All is Forgiven: Credit Card Companies Think You're Wonderful - Again

Nothing personal, but it is, as they say, not about you.

Strictly business. It's about your ability to pay your bills. Which means that your credit card debt can be rolled up into asset-backed securities which can then be sold to investors.

So everyone benefits: you get more credit to buy lattes and large screen TVs. Investors get some new debt-securities to stuff in their portfolios since no one with a pulse trusts the equity markets. And investment banks? Well, heck, they get paid for packaging and selling this effluent. Nothing fancy, just doing their job keeping America and England and France and wherever financially solvent. God's work, as one I-bank CEO called it a while back.

Except, of course, that this is how it started The Last Time. Before that event whose name shall not be spoken. When even really smart, savvy executives discovered they had no frickin' idea what all this financial innovation meant, or obligated them to or implied.

So if that fall nip is in the air and splurging a little here and there feels right, have at it. Just remember what your parents told you about too much of a good thing. Because we have been down this road before. And it doesn't end in a good place. JL

Nick Summers reports in Bloomberg BusinessWeek:

Banks are returning to a practice they abandoned after the financial crisis: taking Americans’ credit-card debt, slicing and dicing it, and selling it off as bonds.
So far this year, banks and other companies that issue credit cards have sold $21 billion in bonds backed by those accounts’ debt, Bloomberg News reported on Aug. 29—up from $4.8 billion in the same period the year prior. Broadly, it’s a bet that consumers have their finances in order and will continue to be able to pay their monthly bills on time.

Bonds thrive when there’s predictability, and the credit-card business has become more stable since the crisis. The number of accounts 30 days past due peaked in March 2009 and again in November 2009, and has been declining ever since. Spenders are reining in their charging habits. Card issuers have cut off their least creditworthy customers, and reforms such as the CARD Act have forced them to be more careful about the riskiness of new customers. While all of this has put a crimp in credit-card companies’ growth, it has made for fat, steady revenue streams. In 2012, that’s not a bad position to be in.

“You may have to go back to the 1980s to see credit losses and delinquencies as low as they are right now,” says Bob Napoli, an analyst with William Blair. “It’s a sign that consumers are much more concerned about having good credit today, and a sign that the credit-card companies have been very disciplined in their underwriting.” The result, Napoli says, is a credit-card market that’s “Goldilocks healthy.”

With Europe’s future a giant question mark, and Treasuries offering meager returns, buyers such as mutual funds view credit-card-backed bonds as an attractive investment. For credit-card companies, this creates an opportunity to lower their own borrowing costs. Yields on top-ranked, five-year credit-card securities are the lowest in five years relative to a common benchmark, according to the Bloomberg report.

Might credit-card companies perhaps be grateful for the 2009 CARD Act, which they fiercely lobbied against? “I think so,” says Scott Valentin, an analyst with FBR Capital Markets. “The key has been the discipline coming out of the CARD Act.” Issuers are being more honest about their upfront pricing, Valentin says, and are restricted from the old industry practice of revising rates at any time for any reason. As Bloomberg Businessweek’s Karen Weise reported in July, the legislation has instilled a “forced rationality” in credit-card companies.

The New York Fed, in a report published yesterday, offered more data about the country’s credit-card habits. The number of open credit-card accounts has fallen 23 percent from its 2008 peak, to 383 million. And balances on those accounts are 22 percent down from their peak in the same year, from $866 billion to $672 billion. (Delinquency rates for student loans and home equity lines of credit rose.) That’s part of a general decline in household debt, which fell 0.5 percent in the second quarter of this year, to $11.38 trillion.

Fans of plastic still have plenty to curse credit-card companies about. This $20 billion-and-growing bonds trend, though, is a rare signal of a saner industry.