Credit Cards Are Frothy, Not Bubbly

A month ago, BusinessWeek ran a cover article essentially predicting that credit cards would be the next shoe to drop in our increasingly precarious economy. “The party was paid for with credit cards,” read the magazine’s bold cover line. “The hangover will be a whopper.”

In the article itself, BusinessWeek had anecdotes about rising defaults, weakened credit card securitizations (all of which, by the way, have triple-A ratings, just as their subprime brethren once did), and lower profits for the big credit card banks like JPMorgan Chase and Capital One. American Express has raised its loan loss provisions by 70 percent; Capital One has put $2 billion aside for loan losses, and might need to do more. And on and on.

As for consumers, BusinessWeek had no trouble finding people who were facing suddenly higher interest rates and lower credit limits as the companies began taking measures to hold their losses down. Even bankruptcies are once again on the rise — this despite the tougher bankruptcy law that the banking industry helped pass three years ago. The article ended with a bank analyst saying, “We’re in uncharted territory.”

Yes, we are. As it happens, I spent this week rummaging around the world of credit cards, trying to answer the same question as BusinessWeek. I found my own set of scary statistics, and talked to credible bears who feared the worst. “Is it a ticking time bomb?” asked Sean Egan, co-founder of the independent ratings firm Egan-Jones — and a man who has been prescient about the subprime crisis. “Absolutely.” And I watched, via the Web, a Congressional subcommittee hearing aimed at stopping some credit card abuses that have become rampant.

My initial instinct was also to believe that credit cards would be a rerun of the subprime mess — as consumers got in deeper and deeper trouble, the pain would move up the food chain, affecting Wall Street and the companies as much as Main Street. Capital One would become the credit card version of Countrywide; securities built around credit card receivables would crumble, just like subprime securities.

But what I actually discovered has made me question that assumption, and now I’m not so sure it’ll turn out that way. Which is not to say there aren’t problems with credit cards — or that many credit card users aren’t going to feel a fair amount of pain. They surely are. It’s just that, to a maddening degree, credit card companies will actually do O.K. while the rest of us suffer. Annoying, isn’t it?

news source : http://www.nytimes.com/2008/03/15/business/15nocera.html?ref=business