The Looming Credit Card Crisis
Today’s forecast: Thunderstorms for the credit card companies.
According to the government stress tests, credit card losses just for the 19 banks under scrutiny could exceed $82.4 billion by the end of 2010. That’s more than the market caps of Citigroup, American Express, Capital One and Discover… combined. Hmmmm…
And that number is unquestionably light. The $82 billion loss would be a consequence of the Treasury’s worst-case scenario, which we’ve noted before is surprisingly rosy. Even worse, the government tests only examined credit card obligations held on bank balance sheets… not the tens of billions of dollars worth of loans packaged into bonds and sold to sucker investors, a la the mortgage-backed securities of 2008.
Factor in those loan-backed bonds and a nastier marketand consultant firm Oliver Wyman forecasts losses twice as large… up to $186 billion for the whole credit card industry.
Strip away the fancy accounting and forecasts and give us your gut reaction to this question: Would you expect more credit card losses during this recession (aka the credit crisis) or the tech bust?
While the current fiasco has managed to surpass the tech bust in nearly every regard, credit card losses are still a long way from 2001 highs. Hell, we’re barely above 2006 levels, when the economy was in the midst of a faux boom. And as you can see, the steepest losses have shown up toward the end of the last two recessions… some very dark clouds hovering above the credit card biz.