules to make the slightest bit of difference?

Whitney is quite right of course that it's a good idea for banks to know their customers and not to rely on centralized, computerized underwriting which relies far too heavily on FICO scores. But I'm not sure that a bigger government guarantee on bank debt is a good idea. Banks are already up in arms about paying for the present guarantee, they're not going to want to pay any more. And the government certainly shouldn't guarantee bank debt for free: if it's going to give money to the banks, it should get equity back.

As for the idea that the proposed credit-card rule will mean a drop of $2 trillion in available credit, color me skeptical. And in any case credit-card credit should really be moved off the balances of national credit-card companies and into personal loans from local banks -- which are easier to pay off and carry much lower interest rates. Banks have deliberately, in recent years, made personal loans hard to get, because credit cards are so much more profitable for them. If we can reverse that trend, that would be a good thing.

It's worth noting that the proposed credit card bill is coming into force only because national banks (invariably headquartered in North Dakota) have shown themselves to be utterly untrustworthy and mercenary when it comes to their credit-card customers. Unless and until credit-card lenders submit to regulation by entities who represent consumers, this kind of thing will, regrettably, be necessary.

Disclosure: No positions.

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This article has 8 comments:

  •  
    Dec 01 02:12 PM
    US consumers are insane. Why take credit card loan and pay the expensive interest. If you don't have the money, Don't spend !!! Spend when you have the money. STUPIT !!!
    Reply | Link to Comment
  •  
    Dec 01 03:03 PM
    Dont forget that US and Basel I and II rules, prohibit banks from lending more than 12 times their capital and retained earnings. Factor in 4% inflation and that means every year banks have to recall 4% of their capital base x 12 in real terms , which depending whose number you use on capital base, ammount to 2 trillion, quite near to your number. The mistake is creating a rule which does not allow banks to lend their inflation adjusted capital and retained earnings. When banks make profits in good years, this capital errosion is partly compensated. In 2009 and probably 2010 that will not be the case. Big trouble ahead.
    Reply | Link to Comment
  •  
    Dec 01 04:38 PM
    [Whitney is quite right of course that it's a good idea for banks to know their customers and not to rely on centralized, computerized underwriting which relies far too heavily on FICO scores]

    In the early 70's, my parents moved to a new town and applied for a mortgage to buy a home. They almost didn't get the loan because the people at the local bank "didn't know them."

    We've sure come a long way. And not for the better.

    On Saturday, I called Chase to ask them to remove a bogus late fee on my credit card. They refused. I literally laughed at the customer service rep and told her to go to lend to some deadbeat and cancelled my account of 12 years.

    I'm exactly the kind of customer these people want - I live beneath my means, have low debt/income, and ahve excellent credit. It took me no more than 5 minutes to apply and get approval online with another issuer.

    These idiots still haven't learned the lesson.
    I
    Reply | Link to Comment
  •  
    Dec 01 08:43 PM
    She doesn't like WFC most, and she might be right

    According to SalaryList.com (only bank business, if you search you can find their other business)

    Wells Fargo $90K
    salarylist.com/all-rea...

    JP Morgan $79K
    salarylist.com/all-rea...

    Bank of America $80K
    salarylist.com/all-rea...

    CtiBank $87K
    salarylist.com/all-rea...
    Reply | Link to Comment
  •  
    Dec 01 08:44 PM
    She doesn't like WFC most, and she might be right

    According to SalaryList.com (only bank business, if you search you can find their other business)

    Wells Fargo $90K
    salarylist.com/all-rea...

    JP Morgan $79K
    salarylist.com/all-rea...

    Bank of America $80K
    salarylist.com/all-rea...

    CtiBank $87K
    salarylist.com/all-rea...
    Reply | Link to Comment
  •  
    Dec 02 02:54 AM
    Gob, he who laughs last.... Remember that all the money the banks lose on deadbeats you pay for with your taxes. So I am not sure you did yourself a favor by sending your bank to a deadbeat and not paying the late fee.

    I have another question. Does anyone actually know what happened with the bailout money. Is there some report on-line? All I know is that Congress passed a law and President signed it, to spend $700 billion, and that some money has apparently been spent. How? By whom? When?

    It would be worthwhile to go back and count the total bailout funds advertised up to now. I think it all might add up to a few trillion dollars around the world all together combined. Say what you will, that's a lot of money. We should all be flush with cash by now. But why aren't we?

    WHERE IS THE MONEY?

    Frankly, it all sounds to me like the bailout is as real as the leveraged investments the spinmeisters -- who got us into this mess -- made. Smoke and mirrors.

    Fix one illusion with another. That's the way to do it. Money for nothing and your chicks for free.
    Reply | Link to Comment
  •  
    Dec 02 12:51 PM
    "WHERE IS THE MONEY?" This is a limitation of forums, where information does not accumulate. SA needs a wiki, where those most interested in a particular facet can discuss it to death and post a consensus for others to access.
    Reply | Link to Comment
  •  
    Dec 05 04:24 AM
    Whitney had one good prediction! At the same time I believe her other
    portfolio picks cost her clients dearly.

    If most analysts evaluate the market one way, and a singular analyst sees it a different way, shouldn't we look at the quantitatives which made the sole analyst prophetic! Either a new method or pure luck guided her fame!

    I would love to see a Seeking Alpha article which
    looked at Whitney's Other Picks and/or performance and explained
    the heuristics which make her a superior Financial Analyst.

    Sincerely,

    JT

    Reply | Link to Comment
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