Credit Card Companies Gone Wild and Other Economic Happenings

Plenty of stories running out there. I will try and take a look at a few.

Credit Card Companies Gone Wild
I really have no real explanation for the lengths credit card companies are going to try and go to alienate their customers. The immediate blow up of credit card rates (depending on lour start point, maybe 50-100% higher!) is a puzzling move (via Clusterstock):

Why Citibank Is Going Crazy Cutting Customer Credit Cards (C)

...That's not too helpful, and it doesn't address the thousands of people who have had their interest rates jacked up to 29.99%.

So we pinged Bill Hardekopf, CEO of Lowcards.com on the matter, and here are some key points he mentioned:

Citi had 92 million customers signed up for credit cards as of February 2008.

Default rates have increased in the past weeks. Additionally, delinquency rates (people paying 35 days late or more) have jumped up to 5.5%. Assuming that Citi somehow retained all 92 million of its credit card customers, that's over five million people. That's no chump change.

"Citi is looking for ways to shed risk and credit cards are a great way to do it." says Hardekopf. He mentions that if you mess up in the slightest, Citi will penalize you through a rate hike. This happened to his daughter who he claims has perfect credit and has been a Citi customer for over five years. She had one late payment in the past four years and apparently, that justified a rate increase to 29.99% - just like the rest of our readers.

Citi is one of the big banks with access to capital at all-time low rates. The jacking up of credit card rates is an obscene move that will only mean more charge offs in the future. For any and all that hold ANY credit card right now, you know what to do. This is ridiculous. I will be closing out my cards over the next week and will look into prepaid cards for Internet purchases.

Two side notes:
-Notice the difference in behavior here. Citi is on the hook (for now) for credit card losses, so they are moving to close as many lines as possible. Fannie Mae (FNM)/Freddie Mac (FRE) and the FHA are on the hook (by extension the U.S. government) for loan losses in mortgage loans, and they are mashing the gas pedal as hard as possible!!

-Karl Denninger of Market Ticker wrote about a similar experience with Capital One and in the article he mentioned the bank PenFed as a possible alternative bank for use. I bet all the hits that Market Ticker sent that way probably shocked those guys!

The Curious Case of Bove Button

What can one make of Dick Bove's actions today? An alert reader at Zero Hedge had this great pickup from a CNBC show Bove was on THIS MORNING at 8:05am. Cannot embed, so follow this link.

At the 1:15 mark Bove predicts that Wells Fargo's (WFC) earnings will push the stock up higher today due to their beating estimates.

If that was that, who cares. Dick Bove is all over the place on banks anyway and wrong for the most part.

The really hilarious part is that at MID DAY TODAY Dick Bove outright downgraded WFC to a SELL!!

So from 8am to about noon Mr. Bove had a change of heart on WFC. I would wonder if this skirts the line on illegal, but I am sure it is all fine. Plus, who is going to check on it anyway? Easily the most fun event of the past month, which generated this leader from Zero Hedge:

Market Tanks After Dick Bove Downgrades WFC
If this is the kind of garbage data that moves the market, then fuck this sh#t.

Oh man that is funny.

Confident, Confident Dry and Secure, Raise your Hand, Raise Your Hand if Your Sure
After watching the late day action in the markets and trying to look over the multitude of rumors and possible catalysts for a late day change of direction I can arrive at only one answer. A little help from the 1980's:


Now I have been accused (by an anon reader in the comments section of the Housing Time Bomb) of not really seeing the real world. I would submit that much of the stock market rally since March has been built on a illusionary confidence that was engineered by the government, hand in hand with the banks, to quiet things down so people would move along. Maybe I am crazy, or maybe I am on to something. Surely the facts can elucidate the truth.

In no particular order, I will post some headlines of important information with some commentary which speak to the real world as it exists, not as it is spun on CNBC and the government.

Monday's Reverse Repo Test A Disaster?
Rumors abound that the Fed's test cases of Reverse Repo actions were pretty poor. The Primary Dealers are not able to help, and thus the Fed is looking to tap the money market funds (guarantee expired last month, what a coincidence!) for their much anticipated "withdrawal of liquidity" from the markets. In September I covered the Fed's targeting of the money markets as an area for concern. I think large holders of cash in Money Markets will not want crappy assets from the Fed backing their buck, but I am crazy after all.

Wells Fargo: The First Leak in the Dam?
The author of the Housing Time Bomb, of whom my brain is an identical twin so I am told, finds some meat from Dick Bove that I guess led him to downgrade the stock:

Bove said the “most disturbing” thing about Wells Fargo’s results is that loan losses seem to be accelerating. Assets no longer collecting interest climbed 28 percent to $23.5 billion from the second quarter, Wells Fargo said, while the reserve to cover future loan losses grew by $1 billion from the second quarter to $24.5 billion.

How can loan losses be accelerating at this stage of the "V" shaped recovery? How indeed one may ask.

Stocks turn lower as note on banks spooks traders
Why would stocks, in the midst of a bull market, turn lower on one man's (who has been very wrong before) call on one bank stock? If WFC is a well-known entity and their books are solid, this would be ignored.

Galleon Group to shut down hedge funds
Insider trading rises to the surface and torches a large firm. I am sure they are the only ones doing this sort of thing. And forget about all the phone lines being tapped, nothing to see here.

SEC Votes Unanimously In Favor Of Dark Pool Regulation
I have no idea how these work, but I know the trading system likes them.

Pay Czar Will Sock Top TARP Takers With Huge Pay Cuts
The best way to get a market sell off is to threaten Wall Street with any kind of action. This headline alone may have been the culprit today.

There are many more.

My point is that the "confidence" as it exists is paper thin and depends wholly on an ongoing marriage of easy money and a free hand for banks. If this charade can somehow result in an organic real recovery, then all will be well. If it cannot, things will look very strange when unemployment is at 12%, foreclosures are rising even after the modification programs, car sales collapse again, and the DOW is at 15,000.

Raise your hand is you are sure of the following:
-Home sales will continue to increase if the first time home buyer tax credit is not renewed (or extended even higher to $25k and every home owner qualifies.)
-Car sales in November will match those in August
-The Banks can repay TARP and exit all government loans and just use the regular sources of funding and have no problems
-Residential paper can be marked to real value and no capital will need to be raised
-Commercial Real Estate vacancy rates do not matter at all
-Unemployment does not matter
-Shadow inventory is a myth

I could go on.

How about it? I wish we could do a real science experiment here. For one morning just have news wires full of "Fed to end MBS purchases, Fed to raise rates, Fed to exit bank lending facilities, Mark to market to be re-instated" and lets see what's what. What is your take on where the stock markets would be then, higher or lower?

Comments

[neers87]

Not a comment on the Mkt, but rather relating to CC practices of financial institutions. Have a 770 credit score, I know this from recent refinance of mortgage. HSBC card with 7 years history paying a fixed rate of 7.9%. Just received a letter stating that the rate is going to go to prime plus 10.????%. Currently that would yield @ 14%. How is it that they can change a contract for fixed rate on an active current account with excellent history to a variable? I have the option of opting out, maintaining my current rate till the thing is paid off, Current bal @ 2k. but losing access to utilize the card further. I'm considering a run-up and opt out strategy just for kicks, I really don't need to do this, but I figure, my current availability of credit is going to take a hit and from cash flow standpoint I should just hang onto any and all funds and run this card up for any purchase I had considered for the next year.

2009 Oct 22 06:55 AM

[Economic Disconnect]

neers87,
My wife and I are in the same boat. No reason for this kind of customer abuse other than some kind of desperation. This would be a great moment for a new CC company called "You Deserve It" that will only charge 1%-2% over their own borrow rates and extend that CC rate to the best borrowers. Sure, the profit margin is small, but tthink of the volume of business it would command. Any have some start up money?

No advice on anyone's own situtaion, but I am closing out my cards after this ridiculous gouging attempt. I refuse to play.

2009 Oct 22 07:27 AM

[Jason722]

"If this is the kind of garbage data that moves the market, then fuck this sh#t."

Nice. Make an effort to remove the 'i' and leave the f-bomb out there in all its glory? Editorial excellence! :)

2009 Oct 22 07:48 AM

[BAC PL]

That you're surprised by the increase in credit card rates (it's happening across the board) is fairly strong evidence that you've not made the connection between these actions and the credit card legislation that's the prime mover.

Our Congress and President have decided that they know better than the free market, and have passed laws that eliminate differential pricing for riskier consumers. Essentially, the good credit risks will now have to fund the deadbeats. If that sounds like an idiotic move -- look at how the government's meddling in pushing mortgages to people who should never have gotten them worked out -- then you can understand how frustrating it is to people in the card industry, who are simply adapting to the new reality. Since when has the government interference made *anything* more efficient? How about never? Oh, and forcing low risk, healthy young people to buy more health insurance than they need is from the same bag of tricks.

The hits just keep on coming.

p.s. Regarding your response to the first commenter, look at Steve Case's Revolution Card.

2009 Oct 22 07:51 AM

[john s. gordon]

citi is probably the worst offender in the realm of credit-card abuses.
my mrs. had one over-limit transaction & they tried to whack me with a 29.99999. the only solution to that is pay off the account in full & cut up the card.
greed causes financial loss to the transgressor.
> jack

2009 Oct 22 09:13 AM

[Old Trader]

Bove's been bullish on the big banks all along, from anything I've ever heard him utter (he's a fairly regular guest on WBBM's "Noon Business Hour" here in Chicago). I guess he's had his "come to Jesus" moment.

2009 Oct 22 09:15 AM

[Philly Jim]

If they continue to alienate paying customers with little risk, they will only hurt themselves, but only in America. I have a feeling that Citi is in self-destructive mode, kinda like GM, all in an effort to minimize it's U.S. presence and focus on their international efforts. Believe me, Citi is booming overseas! Doing business in America is becoming somewhat of a liability for multinational companies.

2009 Oct 22 09:42 AM

[Economic Disconnect]

Jason 722,
I missed that one, glad you picked it out as very important.

BAC PL,
I had never heard of that (Revolution) card, but it seems to have had limited success. Do you have any personal experience with that card?

2009 Oct 22 09:43 AM

[ctjaeger]

Due to ID theft, my credit score was completely trashed. All 3 of my CC issuers raised the rate significantly (from the 7% - 12% range to the 29% - 35% range). Payment history and everything was very solid - no delinquencies or late pays in over 10 years. When trying to get them to understand the situation and revert to the previous rates, they refused. These cards are now closed and paid off and I only use cash. If one didn't have the ability to pay them off, tripling the interest rates could crush a household income statement.

2009 Oct 22 10:22 AM

[David Van Knapp]

Don't cut off your nose to spite your face. The interest rate on a credit card (even if obscene like 29.99%) is irrelevant if you pay your card off in full each month, on time. In this day and age of electronic payments, making the payment on time is a snap (no need to worry about mail delivery). If you hold only one card (rather than several), that one is easy to keep track of in terms of getting it paid off on time. Pay it the same day you receive the statement each month.

I hold one card only (it's from Citi, I like the airline miles), use it all the time, and pay it off on time in full each month. I turn down all the offers I get through the mail or over the counter (at stores) to open up new credit cards. I realize that some people need to carry credit over from month to month, but for those who don't, the percentage rate is not a factor.

Don't mistake this as a defense of the practices described, I hate them. But don't give up a good benefit (the grace period and airline miles or the like) just to get back at the banks. They don't care.

2009 Oct 22 10:26 AM

[Economic Disconnect]

David,
I understand, but what about $100 yearly fees even for those "no balance" card holders? You may think $100 is no problem for their service, but it is still a ripoff. I know the banks dont care what I or anyone else does (unless a lot of people do it) but I am out.

Funny personal story;
I used to be a big gearhead and loved Chevrolet. I have had a GM Visa card forever and have enough points towards a purchase to get about 4k-5k off a new GM. Problem is after buying an Infiniti a few years ago (and anew one last year) I will never buy another brand! Guess those points are wasted!

2009 Oct 22 10:57 AM

[Sham718]

so citi who let you know well ahead when you signed up for the card that if you go over your limit, you will pay a fee is not a justifiable reason that you were hit with a $29 fee? So, banks get kncoked for not disclosing and now banks are getting hit for disclosing as well...Maybe the consumer should own up to their responsibility in managing their finances and quit whining. Any credit card company would've done the same..


On Oct 22 09:13 AM john s. gordon wrote:

> citi is probably the worst offender in the realm of credit-card abuses.
>
> my mrs. had one over-limit transaction & they tried to whack
> me with a 29.99999. the only solution to that is pay off the account
> in full & cut up the card.
> greed causes financial loss to the transgressor.

2009 Oct 22 11:21 AM

[PainfullyAware]

No One Wants To Be A "Creditor" When The People With The "Greatest Debt" Are In Charge Of The "Money Fountain" And Reckless Abandon Rules The Day.

"Value" Does Not Change With Inflation/Deflation - Only The "Exchange Rates" Do.

"Tangibility" Is The Best Strategy In Uncertain Times.

CC companies are preparing for Amazing Losses and attempting to limit their exposure when the "Governmental Free Money Salve" Wears Off.

Nothing Is The Same Forever Unless Balance And Sustainability Are Reached.

How "Balanced" Is A System That Ignores Accountability and Accounting ???

2009 Oct 22 05:05 PM

[kilnwatcher]

My Sears CITI account was hit with a $30 late fee when the due date was moved up 10 days prior to the monthly date due it had for the 30+ years I have had the account... dating to the days when Sears had it's own credit. I called and asked them to remove the fee in that I had never been late on this account in the past. They then informed me that the interest rate on my account had been raised to 29%. This was several months ago and the late fee has never been removed. I have not used my Sears card since and will not be buying my appliances, yard equipment and auto parts at Sears in the future. These purchases will be made with local businesses and financed through the local banks where I hold my accounts.
Today I cancelled my CITI AT&T Universal Card because CITI raised my rate to over 20%... Again, I always make payments on time. I used this card to finance my small business. This account will be going to locally held banks as well. I can't believe that CITI wants to get rid of customers who have excellent credit ratings, pay on time and who manage credit wisely. What kind of customers do they want to keep?

2009 Nov 07 05:19 PM