Egg, a British online bank, said it would cancel the credit cards of 161,000 customers it deemed too risky. The cards will stop working in March. The news provoked angry reactions from some credit-card holders who claimed their credit records were spotless. Egg was acquired by Citigroup last year, before the deterioration in money markets. [From The Economist, Feb. 7, 2008]
Citigroup recently found itself short of cash-on-hand, so they sold another 5% of the company to the UAE. That wasn’t enough, evidently, so now they’re tightening up on lending. First was the mortgage sector, now the consumer credit. Dropping 161,000 credit cards in Britain would work out to dropping over 800,000 were they to do likewise in the United States. Only, this is one small subsidiary bank in Great Britain, and this is only the beginning.
Those credit cards they’ve been “pre-approving” and issuing to anyone who’d sign up will soon be gone. Without the credit card - mad consumerism of the last ten years, store closures will be drastic, and accompanying unemployment will go without saying. Meanwhile, the government is printing more money to keep the spending spree going, even if the banks can no longer underwrite the party. Still, the Fed keeps lowering the interest rates to encourage borrowing – if only anyone were lending! Yet as the cost of money drops for the banks, credit card interest rates and fees are skyrocketing.
And underwriting the chaos, the four insurance companies that guarantee all those plummeting credit-based assets of the world’s financial institutions are now having their own credit ratings lowered. Just yesterday, the president of Deutsche Bank expressed doubt about their strength.
Deutsche Bank AG Chief Executive Officer Josef Ackermann said rating downgrades for bond insurers pose risks that could match the U.S. subprime market collapse. ''It could be a tsunami-like event comparable to subprime,'' Ackermann said in a Bloomberg Television interview in Frankfurt today.[From Bloomberg, Feb. 7, 2008]
There’s been much talk about fear of Recession, but I wrote in November that we were in the beginning of a new Depression. And this Depression will be so chaotic that it won’t conform to any previous definitions. High unemployment, inflation due to printed money, simultaneously drastic deflation in the housing sector. Unemployment is rising beyond the wildest estimates of economists. Banks and Financial Institutions are so close to insolvency that they are selling off chunks of stock just to maintain their credit worthiness, and it isn’t working. And the FDIC?
Just a thought about the FDIC and your bank account: There used to be something called the FSLIC, which got depleted when the Savings and Loans were deregulated and went belly-up on risky investments in the 1980s. The one still-seated member of The Keating Five (five Senators who used influence to avert oversight in return for campaign contributions): Senator John McCain, probably the last guy you’d want in charge at a time like this, and he just nabbed the Republican nomination. Buy precious metals.