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Saturday, June 21, 2008 1:18 PM


$2 Trillion Reduction In Credit Card Lines Coming Up


Credit is drying up everywhere. Banks are now concerned (finally), about rising credit card debt. They have every reason to be. The bankruptcy reform act of 2005, which encouraged such reckless lending is now blowing up in lenders' faces.

Banks and credit card companies wrote that bill. They got everything they wanted. It goes to show you two things:

1) Be careful of what you ask, you might get it.
2) Greed kills.

Furthermore, I expect many of the debt slave provisions of the bill to be undone after Obama is elected. That will increase defaults. Even if an unwinding of that "reform" does not happen, the writing is on the wall for lenders for the simple reason "You cannot get blood out of a turnip".

Regardless of what the law says, unemployed people are not going to be paying credit card bills. A second point is that someone unemployed, with no income, will meet the strict guidelines for wiping away all their debt.

I talked about this in Bankruptcy Reform Act Finally Blows Sky High.

Banks have finally beginning to get the bleak message that credit card defaults are going to soar. In response, Banks are Trimming Limits for Many on Credit Cards.

The easy money that led Americans to depend on credit cards to pay their bills is starting to dry up. After fostering the explosive growth of consumer debt in recent years, financial companies are reducing the credit limits on cards held by millions of Americans, often without warning.

Washington Mutual (WM) cut back the total credit lines available to its cardholders by nearly 10 percent in the first quarter of the year, according to an analysis of bank regulatory data. HSBC Holdings, Target (TGT) and Wells Fargo (WFC) each trimmed their credit card lines by about 3 percent.

Among those four lenders, that amounts to a reduction of about $15 billion in three months. Over all, the amount of available credit for the industry appears to be about flat, with the three biggest issuers — Bank of America (BAC), JPMorgan Chase (JPM) and Citigroup (C) — slightly increasing their overall credit lines. But even they are trying to rein in risky individual accounts.

“This downturn is the perfect storm where the consumer is getting squeezed from all levels,” said Michael Taiano, a credit card industry analyst at Sandler O’Neill. He projects that credit card loss rates for lenders, now around 5.7 percent, could go as high as 10 percent in next 18 months. That would be higher than the peak levels reached after the 2001 technology bust.

Meredith Whitney, an Oppenheimer banking analyst, said the impact of the recent regulatory proposals on lender profits could be so severe that she expected the industry to pull back $2 trillion in outstanding credit lines by 2010. That would be a 45 percent reduction in credit currently available to consumers. Risky borrowers would be squeezed the most.
Direct Bottom Line Hit

Every default is a direct hit to the bottom line. And 10% chargeoffs would not be surprising in the least.

Furthermore, a reduction in credit lines by $2 trillion is not peanuts. Credit is contracting folks. Yes, this is deflation regardless of what energy and food prices are doing.

FDIC Bank Examiner Audits

From a source I consider reliable, I received this email the other day: A good friend of mine has a friend who is a Bank Examiner(BE) for the FDIC. The BE says the message he takes into every exam is "You must raise your loan loss reserves". This is delivered directly to the Chairman, President and CFO of every bank visit, every time. No Exceptions!

I asked for clarification and was told no exceptions, literally means no exceptions. Note that an increase in loan loss provisions means capital will need to be raised or fewer loans will be issued, or both.

Zombification of Banks Accelerates

As I said in Regional Banks Spiral Towards Zero, I suspected Bank United (BKUNA) was raising money at $1.90 because it was told to. BKUNA was down another 11.58% on Friday, to $1.68. I do not see how it can survive even IF it raises the $400 million it is seeking.

Much of the credit on the books of banks is worthless. It will be written off. There is nothing inflationary about this at all. The zombification of banks that I mentioned in Night of the Living Fed is now picking up steam. Consumers are being increasingly zombified as well.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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