“Credit Card Bomb” from the U.S.? Experts Worry Second Mortgage Crisis

A warning has been raised that credit card liability in the U.S. has risen steeply, raising the possibility of a ‘the 2nd mortgage bomb’ occurring.

Fortune (October 30 release), an American business magazine， analyzed that credit card liability in the U.S. rose to 915 billion dollars (about 824 trillion won) increasing the possibility of the country spiraling into yet another mortgage crisis.

The amount of liability relevant to the subprime mortgage crisis that began at the end of last year and grew seriously this year was around 900 billion dollars which is similar to the credit card liability disclosed this time.

American banks have marked the credit card bills spent by consumers as ‘assets’ on their financial statements and have issued bonds based on these assets, and liquefied numerous financial instruments making use of such ‘loan obligations.’

Therefore the failure by consumers to fulfill their obligations to make due payments after spending on their credit cards affects the bond companies connected with the credit card companies, and the credit card accounts one after another.

It is the same circumstances as those surrounding the earlier failure by the mortgage lenders to fulfill obligations affecting the banks and the variety of financial instruments created by banks.

The only difference is that the consumers are not repaying the ‘credit card liability’ this time instead of the ‘mortgage liability.’

If the consumers declare ‘non-performance of redemption’, saying they are unable to repay their credit card bills, and cause the prices of the connected bonds to nosedive, hedge-funds, pension funds and the institutional investors holding the bonds could be seriously affected.

Fortune picked Citigroup, American Express, Bank of America, Capital One, and Washington Mutual as companies likely to be influenced by the steep growth in credit card liability.

Fortune`s gloomy forecast is based on the fact that these banks have continually been showing the poorest performances since 2001. In the third quarter of this year, Citigroup transacted 2.24 billion dollars as its ‘loss’ due to credit card arrearage.

Garry Crittenden, Chief Financial Officer of Citigroup, expressed concern at the worsening situation, saying, “The non-redemption balance of Citigroup customers and capital loans both grew for the first time.”

American Express also expanded its reserve by 44% based on concerns regarding credit card arrearage. The situation is similar for Capital One, Bank of America and Washington Mutual. These companies also expanded their reserves by 20% in preparation for a worsening credit card situation.

But some present optimistic views that the credit card liability will not trigger a crisis as big as the mortgage crisis since it is unlikely to set off all at once.

Christopher G. Marshall, CFO of Fifth Third Bancorp, said, “Credit card risk is not something that goes off right beside you. The U.S. will be able to manage the side-effects of credit card arrearage with its long history in financial derivative bonds.”

spear@donga.com