Next target for fear mongers: Credit cards

Filed under: Newsletters, Stocks to Buy, Financial Crisis

Banking analyst Meredith Whitney is credited with questioning assets on bank balance sheets given the collapse in the real estate market. Taking advantage of a complete lack of information, Ms. Whitney triggered a massive collapse of trust in an industry by claiming that mortgage-backed securities were worth far less than what the market had perceived.

While she may have had a basis for her claims, her assessment was more sensational than factual. Mortgage-backed securities are quite complex instruments whereby loans are sliced, diced and packaged for sale to a global market. With maturities extending 30 years into the future, it is unreasonable and unfair to assume that paybacks, even with high default rates will amount to what is currently priced into the market. The lack of understanding of the underlying security or loans at the individual level has created uncertainty that has yet to be resolved.

For fans of the original "Star Wars" movie, think of the weakness in terms of attacking the Death Star. That one hole was exploited (we can debate the merits of doing so later) by Ms. Whitney and those like her. Well, now Ms. Whitney is moving from one fire to the next. She is turning her attention to the credit card market.

Here it is expected that banks will suffer as credit card lines are withdrawn in efforts to reduce risk. In a statement today, Ms. Whitney said the industry will reduce credit by more than $2 trillion. At a time when consumers are losing jobs at an ever-increasing rate, a reduction in credit is "dangerous and unprecedented," according to Ms. Whitney.

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Next target for fear mongers: Credit cards originally appeared on BloggingStocks on Mon, 01 Dec 2008 16:35:00 EST. Please see our terms for use of feeds.

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