Ga Young (Gina) Jeon
Blog post topic: Credit Card Delinquencies Reach Record Level
Author: Yves Smith
We have stretched our limits. We are finally experiencing the “feared crash” that the finance sector hoped and prayed wouldn’t come.
Hello Reality.
Smith constructs an analysis from the Financial Times composed on Thursday, February 5, 2009. The outcome has simply been what we had feared, yet foreseen years ago. The whole economy deteriorates as the economy slows down and unemployment increases significantly. We are now seeing visible proof:
1. Payments at least 60 days late rose almost half a percentage point last month to a record of 3.75 per cent
2. Credit card lenders increased “charge off” rates in January by 40 percent than a year ago… and were expected to increase more in the second half of 2009.
3. Late payments and defaults on credit cards have been closely linked with levels of unemployment, which have risen dramatically.
4. Rising late payments and defaults on credit card loans would hurt the performance of securities backed by credit card receivables, Fitch said, but downgrades would be limited in the near-term because of lower funding costs.
5. Securities backed by credit card receivables have rallied in recent weeks because of such lower cost funds
The economic deterioration continues to manifest.
I have constructed an easier model to enhance your understanding of this complex situation.
Let’s take manufacturing for instance:
Manufacturing
Revenue ($10)
– (minus amount of $ to produce ($2)
Cost of goods sold
Gross Income ($8)
Expense
= pretax income
– (minus) tax expense
Net income
The Bank
(Functions in a similar way)
One of the main sources of revenue for a bank is interest.
Smith says that credit card lending has historically accounted for between 15 and 25 percent of pretax income at JPMorgan, Bank of America and Citigroup, according to Moody’s Analysts expect these businesses to shrink as lenders tighten credit standards and cut credit lines.
So, out of 100% revenue, 15 and 25 percent were from credit card interest; while 75 to 85 percent of the revenue came from loans, mortgages, and much more.
In money terms,
BEFORE:
If there was $100 revenue, credit cards made up an average of $20.
NOW:
If there is $100 as revenue, credit cards only make less than $10 or $15.
OUTCOME:
Not only are credit markets failing, the housing market, and everything else is crumbling as well.
My analysis is that the banks are now experiencing the exhaustion of the market. The credit industry in particular has created this fictitious capital that ultimately caused the bubble to burst. Now, banks, credit companies, housing markets, the government, investors, and many others are trying to clean up the spilled beans. The documents presented in the beginning passage above clearly shows the outcome of the destructive competitive market field. So many people are unemployed, without homes, facing foreclosures, and most importantly, in SO MUCH DEBT! Our complacency has driven us directly into the shackles and chains of the large financial storm that is preparing to swallow all of us as a whole!
