Bank stocks will crumble in the coming months

Like the rest of the business media, along with market analysts, leading economists, the FRB and top politicians, the WSJ article falls way short of the biggest crisis about to hit the banking industry.   It's the crisis facing the card industry that will come to a head in the coming months when bankcard and private label issuers will send at least 1.5 billion letters to their cardholders announcing steep increases in interest rates, credit line reductions in the hundreds of billions, and tens of millions of card cancelations.  This has to happen because of requirements of the new CARD Act of 2009.  And it will come with major consequences: Consumer anger that could match the current fury over health care reform and thus even lower consumer confidence about economic recovery, sharply reduced consumer spending, higher writeoffs for issuers and massive retailer closings.  Another likely result: an increase in the unemployment rate, pushing it above 10%. 

 

Congress and the president bragged that the CARD Act would increase the protection of consumers from abusive card practices.  But to get there, it radically restricts issuer pricing and risk assessment flexibility.  For millions of cardholders, it will almost double their APRs; for the rest the increase could go as high as 20-30% over current rates.  And on top of that, many issuers are going to reimpose annual fees and eliminate the free ride period that allows 40% of all bankcard holders to escape any interest at all.  In short, consumers are going to be given a billion additional reasons not to trust Washington or banks.  Instead of feeling protected, they are going to go berserk.  Large numbers will stop using their cards and scary percentage will stop paying their bills.  Their fury poses an enormous threat to stock markets and economic recovery.