Sunday, January 13, 2008

We're All Subprime Now

by Bill McBride on 1/13/2008 09:41:00 PM

From Wolfgang Münchau at the Financial Times: This is not merely a subprime crisis (hat tip FFDIC)

If this had been a mere subprime crisis, it would now be over. But it is not, and nor will it be over soon. The reason is that several other pockets of the credit market are also vulnerable. Credit cards are one such segment, similar in size to the subprime market. Another is credit default swaps, relatively modern financial instruments that allow bondholders to insure against default.
The article focuses on Credit Default Swaps (CDS) and suggests the current downturn could be longer than most anticipate (including me):
The German experience has taught us that persistent problems in financial transmission channels cause long economic downturns. Today, the really important question is not whether the US can avoid a sharp downturn. It probably cannot. Far more important is the question of how long such a downturn or recession will last. An optimistic scenario would be a short and shallow downturn. A second-best scenario would be for a sharp, but still short, recession.

A truly awful scenario would be a long recession.
And from Robin Sidel and David Enrich at the WSJ: High-End Cards Fall From Grace (hat tip Brian)
The luster on all those silver, gold and platinum credit cards is getting tarnished.

For the past few years, banks that issue credit cards have aggressively wooed affluent customers with lavish perks and fat credit lines. Now, that high-end strategy is coming back to bite the banks: There are growing signs that some of those consumers are having a hard time paying their bills.
Affluent customers aren't paying their credit card bills? How did the credit card companies define "affluent"? The same standard as the mortgage lenders: Fog a mirror, get a Platinum card?

We're all subprime now.