As Credit Card Defaults Soar, New Danger For Banks

The mortgage-backed financial instruments that have gone such a long way to hurt brokerages like Merrill Lynch (MER) and banks like Citigourp (C) may be just the start of a wave of writes-offs.The next big problem is likely to come from pools of credit card debt.

According to The Associated Press, "the value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the news service"

The trend could undermine whatever recovery big financial firms had hoped for in two ways. First, credit card debt is put into pools which are sold to banks, investment houses, and institutional investors. In that way, the system is no different than it is with mortgage-related securities. About 45% of the nation’s $920 billion in credit card debt has been packaged into these pools.

These credit card instruments are sitting on balance sheets, likely to be written-off in either this quarter or early next year.

The other major area of exposure is banks which hold much of the credit card debt from consumers which has never been resold to other financial companies. Most large money center banks and firms like Capital One (COF) have some portion of this kind of debt.

Investors who thought financial industry problems ended with mortgage-instruments better think again. The write-off problems are about to get worse.

Douglas A. McIntyre