Credit Card Issuers Face Possibility of Highest Losses Ever
Nov 19th, 2008 | By Rob | Category: Uncategorized
I spent some time listening to the Congressional hearings concerning the auto bailout yesterday and it was interesting to hear the differences in expectations among the automakers for 2009. When asked to disclose the amount of money which each of the Big Three would need in order to bridge the gap to 2010 (although they are collectively asking for $25 billion, the dollar amount that each company anticipated that they would need had not been disclosed), the question eventually devolved into an exercise in estimating their projected cash burn rate for 2009. One important question in their burn rate is the state of the American economy: Will consumers buy more or less cars in 2009 than they did in 2008? Ford, GM, and Chrysler are, like everyone else, caught in the middle of the credit crisis and declining consumer spending.
While the nation was busy debating the merits of the auto bailout, Bank of America CEO Ken Lewis, speaking in Detroit, acknowledged that the credit card industry may face its highest credit card losses ever. And earlier that morning, a Goldman Sachs analyst announced his expectation that credit card losses would rise by 25 percent to a charge off rate of 7.95 percent in 2009.
I want to be optimistic about 2009 - but I’m not.
First, I have come to expect that almost all business leaders consider the current climate the most difficult economic conditions that they have faced in their lifetime. And from the business leaders that I’ve heard speak, the conditions have significantly deteriorated since this summer, when households were already facing difficult times because of the real estate downturn. And yet, very little has been done to ease the burden of the times on consumers.
Second, some seem too quick to blame the problems of the automakers on their workers. At one point, the union leader was questioned by a Congressman as to why the Big Three should be required to continue paying the union members a large percentage of their salary if the decision was made not to produce cars at their plant - as they have agreed to do in the contracts negotiated between the union and the company.
With questions like that it’s no wonder people can’t pay their credit card debt. We want everyone to have a job - we just want them to make as little as possible with as few benefits as possible so that our industries can stay competitive.
As I said, I’m not optimistic for 2009. The credit card issuers had better be prepared for hard times as well.
