Page 1 of 2 Paid-up card-carriers feel the pain
By Julian Delasantellis
A clearly outraged colleague sought me out the other day. I wondered what was
making her so upset - was she on another tear about the misogyny coursing
through Beowulf, or maybe that Juliet's fatal love for Romeo was, at its
core, just an example of the virulent suppressed gender dysmorphism that ran
rampant through the Capulet family?
She stuck a piece of paper under my face. The letter was from the American
Express credit card company regarding her account. "As a result of a recent
account review, we have placed a $1,000 limit on your account. Whenever your
spending limit is reached, no further charges on the account will be approved."
And with that, my colleague, a lifelong renter, became yet another
victim of America's subprime mortgage crisis. Soldiers in World War I were
invariably felled by deadly volleys of machine-gun fire or mustard gas; my
friend has fallen under a withering barrage of deleveraging.
In North America, you can arm your wallet with a bewildering supply and variety
of credit cards, from those that allow you to display a photo of your favorite
stock car racing driver, to ones with pictures of the sad puppies that need
adopting from the local animal shelter. The one that stands out is the American
Express card, with either its standard, gold-gilded face, or the
ultra-exclusive "platinum-" (not real platinum, of course) faced card. If you
watch the American Express TV commercials, you'd think that other credit cards,
those issued by Mastercard, Visa and Discover, were just hopelessly and
irretrievably petit-bourgeois and plebeian, barely useful for anything except
purchases of corn dogs and warm beer at the wrestling match.
But the American Express card, ahh, that's different. That's the card for the
finer things in life, more specifically, it's the plastic you use to announce
to the world (I suppose that means the salesclerk, the rest of the people
waiting in line behind you to make their purchases, maybe the security guard in
the back room reading the sports page when he's supposed to be looking at the
closed circuit salesfloor camera feeds) that you have arrived, that you can
afford both the purchase and the expensive annual fees for the card.
While you're snacking on beer nuts and Mountain Dew purchased with your
ordinary credit card, the American Express guy has pulled out his gold for a
salad of mescaline greens and white truffles, chateaubriand thickly coated with
a Grand Cru burgundy demi-glaze, fresh North Atlantic lobster tails, all washed
down with heaping glasses of 1787 vintage Chateau d'Yquem.
The American Express woman's labels all say Prada, for the other credit cards,
their necks itch with the imprimatur of Route 66, K-Mart's in-house "name
designer". For a fun, summer afternoon on the water Mr Average Credit Card
might be down at the sporting goods store getting a kayak (the Sports Authority
website has one for US$99.99), whereas, with the American Express card,
Microsoft co-founder Paul Allen's $200 million, 127-meter "Octopus", the
largest private yacht on earth, might be a purchase both desired and possible.
Of course, wracking up a $200 million purchase might be a challenge with
standard credit cards, as that the purchase would probably bump up against the
cardholder's credit limit fairly quickly - probably right after about the third
zero the clerk enters on the card validation machine. That was the core
distinction of the American Express card, that it offered its holders an
unlimited credit limit. In effect, it laid the entire world at the feet of its
holders for purchase, just as long as the entire balance was paid off with each
month's billing cycle.
Not any more. My colleague now can't buy Paul Allen's yacht with her American
Express card (unless he's willing to take a truly ridiculous offer on it),
which, I'm sure she would use to scour the high seas to find rogue whale
hunters she could ram with the Octopus' hull. If you take on debt, whether to
buy stocks on margin or a house with a mortgage, you are said to be leveraging.
If credit is withdrawn it's called deleveraging. She's been deleveraged.
In Washington Irving's 1819 short story Rip Van Winkle, a man falls
asleep under a tree in pre-revolutionary America, wakes up 20 years later to
find a radically different world. Likewise, should a man have fallen asleep in
2006 and just woken up recently, he, too, probably can barely comprehend the
changed world he now sees.
Those were the days, my friend - back in 2006. That was when Americans dreamed
big dreams, and as a result were faced with truly momentous choices - namely,
either to buy big or even bigger still.
Why get the 63-centimeter plasma TV when you can just as easily have the
125-centimeter? Why settle for the "mini" SUV that weighed only 1,600 kg and
got 20 miles per gallon, when the 3,000 kg big bad boy model getting 11mpg was
just a few steps away on the dealer's parking lot? Most importantly for the
current circumstances, it was then thought to be impossible to live happily in
a hovel-like veritable tarpaper shack of a 260-square-meter, four-bedroom,
three bath, cottage, when it would be just as easy to "super size" your order
with the builder to construct a truly awesome 560 sq m, seven-bedroom, six-bath
McMansion so big that it can be seen from space.
After all, it's not as if the consumers of these items had to do something
quaint, like actually pay for them. These were all to be purchased with credit,
and when the time came to pay the charges back, more credit still was sure to
be readily available; the life of a modern day Midas or Crassus beckoned for
but only the proverbial minimum monthly payment.
For these were the days that the American, and to a large extent the world,
economy, was soaked, drenched, sodden, inundated with a veritable tsunami of
readily available money originating from easy credit.
On Wall Street and in the City of London, private equity investors borrowed
money to take companies "private", to take them off the stock-market listings.
A few months later, they would resell these companies, for fabulous profits, to
other groups of investors who were borrowing even more billions so they too
could sell them back into the market for even more fabulous profits a few
months later still.
Back then, Mr 2006 Sleepyhead probably could have stuffed his pillow well with
the dozens of credit card solicitations that Americans regularly received in
the mail; the future value of the payments on those cards would be, through the
miracle of securitization, bundled up and made into new, high-interest high
demand corporate debt obligations. That freed up capital for even more credit
creation.
Of course, the Jabba the Hut of credit expansion was the subprime mortgage
sector, where, as I have pointed out numerous times starting last year, a money
creation machine was formed that made subprime loans, securitized them, sold
them off from the original lenders, who then used them as collateral for even
more borrowing and lending, even more credit creation, which spurred demand for
more real estate, on and on and on.
"Honey, there's no way we can buy this new SUV."
"Why, is it too expensive?"
"No, not that. It's the cup holders. They'll never hold our triple grande,
half-calf, double-foam mochachinos. Better get the one that costs twice as
much, just to be on the safe side."
And then, starting last summer and fall, it all went away. Like a receding tide
that leaves little sea creatures to be exposed to the sun and then die, the
money wave retreated back into the sea faster than the people squealing like
little children at the beach could chase after it.
First, prices on US real estate could rise no more and started to fall; that
meant that a lot of the subprime mortgage borrowers were not going to be able
to either refinance or meet the new, more costly monthly payments when their
mortgage interest rates reset sharply higher.
The subprime securitized mortgage securities based on the defaulting mortgages
then tumbled in price. Those who had based huge extra rounds of further
borrowing and lending now had a big problem; their collateral, in the case of
borrowing, or required
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