The Credit Card Debt Crisis: The Next Economic Domino
The Credit Card Debt Crisis: The Next Economic Domino
And that's not the end of the economic downward spiral. As more and more Americans default on their credit card debt, banks will find themselves faced with a sickening instant replay of the toxic securities meltdown from the mortgage crisis. In another example of Wall Street "creativity," credit card debt is routinely bundled together into "credit-card receivables" and sold to investors -- often pension funds and hedge funds. Securities backed by credit card debt is a $365 billion market. This market motivated credit card companies to offer cards to risky borrowers and to allow greater and greater amounts of debt.
As these borrowers continue to default, banks and the investors who bought their packaged debt will take a serious hit. And how are the credit card companies trying to offset the rise in bad debts? By raising rates on the rest of their customers -- making it likely that more of them will end up defaulting, causing even more losses for the banks. And round and round and round we go.
And such is the paradoxical nature of the meltdown that Americans keep being encouraged to go back to spending in order to get the economy rolling again. But the problem is, more and more Americans are broke. So the only way they can spend is to charge it, running up balances on credit cards that are structured in a way that makes it harder and harder to pay them off.
Getting dizzy yet?
For years, credit card companies have been fattening their bottom lines with an ever-widening array of fees. Late fees, cash-advance fees, over-the-limit fees. In 2007, lenders collected over $18 billion in penalties and fees. JPMorgan Chase, the nation's top credit card lender, recently began charging many of its customers $10 a month for carrying a large balance for too long a time -- that's on top of the interest they are already collecting on those balances.
And interest rates are escalating. Earlier this month, Citibank warned customers that if they miss a single payment, they could see their interest go up to 29.99 percent (so nice of them to shave off the .01 to keep it from being 30 percent, isn't it?). The company also recently raised rates by 3 percent on millions of non-payment-missing customers. Citibank is not alone: Capital One raised its standard rate on good customers by up to 6 points, and American Express raised rates by 2-3 percent on the majority of its customers.
Sen. Chris Dodd, chairman of the Senate Banking Committee, accuses the banks of "gouging," saying, "the list of questionable actions credit card companies are engaged in is lengthy and disturbing."
Perhaps he should send the bankers a Bible bookmarked to Deuteronomy 23:19: "thou shalt not lend upon usury to thy brother." Indeed, Sen. Bernie Sanders told me last week that he is working on "anti-usury" legislation.
For their part, the bankers have tried to cloak their behavior with corporatespeak. A Citibank spokesman called the rate hikes the result of "severe funding dislocation," and said, "Citi is repricing a group of customers in our Citi-branded consumer credit card business in the U.S. to appropriately manage these risks." An AmEx spokeswoman chalked up its rate hike to "the cost of doing business."
Making such pronouncements particularly galling is the fact that many of the banks summarily raising interest rates and piling on the penalties have received billions in bailout money. Our money. We gave Citi $45 billion, Bank of America $45 billion, JPMorgan $25 billion, AmEx $3.4 billion, Capital One $3.6 billion, and Discover $1.2 billion. In fact, American Express and Discover converted to bank holding companies to make themselves eligible for bailout funds.*
Yet that money seems.....
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And that's not the end of the economic downward spiral. As more and more Americans default on their credit card debt, banks will find themselves faced with a sickening instant replay of the toxic securities meltdown from the mortgage crisis. In another example of Wall Street "creativity," credit card debt is routinely bundled together into "credit-card receivables" and sold to investors -- often pension funds and hedge funds. Securities backed by credit card debt is a $365 billion market. This market motivated credit card companies to offer cards to risky borrowers and to allow greater and greater amounts of debt.
As these borrowers continue to default, banks and the investors who bought their packaged debt will take a serious hit. And how are the credit card companies trying to offset the rise in bad debts? By raising rates on the rest of their customers -- making it likely that more of them will end up defaulting, causing even more losses for the banks. And round and round and round we go.
And such is the paradoxical nature of the meltdown that Americans keep being encouraged to go back to spending in order to get the economy rolling again. But the problem is, more and more Americans are broke. So the only way they can spend is to charge it, running up balances on credit cards that are structured in a way that makes it harder and harder to pay them off.
Getting dizzy yet?
For years, credit card companies have been fattening their bottom lines with an ever-widening array of fees. Late fees, cash-advance fees, over-the-limit fees. In 2007, lenders collected over $18 billion in penalties and fees. JPMorgan Chase, the nation's top credit card lender, recently began charging many of its customers $10 a month for carrying a large balance for too long a time -- that's on top of the interest they are already collecting on those balances.
And interest rates are escalating. Earlier this month, Citibank warned customers that if they miss a single payment, they could see their interest go up to 29.99 percent (so nice of them to shave off the .01 to keep it from being 30 percent, isn't it?). The company also recently raised rates by 3 percent on millions of non-payment-missing customers. Citibank is not alone: Capital One raised its standard rate on good customers by up to 6 points, and American Express raised rates by 2-3 percent on the majority of its customers.
Sen. Chris Dodd, chairman of the Senate Banking Committee, accuses the banks of "gouging," saying, "the list of questionable actions credit card companies are engaged in is lengthy and disturbing."
Perhaps he should send the bankers a Bible bookmarked to Deuteronomy 23:19: "thou shalt not lend upon usury to thy brother." Indeed, Sen. Bernie Sanders told me last week that he is working on "anti-usury" legislation.
For their part, the bankers have tried to cloak their behavior with corporatespeak. A Citibank spokesman called the rate hikes the result of "severe funding dislocation," and said, "Citi is repricing a group of customers in our Citi-branded consumer credit card business in the U.S. to appropriately manage these risks." An AmEx spokeswoman chalked up its rate hike to "the cost of doing business."
Making such pronouncements particularly galling is the fact that many of the banks summarily raising interest rates and piling on the penalties have received billions in bailout money. Our money. We gave Citi $45 billion, Bank of America $45 billion, JPMorgan $25 billion, AmEx $3.4 billion, Capital One $3.6 billion, and Discover $1.2 billion. In fact, American Express and Discover converted to bank holding companies to make themselves eligible for bailout funds.*
Yet that money seems.....
{more...}
posted by gr8fuldaniel | 11:18 AM
