Credit Cards Packaged as Investments

Posted by: Gene M. | Jun 09,2008


How’s this for a bad idea?  Credit card companies are packaging credit card agreements as investments to be sold internationally to investors.  Sound familiar?  It should: this is exactly the problem that led to the subprime mortgage crisis last summer.  Bad credit mortgages were packaged together and sold off to investors.  These investments were quickly profitable in the short term, but we all know what happened long term: the investments tanked, leaving the mortgage industry in shambles.

Now the credit card industry is doing the same thing, which could lead to similar problems.  I say “similar” but not equal.  The difference between mortgages and credit cards is pretty simple: thousands of dollars.  A typical mortgage might be $100,000.  Only very rare borrowers are $100,000 in credit card debt.  That’s just not a normal number for a typical credit card consumer.  That type of figure is normally reserved for a business owner starting a business on credit.  

So while on the surface packaging credit cards together may seem like a horribly irresponsible repetition of history, credit cards and mortgages do have distinct differences.  A home foreclosure is much more dangerous territory than credit card delinquency.  So even if there is a rash of defaults, this will not be as crippling to the credit card industry and those investors who have bought these packaged investments.  

Still, it is a troubling sign that the credit industry would so quickly fall into its old habits, while the credit crisis is still warm.  The trouble is that the credit industry is trying to buy its way out of the credit crisis specifically by packaging together these types of investments.  But investors and credit card companies should tread carefully.  Very carefully.  There is evidence that credit card defaults are cutting into quarterly profits of the major issuers, so it’s not as if credit card defaults do no pose some risk.  Even though these defaults are slight compared to a home foreclosure, this is no reason to enter into such an investment thinking that it is perfectly secure.   

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