“Dominoes” is Not a Pizza

People used their home equity in lieu of a savings, until their equity was worth less than their home loan… and these were not even the subprime miscreant-borrowers who couldn't afford to buy a house in the first place. HELOCs (home equity lines of credit). But at least they had jobs to pay the loans that kept them in their houses… until the layoffs. Big companies too, not just the neighborhood retailers – Yahoo, the car manufacturers, financial services, GE, and the list just kept growing.

No credit? Can't borrow on your house (or pretty much on anything) or your stock portfolio? Don't worry, the Department of the Treasury is bailing out the big boys on top – the ones with $20 billion socked away for annual “end-of-year” bonuses – and in four to six months, that money will arrive to the rest of us (so they promise). Hey, the stock market just rose 11%, so things are great! The “scare” is over. We'll just sit back and watch the Dow go back to above 14,000… any time now… OK, the markets opened a little down this morning; that will pass. Is that the Easter Bunny over there? Meantime, if I need a couple of bucks, there're always my credit cards.

I've mentioned this “next shoe” before, but here are the numbers. Today’s New York Times: “Lenders wrote off an estimated $21 billion in bad credit card loans in the first half of 2008 as more borrowers defaulted on their payments. With companies laying off tens of thousands of workers, the industry stands to lose at least another $55 billion over the next year and a half, analysts say. Currently, the total losses amount to 5.5 percent of credit card debt outstanding, and could surpass the 7.9 percent level reached after the technology bubble burst in 2001.”

Credit card limits are dropping, folks are having their credit cards pulled and the standards for getting and even keeping credit cards have risen substantially. Some are even getting notices that they have exceeded the credit card limit, full and immediate payment is required… except when they reached their limit, they were well below what the company had told them the limit was. It seems the limits were reduced (the “fine print”) retroactively, putting credit card customers “retroactively” in a default situation. And know that if your credit card limits or credit lines change for any one item, odds are pretty good that you will be reduced across the board. In a time when the Federal Reserve is cutting rates for the banks, credit card companies are raising consumer interest rates to cover the higher market risks and defaults.

So foreclosures come from job losses which create credit card defaults which tank the big financial players who issued the credit behind the credit cards. But the Treasury and the federal government, who love to talk about helping the consumer and the homeowner, have the situation very much under control. They're focused only on the “big financial players who issued the credit behind the credit cards” part of the problem and are hoping the rest of the issues just go away.

The Treasury can't even provide bailout money to most small banks that actually service small businesses and consumers, because these lenders aren't publicly traded (6,000 out of 8,500 banks in the U.S. ) – they're working on fixing that “glitch.” Where is that damned Easter Bunny when you need her?! Wanna buy a pile of credit default swaps I got on eBay?

I’m Peter Dekom, and I approve this message.