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Tuesday, 2 December 2008
Next U.S. Crisis: Credit Cards
Government intervention or not, banks will be cutting up America’s credit cards at an unprecedented rate, with grave implications for the economy and company profits.
Government intervention or not, banks will be cutting up America’s credit cards at an unprecedented rate, with grave implications for the economy and company profits.
The U.S. Federal Reserve added more nutrition to its alphabet soup of rescue programs last week when it unveiled the Term Asset-backed Securities Loan Facility (TALF), under which, among other things, it will lend as much as $200 billion to investors in securities backed by credit-card, auto and student loans.
It did so for a very good reason: The securitization market’s freeze now extends beyond mortgages, imperiling run-of-the-mill consumer financing and making it a certainty that many people who use credit to get past “cash flow” situations will be denied.
And even though the U.S. car industry may implode if starved of finance and many students will have to defer education, the real potential disaster is in credit-card funding, which could push lots of households over the brink and with them consumption and every business that depends on it.
Put simply, even with an apparent will to try anything to bring the wheels of finance back into motion, it will be very difficult for government to fill the hole quickly that private finance will leave.
Details of the plan are still sketchy, but let’s assume that it works, even if the plan will give the Fed huge fears about how to get out of its positions after the end of 2009.
All other things being equal, the amount the Fed is putting into the TALF should take the asset-backed securities market back to about where it was in the first half of 2008, which itself was only a third of the volume we saw in 2007.
But all other things are not equal.
The banks that provide the bulk of credit-card funding generally want to cut back, pushed by their own troubles, a conservative reading of the economic situation and, potentially, regulatory changes that while intended to ward off the excesses of the last bubble, will magnify the impact of its bursting.
Meredith Whitney, the Oppenheimer analyst who has so far been ahead in identifying and explaining the weaknesses in the banking system, thinks that more than $2 trillion in credit lines, or 45 percent of all the lines available, will be pulled out from under American consumers in the next 18 months, a figure that puts the Fed’s $200 billion for asset-backed finance in its proper perspective.
“We are now entering a new era within the financial landscape that will be characterized by expanded forced consumer deleveraging with a pronounced downshift in consumer spending,” she wrote in a research note.
“We view the credit card as the second key source of consumer liquidity, the first being their jobs,” the note said. “Pulling credit at a time when job losses are increasing by over 50 percent year-on-year in most key states is a dangerous and unprecedented combination, in our view.”
Whitney notes that the three largest credit card lenders, Bank of America , Citigroup and JPMorgan Chase, which together account for more than half of the amount outstanding on U.S. credit cards, have each discussed reducing card exposure or slowing growth. Capital One and American Express, with another 14.5 percent, have also talked about limiting lending.
That will set the tone for the rest of the financial industry, which will be grappling with new regulation that would impair the profitability of credit-card lending and push more off-balance-sheet securitizations back onto the banks’ already strained books.
Cutting back on abusive lending and forcing banks to recognize and account for the risks they take are surely good things, but they will have the perverse effect of making the credit crunch worse, at least temporarily.
And looking at the balance sheets of individual Americans, there is good reason to think that the credit crunch should get worse: that they should consume and borrow less and save more.
I would argue that far from being non-functioning, financial markets are closer to pricing in the true risk of lending to consumers now - with credit cards charging about 10 percentage points more than five-year Treasury notes - than they were six months ago, when the gap was only about 7.65 percent.
But the mother of all unintended side effects is that the faster consumers cut back, the worse it will be. The kind of consumer cutback implied by the consumer credit crunch that now looks likely would blow a hole below the waterline in the U.S. economy.
The use of unconventional measures by the Federal Reserve and the U.S. government is only beginning.
1 comment:
Next U.S. Crisis: Credit Cards
By James Saft, Reuters
2 December 2008
Government intervention or not, banks will be cutting up America’s credit cards at an unprecedented rate, with grave implications for the economy and company profits.
The U.S. Federal Reserve added more nutrition to its alphabet soup of rescue programs last week when it unveiled the Term Asset-backed Securities Loan Facility (TALF), under which, among other things, it will lend as much as $200 billion to investors in securities backed by credit-card, auto and student loans.
It did so for a very good reason: The securitization market’s freeze now extends beyond mortgages, imperiling run-of-the-mill consumer financing and making it a certainty that many people who use credit to get past “cash flow” situations will be denied.
And even though the U.S. car industry may implode if starved of finance and many students will have to defer education, the real potential disaster is in credit-card funding, which could push lots of households over the brink and with them consumption and every business that depends on it.
Put simply, even with an apparent will to try anything to bring the wheels of finance back into motion, it will be very difficult for government to fill the hole quickly that private finance will leave.
Details of the plan are still sketchy, but let’s assume that it works, even if the plan will give the Fed huge fears about how to get out of its positions after the end of 2009.
All other things being equal, the amount the Fed is putting into the TALF should take the asset-backed securities market back to about where it was in the first half of 2008, which itself was only a third of the volume we saw in 2007.
But all other things are not equal.
The banks that provide the bulk of credit-card funding generally want to cut back, pushed by their own troubles, a conservative reading of the economic situation and, potentially, regulatory changes that while intended to ward off the excesses of the last bubble, will magnify the impact of its bursting.
Meredith Whitney, the Oppenheimer analyst who has so far been ahead in identifying and explaining the weaknesses in the banking system, thinks that more than $2 trillion in credit lines, or 45 percent of all the lines available, will be pulled out from under American consumers in the next 18 months, a figure that puts the Fed’s $200 billion for asset-backed finance in its proper perspective.
“We are now entering a new era within the financial landscape that will be characterized by expanded forced consumer deleveraging with a pronounced downshift in consumer spending,” she wrote in a research note.
“We view the credit card as the second key source of consumer liquidity, the first being their jobs,” the note said. “Pulling credit at a time when job losses are increasing by over 50 percent year-on-year in most key states is a dangerous and unprecedented combination, in our view.”
Whitney notes that the three largest credit card lenders, Bank of America , Citigroup and JPMorgan Chase, which together account for more than half of the amount outstanding on U.S. credit cards, have each discussed reducing card exposure or slowing growth. Capital One and American Express, with another 14.5 percent, have also talked about limiting lending.
That will set the tone for the rest of the financial industry, which will be grappling with new regulation that would impair the profitability of credit-card lending and push more off-balance-sheet securitizations back onto the banks’ already strained books.
Cutting back on abusive lending and forcing banks to recognize and account for the risks they take are surely good things, but they will have the perverse effect of making the credit crunch worse, at least temporarily.
And looking at the balance sheets of individual Americans, there is good reason to think that the credit crunch should get worse: that they should consume and borrow less and save more.
I would argue that far from being non-functioning, financial markets are closer to pricing in the true risk of lending to consumers now - with credit cards charging about 10 percentage points more than five-year Treasury notes - than they were six months ago, when the gap was only about 7.65 percent.
But the mother of all unintended side effects is that the faster consumers cut back, the worse it will be. The kind of consumer cutback implied by the consumer credit crunch that now looks likely would blow a hole below the waterline in the U.S. economy.
The use of unconventional measures by the Federal Reserve and the U.S. government is only beginning.
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