Chad Gray_

Credit Card Crunch: Creating a New Generation of Subprime

Thorough write-up, but I agree with Dussault Capital's comment above about the "en masse" drop in FICO scores. Very possible that Fair Isaac adjusts the magic formula and the curve will shift. This isn't unlike the administrators of the SAT tests who, in the mid 90's, decided to grade the test on a curve to prevent scores from continuing to decline - problem solved.

The other equally likely scenario is that the FICO scores do drop in aggregate causing credit card companies to lower their cutoff. They've got X billions of dollars that they'd like to lend to keep up with their growth targets etc... Much like a university who has X thousands of seats to fill and the bar gets drawn accordingly.

Of course this is all an inconsequential argument. At the end of the day, those who had been buying credit ABS's are going to be much more selective, and CDS insurance will be much harder to come by. That will dry up the source of funds available to lend and the overall lending pie will shrink.