Are there are lot of credit-default swaps referenced to securities backed by credit-card receivables?

October 24, 2008 1:20 PM

Banks are preparing for a rise in defaults on credit card debt. That debt is securitized, and although home-equity loans have overtaken credit-card debt since 2003 it still makes up a good percentage of asset-backed securities. Are those credit-card debt products tranched and insured and re-insured with credit-default swaps like the mortgage-backed securites are? If so, is there some reason to hope that credit-card defaults won't trigger another credit crisis or aggravate the one that stalled interbank and corporate-bond lending this month?

(Bonus question: what's the huge "Other" category in that SIFMA chart of outstanding asset-backed securities by underlying debt type?)

posted by nicwolff to work & money (4 answers total)

The other category is a grab bag, but I'd guess the biggest chunk of it in the last couple years is leveraged loan CDOs--that is, corporate loans issued as part of a leveraged buyout, leveraged acquisition or dividend recap. It would also include small business loan pools, commercial real estate CDOs and probably other odd stuff like utility companies securitizing future rate increases (dunno what that's called exactly).

As for the credit card ABS market...I don't believe there's an OTC CDS market for credit card ABS. Nor do I believe there's a comparable index to the ABX for RMBS. All the data I look at just comes straight from the big issuer's Master Trusts (for example, I'll see a report that includes the Chase, BoA, AmEx and Cap One data and it'll imply that these represent the market as a whole).

There's a couple big differences between the MBS market and the card ABS market. First, there's a bigger concentration among the bigger issuers (it's dominated by the large banks, Cap One, AmEx--though there are a bunch of smaller private label issuers). Second, because of the revolving nature of credit cards, the structures are very different. I'm not intimately involved in this market, but here's my simplified understanding: Issuers form "Master Trusts" which hold the revolving accounts. An assumption is made as to the average percent outstanding of total credit lines and the "permanent" balance below that percentage serves as collateral for bonds issued by the Master Trust. The residual revolving piece is retained by the issuer. This, in addition to the extra servicing needs of the credit card business, means that the original issuer has more of a "stake" than the MBS issuer in an "originate and distribute" model.

There's no reason a derivatives desk couldn't sell protection against the bonds issued by the Master Trusts. I just don't think it's a wide-spread OTC market--more like a bespoke setup. But I'm not involved on this side of the business, so I defer to those with more direct knowledge.

The other thing that comes to mind is the collateral (or lack thereof) in the credit card business. The MBS market got in trouble in part because the underlying collateral ballooned in value, or was fraudulently represented to have done so. Credit cards are unsecured, so you don't have the problem of overvalued collateral. That's not to say that the credit card industry wasn't overly aggressively.

I hope that's helpful. I'm not long or short any card ABS. I'm not a derivatives or ABS trader/banker. I'm not making any predictions about the likely direction of the credit card industry or the market/economy in general.
posted by mullacc at 2:25 PM on October 24, 2008

I think it could be a factor in worsening the current economy but like you point out, it is not nearly as large a factor as the money tied up in mortgages.

I watch/listen to the financial news everyday. I haven't heard much buzz about credit-card debt products but that doesn't mean it isn't a threat but I give up predicting what I should worry about next. It's a crapshoot these days.

Here's a quote from this article:


“I don’t see the credit card industry facing the kind of stress that the mortgage industry has faced," says Shapiro. "They have had time to prepare, to tighten their underwriting standards which were not stretched to the same degree as they were in the mortgage industry."

Still, that doesn't mean the growing losses aren't going to hurt.

Credit card write-offs last year totaled $26.6 billion, and are on track to reach more than $41.4 billion this year. And that's just the beginning.

“We think 2009 is going to be a difficult year for the credit card industry," Shapiro says. "There’ll be higher charge offs, slower growth, people are cutting back on spending. That is going to mean pressure on earnings.”
posted by i_love_squirrels at 2:27 PM on October 24, 2008

Other means precisely that. You can put damn near anything in a security like that (as long as someone will buy it). NPR's Planet Money had a discussion with a pair of guys who's job is to figure out just what assets are worth inside these things, and an example they highlighted was an airline route. The route flight from Tokyo to Seoul. Sell asset backed securities to buy a new plane, then pay it with route revenues. I'm not sure, but perhaps that's under equipment leasing.

One example they mention that's surely under other is "Bowie Bonds" -- basically bonds securitized by David Bowie's revenue stream!
posted by pwnguin at 2:49 PM on October 24, 2008

Are those credit-card debt products tranched and insured and re-insured with credit-default swaps like the mortgage-backed securites are?

I focused on insurance in the form credit default swaps above. But card ABS are also insured (or "wrapped" in the jargon) the traditional way by financial guarantors like MBIA and FGIC.
posted by mullacc at 2:50 PM on October 24, 2008 [1 favorite]