Toxic Credit Card Debt-Part II

Credit card companies have made lots of money shoveling out cards to anyone they could find and then charging them high and hidden fees and astronomical interest rates.

Weren’t they worried that people might not be able to pay?

Well, yes and no.  One reason for the “no” is that the credit card companies took a page out of the mortgage lenders playbook.  As Arianna Huffington explains:

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 households find themselves unable to meet their credit card payments, those institutions that bought the “receivables” will find themselves holding worthless assets.  In other words, we face a rerun of the mortgage toxic asset crisis, a crisis that we have yet to solve.  This will only drive our economy deeper into recession—no doubt encouraging the government to provide more bailouts.

Trends certainly provide reason for concern. reports that:

At Charlotte, North Carolina-based Bank of America, the largest U.S. lender by assets, 7.8 percent of credit-card accounts were delinquent in February by more than 30 days, according to Bloomberg data. That’s up from 5.9 percent last August. Delinquencies are jumping throughout the industry in tandem with unemployment, which reached a 25-year high of 8.5 percent in March.

Charge-offs, which are loans that banks don’t expect to be repaid, increased to an average of 8.02 percent in February from 4.53 percent a year earlier.

The fact that credit card companies have responded to these trends by raising fees and interest rates only makes the situation worse.  Growing worried, the Federal Reserve has decided to put limits on the ability of credit card companies to raise rates on existing credit balances.  Sounds good, but its initiative will not take effect until July 2010!

Something a little bolder is in order.

Toxic Credit Card Debt-Part I

The curtain is coming up soon on Act 2 or is it 3 in the financial crisis—the credit card debt crisis.

According to the Federal Reserve, outstanding credit card debt carried by Americans reached a record $951 billion in 2008.  That number continues to rise.

As the recession deepens more people are being forced to use their credit cards for survival.  Not surprisingly, many of them are also finding it difficult to make their required payments.  And, when that happens, banks are quickly jacking up their interest rates and fees.  Actually they are doing it to everyone.

As Arianna Huffington explains:

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 [February 2009], Citibank warned customers that if they miss a single payment, they could see their interest go up to 29.99 percent . . . . 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.

All of this is pushing more and more people into bankruptcy.  And, remember those securitized home mortgages that we now affectionately call toxic assets—well the same securitization process happened with credit card debt.  We are talking about a $365 billion dollar market of potentially new toxic assets held by investment banks, money market funds, and pension funds.

BUT WAIT—On April 22, President Obama met with the major credit-card issuers.  According to, Obama told them that they must (and this is a direct quote): “eliminate some of the abuse,” especially with regard to rate increases on cards and changes in fees.  ELIMINATE SOME OF THE ABUSE?  Which part of the abuse is OK?

Perhaps not surprisingly, the head of card services for JPMorgan Chase & Co. called the meeting “a very productive conversation with the president.”

To be continued.

Forcast: Continued Hard Times

Some analysts are trying to make the case that the recession has bottomed out—and things can be expected to slowly but steadily improve.  Sorry—not very likely.

A recent International Monetary Fund [IMF] study of recessions certainly provides support for this pessimistic view.  The IMF examined the recession experiences (122) of the more advanced capitalist countries (21) over the last 50 years.

It found that recessions associated with a financial crisis were deeper and longer than recessions associated with other shocks.  It also found that highly synchronized recessions (those involving 10 or more of the advanced countries) were deeper and longer than those limited to one region.

Drum roll for the conclusion:  “Recessions that are associated with both financial crises and global downturns have been unusually severe and long-lasting.”  And, that is the kind of recession we are experiencing now.  In other words, don’t expect any kind of reversal before the end of next year at best; and a weak recovery after that.

Studying Europe

How are European workers responding to the current crisis?  Based on reporting by the Christian Science Monitor, it appears quite differently then workers in the U.S.

Here are some examples of recent European actions:

  • “The British arm of Visteon, which is a major supplier to Ford, announced Tuesday [March 31, 2009] that it was cutting almost 600 jobs across the United Kingdom, including 210 in Northern Ireland. It filed for bankruptcy the same day. Workers immediately occupied Visteon’s manufacturing facility in Belfast, seeking an enhanced layoff package, which they say should be financed by the factory’s former owner, Ford Motor Co.. . . Workers in Visteon’s two plants in Britain also attempted occupations Wednesday [April 1]. Fifty people are protesting inside a plant at Basildon, Essex, while others are protesting outside a plant in Enfield, London.”
  • “In Ireland, fired workers at Waterford Crystal occupied the world-renowned glassmaking factory after it was shut down. The occupation, which started in late January, ended after almost two months with the announcement that 176 jobs had been saved for at least six months.”
  • “In Dundee, Scotland, staff at Prisme, a box manufacturer, are in the fifth week of an occupation and are reportedly planning to restart the business as a workers’ cooperative.”
  • “In France, workers at Caterpillar took the dramatic step Tuesday of kidnapping four managers, who were held for 24 hours at the company’s plant in the southeastern city of Grenoble before being released Wednesday. . . . The action at Caterpillar was the fourth “bossnapping” in France in the last month. Last week, workers at 3M held executive Luc Rosselet overnight until management agreed to discuss job cuts with staff. The chief executive and director of human relations of Sony’s French arm were also held for a day by workers, and two managers were locked up at a Kleber-Michelin machine-parts factory in Toul.”

It certainly seems worth our time to learn more about these actions and the reasons European workers have had the capacity and inclination to respond so quickly and collectively to corporate actions.

Going, Going, Gone

The downturn has meant the end to some major businesses, like Circuit City.  The on-line publication 24/7 Wall Street predicts that before this recession is over many more major brands will have disappeared, either because of bankruptcy or forced merger.

After studying “sales information, information from industry experts, brand histories, the level of competition in each brand’s market, and the extent to which that competition is growing” the publication predicts that the following 12 brands “will not survive until the end of next year.”  The 12 are:

1. Avis/Budget
2. Borders
3. Crocs
4. Saturn
5. Esquire Magazine
6. Gap
7. Architectural Digest Magazine
8. The Chrysler brand
9. Eddie Bauer
10. Palm
11. AIG
12. The forced merger of at least two major airlines, with United Airlines, American Airlines, and U.S. Air among the most likely candidates.

Great Depression or Great Recession?

So you may be wondering—are we experiencing a new Great Depression or only a Great Recession?  Many economists who look just at the U.S. say that the trends do not support the Great Depression position.

But two well-known economists have just written an article claiming that when one looks at the world, the trends show it “plummeting in a Great-Depression-like manner.  Indeed, world industrial production, trade, and stock markets are diving faster now than during 1929-30.”

On the bright side, they also say that “the [world] policy response to date is much better.”

The piece is “A Tale of Two Depressions,” by Barry Eichengreen and Kevin H. O’Rourke.   It is short and easy to read—you should check it out.

Taxes and Political Will

We worry about sustaining vital public services, services that grow ever more important during a time of crisis like the present.  With revenue declining because of the “Great Recession” all the talk is that we have no choice but to make the tough decisions about which programs to cut and by how much.

Calls for tax increases on the wealthy are routinely dismissed as bad economics.  According to the conventional wisdom, we need to keep their income taxes low in order to create the right entrepreneurial environment (to encourage their investment).  In fact the argument usually ends up supporting new tax cuts.

Hearing this kind of talk you wouldn’t know that every year between 1936 and 1981 the top marginal tax rate was at least double the current top marginal tax rate of 35%.

We are talking real money here.  As the Institute for Policy Studies reports:

In 2006, the 139,000 taxpayers reporting at least $2 million in income paid taxes, after taking advantage of every loophole they could find, at a 23.21 percent rate.  In 1955, taxpayers who made over $2 million in 2006 dollars paid taxes—on their total incomes—at over twice that rate, just over 49 percent. U.S. taxpayers who made over $2 million in 2006 averaged $5.9 million in income. If these taxpayers paid taxes at the same rate as their 1955 counterparts, the federal treasury would have collected, in 2006, over an additional $202 billion.

Who’s Defending The Public Interest? Not Our Government

Treasury Secretary Geithner is quite the guy.  Before becoming Treasury Secretary, he was head of the New York Federal Reserve Bank.  As the Washington Post reports, in that capacity he was responsible for overseeing and regulating bank activity.  Although he raised questions about bank risk management strategy, he did little to reign in speculative activity.  In fact, in a May 2006 speech at NYU, Geithner sung the praises of credit derivatives, claiming that they probably improved “the overall efficiency and resiliency of financial markets.”  Now he declares that “We’re having a major financial crisis in part because of failures of supervision.”

Geithner’s latest plan for cleaning up the “toxic” assets that currently dominate bank balance sheets is basically designed to once again reward speculators at public expense.  It appears that defending the public interest is not part of his job description.

Here is how Dean Baker describes what is being proposed:

[Geithner and his associates] have devised a plan that for $1 trillion (approximately equal to 300 million kid-years of SCHIP, the State Child Health Insurance Program) can alleviate the stress on the banking system. Note that no one claims that $1 trillion spent on the Geithner plan will actually clean up the banking system – that would be asking too much. [Its supporters] only assure us that this $1 trillion (more than enough to have energy-conserving retrofits for every building in the country) will make things better. Isn’t that enough?

Oh, by the way, some people will get very rich off the Geithner plan. Some hedge and equity fund managers could make hundreds of millions or even billions off the Geithner plan. And, under current law, they will pay a lower tax rate on this money than a schoolteacher or firefighter. Are you sold yet?.

So—how does it work?  The government is apparently going to encourage large institutional speculators (such as hedge funds) to bid on bank toxic assets by putting up approximately 92% of the purchase price.  Take an asset that is up for sale for $150.  The speculator would have to put up $12 of its own money.  The Treasury would put up $12 of our money.  And then the Treasury would provide the speculator with a guaranteed low cost $126 loan.  If the asset turns out to be worthless, the speculator loses $12 and we lose $138.  If the asset rises in value, say to $200, then the speculator pays back the loan, and we split the $74 profit—the speculator makes $37 on its $12 investment and we make $37 on our $138 investment.

As Joseph E. Stiglitz, former chairman of the Council of Economic Advisers Nobel prize winner, explains:

What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess.

Oh, and have you heard about Larry Summers, the director of Obama’s National Economic Council?  According to the New York Times, he “earned more than $5 million last year from the hedge fund D. E. Shaw and collected $2.7 million in speaking fees from Wall Street companies that received government bailout money.”

Still have confidence in Obama’s economic team?

The Unemployment Rate Continues Its Rise

The unemployment rate for March climbed to 8.5%, the highest level in a quarter-century.  Our economy has lost an average of 684,000 jobs per month since November 2008.

This unemployment rate (known as U-3) significantly understates the actual degree of unemployment.  For example, it counts people involuntarily working part time as fully employed and it does not count people that want to work but have given up looking for work.

The government does have an alternative measure of unemployment that corrects for these shortcomings, known as U-6.  The March U-6 rate was 15.4%.  That is some 25 million workers.

One reason for the growing disparity between the U-3 and U-6 rates is that companies have been slashing hours.  The average workweek fell to a seasonally adjusted 33.2 hours, the lowest level on record.  Since the beginning of the downturn, the number of people forced to work part-time has grown by 5.4 million workers.

The Unsatisfactory State of Labor Law Enforcement

NEW YORK TIMES Enforcement Agency Is Failing Workers, Report Says By STEVEN GREENHOUSE

Published: March 25, 2009 The federal agency charged with enforcing minimum wage, overtime and many other labor laws is failing in that role, leaving millions of workers vulnerable, Congressional auditors have found. In a report scheduled to be released Wednesday, the Government Accountability Office found that the agency, the Labor Department’s Wage and Hour Division, had mishandled 9 of the 10 cases brought by a team of undercover agents posing as aggrieved workers.

In one case, the division failed to investigate a complaint that under-age children in Modesto, Calif., were working during school hours at a meatpacking plant with dangerous machinery, the G.A.O., the nonpartisan auditing arm of Congress, found. When an undercover agent posing as a dishwasher called four times to complain about not being paid overtime for 19 weeks, the division’s office in Miami failed to return his calls for four months, and when it did, the report said, an official told him it would take 8 to 10 months to begin investigating his case.

“This investigation clearly shows that Labor has left thousands of actual victims of wage theft who sought federal government assistance with nowhere to turn,” the report said. “Unfortunately, far too often the result is unscrupulous employers’ taking advantage of our country’s low-wage workers.” The report pointed to a cavalier attitude by many Wage and Hour Division investigators, saying they often dropped cases when employers did not return calls and sometimes told complaining workers that they should file lawsuits, an often expensive and arduous process, especially for low-wage workers.

During the nine-month investigation, the report said, 5 of the 10 labor complaints that undercover agents filed were not recorded in the Wage and Hour Division’s database, and three were not investigated. In two cases, officials recorded that employers had paid back wages, even though they had not.

The accountability office also investigated hundreds of cases that it said the Wage and Hour Division had mishandled. In one, the division waited 22 months to investigate a complaint from a group of restaurant workers. Ultimately, investigators found that the workers were owed $230,000 because managers had made them work off the clock and had misappropriated tips. When the restaurant agreed to pay back wages but not the tips, investigators simply closed the case.

In another case, the accountability office found that workers at a boarding school in Montana were not paid more than $200,000 in overtime. But when the employer offered to pay only $1,000 in back wages as the two-year statute of limitations approached, the division dropped the case.”We have a crisis in wage theft, and the Department of Labor has not been aggressive enough in recent years,” said Kim Bobo, executive director of Interfaith Worker Justice, a group that advocates for low-wage workers.  “The new secretary of labor says she’s the new sheriff in town, but I’m concerned she’s facing the wild, wild West of wage theft.”

Secretary of Labor Hilda L. Solis said she took the report’s findings seriously.” I am committed to ensuring that every worker is paid at least the minimum wage,” Ms. Solis said, “that those who work overtime are properly compensated, that child labor laws are strictly enforced and that every worker is provided a safe and healthful environment.” Ms. Solis said the Wage and Hour Division planned to increase its staff by a third by hiring 250 investigators – 100 of them as part of the federal stimulus package – “to refocus the agency on these enforcement responsibilities” and “ensure that contractors on stimulus projects are in compliance with the applicable laws.”Ms. Solis said the hirings would “reinvigorate the work of this important agency.”