Real story behind credit card limit & declined card stories:THE CARD COMPANIES HAVE NO MONEY TO LEND [View All]

There has been a slew of stories in the liberal blogosphere about credit card companies arbitrarily and unilaterally telling card holders that their limits have been lowered, or declining routine purchases on cards, or even canceling cards.

The credit card companies are trying very hard to convince card holders that they did something wrong or that they have new card holder credit rating standards, and so on.

But that's not the real reason. The real reason is as clear as the latest headlines in the business section of any newspaper, and I wish I could shout this over and over again:

THE CREDIT CARD COMPANIES HAVE NO MONEY TO LEND TO CARD HOLDERS.

This is because, as with mortgages, the companies that appear to be lending you money are actually not doing so. They are "originating" and "servicing" the loans that are represented on your credit card bills. But for years, they have been using other people's money, and that source of money dried up back in October.

When you charge something on a credit card, that debt becomes a "credit card receivable." (It's called a receivable in the same sense as the bookkeeping term, "accounts receivable." It's money that is expected to come in shortly.)

These credit card receivables have been packaged into trusts, and trust certificates sold to banks, financial companies, and institutional and foreign investors. They are just like "mortgage backed securities," but they are called "credit card receivable asset backed securities."

The total amount of US "credit card receivables" is around $960 billion although not all of them are securitized. But in a peak year like 2007, the total amount of securitized credit card receivables was around $95 billion per year.

That market froze in October, which means credit card companies have lost the source of the money they were lending to credit card holders. That means investors will not buy credit card receivable backed securities or lend money taking them as collateral. Also, as people lose their jobs and fail to pay their credit card balances, credit card receivable backed securities look even worse to investors that mortgage backed securities. Credit card receivable backed securities have become "toxic assets" just like mortgage backed securities.

Bloomberg reports that Moody's estimates that the total amount of credit card receivable backed securities that will be sold in all of 2009 could be as little as $10 billion.

They have no money to lend you, but they want to make you think that you are unworthy of their money.

The shut down of the credit card receivable market contributes to the vicious downward spiral of the economy because as people can't use their credit cards, they spend less, which means lower demand for products which means more layoffs in the retail sector.

Here is a news story from Bloomberg about it:

http://www.bloomberg.com/apps/news?pid=20601087&sid=aInk6vXOwoB0&refer=home

Bank of America, AmEx May Suffer on Card Defaults

...

The market for bonds backed by credit-card payments, once a major source of funding for lenders including American Express, froze in October after investors demanded wider spreads on new debt. Companies issued $76 billion in securities last year, down from $95 billion in 2007, and may sell as little as $10 billion in debt this year, according to Moody’s.