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Still in the Cards

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How long can U.S. consumers pile on 15% to 20% interest rate debt before the economy collapses from the weight of it?

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This article was written by Minyan Peter, author of other popular articles such as the E-Trade Trade and Discover's Goodwill Hunting.


Beyond the fact that revolving credit (largely credit cards) grew at a frightening 8.8% annual rate in the third quarter (more than double the rate of growth from last year's third quarter, almost 30% above the second quarter and more than 3 times the growth rate of consumer spending) and the fact that the cost to consumers for credit card debt continues to rise, Capital One (COF) reported its revenue margin for U.S. card operations rose to 18.8% in the third quarter from 16.3% in the second quarter. The statistic that caught my attention most in Friday's Federal Reserve report on consumer credit was that of the $25 billion increase in revolving credit for the quarter, $11 billion, or 44% of the increase, was funded through the securitization market. And, overall, 48% ($444 billion) of all non-mortgage revolving credit is currently off-balance sheet.

Should the market for new credit card asset-backed securities follow the plight of the mortgage market, it is difficult for me to imagine the ability for some issuers to find both the capital and liquidity to support the on-balance sheet growth of these assets. Further, the immediate earnings hit to establish loan loss reserves for 5% loss credit card assets returning to the balance sheet (albeit over time), would be significant – at current loss rates roughly $20 billion.

While the U.S. Treasury appears to have its hands full with the housing market, it may want to free up a few folks to think about the credit card market. At an industry-wide 15.5% annual interest rate cost, this quarter's $25 billion credit card balance growth alone represents a more than $3.75 billion incremental non-deductible interest expense drag to the U.S. consumer for 2008. It is not clear to me how many more quarters U.S. consumers can pile on 15% to 20% interest rate debt before they, their banks, and our consumer spending dependent economy collapse from the weight of it.
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Position in COF
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