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Fund Forward

Could Credit Card Debt Be Next $950B Blowup?

Amid the sobering talk of a possible recession, there were two pieces of news last week that are cause for additional consternation. First, bond guru Bill Gross of Pimco warned that the subprime crisis could linger for another two years, wiping out another $250 billion in loan defaults through the end of next year on top of the $900 billion worth of current questionable collateralized debt obligations and subprime loans.

Then, a convincing article appeared in Fortune making the case for a potential second credit meltdown, this time involving the $950 billion in consumer credit card debt.

Banks, which have been reporting their worst quarterly results in six years, have begun warning about credit card delinquencies now that over-leveraged consumers don't have the home equity to pay down this debt. Citibank Chief Financial Officer Gary Crittenden told analysts that the bank has set aside $2.24 billion for possible future defaults, as Citi is concerned about consumers' high balances and cash advances.

Deutsche Bank banking analyst Michael Mayo recently wrote, "We are in a heightened state of alert to monitor a potential domino effect." Making matters worse, credit card debt is not secured, as mortgages are.

Much as the subprime crisis has hurt a wide variety of banks and asset managers invested in asset-backed securities, a similar calamity in the credit card industry would have the same kind of ripple effects-most certainly affecting hedge funds, pension plans and mutual funds. As it turns out, even many money market mutual funds were exposed to risky subprime paper.

But not everyone agrees that a crisis is imminent. Some analysts say that credit card delinquencies are low, whereas banks were foreclosing on mortgages for months ahead of the subprime crisis.

Others say that whereas asset securitization of subprime loans was not accurately assessed or understood even by the credit rating agencies, financial institutions have proven themselves adept at securitizing credit card debt.

"The performance in the core consumer [asset-backed securities] sectors is expected to deteriorate modestly, but not enough to cause substantial downgrades," said Kevin Duignan, a managing director at Fitch.

(c) 2007 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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Recent Posts

Mutual Funds Must Go High-Tech-v. 3.0

Over the last number of years, mutual fund transfer agencies and shareholder communications companies have tried to convince shareholders to accept paperless summary prospectuses, proxies, trade confirmations and electronically stamped signatures. Fund supermarkets and web home pages have broadened their horizons to include market commentary, videostreaming and personal financial news. At the same time, exchange-traded funds, funds-of-funds, hedge FoFs, unified managed accounts, target dates, 401(k) auto enrollment and heightened awareness among people throughout the country of the difficulties of being retired-have taken off.

Test of the Massey Mine

Fund giant boards of directors at AllianceBernstein, American Funds, Fidelity, Vanguard and others are reportedly starting to bring about meaningful change in the corporations in which they are invested. Proof should come any day now, when the shareholder proxy votes from the annual meetings are released. Fund chief executive officers spoke about the power and influence their proxies wield in an interesting Reuters article last week, "Mutual Funds Seek to Shed 'Rubber Stamp' Tag."

Milestones

In 2011, 401(k) plans will turn 30, but the milestones the mutual fund industry has reached in this time are but a nanosecond in the history of U.S. retirement policy. Executives we interviewed for this special edition of Money Management Executive for the Investment Company Institute's meeting in Washington, speak to important milestones of the recent past and into the future. Look inside for observations and forecasts by Ted Benna, Robert L. Reynolds, Dan Fuss, David C. John, Steven Miyao and others.

At Age 30, It's Time for a Revamping for the 401(k)

This year marks the 30th anniversary of the 401(k), the revolutionary retirement savings vehicle that has been annihilating pension plans, empowering individuals to take part in the stock market-and, sadly, that left retirees with the misfortune of leaving the workforce in 2000 or 2008 very badly off. The cracks in the system are prompting many asset managers, regulators and retirement experts to take a hard look at 401(k)s and how they can be fixed.

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Lee Barney

Lee Barney served as editor of Money Management Executive from 2002 to 2010. Previously, at United Media’s Wall Street & Technology magazine and Risk/Waters Information Services, she covered financial IT. For TheStreet.com, she wrote the daily “Meet the Street” column covering a broad spectrum of market-moving events. Lee began her career as a reporter in Tokyo with The Japan Times and was executive editor of Spotlight magazine.