FINANCE: The Debt Trap

The credit Trap - A set of NYTimes articles definitely worth reading on what is sure to be the next big ding to the US economy - credit card debt. A good portion of the Tier I assets on the balance sheets of banks like Citi are consumer credit card loans. Its easy to imagine that those assets will prove to be just as unreliable as the MBS CDOs (mortgage backed securities) that they recently wrote down.

I imagine what makes selling credit cards to people already massively in debt so attractive for a bank is that there is a good chance those people will continue running up debt. credit card debt is very attractive to a bank - assuming consumers don't default. Whatever debt consumers run up is booked as an asset on a bank's balance sheet while the bank gets to book income in the form of interchange fees as money is spent and on interest fees and late penalty charges as the de facto consumer loans are serviced. This arrangement works fine for everyone until the consumers can no longer service the loans and are thus forced to default on the debt - at which time the bank's credit card loan assets need to be written down. A state of affairs that must just result in another liquidity crisis as banks end up capital ratios below the acceptable level. But if you're rewarded based upon only a given year's performance, you might just not care...

Another interesting element from an FDIC website page:

These intangible assets are commonly known as purchased credit card relationships (PCCRs). PCCRs represent the right to conduct ongoing credit card business dealings with the cardholders and normally are recorded as assets when a bank purchases existing credit card receivables at a premium and has the right to provide card services to the cardholders whose credit card accounts have been purchased. PCCRs may also be acquired when a bank purchases an entity that owns a credit card portfolio.

And apparently PCCRs are counted as a Tier 1 Capital...

PCCRs are one of only a few intangible assets that are not deducted from Tier 1 capital, subject to certain limitations. A deduction of all or a part of the PCCRs may be required if the carrying amount is excessive in relation to their market value or the level of the bank's capital accounts.

According to this IHT article, citibanks credit card recievables amount to approximately $91 Billion.