Reuters writes that "Credit card companies have little to celebrate as many analysts brace for 2009 to be one of the worst years on record for consumer credit." The exposure could be $70 billion.
It is fascinating the the credit card business has not learned much from the rest of Wall Street, or even from the airline industry. Perhaps it is because it made the mistake of thinking that the economic expansion go on forever. Hedging is a part of many businesses. Why was the credit card business any different from airlines who hedge fuel costs?
Creating a financial instrument that would allow traders to short consumer defaults should hot have been very difficult. Banks love to create these kinds of derivatives, which became painfully apparent with the mortgage-backed securities industry. Since some of the issuers like Citigroup (NYSE:C) also ran investment banks and trading desks, they had all the tools to set up a system to give their credit card divisions some protection against rising consumer defaults.
But, that has been the financial industry over the last three years. Bet on things that will fall and avoid those that are valuable.
Douglas A. McIntyre is an editor at 247wallst.com.
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