CREDIT CARDS --- the next jackboot to drop
The credit card business has been relatively resilient during the financial crisis that has evolved over the last year, but that is changing. Significantly higher delinquencies and then charge-offs are coming. They will likely be massive.
The evidence is not just intuitive or based on consumer credit trends to date. The actions of the major players tell the story. JP Morgan and Citibank are the two largest bank card issues. JPM's huge dividend cut is anticipatory, given their desire to conserve capital in the event of future deterioration in the economy. What they may see is the potential of this credit card overhang which they can't size in any precise way yet. Citi's continued crisis suggests concerns beyond their cache of toxic institutional assets as those have been throughly exposed. Is credit card that next source of illiquidity that scares the institutional funders away. Adding to these perhaps clear signs was yesterday's confirmed reports that American Express is offering a portion of its card base a $300 payoff to close their account. This is unprecedented.
An August 24, 2007 post here laid out the possible path to a credit card crisis. We're far down that trail. A less diversified credit card issuer like Capital One that uses its industry leading mathematical models to lend across a wide spectrum of credit scores may find that the old assumptions are completely useless, and it would not be a surprise to see this financially resourceful company with a stock price that barely keeps it listed by the end of the year.
It may not be as dire as that, but it is a certainty that something bad is in the cards.
The evidence is not just intuitive or based on consumer credit trends to date. The actions of the major players tell the story. JP Morgan and Citibank are the two largest bank card issues. JPM's huge dividend cut is anticipatory, given their desire to conserve capital in the event of future deterioration in the economy. What they may see is the potential of this credit card overhang which they can't size in any precise way yet. Citi's continued crisis suggests concerns beyond their cache of toxic institutional assets as those have been throughly exposed. Is credit card that next source of illiquidity that scares the institutional funders away. Adding to these perhaps clear signs was yesterday's confirmed reports that American Express is offering a portion of its card base a $300 payoff to close their account. This is unprecedented.
An August 24, 2007 post here laid out the possible path to a credit card crisis. We're far down that trail. A less diversified credit card issuer like Capital One that uses its industry leading mathematical models to lend across a wide spectrum of credit scores may find that the old assumptions are completely useless, and it would not be a surprise to see this financially resourceful company with a stock price that barely keeps it listed by the end of the year.
It may not be as dire as that, but it is a certainty that something bad is in the cards.
posted by John Borden at 9:36 AM
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