A number of bank analysts believe that the reason industry earnings will not improve next year is a sharp spike up in credit card defaults.
In many cases, financial companies are faced with more than the direct losses of customers who walk away from their obligations. These debts have been put into pools not unlike those which were created for mortgages. Those pools could become toxic quickly if the underlying debt begins to sour at an increasingly rapid pace.
According to The New York Post, "WASHINGTON is so nervous that credit cards will become the next financial sinkhole that the government will soon ask banks to go through the arduous task of running tests on hundreds of millions of their cardholders. On Oct. 7, the Office of the Controller of the Currency put together a test called Definitions of Data Fields Collected Monthly at the Account Level, which asks banks nationwide to put the 700 million or so credit cards in existence to a test of 74 questions."
That is probably another indication that the government is concerned that the $700 billion Paulson bailout fund may not be enough to see the financial system through 2009.
Douglas A. McIntyre
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