Belvedere Research

U.S. Credit Card Performance: More Deterioration in April

Visa & Mastercard are just payment processing companies, like PayPal or whatever. They provide a service that offers convenience and deserve to make their profits for doing so. The banks (COF, BoA, Providian, AmEx, etc...) that extend the lines of credit are not so clearly adding value to the economy and their profits are far less deserved.

COF for one (I'm short w/ puts) has fallen about 20% in the last month or so, and I believe they have a ways further to fall. Issuing banks have several factors squeezing them right now:
(1) debt already on the books is much less likely to pay off than they thought when they issued. "thought" may be too generous, maybe "hoped" is a better word
(2) overextended consumers, and those who file bankruptcy etc... will (eventually) stop charging as much to their cards as they feel the pinch which bounds their profits. Admittedly, in the short term, they may charge more because they have to, but you can only spend more than you make for so long...
(3) As more consumers/voters get overwhelmed with their credit card situations, there will be more public outcry and vilification of the credit card industry for their shady double cycle billing and high APR fees. Congress will get in on the act and will pass legislation limiting the fees that card companies can charge (it's an election year after all!) and this will SEVERELY squeeze profit margins. Intuitively, I have to believe that a lion's share of card issuers' profits come from penalties and fees that could be (and probably should be) curtailed.

I'm talking my book here since I'm betting against COF, but in my opinion COF will be the CFC (countrywide) of 2008...