A Night With The Bears

In the coming weeks and months, Robert Ian will be discussing many of the major changes taking place in the world today. Some will be good. Some will be bad. Many of these changes will have no apparent solution.... But together, we can not only conquer change, but our fears as well. Join him weekly for practical analysis and tips. Read Full Bio

One of the most brilliant economic thinkers of our time is Eric Sprott, our neighbor to the North in Canada. Several weeks ago, his company Sprott Asset Management, held an event in Toronto called “A Night With The Bears.”

This invitation-only gala event pulled together four distinguished economic speakers — Eric Sprott, Nouriel Roubini, Ian Gordan, and Meredith Whitney. Each of these experts presented their own unique view of the global economy and where we are headed in the near future.

Of particular note were the comments by Meredith Whitney, who was a managing director of Oppenheimer & Co. and now manages her own firm. She is a well-respected and prominent banking analyst in New York City and appears regularly on Fox News, Bloomberg and CNBC. In October 2008, she was ranked as one of Fortune 500’s “50 Most Powerful Women in Business.”

She discussed the accelerated and dramatic changes taking place in the credit card industry. Namely, that 2/3 of the credit card industry is dominated by 5 lenders and that there is currently $4.2 trillion dollars in credit card lines outstanding — of which about $800 billion is in use.

She predicts that we will see a 55% reduction of available credit lines outstanding in the near future.

This is going to have a dramatic and negative impact on any anticipated recovery Washington might be expecting. Currently 90% of Americans revolve their credit lines at least once a year and over 45% do it each month. Many individuals and small businesses view their credit cards as a cash flow management vehicle.

She went on to predict that every single person will have their credit card line reduced by 5%, 10%, 50% or even 80% and that the psychological impact on consumers will be profound because most people will no longer have a perceived financial cushion for emergencies.

In other words, everyone is going to have their credit card lines reduced and those who do carry a balance, who happen to pay down a chunk of their card to get some breathing room, are going to have their credit limit lowered as well.

This practice is called “chasing the balance,” and it will continue to suffocate small businesses and individuals throughout the country. It’s like coming up for air in a swimming pool and then having someone throw a weighted net over top of your head. It’s a form of financial water boarding that creates fear, panic and anxiety in an already fragile economy.

A good friend of mine recently suffered his own financial water boarding. He ran into a health care crisis and ran up over $150k in unforeseen medical bills. Much of this went onto credit cards. He had never missed a payment and one day, on one of his bills, the interest rate went from 10.9% to 29%. No explanation given.

He called and received a lot of financial runaround and doublespeak. The customer service agent on the phone kept reading from her script but offered no direct answers to his questions. So guess what? He stopped paying on that card. Let me point out that this card was with one of the 5 lenders who dominate the credit card industry.

A side note: This was one of those lenders who got free money from the government during the bailout (i.e. from you the taxpayer) and was now turning around and loaning that free money at 29% interest.

Then this particular company started hounding him with collection calls every hour for 14 hours a day. To deal with it, he turned the ringer on his phone to silent. When he was about 2.5 months late, he called them back and now that he was “officially delinquent,” boy did they have a deal for him. He was now eligible for a special program that froze his balance with a 5-year payoff at zero percent interest.

I kid you not. Later he told me about a second card that offered him a 5-year payoff at 4% interest.

Has he damaged is credit rating? Yes. Am I recommending people do this? No. But one has to ask what good is a credit rating when many banks won’t loan money or help customers with more favorable terms?

Meredith Whitney concluded her comments by pointing out that so much of America’s lending is concentrated with 5 mortgage originators who control two-thirds of the securitization market. This centralized lending prevents these bankers from knowing their borrowers.

As the economic crisis unfolds, I believe knowing who you are doing business with will be critical for economic survival. Because of this, I believe the future of banking belongs to the regional and community banks.