Cute kids. What a life!
Yep, rally could well be done. Might be one more boost from waving magic twangers at the uptick rule, just as there was concomitant with the mark-to-market tomfoolery last week.
Seen this?
Meredith Whitney about the recovery and possible impending credit crunch.
[10:27] Credit Card Crisis
But talking about credit cards, you've been sounding the alarm talking about a squeeze that banks are--and gee, American Express already has--and other banks have, cut back on your lines. You may not have used them. But you may have thought you had $10,000. Now you have what, $500?
This is the most interesting topic for me out there, which is credit card lines. So, there are about $4.6 trillion in unused credit card lines. And there are about $840 billion of used credit lines. So, in the fourth quarter alone, I'm sorry, now of course it's $4.2 trillion. In the fourth quarter alone, half a trillion dollars of lines were cut from the consumer, half a trillion.
And this is before any type of regulatory changes. So, banks are cutting lines for a couple of reasons. No. 1, risk aversion. No. 2, they don't want to hold regulatory capital against unused lines when they are so capital-dependent. And No. 3, which is also risk dependent is, where I have a monogamous relationship with you as a mortgage borrower, I have multiple relationships with my credit cards.
So, when, you know, cameraman A cuts my credit card line, I have more exposure to you and cameraman B. So, you don't want to be the last one holding the hot potato. So, you pull your line. And I'm stuck with fewer lines. And my borrower's, my lender's stuck with more exposure to my line. That's the last place he wants to be.
So, the credit card version of a run on the bank?
I haven't thought about it, but that's exactly right. And when you get a pay cut, 90% of Americans use their credit card to--
Tide them over?
Tide them over and as a cash-flow management vehicle. So, when your credit card line gets cut, it's the equivalent of getting a pay cut.
And there's a regulation coming along from the Office of Thrift Supervision, can you explain that?
Sure.
That's going to throw a real wrench into people's access to credit card capital.
I'm sure you will get shivers up your spine, unintended consequences. This is "Unfair and Deceptive Acts and Practices." And there are a lot of good things that it does. This is regulation to protect the consumer. And that's passed by, it's already passed. It's just a question of, it's supposed to go into effect by mid-2010.
It may get accelerated by Congress before that, but passed by the Office of Thrift and Supervision, National Credit Union Association, and who am I forgetting, the Fed, all three regulatory bodies that govern credit cards. So, what happens is, to protect the consumer, they say OK, well you're going to need a grace period through which to pay your credit card bill. So, you go on vacation. You come back. "Wait, I have to pay my bill in two days?" Oh, now you get a required 21-day grace period.
And there are other things it does in terms of, if I give you a teaser-rate product and you make a payment, right now it goes, your payment goes to the low-interest-rate part of the credit card portion. Going forward, it'll go to the high-interest credit card payment. So, you can ultimately get out of debt.
The unintended consequence it risks doing, and I think it will do, is I, as a lender for your credit card, an unsecured lender for your credit card, monitor your credit bureau monthly. And so, I know when you're late with your phone bill, your utility bill, your sacrosanct cable bill. Right, for a man, it's all about the cable bill. And so, I'm going to monitor that and change your rate accordingly. Well, going forward, after this is adopted, I can look at your credit bureau, but I can't do anything to you unless you're late with me.
And the obvious risk here is, by the time you're late with me, you've maxed out your credit card bill in Mohegan Sun or Atlantic City--sorry, New Jersey native--and I'm left holding the bag. My natural instinct is to cut your line. And that's what's going to happen. But the half-a-trillion dollars of lines that were cut last year were well in advance, and, I would say, had nothing to do with the UDAP proposal. So, that's more on the come. Now, I think there's going to be $2.7 trillion in lines reduced. So, a 50% cut of the lines outstanding.
Wow.
That's going to have the scariest impact on the economy, I think.
And that's ongoing now?
Yeah.
Wow.
forbes.com |
