Comments on: Profiting from Credit Card Defaults

By: Jen

Jen — Fri, 02 Jan 2009 02:02:04 +0000

I apologize but all this seems extremely selfish and irresponsible in light of economic times. People are loosing their jobs, going broke having hard time feeding their families, and what I am reading here is how people can make money off other’s misery. This is exactly the attitude that got is into this mess, as a nation…not just a few group of people who have stock in banks. Shall we say to all those people-Let all thos in debt eat cake! And then we can toss them our scraps. It just seems very wrong to me.

By: kitty

kitty — Thu, 01 Jan 2009 20:11:19 +0000

I wonder how much of this is already factored into the market and the cost of these stocks. So shorting seems risky to me. Have you checked earnings (or loss) expectation for the quarter vs charge-offs? Disclosure: I own Citigroup stock – bought for $5.25 one day before the bottom. This was a gamble, so I only bought 150 shares – the amount I wouldn’t lose sleep over. Should’ve probably sold two days later…

HSBC is interesting. Not only they have all the expected losses, but I believe they also lost a bunch of money with Madoff.

“And you need to remember, American Express has a very different cost structure from VISA providers. Their cut off the top on merchant transactions is MUCH higher (half their income), and their high-end cards may provide significantly more interest income than even the best VISA customers (the “status symbol” effect).”

Exactly. I believe bank’s share of merchant transaction fees is $0 – these fees go to Visa company and not to the banks. AmEx gets everything. They also have corporate card business as well as corporate travel business, although with slowing economy there’ll be less business travel. I don’t know how much profit corporate cards bring – they have to be paid in full by the due date or the holder’s manager gets a friendly reminder.

By: andy

andy — Thu, 01 Jan 2009 07:09:29 +0000

I would even consider shorting Capital one, particularly because it needs the extra capital. In the current climate, the best bet is to stay put or trade with ETF’s/funds.

By: GettingUp

GettingUp — Tue, 30 Dec 2008 23:34:19 +0000

It is definitely interesting to note that AMEX has the highest default rates. Also, almost as surprising is Bank of America. Citigroup, I would expect, as I think that they do more sub-prime credit card lending, as well as private label cards.

I am very surprised about who is NOT on the list… HSBC. They have a huge amount of private label card holdings, and have been using “advanced credit profiling” for years. This sometimes allows more sub-prime borrowers to get credit. Capitol One surprises me as well.

I think that there are some very rough times ahead for credit card issuers.

By: TMN

TMN — Tue, 30 Dec 2008 16:21:20 +0000

That’s an interesting assessment given my own recent experience as a customer of two of the companies you mention.

I hold both an American Express card and a Capitol One Visa (paid off in full every month, of course). The AmEx offers competitive interest rates, amazing bonus services such as extended warranty on anything you buy with the card, and cashback that averages 2.2% across my purchases this year.

CapitolOne has been my backup card for a while, since it’s my oldest account. They’ve been desperately sending me “please call by to upgrade your account” letters for nearly a year. When I did finally relent, their representative was able to offer me 1% cashback on select purchases only, and 18% APR. I have a credit score above 770, and have been a customer of theirs (in good standing) for over 6 years, and the “upgrade” they were offering was just sad.

Now, it’s true that sometimes better terms are a sign of desperation. But I can’t imagine that massive advertising campaigns coupled with extremely uncompetitive rates for those who apply is a great sign either. And you need to remember, American Express has a very different cost structure from VISA providers. Their cut off the top on merchant transactions is MUCH higher (half their income), and their high-end cards may provide significantly more interest income than even the best VISA customers (the “status symbol” effect).

I’m not denying that AmEx is facing some hard times… everybody is. But from my observations, CapitolOne has been flailing around in desperation for quite a while now.