Bank's $180 Billion Credit Card Time Bomb

by Dollars and Sense

If the economy stays on its present dismal course, banks can expect to lose $180 billion, according to analysts quoted in the New York Times. The figure is much higher than the government's so-called "stress test" scenario of $82.4 billion in losses because the Fed presumed no increase from current unemployment rates, and because they didn't count the losses from securitization of credit card debt. Yes, the banks bundled up credit card debt just like it did bad mortgages, selling and reselling it to investors and creating liabilities far in excess of value of the underlying loans.

The average US household has over $8,400 in credit card and other revolving debt. With unemployment rising, housing prices unlikely to climb back to bubble elevations, and consumers saving more, and Congress considering curbing the most egregious predatory practices of the industry, the glory days of credit card profits for banks appears to be over.

The banks are also slashing the credit available to consumers. According to Meredith Whitney, lenders are cutting back credit lines by $2.7 trillion over the next year, a 57% reduction of available credit from just two years ago. As consumers cut back their spending, the negative feedback loop will only accelerate.

--d.f.