Credit Card Defaults To Increase Losses For Banks

| June 6, 2008 | 0 Comments

The credit crisis in the financial community continues.  Despite the markets rallying off of mid-March lows, we’ve been hit by a string of bad news.  Starting it off was Wachovia (WB).  The board of this $43 billion bank ousted their senior management.  The shares promptly fell to a new 52 week low.

Then came Webster Financial (WBS).

This regional bank announced a capital raising plan to improve their liquidity.  Investors read between the lines and realized if they’re raising capital they probably have a problem.  This sent shareholders rushing for the door and the stock fell to a new 52-week low.

Don’t forget Lehman.

Not to be outdone, Lehman Brothers (LEH) also had their moment in the spotlight.  Despite more than $30 billion of cash on the balance sheet and presumed access to the Fed Funds Window rumors swirled.

Concerns over liquidity took a bite out of the stock.  This was followed by rumors that they’re looking for a big investor overseas.  The stock fell to a new 52-week low.

OSo why rehash old news?

To point out a simple pattern.  The recession we’re in hasn’t shown up in the traditional sense.  Our GDP is still growing . . . but make no mistake . . . our economy is struggling.

This means more pain is yet to come.  Here’s the key question: “What’s Next?”

Let me tell you, it’s not that hard to figure out.  Over the past 10 years home equity loans were very popular.  Everyone used them.  Money was extracted from rising home prices and used for remodeling kitchens and bathrooms.  People bought big screen TVs, boats, and cars.  The list goes on and on.

But all of that’s changed.

With real estate values heading lower, the days of easy money are over. Everyone who viewed their home as a giant ATM suddenly found it “Out of Order.”

This couldn’t happen at a worse time.

Inflation is setting in and every day costs are going up.  Food prices are up.  Gas prices are up.  The cost of everyday living is accelerating, and it’s starting to hurt.  With more and more disposable income going to buy everyday essentials, consumers are finding themselves in a quandary.

How to finance their lifestyle?

The answer is simple . . . credit cards.  Over the last few years credit card companies passed out their products like candy to hungry kids on Halloween.  They might soon come to regret that move.

Credit cards are easy to use, and most people have more than one – I know people with more than ten!  But here’s the problem.  With the cost of everything going up eventually consumers are going to need to make a decision.  Do they make payments on their debt, or do they buy food and gas?

Credit card companies are going to get hit with higher default rates.  This will undoubtedly hurt their profits.  We’re not far from major problems in the consumer debt industry.

The trend’s already starting.

According to the Federal Reserve, in the first quarter credit card delinquencies were over 4.8% . . . a rate not seen since 2002.  Just give it time. . . .it’ll get much worse.

So, who’s going to suffer?

Capital One Financial (COF) is facing the biggest risk.  Over the last year the stock’s fallen from $80 to $50.  I can’t help but think this is just the beginning.  If you own a big slug of this stock, I’d seriously rethink that position.

With every dark cloud there’s a silver lining.

Two companies are already benefiting from increased credit card usage. . . Mastercard (MA) and Visa (V).  Both companies take a small fee every time a card is used.  The more the better.  The best part is they don’t take on any credit risk.  They get paid even if you don’t make good on your credit card bill.

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Category: Stocks

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The Dynamic Wealth Report works with a number of staff writers and guest experts who specialize in everything from penny stocks to ETFs to options trading. These guest analysts post under the 'staff writer' moniker for ease of use.

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