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Sunday, June 29, 2008 12:28 PM

Fire Sales Of Bank Assets Coming Up

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CNNMoney is reporting Credit Card Issuers Face Bigger Losses Than Expected.

"The deterioration in credit cards is accelerating faster than many had expected," said Christopher Wolfe, an analyst at Fitch and one of the authors of the report published Friday. "The message we are trying to deliver is that things are going to get worse before they get better. Thus far, credit card businesses have been profitable but that could change."

Fitch analysts are expecting an increase in prime charge-off rates - or losses from defaults on card payments as a percentage of loans outstanding - to at least 7% by the end of the year from 6.4% in May.

Particularly vulnerable, say analysts, are credit card issuers such as Washington Mutual, or WaMu, and Capital One Financial Corp. (COF) with higher subprime exposure, a category of high-risk borrowers with high delinquency who fueled the mortgage crisis.

WaMu, which bought a subprime credit card issuer in 2005, reported in the first-quarter net charge-offs of 9.32% on $26 billion of credit card loans. This is up from 6.31% a year earlier. It ratcheted up its loss reserves in its credit card unit by more than 60%. A WaMu spokesman declined to comment, citing the so- called quiet period ahead of earnings.

Credit card issuers that are part of bigger banking institutions such as Citi aren't in the clear either. The financial services behemoth had net losses of 5.83% in its U.S. cards portfolio in the first quarter, a 1.2% rise from a year earlier. "While current losses remain below peak levels, they are running above the long-term average," said Fitch analysts in their report. A Citi spokesman declined to comment on upcoming second-quarter results.
Suitors Drop Out Of Auction For GE Card Unit

Suitors are dropping out of auction for GE's $30 billion credit card unit. Had GE tried to sell that card unit 2 years ago there would have been 10 banks chomping at the bit to pick up that portfolio. Now, no one wants it.

It was growth at any cost for as long as I can remember. How quickly things change.

Growth at any cost was one of the ramifications of the Bankruptcy Reform Act of 2005. For more, please see Bankruptcy Reform Act Finally Blows Sky High. Now capital impaired banks cannot afford any more losses, yet card losses are mounting and about to get much worse.

With Massive Government and Private Sector Job Cuts Coming, unemployment is set to soar. Rising unemployment means rising card defaults. It is that simple.

WaMu In Deep Serial Trouble

While some have chanted these banks are selling below breakup value, I disagree. What is the value of a card portfolio that no one will bid on? Take a look at WaMu. It is in deep serial trouble. WaMu is sitting on a massively troubled pay option ARM portfolio and a huge subprime card portfolio.

Both of those pieces have negative value. WaMu would have to pay to get rid of them.

Where's The Breakup Value In Citigroup?

I have repeatedly said that Citigroup would not survive in its current form. It will be broken up. But how much is its card unit worth today in a fire sale if it has to get rid of it? How much is any of its units worth in a fire sale?

Sooner or later we will have our answer. Fire sales will be coming up.

Mike "Mish" Shedlock
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