The Eastern Front For Banks: Credit Cards

How many people in the US have credit cards? The answer might be misleading. Some of the unusually reckless have three, four, or five cards. They use the money available from one to pay part of the balance on another. In that way, the common man runs his finances like the money center banks have. He is reckless to a fault, but knows the future is bright and will bail him out.

Now that credit cards balances are at historic highs and people do not have money to cover the nut, banks are faced with another wave of defaults and write-offs. Instead of being homes, the culprit is plastic.

According to The Wall Street Journal. "Banks and big card issuers have seen card losses climb and are projecting that things will worsen in 2009." There is no surprise in that. The deadbeats are already stopping their payments and claiming insolvency.

As of last year, total US credit card debt was more than $900 billion. How much of that ends up not being paid? In a really deep recession, maybe 10%. That may be a lot of money, but spread around to a large number of banks it may actually not be so bad.

All of that leaves out the calculation of credit card debt pools which were bundled and cut into tranches the way that subprime mortgages were. The derivatives have leverage levels which probably rival those of mortgage paper, so when the default rates on the underlying credit rises, the compound problem for banks could be several times worse than the charge-offs from consumers.

There may be another very large set of write-offs coming at banks. The whirlwind of debt compounded by securitization is not something in the past. Wall St. may only have seen the first act.

Douglas A. McIntyre