While the market was busy looking at all of those "For Sale" signs around most neighborhoods, it forgot that people also put three or four expensive cars in their driveways and bought $5,000 home entertainment centers.
Someone has to pay for all of that hardware, but it is not going to be the people who bought it. They are broke and jobless. The repo men are being sent from car loan companies and Best Buy (BBY) to get the stuff back. Unfortunately, used cars and consumer electronics have not held their value.
MarketWatch reports that "According to Innovest StrategicValue Advisors, banks will charge off $18.6 billion in delinquent credit-card accounts in the first quarter of 2009 and $96 billion in all of 2009, more than double the research firm’s forecast for all of this year." That may be a drop in the bucket compared with what banks and operations like GMAC will be hit with from bad car loans.
The problem is not as simple as bad loans. These credits were securitized and chopped into tranches the same way that mortgages were. In other words, there is another wave of toxic securities emerging. The $700 billion government bailout almost certainly does not take into account a future catastrophic failure of a set of assets which are not tied directly to the housing market.
The IMF says that losses related to mortgages will cause $1 trillion of write-offs spread across the world’s banks. Car and credit card derivatives may not represent as big a pool, but, like toxic paper tied to mortgages, no one knew how great the problem was until it was one top of them.
The credit default disaster has another chapter coming next year.
Douglas A. McIntyre
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