In the 1967 film, The Graduate, Mr. McGuire is counseling Ben Braddock (played by Dustin Hoffman) on what field to go into now that he has graduated college. The dialogue went like this:
Mr. McGuire: I want to say one word to you. Just one word.
Benjamin: Yes, sir.
Mr. McGuire: Are you listening?
Benjamin: Yes, I am.
Mr. McGuire: Plastics.
Benjamin: Exactly how do you mean?
Mr. McGuire: There's a great future in plastics. Think about it. Will you think about it?
Not exactly the same plastic that banks ventured into. But their type of plastic (credit cards) had an equal promise of a great future. But is this the next financial tsunami? Are we destined to be swamped by a sea of molten plastic resulting from the next financial meltdown that is now being talked about in hushed tones in the corridors of America's banks, while the media begins to turn up the volume.
A recent story on CNN said, "major banks have been hit hard by bad mortgages. Now, fears are growing that troubled financial institutions are going to have another consumer headache to deal with: credit card defaults."
"There have been no shortage of warnings about the business as the economy continues to sputter."
"Just last month, Bank of America CEO Ken Lewis warned lawmakers at a high-profile Congressional hearing on the government's $700 billion rescue plan that he had no doubts 2009 would be an "awful year" for the credit card industry."
Fearing a wave of credit card-related losses, banks have been aggressively setting aside funds to help cushion the blow. One problem, note analysts, is that banks aren't quite sure just how severe the losses will be.
Industry charge-offs, or loans a bank considers to be uncollectable, climbed to a historic high of 7.73% in December. Most analysts expect that figure to head higher as more and more people find themselves out of work.
Unemployment rates, widely viewed as the most reliable indicator of future credit card losses, climbed to 8.1% in February - its highest level in 25 years.
A widely used rule of thumb is that charge-offs typically climb to 1 percentage point above the unemployment rate. And many expect the unemployment rate to keep rising throughout the year.
Of course, this is not the first time that credit card issuers have had to contend with relatively high unemployment. During the recession in the early 1980s, the jobless level peaked at 10.8% in late 1982. But some experts point out that this is a much different time for the industry.
Not only did a much smaller slice of the American public own a credit or charge card, the amount of credit issued by the industry was just a fraction of what it is today. As of January 2009, the amount of outstanding credit in the industry totaled just under $1 trillion, compared to just $70.5 billion in 1982.
But some analysts point out that the magnitude of any future credit card problems will be mitigated by the fact that most banks' credit card businesses are a fraction of the size of their ailing mortgage portfolios.
"You are not going to have a complete redo of the subprime mortgage mess because it is simply not the same scale," said David Robertson, publisher of the industry trade publication Nilson Report.
What is also encouraging, notes Robertson, is that banks' credit card operations have become much more adept at adjusting to tough economic times after years of practice, including the downturn that followed the dot-com bubble earlier this decade.
Well I hope David Robertson is right. We had a pretty good day today--the Dow was up 5.8% and Citigroup said they made a profit in the first two months of this year (although we'll wait and see how much of that is left after the charge-offs).
I guess the whole point is that we can't become paralyzed by fear of the next disaster. We have to continue to take care of our customers as best we can so we can begin to recover and prosper together.
Cheers,
Nick Vaglio, CFMP
