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Merideth Whitney


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Whitney Sees Credit Cards as the Next Crunch: Report

MERIDETH WHITNEY, BANKS, FINANCIALS, CREDIT, CREDIT CARDS, CONSUMERS, STOCK MARKET, ECONOMY

Reuters | 10 Mar 2009 | 07:16 AM ET

Prominent banking analyst Meredith Whitney warned that "credit cards are the next credit crunch," as contracting credit lines will lower consumer spending and hurt the U.S. economy.

 

"Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is under-appreciated is the role of credit-card availability in that spending," Whitney wrote in the Wall Street Journal.

 

Although credit was extended "too freely over the past 15 years" and rationalization of lending is unavoidable, what needs to be avoided was "taking credit away from people who have the ability to pay their bills," said Whitney, CEO of Meredith Whitney Advisory Group.

 

 

Whitney said available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone, and she estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010.

 

"Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy," Whitney said.

 

There is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon, she said.

 

"Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57 percent contraction in credit-card lines," she said.

 

Over the past 20 years, Americans have used their credit cards as cash-flow management tools, she said adding that 90 percent of credit-card users revolve a balance at least once a year, and over 45 percent of credit-card users revolve every month.

 

Whitney said the five lenders which dominate two-thirds of the credit-card market need to work together to protect one another and preserve credit lines to able paying borrowers by setting guidelines on credit.

Whitney Sees Credit Cards as the Next Crunch: Report

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Guest JackRiver

I really didn't want to promote this article, but I felt it proper to give it full viewing.

 

I have a few quips, but one jumps out at me on first reading.

 

The article and Whitney, "Although credit was extended "too freely over the past 15 years" and rationalization of lending is unavoidable, what needs to be avoided was "taking credit away from people who have the ability to pay their bills," said Whitney, CEO of Meredith Whitney Advisory Group."

 

Me:  I'm trying to figure out how many people with this so called ability to pay their bills are maxed out on their credit cards.  I have the ability to pay my bills and my credit card providers could cut my lines by 99% and I wouldn't notice the difference.  Clearly many people aren't like me, but I suspect that people who can pay their bills aren't maxed out on their credit lines.

 

With that said, I guess it makes some sense to take a stab at her broader concern, the aggregate lowering of lines of credit.  Like above, the article leaves out the fact that for reduction in credit lines to actually effect consumer spending and the velocity of money, credit lines need to be reduced below the present or average outstanding balances on the cards.  Unused credit lines do not factor into the money multiplication process though I'm not familiar with bank accounting so I do not know if it effects money supply but if money doesn't turn over at least once then it is as if it doesn't exist from a multiplication stand point (i.e. 1 x 0 = 0). 

 

So what is Merideth really saying?  Best that I can tell, she's saying that some people will not be able to pay their debts.  Now that is prescient.  Like the one gal who thought that NINJA loans may have some negative economic ramifications.

 

Oh, and yes Ms. Whitney, de-leveraging means contraction.  Why don't you tell us something we don't already know?  Like how much bad credit card receivables are outstanding and how that compares with the allowances for these bad debts.  Also would be helpful if you told us who was under reserved (please, not Citigroup again).  You can't tell us that because your fraud is someone who makes general or obvious statements.  Kind of like that lying no good horoscope that said that romance was in the air, and that my work life would be challenging yet interesting.

 

Yours

 

Jack River

 

 

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Well, she's been pretty on the ball throughout this whole crisis. If she gets this call wrong, it will be her first.

 

She has a valid point though ... I mean it all depends where unemployment goes ... figure out the rate of unemployment, then add about 2-3% and voila ... you have your loan loss rates for credit card loans to consumers - that's the standard metric in the banking industry for consumer businesses.

 

things get scary when a depression-like scenario eventuates. WFC included ...

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Doom sells, especially now.  So how big is the potential problem?  To me, reigning in credit limits is only wise, especially when it comes to preserving capital ratios.  Nobody needs $100,000 in credit card limits.  The outstanding balance drawn is $800 billion.  Let's say 10% of that becomes impaired, which I would think would pretty extreme.  We're looking at $80 billion maximum to be written off over a couple of years, spread among hundreds of institution.  After what we've been through, I'm thinking that can be absorbed pretty easily.

When it comes to hurting GDP through lower retail sales, if only $800 billion out of $5 trillion is currently being drawn upon, why will taking $2 trillion of that unused capacity away hurt consumption so badly?

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I remember when she was mocked on CNBC last spring for saying that Citi was going to have to raise massive amounts of capital.

 

People on this board generally don't have the same relationship with credit as the broader public.    The credit line reductions aren't being spread evenly across all types of customers, they're mostly affecting those people who actually use their full limit.  Add in the higher fees and penalties for being late/overlimit, and people will cut back even more.

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I don't know much about Whitney, just that she is among many names who are referred to as 'experts' now, but I had never heard of before 2 years ago (Roubini, Doug Kass, etc).

 

The interesting thing to me, is that there were all these massive dislocations in our economy... they are now ALL reversing (savings rate is up, consumer spending down, exports from china down, housing prices normalizing, stock prices normalized mostly, credit cost is now more realistic, etc etc etc).

 

A recession is a repayment of growth for past misallocations... we get it.  But you can't cite a correction of a problem as a bad thing when everyone is aware.  Should we have $5T of credit card lines available?  NO!!!!  It should be 1/10th of that (if any).  The people who use their credit cards as cash management are going to be forced to save... yes, that will slow the economy in the near term, but freakin' A, isn't the end result what we always wanted??

 

If people want to be bearish about all these macro things heading in the wrong direction from 2003-2006, at least acknoledge that they are heading in the RIGHT direction now... don't start focusing on how GDP is going to get hit by it when you were NOT focusing GDP to the upside.

 

Maybe I am just misinterpreting Ms. Whitney.  Some people just seem naturally negative about what happens... always. (some folks are the opposite).

 

I just don't get why the above CC stats are bad...

 

Ben

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Jack,

 

 

I think she deserves a lot more credit and respect than you seem willing to give her.  Ms. Whitney has been spot on for a long time, even back in the days where it could have cost her a career.  Her husband was concerned for her safety at one point too.

 

Just because she is a financial analyst doesn't mean she is "a puppet".  Please!

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Guest JackRiver

I didn't say that she is a puppet because she is a financial analyst.  You may wish to give credit to puppets, but most people understand there's a ventriloquist.  Besides, you are missing the point of my post.

 

Yours

 

Jack River

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I remember back in about August-December 2007 (that's right 2007!!) ... looking at all the research back then ... all the big brokers had either buy or hold recommendations on the big banks.

 

She was the only one who went out and said doom is coming, banks need to raise capital and received much criticism for that.

 

 

 

 

 

 

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Guest JackRiver

Uhurupeak

 

What exactly was Whitney "spot on" about?  Is it that banks were levered 30 to 1, 40 to 1, and that if ever asset prices pulled back ever the slightest that we would have a financial disaster on our hands.  Is that what she's spot on about?  I mean, is there something complex about those ratios that I'm missing?  Is she "spot on" now about credit lines and credit card debt?  I mean, is she?

 

Yours

 

Jack River

 

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Is she "spot on" now about credit lines and credit card debt?  I mean, is she?

 

Yours

 

Jack River

 

 

I dunno ... it's hard to tell. If unemployment goes crazy then she might be ... it's all part of being a good analyst.

And if she's right, then you should be shorting C, BAC, JPM and WFC, not going long. You definitely should not be holding onto the stock of the big banks at all.

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"And if she's right, then you should be shorting C, BAC, JPM and WFC, not going long."

 

And we should all be shorting the market waiting for an even earlier better entry point...

 

What does this kind of thinking asist in?  Will any banks survive 15% unemployement?  YES... will their stocks do well... NO.

 

There is always a possibility things can get worse... You handicap your odds, diversify your bets, and you take your chances.  You protect your downside as you see necessary.

 

It's a little to faddish these days to talk about all this worst case crap... nothing is new, it can always get worse.  It can also always get better.

 

Ben

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  • 4 years later...

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