

The Worst Is Yet To Come: Anonymous Banker Weighs In On The Coming Credit Card Debacle - jseliger
http://executivesuite.blogs.nytimes.com/2008/11/25/the-worst-is-yet-to-come-anonymous-banker-weighs-in-on-the-coming-credit-card-debacle/?em

======
Hoff
Profit always comes from risk.

If I can borrow a house and live in it and get bailed out in the ensuing
default storm, I win.

If I build my house in an area prone to flooding and can get bailed out, I
win.

If I can originate a gazillion loans at a fee and without repercussions for
defaults, I win.

If I can run a company into the ground while getting nice perks and a salary
without any repercussions, I win.

If I can get elected to high office through lies or distortions or conduct my
term in an incompetent or questionable or criminal fashion and leave the mess
for the next office holder, I win.

Welcome to capitalism, now increasingly featuring socialized risk.

And with the recent discovery of Too Big To Fail, this form of capitalism just
gets better.

------
netcan
_A good credit score does not equate to the ability to repay debt._

This seems to be a recurring theme across the world. I tend to be left of many
debates on this forum. But this is a strange thing to have settled on: It is
the _lenders'_ responsibility to make sure that their customers can afford
repayment. _Consumers_ will take as much credit is offered to them. The
complaint is rarely about making information available to consumers. It's
about making the correct decisions for them.

Don't get me wrong. I'm not blaming media or politicians for taking this line.
It seems true. People do not seem to be able to manage their debt. A stable
solution will effectively put the decision of how much to borrow in the hands
of someone else: Banks, Governments etc. not consumers.

Then this article goes on with the assumption (again, seemingly correct) that
consumers are incapable of resisting the banks' marketing. Since many
desicions are essentially made at the bank, they make a decision on a high
credit line at a high interest rate. He suggests correcting this by making
unsolicited direct marketing illegal. Supposedly, consumers would then
actually look for a card with a reasonable interest rate instead of accepting
whatever is given to them.

~~~
mynameishere
Substitute the word "adult" for "consumers" in what you say,

" _Adults_ will take as much credit as offered to them." (No, they won't.)

"A stable solution will effectively put the decision of how much to borrow in
the hands of someone else: Banks, Governments etc. not _adults_." (Wrong
again.)

etc. By contrast, if you replace "consumers" with "children" then it still
makes sense.

Really, whatever solution we come up with needs to punish people according to
the rules as they stood at the beginning of the game. No new _ex post facto_
rules, please. Banks and ( _some_ ) adults bet on black when the wheel went
red. Let them pay.

~~~
raganwald
> Substitute the word "adult" for "consumers" in what you say, "Adults will
> take as much credit as offered to them." (No, they won't.)

What you are doing is suggesting that being an _Adult_ carries with it certain
behaviours such as not spending more money than the adult can afford to repay.
However, the word Adult actually means being of a certain age, and perhaps you
would like to assume that everyone of that age has that level of maturity and
prudence.

I think what you really mean is that adults ought not to o these things, and
if they do these things, they are defective in some way, and therefore don't
count. This is a little like those drug studies where anyone that dies while
taking the experimental drug is tossed out of the study.

So when I say "Martha over there got a $26,000 line of credit even though she
is a home-maker with no income and no assets in her name," you say "Martha
isn't really an adult, she is a foolish child in a woman's body."

The simple fact is, adults do many things you and I might consider reckless or
illogical such as borrow more than they can afford.

As proof of this, I give you George W. Bush.

~~~
nostrademons
When I was a kid, I was (naturally) a big fan of kid rights. I always thought
that kids should be able to vote, enter into contracts, be considered legally
a "person", drive if they could reach the pedals and see out the windshield,
and decide whether or not they went to school.

My reasoning for this was not that kids were so smart or mature that they
could do this responsibly. It was that the vast majority of _adults_ were dumb
and immature and can't do this responsibly, and yet we give them all these
rights and privileges anyway.

Since becoming a legal adult in 1999, I have seen little to make me believe I
was wrong in this assessment.

It's interesting - if you consider children=dependent and adults=independent,
modern society has made children of us all. _Everyone_ (except wackos like the
Unabomber) is dependent on someone else now - the economy is just too
intertwingled to function without other people. Folks leave the nest of their
parents to become dependent upon their employers, and then leave that behind
to grovel at the trough of investors, and if that doesn't go well, they become
slaves of the credit card companies. That seems to be the price we've paid for
all our cool new toys.

I, for one, welcome our new Neverland overlords.

~~~
aaronblohowiak
Not all people are created equal.

There are distinct changes in the brain that happen, as well as changes in
hormones that also _may_ support age-based restrictions on activities.

------
sethg
I don't think the lenders were being terribly irrational. Credit-card issuers
make their profits from interest and late fees. If a customer racks up a large
balance on a card, makes only the minimum payment for years and years, and
then defaults, the credit-card issuer will walk away with a net profit, even
if it has to write off the principal of the original loan. And usually
customers in this situation can be squeezed for quite a while before they
default.

One simple way to ameliorate the problem in the future would be to require
every credit-card statement to include a warning: "If you do not borrow any
more on this card and make only the minimum payment every month, it will take
you ____ months to repay your debt completely." Such a requirement was
considered when Congress amended the bankruptcy code a few years back, but the
bank-industry lobbyists kept it out of the final bill. That should tell you
how much the banks wanted their customers to be fiscally responsible.

~~~
Retric
Don't forget a 25% default rate per year can still be cash flow positive when
they are charging a 29% interest rate and adding on other fees.

~~~
Retric
Just adding the math for those who might have missed my point.

If 3/4 of people avoid default the rest don't so .75 * 1.28 = .9675 which is
less than 1, but the 25% that fail don't all fail on the first day so they are
probably going to average ~6 months of payments so .25 * .5 * .29 + .9675 =
1.00375 which is larger than 1. Add in some fee's and whatever principle
people payed back before defaulting and you are making money.

Next year some people that made it this year will fail but your adding some
people to make up for those that defaulted last year. In the end you need
people to average 4 years before defaulting which I suspect is normal.

~~~
sethg
_nods_

And until the card issuer officially writes down the debt, the principal that
the borrower owes to the issuer is counted as an asset on the issuer's balance
sheet.

~~~
Retric
Yep, but they don't write down all of that debt they first charge insane late
fee's and interest for a few months and then sell that highly inflated debt to
a collection agency or package up that debt before it defaults and sell that
to wall street.

------
noonespecial
Every once in a while I sense what true panic would be like when I look around
my local WalMart and ask myself _"what would happen if all of those credit
cards suddenly stopped working?"_

I'm more afraid of this than even the darkest jihad plot from the most extreme
nutjob in the middle east. I'm not much for the TEOTWAWKI doomsday scenarios,
but if all of the credit cards stopped working? _damn! that'd be tense._

~~~
bd
I find this very hard to understand.

Credit cards are virtually non-existent where I am (despite a strong marketing
push). For cash-less payments or ATM withdrawals everybody just uses debit
cards.

If people go to minus with their accounts (it's possible also with debit
cards), they feel really bad.

How can society become so dependent on credit cards that you can get seriously
scared what would happen if they stopped working?

~~~
jimbokun
Where do you live?

I'm guessing not the United States. Yes, it has gotten that bad here.

~~~
bd
I'm in Europe.

I do understand that it is bad in US, but not how it became so.

It probably isn't just because of "credit" aspect of the credit cards.

Even here people buy stuff on credit. Just it is structured in a different way
- credit is bound to products, not people. For example it's popular for
retailers to offer payments over longer time for more expensive items.

If this stopped to work, nothing much would happen. Few people wouldn't have
large screen TVs, or leather sofas, or similar stuff.

Maybe US problem is that credit was too fluid, so that people started to use
it to pay for essential things (food, rent, bills, etc)?

~~~
noonespecial
Yes that's it exactly. I've even known some people to use cash advances on
their credit cards to pay their mortgages.

The problem goes much deeper than that though. Many people use credit cards
for all purchases and have structured their lives around not having ready
access to cash even for necessities like food. The credit cards have become
vital time lag buffers for cyclic pay.

The real panic would occur when people realized that they were out of food,
have no cash and payday is 3 weeks away.

The bank that issued the credit card has folded, so it no longer works. You
are hungry, and there are 200 people standing next to you in the same
predicament.

Many _many_ people have no (zero) cash reserve and don't really understand why
this might be a _very_ bad thing.

So I am afraid.

~~~
bd
Wow, I didn't realize it was this bad. People can be very silly.

As the old saying goes: _"civilization is only four meals away from anarchy"_.

<http://www.timesonline.co.uk/tol/news/uk/article492642.ece>

------
Dilpil
A fool and his money are easily parted. True for consumers, true for banks.

~~~
nradov
Or as the great Gordon Gekko once said, "A fool and his money are lucky enough
to get together in the first place." :-)

------
ivankirigin
Actually, the worst to come is the unfunded pensions (public & private) and
social security. That is a debacle foreseen since the 30s.

------
dhimes
Holy smokes! A $7000/month mortgage on $150K per year? That's a HUGE mortgage
payment. (Mine was considered steep at around $2K/month).

------
fbbwsa
More interesting to me is the question of what actions can be taken to get on
the winning side of this.

If its really so inevitable, what sort of positions can I put on to profit the
most from this?

------
known
Credit for investment purpose is encouraging. But not for consumerism.

~~~
jerf
You'll find that if you dig down into the situation, credit for consumers _is_
credit for investment purchases. That's one of the root problems here; your
default doesn't just hurt you, it hurts everyone invested in you. And that
cascaded, big time.

------
nazgulnarsil
these corrections have lasted a historical average of 17 years. The current
one started in 2000 so we have another 9 years to go.

~~~
smanek
care to share a source on the 17 year claim?

~~~
nazgulnarsil
<http://www.zealllc.com/2007/longwave3.htm>

------
RobertL
I can't believe that anyone still believes anything they read in the NY Times.

------
lst
Side note:

Everybody telling you that there is a solution for the current world-wide
financial crisis is simply a non-expert.

There has never been a situation like the current one in history:

The Big Failing of Communism is already past. The Big Failing of Capitalism is
currently happening.

You rich ones should prepare...

P.S. You don't need to believe me, you will simply see it happening soon...

~~~
jerf
The Big Failing of Communism is past.

The Big Failing of "Capitalism That Thought It Was Rich Enough To Afford Some
Communism" is happening.

Unfunded pension guarantees? Governments ordering banks to make loans they
can't afford? The failure of government corporations like Fannie Mae and
Freddie Mac due to being disconnected from the market? Massive nationalization
of debt in response to the crisis?

Very little of this crisis is "capitalism" in any sense of the term.
Government meddling is present in every aspect. Nay, _massive_ government
meddling.

~~~
lst
There are simply too many bad (really bad) things growing exponentially in our
current times.

(Nobody wants to hear it, but it will come: we all will be poor within the
next few years. That is, the small world-wide percentage of still-rich-ones
will all go away...)

So, the whole planet will have a 'reboot', and since a reboot starts from 0,
there will be an exponential growth of wealth for everybody!

Now, the above is either foolish or prophetic...

