December 12,2008
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Shoring Up the Credit Card Industry, Pt.1 –
– Key Issues that Must be Addressed.New initiatives are already being instituted to stabilize our credit card industry. Among the faltering aspects or the industry are:
1) Detrimental loss of securitization.
2) Escalating default rates of credit card borrowers.
3) Plummeting quarterly reports of the credit card industry.
4) Loss of Wall Street's confidence in the market.
5) Loss of consumer confidence.Securitization had not gained spotlight until bad quarterly gains for the credit card industry were attributed to it. Securitization is the market of packaging up debt accounts and selling them to secondary markets. Up till now, this has been very lucrative. But, as of late, the securitization market is drying up. Most of the securitization market damage was caused by the housing market abuse and not credit cards. But, unfortunately, the card industry has been sucked into it and has suffered greatly for it. Behind-the-scenes critical revenues have developed into sustaining revenues through lean times. With the collapse of securitization, the credit card industry players were forced to deliver the bad news in their most recent quarterlies that that they couldn't pay the rent this quarter.
Here, is where the government can help. The industry was floundering for ways to revive interest in securitization by making the packages more attractive in any way they could. They immediately tried hiking interest, attaching more penalties for default, adding other fees and losing higher risk accounts. However, this had a bad effect in the industry's viability to it's consumers.
The government has taken a very different approach to the problem. They reason that, placing further burden on the consumers only makes the problems worse. So they've instituted a large bailout initiative not to fund the industry but to make the debt more secure. The government has earmarked a portion of the $700-billion bailout fund to guarantee some of the debt being offered for purchase. The moneys will only be used for covering charge-offs due to ‘roll-rates (these explained later). This doesn't throw extra money into the packages but does make them less risky. This is expected to attract securitization investors based on the lower risk presented. In other words, we're gambling that we can reduce default, not bang the, already hard-pressed, consumer for more cash as we drive them to bankruptcy.