In the face of weakening economic conditions, many people have found the interest rates on their credit cards heading significantly higher.  As a result of “risk based” pricing by the nations largest banks, many of these individuals saw higher interest rates even though they were not delinquent on their payments.  According to CreditCard.com, the average outstanding credit card debt for households was $10,679 at the end of 2008.  This puts the average yearly interest cost on credit card balances at over $2,000 if we assume the average credit card rate is 14.2% (according to IndexCreditCards.com).

Right now, banks are cutting credit lines and raising fees — and have been reluctant to pass along the savings resulting from Federal Reserve interest-rate cuts meant to boost the sagging economy. President Obama has met with credit card executives and has called for an end to abusive credit card lending practices. Last year, the Federal Reserve passed changes to credit card practices that will take effect in 2010.  The House has just passed a bill deemed to be the Credit Card “Bill of Rights” targeting credit card fees and rates.  The Senate is expected to pass its own version shortly.  Restrictive legislation is being passed at the same time that banks have absorbed about $55 billion in credit card defaults last year, up from $43 billion in 2007.  These defaults could are likely to reach $65 billion this year.

The crux of the problem facing the banks is that credit card lending is unsecured, meaning that if an individual decides to default on his/her credit card debt that the bank has no asset to seize as compensation.  This is leading to massive charge-offs (debt that has been deemed uncollectible) at the banks.  Losses on consumer credit are probably the number one drag on bank earnings right now and these charge-offs jumped to an annualized rate of 8.8 percent in February, the highest in 20 years of data.  The credit card losses at the banks are directly correlated with the unemployment rate in the country, and according to Moody’s, credit card charge-offs are likely to peak at 10.5 percent in mid-2010.

One of the issues that very few people are talking about because it hasn’t shown up in the data yet is that the average outstanding credit card debt for households is growing, and due to the recession, is doing so at an even more rapid pace.  It’s pretty clear that in household where someone has lost a job, cash would only be used sparingly and only to pay for items that couldn’t go on a credit card such as mortgage payments, car payments, and education expenses.  The reason behind this is that since the time frame in which the person will regain employment is very uncertain, its in the best interest of the individual to deplete their savings as slowly as possible so they can continue to live in their home and drive their car until they find new employment.  The credit card would be used to put food on the table and to pay for all other living expenses.

Even personal finance guru Suze Orman, who has built a career advising Americans to get out of debt and how to do it, is now advocating that consumers go into credit-card debt in order to make sure that they have eight months worth of cash on hand in case of an emergency.

“If you have an unpaid credit card balance not much saved up in emergency savings, I need you to listen up. My advice has changed. I want you to only pay the minimum due on your credit card balance, and instead, make it your top priority to build as much of an emergency cash fund as you can”  –Suze Orman

Because of rising charge-offs and growing credit card balances, banks have no choice but to raise credit card rates to reflect the increased riskiness of their borrowers.  Even if a person has been making payments on time in the past, there is no guarantee that they will continue to do so in the future, as they could soon find themselves drowning in their own consumer debt.

Legislation to restrict credit card rate increases must be carefully crafted in order to reflect the reality of the current situation that we are in.   Banks only give consumers credit cards because they expect to make money.  In fact, credit card lending has historically accounted for between 15 percent and 25 percent of pre-tax income at JPMorgan, Bank of America and Citigroup, according to Moody’s.  If a bank feels that it can’t raise its interest rate to a point where it properly reflects the creditworthiness of the borrower, it won’t lend to them at all.  A cap on credit card rates would lead to a contraction in consumer credit, taking credit cards out of the hands of the people who need them most.

Everyone generally agrees that we need to end abusive credit card lending practices, such as the need to read the really fine print in order to avoid getting slammed with unnecessary fees, and I commend the Obama administration for showing leadership on this issue.  What we don’t need is legislation driven by consumer outrage over higher credit card rates, that has the potential to drive banks to restrict credit card lending altogether.  That is our nation’s current dilemma.

Uncategorized banks, credit cards

A recent outbreak of swine flu in Mexico has killed over 100 people and threatens to become a global pandemic. Swine flu is usually spread from pigs to pigs and is rarely transmitted from pigs to humans. It appears that a new strain of swine flu, type A H1N1, can be spread between humans and is spreading into the United States and other countries.

The new strain of swine flu is resistant to some commonly used antiviral drugs. Not much is known about the human to human spread of swine flu, as there have not been many reported cases in the past.

The uncertainty surrounding the swine flu outbreak has caused the stock market to head lower today, as travel and commodity stocks were hard hit. Furthermore, the U.S. is advising Americans not to travel to Mexico. If the swine flu were to develop into a global pandemic, world GDP would be expected to decline sharply, making the current recessionary environment even worse.

Currently, there is no vaccine available right now to protect against swine flu. However, there are everyday actions that can help prevent the spread of germs that cause respiratory illnesses like influenza.

• Cover your nose and mouth with a tissue when you cough or sneeze. Throw the tissue in the trash after you use it.
• Wash your hands often with soap and water, especially after you cough or sneeze. Alcohol-based hand cleaners are also effective.
• Avoid touching your eyes, nose or mouth. Germs spread this way.
• Try to avoid close contact with sick people.
• If you get sick with influenza, stay home from work or school and limit contact with others to keep from infecting them.

Swine Flu Outbreak Map

This is probably the best Swine Flu map currently out there. Created by a user named niman, who claims to be a biomedical researcher based in Pittsburgh, Pennsylvania, the H1N1 Swine Flu map is constantly updated with new or suspected cases across the globe. Pink markers are suspected cases, purple markers are confirmed cases, yellow markers are confirmed to be something else, and deaths are marked by a pink marker without a dot. Also, in the lefthand sidebar you’ll find the latest cases in text form. You can also view the map in Google Earth.

For more information on swine flu, visit CDC.gov or follow the CDC on Twitter.

Uncategorized swine flu

Oh, Nooo! Morgan Stanley surprised analysts this morning and posted a loss for the first quarter 2009. Just when we thought things were getting better for financial stocks.

The reported loss was $177 million, or $0.57 per share. They also slashed their dividend 81% to 5 cents per share. When compared with Goldman or even Citigroup, who both were profitable, this looks bad for Morgan Stanley.

For the quarter, Morgan Stanley posted strong trading profits, but it’s results were nowhere near as strong as Goldman’s because they the firm doesn’t have the same “risk appetite”.

The most interesting thing about their earnings was the fact that they had to take a $1.5bn hit to earnings, because their credit spreads improved and it now costs them MORE to buy back their own debt. This is the same accounting loophole that allowed Citigroup to post a $2.5bn gain when people thought it was LESS creditworthy than the quarter before. Usually it’s a good thing when your credit improves. I guess my common sense would have caused me to fail accounting class.

All is not lost however, Morgan Stanley would have been profitable for the quarter had it not been for this accounting rule. More smoke and mirrors but this time they smacked MS in the face.

Uncategorized citigroup, goldman, morgan stanley

Marathon Monday is perhaps the best day of the year to enjoy Boston sports. Today features a fun-filled day that starts with the running of the marathon, continues with a Red Sox game, and is capped off by a Celtics playoff home game — what’s better than that!. I didn’t get a chance to watch the marathon today, but I did see some running. The running I saw was that of stock market investors running to the sidelines on the back of renewed fear surrounding financial stocks. As a result the Dow dropped 290 points and financial stocks were absolutely crushed. Below are the highlights from the day’s action:

• Bank of America reported solid profits but indicated that loan problems were persisting and even getting worse.
• There was increased scrutiny on Citigroup’s surprise quarterly profit, which seemed to come more from shrewd accounting than a sharp rebound in its core businesses. Goldman Sachs noted that Citigroup’s credit losses were growing at a “rapid rate” and put a price target on the stock at $1.50.
• Last night, the Turner Radio Network published what it claimed was a “leak” of the Treasury stress tests. They didn’t actually publish a document, just a summary and in short they said the stress tests showed the entire banking system was stunningly insolvent.
• The NY Times published an article stating that to in order to provide continued assistance to banks without having to petition Congress for more TARP funds, the U.S. may convert the preferred shares they own in banks as a result of TARP to common stock, similar to what they have done with Citigroup.
• The Financial Times was out saying that the U.S. was going to place additional conditions on those banks who plan to repay TARP funds. As a result, the market is likely to punish “bad” banks who have not repayed TARP and reward “good” banks that do.

Uncategorized bofa, citigroup, stock market

Citigroup released its financial results today for 1Q09 and they were profitable (let us all rejoice!!). Not so fast though , Citi posted a loss of $0.18 per share on a profit of $1.6bn for the quarter (I didn’t know it was possible to have negative EPS when being profitable).

It looks like Citi has used some “smoke and mirrors” to create this profit. For one, Bloomberg is reporting that:

“Citigroup posted a $2.5 billion gain because of an accounting change adopted in 2007. Under the rule, companies are allowed to record any declines in the market value of their own debt as an unrealized gain.”

Furthermore, Citigroup has been able to move some assets that might suffer further writedowns, into its “held to maturity” portfolio, which means it doesn’t have to mark those assets to market. Again, another accounting trick.

Like the other banks, the company saw a huge gain in its trading profit for the quarter, though it continues to show real weakness in basic areas like credit cards and retail banking. The graph below from the investor presentation struck me as interesting as Citi is facing Net Credit Losses (NCL) of over 10% from Credit Cards in 1Q08, and the trend is only accelerating. Ouch!

Citigroup also announced that the long awaited exchange offer swapping preferred shares for common shares will take place after the stress test results are released May 4.

With all this said, I actually like owning Citigroup stock in the short term. I think the market has been pessimistic (and rightly so given the numbers), but the pessimism has gone too far. I’m playing for a pop when the stress test results come out, because the market already believes Citi will be the worst performer among the 19 banks and will need to raise more capital.

Uncategorized citigroup