Sun, Dec 23 2007
SQUEEZE IS ON FOR THE LITTLE GUY
Unpaid Credit Cards Bedevil Americans
AP Impact: Americans' See Their Debt Woes Expand As Unpaid Credit Card Bills Are on Rise
SAN FRANCISCO, Associated Press (AP) -- Americans are falling behind on their credit card payments at an alarming rate, sending delinquencies and defaults surging by double-digit percentages in the last year and prompting warnings of worse to come.
An Associated Press analysis of financial data from the country's largest card issuers also found that the greatest rise was among accounts more than 90 days in arrears.
Experts say these signs of the deterioration of finances of many households are partly a byproduct of the subprime mortgage crisis and could spell more trouble ahead for an already sputtering economy.
"Debt eventually leaks into other areas, whether it starts with the mortgage and goes to the credit card or vice versa," said Cliff Tan, a visiting scholar at Stanford University and an expert on credit risk. "We're starting to see leaks now."
The value of credit card accounts at least 30 days late jumped 26 percent to $17.3 billion in October from a year earlier at 17 large credit card trusts examined by the AP. That represented more than 4 percent of the total outstanding principal balances owed to the trusts on credit cards that were issued by banks such as Bank of America and Capital One and for retailers like Home Depot and Wal-Mart.
At the same time, defaults -- when lenders essentially give up hope of ever being repaid and write off the debt -- rose 18 percent to almost $961 million in October, according to filings made by the trusts with the Securities and Exchange Commission.
Serious delinquencies also are up sharply: Some of the nation's biggest lenders -- including Advanta, GE Money Bank and HSBC -- reported increases of 50 percent or more in the value of accounts that were at least 90 days delinquent when compared with the same period a year ago.
The AP analyzed data representing about 325 million individual accounts held in trusts that were created by credit card issuers in order to sell the debt to investors -- similar to how many banks packaged and sold subprime mortgage loans. Together, they represent about 45 percent of the $920 billion the Federal Reserve counts as credit card debt owed by Americans.
Until recently, credit card default rates had been running close to record lows, providing one of the few profit growth areas for the nation's banks, which continue to flood Americans' mailboxes with billions of letters monthly offering easy sign-ups for new plastic.
Even after the recent spike in bad loans, the credit card business is still quite lucrative, thanks to interest rates that can run as high as 36 percent, plus late fees and other penalties.
But what is coming into sharper focus from the detailed monthly SEC filings from the trusts is a snapshot of the worrisome state of Americans' ability to juggle growing and expensive credit card debt.
The trend carried into November. As of Friday, all of the trusts that filed reports for the month show increases in both delinquencies and defaults over November 2006, and many show sequential increases from October.
Discover accounts 30 days or more delinquent jumped 25,716 from November 2006 and had increased 6,000 between October and November this year.
Many economists expect delinquencies and defaults to rise further after the holiday shopping season.
Mark Zandi, chief economist and co-founder of Moody's Economy.com Inc., cited mounting mortgage problems that began after this summer's subprime financial shock as one of the culprits, as well as a weakening job market in the Midwest, South and parts of the West, where real-estate markets have been particularly hard hit.
"Credit card quality will continue to erode throughout next year," Zandi said.
Economists also cite America's long-standing attitude that debt -- even high-interest credit card debt -- is not a big deal.
"The desires of consumers to want, want, want, spend, spend, spend -- it's the fabric of our nation," said Howard Dvorkin, founder of Consolidated Credit Counseling Services in Fort Lauderdale, Fla., which has advised more than 5 million people in debt. "But you always have to pay the piper, and that can be a very painful process."
Filing for bankruptcy is no longer a solution for many Americans because of a 2005 change to federal law that made it harder to walk away from debt. Those with above-average incomes are barred from declaring Chapter 7 -- where debts can be wiped out entirely -- except under special circumstances and must instead file a repayment plan under the more restrictive Chapter 13.
Personal finance coaches say the problem is most grave for individuals who are months delinquent or already in default -- like Kenneth McGuinness, a postal clerk from Flushing, N.Y.
His credit card struggles began nine years ago, when he charged his son's college tuition and books. He thought he was being clever: His credit card's 6 percent "teaser" interest rate was lower than the 8.6 percent interest on a college loan.
McGuinness, 61, soon began using Citibank and Chase cards for food, dental work and copays on doctor visits and minor surgeries. Interest rates surged to 30 percent. Now he's $37,000 in debt and plans to file for bankruptcy in February.
"I tried to pay what I could and go after the high-interest accounts first," McGuinness said. "But it just kept getting higher and higher, and with late charges and surcharges I was going backward."
In the wake of the jump in defaults on subprime mortgage loans made to borrowers with poor credit histories, banks have been less willing to allow consumers to consolidate credit card debt into home equity loans or refinanced mortgages. That is leaving some with no option but to miss payments, economists said.
Investors also are backing away from buying securitized credit-card debt, said Moshe Orenbuch, managing director at Credit Suisse. But that probably has more to do with concerns about the overall health of the U.S. economy, he said.
"It's been getting tougher to finance any kind of structured finance -- mortgages, automobile loans, credit cards, student loans," said Orenbuch, who specializes in the credit industry.
Capital One Financial Corp. reported that delinquencies and defaults are highest in regions where troubled mortgages are concentrated, including California and Florida.
Among the trusts examined, Bank of America Corp. had the highest delinquency volume, with overdue accounts valued at $5 billion. Bank of America defaults in October were almost 200 percent higher than in October 2006.
A spokesman for Charlotte, N.C.-based Bank of America declined to comment.
Other trusts -- including those linked to Capital One, American Express Co., Discover Financial Services Co. and those containing "branded" cards from Wal-Mart Stores Inc., Home Depot Inc., Lowe's Companies Inc., Target Corp. and Circuit City Stores Inc. -- also reported striking increases in year-over-year delinquency and default rates for October. Most banks and other financial institutions holding credit card debt on their own books also reported double-digit increases in delinquencies.
The one exception in October was JPMorgan Chase & Co.'s credit card trust, which reported declines in both delinquencies and defaults. A Chase spokesperson attributed this to its focus on prime borrowers and aggressive account management.
By contrast, Capital One executives told analysts last month that the company projected 2008 write-offs of credit card debt to be at least $4.9 billion. This projection, analysts were told, took into account growing delinquencies and potential effects if the housing market continued its downward slide.
Capital One spokeswoman Julie Rakes said the increase in delinquencies could be due to an accounting change last summer, which shortened the grace period between when statements were issued and the due date.
Capital One also reported that the number of accounts 90 days or more in arrears had increased between October and November. More than 1.2 million of Capital One's 30 million accounts were either delinquent or in default.
Many personal financial coaches expect this trend to accelerate in 2008 -- particularly among people who took out untraditional loans whose interest rate has risen, requiring owners to pay mortgages several hundred dollars more than just a year ago.
"You're looking at more and more distress -- consumers desperately trying to preserve their credit lines, but there's nowhere else to go," said Robert Manning, director of the Center for Consumer Financial Services at Rochester Institute of Technology. "It's like a game of dominoes."Sun, Dec 23 2007
CRIMINAL PLAYS BY THE MONEYED CARTEL
The bottom line is these fuckers are mugging the people, completely against the Constitution and all moral law, and nobody whose job it is to prevent this garbage is doing a goddamned thing to stop them.
THE FOREST HIDING BEHIND THE TREES
by Richard K. Brawn
December 20, 2007
If the simplest solution is probably the most likely, then the simplest definition of the problem also best defines the problem. The first step is to state the situation. So here it is. The men operating the Federal Reserve Bank are operating in secret, conducting ex post facto public policy, governance without due process, without regard to the public right to petition government, doing financial operations without restraint of civil liability, and virtually no oversight by Congress. The Federal Reserve Bank is conducting foreign policy and by what right we shall never know. Despite the Constitutional provision that all appropriations will be started in the House of Representatives, the Federal Reserve Bank has handed out colossal sums of money. Money is power in politics. These actions by this Federal Reserve Bank are completely outside the bounds of the United States Constitution. This is just part of the situation.
Many, many media articles are floating around about what the Federal Reserve Banks representing the fiat money countries are up to. Not a single one of those writings is completely factual. More to the truth is that there are insiders and there are outsiders. The media and media writers have absolutely no capability to obtain a total picture from inside corporations, government, or Reserve Bank decision centers. These decision centers are totally fragmented. Their number far exceeds all the bits and pieces represented by all the financial markets that we have come to know by their acronyms (CDO, etc). The decisions are correspondingly fragmented by opacity that always exists between insiders and outsiders. The decision centers are microcosmic compared to the big picture. Each decision center is island within an opaque ocean. Adding to this morass are new devices being established by the Reserve Banks, and other participants in the markets. Whatever is new has to be integrated into an opaque morass. Nobody sees more than the microcosm to which they are exposed and nobody knows more than that which they perceive within their microcosm. All the rest is imagination.
Imagination is running rampant in the media. It is creating its own obscuration of the situation. Searching for truth within a well written essay that was really constructed to provide financial benefit to the writer, is like searching for a pin in a haystack representing human self-interest. At this point, everything is mere guess work and supposition. Reserve Bank deliberations are closed to the outsiders. That is not to say that all non-reserve bank personages are outsiders. Some will have insider privileges to key information and some will receive immunity for their private party actions through creation of after-the-fact ‘public’ policy. But, all who are not actually ‘insiders’ must consider themselves to be outsiders and forego elevated ego-trips. The ethical complications of this morass are becoming apparent. Police of self-interest and self-dealing is an identifiable victim. Investigations initiated today will be subject to political judgment tomorrow. The extent of fraud may be so pervasive that prosecutors will simply cherry pick and delay. Civil claims of wrong doing will suffer from the special legal privileges provided by the corporate cloak.
I have tried to create a hairball smoke, mirrors, illegality, and complexity so you can truly be ready for simplicity.
Here is the problem: Those with capital do not wish to add further good capital into such a system.
Richard BrawnSun, Dec 23 2007
EUROPE LOOKING PRETTY DARNED FUCKED TOO
Crisis may make 1929 look like walk in the park
By Ambrose Evans-Pritchard
The Telegraph, London
Saturday, December 22, 2007
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2007/12/23/cccris...
Twenty billion dollars here, $20 billion there, and a lush half-trillion from the European Central Bank at giveaway rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.
As the credit paralysis stretches through its fifth month, a chorus of economists has begun to warn that the world's central banks are fighting the wrong war, and perhaps risking a policy error of epochal proportions.
"Liquidity doesn't do anything in this situation," says Anna Schwartz, the doyenne of US monetarism and life-time student (with Milton Friedman) of the Great Depression.
"It cannot deal with the underlying fear that lots of firms are going bankrupt. The banks and the hedge funds have not fully acknowledged who is in trouble. That is the critical issue," she adds.
Lenders are hoarding the cash, shunning peers as if all were sub-prime lepers. Spreads on three-month Euribor and Libor -- the interbank rates used to price contracts and Club Med mortgages -- are stuck at 80 basis points even after the latest blitz. The monetary screw has tightened by default.
York professor Peter Spencer, chief economist for the ITEM Club, says the global authorities have just weeks to get this right, or trigger disaster.
"The central banks are rapidly losing control. By not cutting interest rates nearly far enough or fast enough, they are allowing the money markets to dictate policy. We are long past worrying about moral hazard," he says.
"They still have another couple of months before this starts imploding. Things are very unstable and can move incredibly fast. I don't think the central banks are going to make a major policy error, but if they do, this could make 1929 look like a walk in the park," he adds.
The Bank of England knows the risk. Markets director Paul Tucker says the crisis has moved beyond the collapse of mortgage securities and is now eating into the bedrock of banking capital. "We must try to avoid the vicious circle in which tighter liquidity conditions, lower asset values, impaired capital resources, reduced credit supply, and slower aggregate demand feed back on each other," he says.
New York's Federal Reserve chief Tim Geithner echoed the words, warning of an "adverse self-reinforcing dynamic," banker-speak for a downward spiral. The Fed has broken decades of practice by inviting all US depositary banks to its lending window, bringing dodgy mortgage securities as collateral.
Quietly, insiders are perusing an obscure paper by Fed staffers David Small and Jim Clouse. It explores what can be done under the Federal Reserve Act when all else fails.
Section 13 (3) allows the Fed to take emergency action when banks become "unwilling or very reluctant to provide credit." A vote by five governors can -- in "exigent circumstances" -- authorise the bank to lend money to anybody and take upon itself the credit risk. This clause has not been evoked since the Slump.
Yet still the central banks shrink from seriously grasping the rate-cut nettle. Understandably so. They are caught between the Scylla of the debt crunch and the Charybdis of inflation. It is not yet certain which is the more powerful force.
America's headline CPI screamed to 4.3 per cent in November. This may be a rogue figure, the tail effects of an oil, commodity, and food price spike. If so, the Fed missed its chance months ago to prepare the markets for such a case. It is now stymied.
This has eerie echoes of Japan in late 1990, when inflation rose to 4 per cent on a mini price-surge across Asia. As the Bank of Japan fretted about an inflation scare, the country's financial system tipped into the abyss.
In theory, Japan had ample ammo to fight a bust. Interest rates were 6 per cent in February 1990. In reality, the country was engulfed by the tsunami of debt deflation quicker than the bank dared to cut rates. In the end, rates fell to zero. Still it was not enough.
When a credit system implodes, it can feed on itself with lightning speed. Current rates in America (4.25 per cent), Britain (5.5 per cent), and the eurozone (4 per cent) have scope to fall a long way, but this may prove less of a panacea than often assumed. The risk is a Japanese denouement across the Anglo-Saxon world and half Europe.
Bernard Connolly, global strategist at Banque AIG, said the Fed and allies had scripted a Greek tragedy by under-pricing credit long ago and seem paralysed as post-bubble chickens now come home to roost. "The central banks are trying to dissociate financial problems from the real economy. They are pushing the world nearer and nearer to the edge of depression. We hope they will eventually be dragged kicking and screaming to do enough, but time is running out," he said.
Glance at the more or less healthy stock markets in New York, London, and Frankfurt and you might never know that this debate is raging. Hopes that Middle Eastern and Asian wealth funds will plug every hole lifts spirits.
Glance at the debt markets and you hear a different tale. Not a single junk bond has been issued in Europe since August. Every attempt failed.
Europe's corporate bond issuance fell 66 percent in the third quarter to $396 billion (BIS data). Emerging market bonds plummeted 75 percent.
"The kind of upheaval observed in the international money markets over the past few months has never been witnessed in history," says Thomas Jordan, a Swiss central bank governor.
"The sub-prime mortgage crisis hit a vital nerve of the international financial system," he says.
The market for asset-backed commercial paper -- where Europe's lenders from IKB to the German doctors and dentists borrowed through Irish-based "conduits" to play US housing debt -- has shrunk for 18 weeks in a row. It has shed $404 billion or 36 percent. As lenders refuse to roll over credit, banks must take these wrecks back on their books. There lies the rub.
Professor Spencer says capital ratios have fallen far below the 8 per cent minimum under Basel rules. "If they can't raise capital, they will have to shrink balance sheets," he said.
Tim Congdon, a banking historian at the London School of Economics, said the rot had seeped through the foundations of British lending.
Average equity capital has fallen to 3.2 per cent (nearer 2.5 per cent sans "good will"), compared with 5 per cent seven years ago. "How on earth did the Financial Services Authority let this happen?" he asks.
Worse, changes pushed through by Gordon Brown in 1998 have caused the de facto cash and liquid assets ratio to collapse from post-war levels above 30 per cent to near zero. "Brown hadn't got a clue what he was doing," he says.
The risk for Britain -- as property buckles -- is a twin banking and fiscal squeeze. The UK budget deficit is already 3 per cent of GDP at the peak of the economic cycle, shockingly out of line with its peers. America looks frugal by comparison.
Maastricht rules may force the Government to raise taxes or slash spending into a recession. This way lies crucifixion. The UK current account deficit was 5.7 per cent of GDP in the second quarter, the highest in half a century. Gordon Brown has disarmed us on every front.
In Europe, the ECB has its own distinct headache. Inflation is 3.1 per cent, the highest since monetary union. This is already enough to set off a political storm in Germany. A Dresdner poll found that 71 per cent of German women want the Deutschmark restored.
With Brunhilde fuming about Brot prices, the ECB has to watch its step. Frankfurt cannot easily cut rates to cushion the blow as housing bubbles pop across southern Europe. It must resort to tricks instead. Hence the half trillion gush last week at rates of 70 basis points below Euribor, a camouflaged move to help Spain.
The ECB's little secret is that it must never allow a Northern Rock failure in the eurozone because this would expose the reality that there is no EU treasury and no EU lender of last resort behind the system. Would German taxpayers foot the bill for a Spanish bailout in the way that Kentish men and maids must foot the bill for Newcastle's Rock? Nobody knows. This is where eurozone solidarity stretches to snapping point. It is why the ECB has showered the system with liquidity from day one of this crisis.
Citigroup, Merrill Lynch, UBS, HSBC, and others have stepped forward to reveal their losses. At some point, enough of the dirty linen will be on the line to let markets discern the shape of the debacle. We are not there yet.
Goldman Sachs caused shock last month when it predicted that total crunch losses would reach $500 billion, leading to a $2 trillion contraction in lending as bank multiples kick into reverse. This already seems humdrum.
"Our counterparties are telling us that losses may reach $700 billion," says Rob McAdie, head of credit at Barclays Capital. Where will it end? The big banks face a further $200 billion of defaults in commercial property. On it goes.
The International Monetary Fund still predicts blistering global growth of 5 per cent next year. If so, markets should roar back to life in January, as though the crunch were but a nightmare. There again, the credit souffle may be hard to raise a second time.Sun, Dec 23 2007
WHERE'S THE BLACK GOLD?
Map of the world, with countries' sizes depicted relative to their Oil Reserves (which explains the geopolitical bullshit we can't make heads or tails of):
The SIZE of each country on this map reflects the relative size of its OIL RESERVES.
The COLORS reflect different levels of OIL CONSUMPTION (per country, not per capita -the key is on the left).
The map's sources are identified as the BP Statistical Review Year-End 2004 and the Energy Information Administration.
(bigger map at Energy Bulletin)Sun, Dec 23 2007
WHISTLING IN THE DARK
The world financial system is in huge deep kimchee, and folks are just hoping it will all automagically go away. The magnitude of the problem is barely understood by the relatively small handful of macroeconomic geeks who are madly sounding alarms, and the population at large is far more interested in Britney Spears' underage sister's pregnancy (the gossip topic dujour). The news barely contains a nervous ripple or two, with a few talking heads giggling vapidly, like Morbo's spritzhead co-anchor Linda on Futurama.
MARKETS IN DENIAL
by Christopher Laird
PrudentSquirrel.com
December 21, 2007
The ECB just lent out an astounding half $Trillion worth of money to 390 banks in only one day this week. It was to combat the lending freeze in Europe where banks are refusing to lend to each other over concerns about the mortgage losses this year. The demand was so high it caused alarm.
The question that comes to mind is, ‘Hey, we have a first class financial emergency here, when are the stock markets going to react accordingly?’
Consider this comment:
“Commentators joke about banks and financial institutions "going to the confessional," meaning that they admit that a percentage of their assets are mortgage-backed securities that are now near-worthless.
The fact is that very few institutions have gone to the confessional. Probably 99.9% of even the world's financial institutions are hiding vast amounts of near-worthless securities, and that doesn't even touch upon investments by non-financial companies (such as investment pools in state and local governments like those in Florida and Montana.”… Link
"What has become evident is that banks are concerned about the capital position of other banks. They do not know where the losses resulting from the array of derivative financial instruments will finally come to rest, and I think in the last four weeks we've also seen a more disturbing development, which is that the banks themselves are worried that the impact of their reluctance to lend collectively will lead to a sharper downturn in the United States, and perhaps elsewhere, thus generating further losses outside the housing and financial sectors, which will feed back onto balance sheets and reinforce their reluctance to lend, because of the need to generate more capital." Mervyn King, Governor Bank of England
It is hoped that the EU banks will bring to light the extent of their losses by first quarter 08. If not, the crisis continues unabated. The main problem is that they don’t know who is hiding losses.
Another huge market in trouble
Also consider that there is a major crisis building right now in the $2.5 trillion municipal bond market in the US. The bond insurers such as MBIA are at risk of having their AAA ratings pulled (they already are probably not AAA but the rating agencies know if they pull that, the tens of thousands of securities they guarantee will lose their ratings, and result in fire sales, the kind of problem that started the huge credit crisis with Bear Stearns before Summer.)
There were comments several months ago that the ‘subprime’ credit crisis would blow over. Rather it is mushrooming out of control into other huge credit markets, and leading to new $billions of losses and a collapse of lending and confidence in banks in the EU and US.
Rather than talking about the ‘subprime ‘ crisis, one would do better to now realize this is a pan credit crisis, spreading to other major credit sectors. The ARM resets are only beginning, they include about half of all mortgages made since 2003, and all levels of credit. We have only seen the beginning of the mortgage problems in 07, not its ending. Try 08, 09 for prospects. One huge amount of new ARM resets.
What US rate freeze plan?
Oh and that US mortgage freeze plan? I estimate it’s only going to affect about 4% of the problem mortgages, as the criteria to qualify are quite restrictive. That plan was mere window dressing. No real effort was made to avoid the nasty wave of pending resets coming in 08 and beyond.
Of course the US and other stock markets rallied when the news came out on that so called mortgage rate freeze plan.
A whole LOT of CB money
Then the US Fed and ECB and other central banks got together last week to discuss a plan to infuse a lot of money into credit markets. The stock markets rallied. Then, come this week the ECB has to loan out an astounding $500 billion worth of money because banks won’t lend to each other. The Stock markets yawned that off.
I read an interesting quote where a hedge fund manager said, if someone would take him out of all his positions right now, he would gladly go to 100% cash. He is only a reluctant participant.
I have a feeling that kind of thinking is one reason the markets are not reacting as of yet to this incredible credit crisis. But how long can that last? The stock markets are clearly in denial, they are down, but are not even closely reflecting the severity of this world financial market.
One thing is sure, world economic activity will contract due to very difficult credit markets. That will affect profits in 08 in the US, EU and other major economies. Then we will see a significant reaction to this mushrooming credit disaster. So far, massive central bank interventions have done just about zero to lower credit spreads in the troubled 3 month short term money.
Monetization when?
The only thing central banks have been able to do is basically loan ‘unlimited’ amounts of money out for collateral of all types. The central banks don’t want to appear to be monetizing the mess, but they may eventually have to do that. Gold would go out of sight.
Right now, central banks are not just ‘printing’ money and throwing it around, they are taking collateral against that. But, if the collateral turns sour, central banks will have to face the choice of taking those losses off financial institutions books, or else face this crisis for years. Just taking the bad assets as collateral does not take losses off bank’s books. That is the status quo now. Banks are nursing big losses, and have no way to get out of them, without fire sales.
There has been no meaningful movement on the credit situation, and it is rapidly spiraling out of control. So far, stock markets have been in denial for the most part. That has to change for the worse. Eventually, the mushrooming damage from the collapsing credit markets will cause a world stock detonation. The central banks have few options and are not sure what to do. Worse, it appears that the only thing that could work to free the banks it to take those losing assets off their books, which would effectively be monetization of all the losses. So far, those losses are estimated to be up to $1 trillion worth. It could easily end up being perhaps 5 or more $Trillion.
And now, with other huge and important markets in trouble ($2.5 trillion muni bond markets) unless a solution is found soon, we will be looking at a tumultuous 08 in all markets. If that happens, gold would be pulled in different directions. First, gold would want to sell off due to liquidity problems, second, gold would want to rise due to flight to financial safety.
But just about everything else other than precious metals will get killed next year if the markets ever do react to the collapsing credit markets.All news articles and images provided under the Fair Use Notice.