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Archive for October, 2008

Credit Card Issuers Unite to Force Consumers Into Bankruptcy?

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The NYT published an article about the credit card industry, highlighting steep cuts some lenders are makings. One of the more surprising aspects of the article was that shoppers were being profiled against other shoppers for credit cuts.

Lenders are shunning consumers already in debt and cutting credit limits for existing cardholders, especially those who live in areas ravaged by the housing crisis or who work in troubled industries. In some cases, lenders are even reining in credit lines after monitoring cardholders who shop at the same stores as other risky borrowers or who have mortgages from certain companies.

While such changes protect lenders, some can come back to haunt consumers. The result can be a lower credit score, which forces a borrower to pay higher interest rates and makes it harder to obtain loans. A reduced line of credit can also make it harder for consumers to manage their budgets, because lenders have 30 days to notify their customers, and they often wait to do so after taking action.

So the lenders offer you a credit line that gives you a false sense of security, and pull the rug out from underneath you when you need to rely on that offer. Then they don’t even let you know until you have reached your new lower limit or a month has passed.

Pricing risk behaviorally further increases the risks to the poorest of the poor. Lets say a person gets laid off or has a bad earning month and shop at Aldi (a discount grocery store). Based on risk assessments associated with shopping habits, acting responsible and living more frugally may increase the chances of a consumer getting their credit line pulled and going bankrupt.

Snce the consumer bankruptcy law was rewritten by MBNA in 2005, consumers can’t get bailed out the way the bankers just did. If the consumer dies then so does the economy. But nobody cares about the consumer, and the consumers won’t realize it until they are a day late and a dollar short.

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October 29th, 2008 at 2:48 pm

Posted in credit

It’s My Money, And I Need it Now

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Or was it it’s my money, and they want it now?

The Wall Street Journal reports that the taxpayer funded corporate candy banking bailout is getting requests from all corners of the markets, with handout requests coming from insurance agencies, car manufacturers, and other industries:

The U.S. Treasury Department is considering taking equity stakes in insurance companies, a sign of how the government’s $700 billion program has become a potential piggybank for a range of troubled industries. The availability of government cash is drawing requests from all corners, with insurance firms, auto makers, state governments and transit agencies lobbying for a piece of Treasury’s pie. While Treasury intended for the program to apply broadly, the growing requests could rapidly deplete the $700 billion, an amount that initially stunned many as being quite large.

Barry Ritholtz once said that “Capitalism without failure is like religion without sin.” And even before this government handout is done the toxic effects are already kicking in, with investors worrying that banks that did not get a handout are set up to fail:

The Treasury Department has decided to let banks individually announce that the government will invest in each firm, scrapping an earlier plan to release the names of multiple banks receiving federal money all at once. The decision came after concerns that banks left off any group list would appear too weak for government assistance, spooking investors and depositors and potentially making troubled banks’ situations more dire.

With enough handouts appearance becomes reality. Spread that across dozens of industries and people will make a lot of false assumptions, killing many good businesses in favor of larger and sloppier competitors.

Written by admin

October 25th, 2008 at 12:40 pm

Posted in credit