Debt and Fraud - the inescapable facts of life in 2008

"The two most common elements in the universe are hydrogen and stupidity", so goes a wise crack.
The way the world is going in 2008, it looks like Debt and Fraud are going to the two most common elements in our lives. Never in economic and social history have these subjects taken so much of our daily lives. Even my school going son has heard of 'sub-prime' - words that were the exclusive bastion of credit professionals. In my school days, we only knew about prime numbers in Maths!
Let us take debt first. Debt in all forms - mortage, credit card, loans, student, toxic, ninja ..... has permeated our daily lives. So much so, that debt is beating global warming as the greatest urban obsession. Never before have so many parts of our society looked at debt. I think more people now across the world are aware of the indebtedness of Americans and its likely implications on the rest of the world. A wonderful example of how much debt dominates our lives is indicated at the following event laid out in http://www.keepitinyourpants.org/. A video contest has been launched offering a top prize of $5,000 for the best student-made public service announcement regarding credit cards. A new contest for budding filmmakers is the growing problem of "Debt Disease" among young Americans. The first-place winner of the "Keep It In Your Pants" contest -- open to students 14 years of age and older enrolled in middle school, junior high, high school, college, or graduate school -- will receive a $5,000 scholarship for school-related expenses.
Another event indicating our love for debt -Leading U.S. and international scholars will gather to examine the phenomenon of debt at “A Debtor World: Interdisciplinary Academic Symposium on Debt,” sponsored by the American Bankruptcy Institute (ABI) and the University of Illinois College of Law. The symposium, scheduled for May 2-3, at the University of Illinois in Champaign, Ill., will feature a paper and presentation by each of the expert speakers on a topic related to the accumulation, psychological effects or resolution of debt. The purpose of the Debt Symposium is to take a scholarly examination of debt as a phenomenon, rather than as a problem or solution. It will feature leading U.S. and international scholars who have written about debt or issues related to debt in a wide range of academic disciplines such as sociology, psychology, history, philosophy, law, neuroscience, business, economics, finance, strategic management and organizational theory."
The other subject dominating our lives now is the F word - Fraud. KPMG's recently released Fraud Barometer - http://www.kpmg.co.uk/news/detail.cfm?pr=3028 confirms our worst fears on vulnerability - with record levels of fraud coming into the open in UK. I suspect that Fraud will continue to engage our attention. In a perverse way, Fraud is simply a follow up on Debt. The classical theory of Fraud states that for Fraud to thrive, it requires an incentive and circumstances. In the present debt driven times, stretched debtors have more than enough incentive and willing to take the risk; circumstances also present themselves! Organized gangs and phishers are going to find many ordinary people willing to be mules - with so many burdens. As a wise soul put it -"Fraud is like electricity; shocking and follows the path of least resistance".
On Fraud, do check out the latest release by the FTC on rank order of consumer complaints. ID Theft is right on top. http://www.ftc.gov/opa/2008/02/fraud.shtm

Credit Card Acid Rain?

While the US (and the world) is groggily trying to get back on its feet after the mortgage sucker punch, the knockout punch seems to be flying in! The toxic sub prime home mortgage debt of USD 900 B may be overwhelmed by an acid rain of credit card debt pouring in. The US has more than a Trillion USD of credit card receivables that is largely securitized through asset backed securities.
In its G-19 Consumer Credit report last year, the Federal Reserve estimated the nation's credit card debt at about $3,000 for every man, woman and child in the United States. Other studies indicate the average credit card debt borne by a card holder is close to $10,000.
And why do I believe the credit card debt wallop will be more painful? Simple, cards have not only provided issuers with stupendous ROI but also sustained consumer spending across the US economy. In fact, the online shopping boom wouldn't have been possible without plastic credit. APRs on credit cards have held firm even in a declining federal interest rate regime. The sheer profitability of credit card lending meant the banks could continue to take higher 'risk charge' on their portfolios and still continue to grow. Sub prime card APR rates go as high as 42% in the US. The customers who used their credit cards to pay mortgage bills will now show up as defaulting on a higher cost debt.
The consumer addiction to 'shop on minimum monthly payments' may be coming to roost soon. The signs are already showing up. American Express' US Card services (top end card issuer) made a loss provision of USD 1.1 Billion (US business only) in 4Q 2007; leaving it with a small change net operating profit of USD 7 million for US cards business. If the premium segment is needing added provisions - imagine the effect on the mass / subprime segments who live off their credit cards!
A mortgage like meltdown in the credit cards industry will have wider implications - retailers, restaurants, travel agencies......
The US post office will be the most affected - card issuers sent out 5.3 billion mailers to prospective customers in 2007 - this is twice the combined population of India and China receiving card offers. All the temptations of great offers, balance transfers, 0% 'tart' rates may now show up on issuer balance sheets.
US card issuers have so far engaged in outsourcing credit card processes and back office services. Now looks like they have to find a way to outsource card debt!