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  • From: bob ford <bobford79 AT yahoo.com>
  • To: homestead AT lists.ibiblio.org
  • Subject: [Homestead] Credit lines to decrease by trillions
  • Date: Mon, 1 Dec 2008 11:43:01 -0800 (PST)

Just posted on NYT. This is a very big deal, which could dry up more than
all of the liquidity that has been pumped into the economy. Credit card
spendeng is second only in consumer liquidity to actual paychecks. This
could be very good for the long-term financial health of the average
american; but I don't see how it will do anything but make this present
recession much worse
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By REUTERS

Published: December 1, 2008

Filed at 12:38 p.m. ET

Skip to next paragraph (Reuters) - The U.S. credit-card industry may pull
back well over $2 trillion of lines over the next 18 months due to risk
aversion and regulatory changes, leading to sharp declines in consumer
spending, prominent banking analyst Meredith Whitney said.

The credit card is the second key source of consumer liquidity, the first
being jobs, the Oppenheimer & Co analyst noted.

"In other words, we expect available consumer liquidity in the form of
credit-card lines to decline by 45 percent."

Bank of America Corp <BAC.N>, Citigroup Inc <C.N> and JPMorgan Chase & Co
<JPM.N> represent over half of the estimated U.S. card outstandings as of
September 30, and each company has discussed reducing card exposure or
slowing growth, Whitney said.

Closing millions of accounts, cutting credit lines and raising interest rates
are just some of the moves credit card issuers are using to try to inoculate
themselves from a tsunami of expected consumer defaults.

A consolidated U.S. lending market that is pulling back on credit is also
posing a risk to the overall consumer liquidity, Whitney said.

Mortgages and credit cards are now dominated by five players who are all
pulling back liquidity, making reductions in consumer liquidity seem
unavoidable, she said.

"We are now beginning to see evidence of broad-based declines in overall
consumer liquidity."

"Already, we have witnessed the entire mortgage market hit a wall, and we
believe it will, for the first time ever, show actual shrinkage over the next
few months," she wrote.

The credit card market will be 18 months behind the mortgage market and will
begin to shrink by mid-2010, Whitney said.

Whitney also expects home prices to continue falling another 20 percent hurt
by lower liquidity. They are down 23 percent from their peak, she said.

"In a country that offers hundreds of cereal and soda pop choices, the
banking industry has become one that offers very few choices," Whitney wrote
in a note dated November 30.

She also said credit lines to consumers through home equity and credit cards
had been cut back from the second-quarter levels.

"Pulling credit when job losses are increasing by over 50 percent
year-over-year in most key states is a dangerous and unprecedented
combination, in our view," the analyst said.

Most of the solutions to the situation involve government intervention, and
all of them require more dilutive capital to existing lenders, she said.

"Accordingly, we continue to be cautious on our outlook on US banks."

SUGGESTIONS

In a column in the Financial Times, Whitney suggested four adoptable changes
to make a difference.

The first would be to re-regionalize lending, which has gone from "knowing
your customer" or local lending, to relying on what have proven to be
unreliable FICO credit scores and centralized underwriting, due to the
nationwide consolidation since the early 1990s, she wrote in the column.

Expanding the Federal Deposit Insurance Corp's guarantee for bank debt will
also help as the banks need to know they can access reasonably priced credit
for an extended period to continue to extend new credit lines, she wrote in
the column.

Whitney also advised delaying the introduction of new accounting rules, which
would bring off-balance-sheet assets back on balance sheet, until 2011 or
2012, as the primary assets that will come back are credit card loans.

Whitney suggested amending the proposal on Unfair and Deceptive Lending
Practices that is set to be adopted in 2010, saying restricting lenders'
ability to reprice an unsecured loan will cause them to stop lending or to
lend less.







  • [Homestead] Credit lines to decrease by trillions, bob ford, 12/01/2008

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