The $915B Bomb in Consumers’ Wallets
October 31st, 2007Via: CNN:
This past summer’s subprime meltdown involved about $900 billion in now-suspect securitized debt, reckless lending, and consumers who buckled under the weight of loans they couldn’t afford. Now another link in the consumer debt chain – credit cards – is starting to show signs of strain. And the fear that the $915 billion in U.S. credit card debt (an uncannily similar figure) may blow up has major financial institutions like Citigroup, American Express, and Bank of America strapping on their Kevlar vests.
Last month, as banks reported their worst quarterly results since 2001, concerns about rising credit card delinquencies began to make their way onto earnings announcements alongside mentions of subprime woes.
First Citigroup, reporting a 57% decline in earnings, cited higher consumer credit costs and said it would put aside $2.24 billion in loan-loss reserves to cover future defaults.
In describing the situation to analysts, CFO Gary Crittenden said Citi’s credit card holders were beginning to increase the balance on their cards or take cash advances on those cards for the first time – behavior that, in his experience (which includes seven years as CFO of American Express), can translate into future trouble. Citi said the change in loan losses was “inherent in the portfolio but not yet visible in delinquencies.”
