Tuesday, October 30, 2007

Quick Takes: The Next Subprime

There is growing evidence that the non-recourse consumer debt is under stress. Credit card debt shares similar aspects to subprime; it has been sliced, diced, and re-packaged by Wall Street in the securitization market.

Both the amount of debt on cards and delinquency rates are rising rapidly over the past few months. The rising rates of bad consumer debt places the packaged securities backed by credit card receivables under pressure. In a situation eerily similar to the recent sub-prime crisis, these securities would decline in value and over-leveraged firms would face margin calls. Leading to widespread havoc and a lock-up of the market as illiquid issues could not be priced. It would make the meltdown during August appear to be a light-weight rehearsal for the focal tragedy performance.

Adding fuel to the situation is that many consumers are using plastic to stave off defaulting on their mortgages. The end game is pretty clear for most of these homeowners, and it is just a matter of time until most default both on their homes and credit card debt.

The $915B bomb in consumers' wallets
Americans have record credit-card debt and banks are starting to sweat an uptick in default rates, reports Fortune's Peter Gumbel. Why some fear this could be the next subprime.

Stressed US borrowers use plastic to delay default