The Credit Card Issue

Posted on Macro-Man's blog: A Popular New Year's Resolution: "Stop Paying My Credit Card Bills"

• 
  
  
  Macro Man doesn't do single name stocks, and frankly has no idea (or at least one that's he's prepared to make public) whether C is a buy, sale, or hold. But the underlying dynamic, one of rising non-performing loans (and concomitant non-performance of structured credit products that bundle them together) is far from bullish. Stories are beginning to ciruclate that the Fed is struggling to find many interested parties to participate in the TALF. If that goes down like a lead zeppelin, the risk must be that equities swiftly follow.

See also the following article posted earlier: Whitney Says Credit Cards are the Next Credit Crunch

• As credit-card companies continue to rapidly cut credit lines, consumer spending may risk impairment, potentially aggravating an already fragile economy.
  
  Prominent financial analyst Meredith Whitney, the CEO of Meredith Whitney Advisory Group, warned Tuesday in The Wall Street Journal that without the careful attention and collaboration of regulators and leading lenders, “unintended consequences could occur” to the economy.
  
  She warned that the reduction in credit lines is inevitable, but the velocity must decline.
  
  The fourth quarter of 2008 showed the beginning of this rapid decline of available lines, as $500 billion of lines was expunged in that three-month period alone.
  
  Whitney estimated only six months ago that by 2010, $2 trillion in credit lines would be expunged -- however, after evaluating fourth quarter losses, she warns this could occur as soon as this year. She predicts that in 2010 the number could be as high as $2.7 trillion, an overall contraction of 57%.
  
  A survey conducted by Credit.com last week indicated that 33.7% of consumers said that their credit card company has in some way changed their account.
  
  According to the survey, 15% of consumers said that their interest rates were increased while 11% indicated that their minimum payment due was increased. Another 9% said that their due dates were changed, with the remainder indicating that either their limits were lowered, rewards program reduced, or accounts closed. Consumers suffered from one to all of these alterations.
  
  Whitney attributes this rapid declination to four factors including misguided lending, “hot-potato” lending, and possible changes to the Unfair and Deceptive Acts of Practice [UDAP].
  According to the analyst, “lenders became overly reliant on FICO scores that have borne out to be simply unreliable” adding that overly optimistic underwriting standards, in a time when unemployment was well below 6%, may have deceived the creditworthiness of borrowers.
  
  Now that underwriting standards are becoming more realistic, some borrowers may not “appear worth the risk” and may see their lines dropped, Whitney said.
  
  Another contributing factor is that “home price depreciation has been a more reliable determinant of consumer behavior than FICO scores.” Due to this factor, lenders have overly relied on Zip codes while determining risk, potentially hurting reliable borrowers who live in riskier Zip codes.
  
  Whitney said that “while a mortgage loan is largely a ‘monogamous’ relationship between borrower and lender, an individual has multiple relationships with credit-card providers.”
  
  No lender wants to be the last one standing, or holding open credit lines -- therefore as lines are cut and risk switches to the next biggest lender, that lender may also pull their lines, exemplifying a sort of domino-like effect.
  
  Whitney advised that since there are only five main lenders controlling two-thirds of the market, they must work together “to protect one another and preserve credit lines to able paying borrowers.”
  
  Potential changes to UDAP may “restrict re-pricing of risk, which could in turn restrict the availability of credit,” according to Whitney.
  
  This regulation, set to be effective by mid-2010, may cause lenders who can’t re-price to “simply not make the loan,” she said.
  
  According to Whitney, over the past 20 years Americans have used their credit cards as a way to budget cash-flow and save for future liquidity. In most cases, Americans will not max out their credit cards, using the extra balance for just-in-case scenarios.
  
  Whitney warns, however, that this scenario has the potential to change dramatically. She said that although cutting credit lines is unavoidable, taking credit away from an able borrower may seriously weaken their financial position, in turn weakening the economy.
  
  Two-thirds of the U.S. economy depends upon consumer spending and with the role of credit-cards playing an imperative role, action must be taken immediately, according to Whitney.