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.