weekend commentary - terminal credit card borrowing
(snip)"Credit Cards: Terminal Ponzi Finance
Thursday, May 8th, 2008 at 7:41 AM
Any intelligent observer who understands the fundamental concepts and realities of a Ponzi finance based economy knows that borrowers will move from one worm hole to another until credit is exhausted and withdrawn. Meanwhile the same cast of characters who never saw the mortgage rout develop, fail to see a new disaster coming.
The last Joe Ultra Light Sixpack (JULS) kamikaze assault has spilled into credit card borrowing, which soared last month. My theory holds that these borrowings are not exactly trips to the mall either, but represent desperate attempts to purchase essentials like food, gasoline and utilities. Of course such borrowings are quite problematic because of the usury rates being levied. It is problematic for the lenders and ABS holders because it is the end of the line in terms of Ponzi finance from other sources to service the old debt. The timing of this surge couldn’t be worse either, given that credit conditions in the card sector were already worsening.
May 7 (Bloomberg) -- U.S. consumer borrowing jumped more than double the amount economists forecast in March, indicating a slowing economy is forcing Americans to accumulate credit-card and other forms of debt.By category, revolving debt such as credit cards rose $6.3 billion during March.
Overdue payments at the six largest U.S. credit-card lenders reached the highest since November 2004, according to data compiled by Bloomberg. An average of 4.11 percent of loans were at least 30 days late in February and March, according to reports filed by American Express Co., Bank of America Corp., Capital One Financial Corp., JPMorgan Chase & Co., Citigroup Inc. and Discover Financial Services.
The consumer credit card market is nearly a trillion dollars in receivables at present. So far it has been spared the worst effects of the housing bust and inflationary wipe out of JULS. The reasons for this are simple. Cards give no questions asked access to credit to a large number of the Gente, and the payments are minimal. Once debtors run up one card, they wash, rinse, repeat the process on a second, and a third, using Ponzi finance to do it. The math of paying fees, fines, and 15-20% or more interest rates is of course nasty. Coupled with the complete lack of wage growth, less access to HELOCs and devastating inflation, I would expect these conditions to erode very fast over Mad Max summer.
Here’s how this scam works: according to the Fed surveys 85% of lenders tightened standards on subprime mortgages in the first quarter. However, direct mail offers to high risk households- defined as those using more than 30% of their available credit grew 5% between the 2Q-3Q, 2007. The Boyz sent out 363 million mailers to this group!
So far lenders have been slick at working their lending spreads. Their costs (Libor) have been dropping, and they have failed to pass their savings on to consumers. The illustrates once again why lower interest rates has little if anything to do with helping consumers and Sheeple other than hyper-inflating their costs. So the impression is given of a boom in lending activity, widening spreads, and just “normalizing” losses. Like housing and home equity lending this of course completely fails to account for the Ponzi nature of this particular game, making it primed for a big fall.
Business Wire: Excess spread is a measurement of the extra cash flow generated by securitized credit card receivables and is a barometer for the health of credit card transactions. Fitch’s Prime Credit Card Index for March 2008, which aggregates trust performance through the end of February, reports three-month average excess spread at 7.56%. Excess spread has hovered around this 7.5% level since the second quarter of 2006; prior to that the excess spread level averaged approximately 6.5%.
Since the implementation of the Bankruptcy Reform Act in October 2005 (BK) and the wave of filings that immediately preceded it, the credit card sector has experienced abnormally low chargeoff and delinquency rates. After two-and-a-half years, those rates have begun to approach historically observed levels. The Fitch prime chargeoff index reached 5.73% in March, compared to pre-BK average levels of around 6%. Chargeoffs have climbed 100 basis points (bps) over the last six months, coincident with the economic stress which is affecting the performance of all consumer ABS. Delinquency levels are also elevated and have rebounded to pre-BK levels. Year-to date bankruptcy filings have increased 27% over 2007, but the volume of weekly filings remains at least 30% below pre-BK levels.
Currently, excess spread on credit card ABS has been bolstered by the drop in LIBOR rates. The coupon on most credit card ABS is based on one-month LIBOR, which has experienced a 250bp drop over the last six months. Therefore, the effects of slightly lower yield and higher chargeoffs are being offset by lower borrowing costs, keeping excess spread steady. Yield reduction has remained modest as well, as card issuers have proven adept at managing their yield through pricing initiatives and dynamic strategies implemented to reflect changes in card usage over time. As a result, although the prime rate, which drives cardholder interest rates has been lowered by 200bps since the beginning of the year, yield reduction on credit card ABS in March 2008 was only 36bps lower than the average for the 2007 calendar year. Yield comprises collected finance charges, fees and interchange revenue."(snip)