[Editor's Note: Today's blog post is by guest author William Seebeck. I've known Bill for decades, going back to our time working together at Lexis-Nexis in Dayton, Ohio during the 1980's. Bill has a wealth of experience in online systems, banking, publishing, and public relations.]
By Bill Seebeck
While the government and the Congress have been propping up the banks with billions of dollars, the banks have not been spending all their time figuring out how to begin lending again, they have been using the money to contract rather than expand with drastic impact to consumers and the economy.
The banks have assigned just enough staff to create the illusion that they are lending, but in fact they have been hiring hundreds of collection agents, reducing lines of credit, increasing rates for bank charges and in the credit card realm, dumping accounts that always pay on time in favor of accounts that they can push over the edge with more fees and increased debt in an effort to gain more income.
It is fast becoming known in the credit card world that in March the banks will increase rates on millions of customers. The annual percent rates (APR) will change and the consumer once again will take it on the chin big time.
These predatory actions are helping to make it very clear that there is another shoe yet to drop in the banking industry and that is the credit card business.
With the collapse of the asset-backed securities (ABS) marketplace, the banks took a big hit. First, it was with mortgages and now it will be with credit cards. Yes, just like with mortgages, since 1987, banks have been packaging credit card debt and receivables into what is called credit card asset-backed securities.
How does it work?
Over the past 12 months, we have come to know about how mortgages were turned into securities (mortgaged backed securities). The same can pretty much be said for turning credit card debt and receivables into a security (credit card backed securities).
In the credit card model, the bank that issues the credit card bunches up groups of accounts or receivables usually into the form of a bond "backed" by these accounts or receivables and sells them to a trust. In turn, the trust issues securities backed by those receivables.
Now, here is where I believe the process becomes risky. The bank that issued the card and "sold" the account or receivables still services the account BUT, the assets that were "sold" have been removed from the bank's balance sheet.
Why is that important?
It's important because since the assets are no longer on the bank's balance sheet, the bank can reduce its capital requirements and seek new accounts to make for the ones "removed" from the balance sheet. Capital requirements are the reserves that banks must put aside by law to essentially protect the bank's business. These funds can't be tampered with and must remain on deposit, just in case.
What happens next?
When you, as a credit cardholder pay your bill each month, that money goes into the trust. Those funds are used to pay those that have bought the Credit Card backed securities.
So what happens, if there is a slowdown in people paying on their balances?
Well, as you can imagine, the bank's are in trouble, not only because you owe them money on the balance they have lent you via the card, but also because they have already sold your debt/receivables and there is less money in the trust to pay the investors. Also, when your balances increase, it means that the banks can't add as many new accounts and must maintain larger capital reserves. Not good for them or you.
The Banks and Your Card
Banks want you to use your credit card because it creates more debt/receivables for the bank to use as noted above. The banks do not like cardholders that pay their balances off in full each month because then the bank doesn't get to assess finance charges or to have reason to raise their APR rates.
When the growth of the banks portfolios of card users slows down, the bank looks for other ways to still get what it needs from the card accounts that remain in its portfolio.
One of the ways of doing that is by raising the basic Annual Percentage Rate they are charging on all accounts and then increase all kinds of fees across the board. That is what I believe they will do in March. Further, I believe that the banks will also seek to close accounts that are not producing an ever-increasing amount of fees. It will tell the customer that their basic rate is being raised and give them an opportunity to close their accounts and move elsewhere.
Not a pretty picture folks, but neither was it on March 15, 44 BC, when Julius Caesar went to the Senate.
© 2009 WBSeebeck
[Correction: This blog post was updated March 2, 2009. The prior entry on February 23, 2009 incorrectly included a draft instead of the final version. My sincere apologies to Bill and to I've Been Mugged readers.]