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Connect the Dots

posted by Elizabeth Warren

As I was reading last night, I came across three separate little dots of information.  The first dot was good news for AmEx, the credit card of choice for higher-income, less financially stressed families, from JD Powers rating company:

American Express ranks highest among all credit card companies and performs well across all of the five customer satisfaction factors. Amex’s customers are generally what the industry calls “transactors” – customers who pay off their bills in full every month and the company focuses on the rewards and benefits of its cardholder experience and it excels in meeting their expectations. Nearly 8 out of ten transactors select their card because of the value they feel they get from its rewards programs, with interest rates of little importance because of their purchasing style.

The second dot was bad news for AmEx:

The second dot was bad news for AmEx:

Credit-card groups were among the key casualties as fears grew of rising defaults. American Express fell 5.3 per cent to $38.75 after Lehman Brothers forecast net charge-offs - a measure of uncollectable debts - on its cards would rise to 8.5 per cent of loans by next year.

The credit card company that probably has the maximum number of customers who pay their bills and has more customers who love their AmEx cards than any other company will likely experience an astonishing 8.5% default rate on its outstanding loans next year. For decades, credit card default rates remained in the 3-4% range.  A number like 8.5% puts AmEx credit cards in the same kind of reversal-of-fortune as Countrywide.   

The third dot tells what AmEx is up against: Credit card solicitations have dropped back to a mere four billion pre-approved offers in 2008.  That's a bit under 40 mail solicitations for every household in America--plus the college and mall marketing, the print ads, the television ads, etc.

I connect the the dots this way:  First, the projected defaults for AmEx suggest that trouble is climbing the income ladder.  Second, the projected defaults suggest that the economic news is going to get uglier in 2009.  And, third, the credit card issuers' plan to avoid complete collapse is to find more people to borrow money, presumably at prices high enough to offset the losses.  And all three dots suggest the plan won't work.


And, third, the credit card issuers' plan to avoid complete collapse is to find more people to borrow money, presumably at prices high enough to offset the losses.

Sounds like subprime to me. Didn't they already try this by introducing the credit card? Until the financial institutions, and the powers that be, realize that the American consumer is maxed out, we're in for a world of hurt. And the ones that tend to have credit aren't stupid enough to spend it in a deflationary environment. Oh yeah, the average college graduate starts off the real world with 30K in debt. Where are these customers going to come from?

Sigh, I guess there's always expansion to Russia, China, and the Gulf Coast.

Maybe it's time for Ben Bernanke to create a new Fed facility that can take some of that Amex default exposure off Amex's books ... at least until the economy turns around and it's once again safe for credit card companies to pre-approve cards for people on a ninja basis: no income, no jobs .. and so forth.

"First, the projected defaults for AmEx suggest that trouble is climbing the income ladder."

it suggests to me that folks are spending more than they have before they climbed the ladder so the trick is climbing the ladder without a ton of debt in your backpack.

Defaults are an issue but so is the overall stress placed on the consumer by the financial crisis. AMEX is likely to face an even more challenging environment as more "transactors" turn into customers accumulating balances as they struggle to pay off their bills and securing credit lines becomes next to impossible.

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