God, why does this story have such a familiar ring?
FT: Record credit card losses are pushing big US banks to come to the rescue of off-balance sheet vehicles they use to transform hundreds of billions of dollars in consumer loans into securities sold to investors.
The support provided by Citigroup, Bank of America, JPMorgan Chase and American Express underscores how the deteriorating health of the US consumer is opening new fronts in the financial crisis.
Most credit card loans are placed into pools – structured as trusts – that are used to back bonds sold to investors.
Banks rely on such “securitisations” to fund their huge levels of credit card lending while keeping most of the risk off their books.
Although they are not obligated to support the pools of credit card receivables when losses mount, banks have done so to ensure investors continue to buy such securities.
The issue of credit card losses is one reason the unemployment issue is so important, since defaults and unemployment are so linked. And it will be one reason why the government will put so much emphasis on make-work and other forms of keeping unemployment down by force, since such actions would be both popular (with the masses) and a way of keeping the banks solvent. And such action would be in keeping with the general notion of transfering debts and rotten loans to the government from the private sector.