Wall Street’s still drowning in bad paper

October 27th, 2008 at 06:42pm Annette LaCross

Published Oct. 26:

By now, you know better than to watch the stock market, I hope.

The ugly reality of Wall Street, where the Dow Jones industrial average closed Friday at its lowest finish since the financial crisis began six weeks ago, only reminds us that some of the $7 trillion the market has lost was ours.

Since the Great Tidal Wave of Irresponsible Subprime Mortgages first crested some two years ago, we’ve been battered by one wave after another, each made up of mysterious and exotic-sounding financial whatchamacallits: auction-rate securities, credit default swaps, commercial paper, Alt-A mortgages, collateralized debt obligations and still more subprime mortgages.

And if you look to the horizon, you’ll see another wave coming at us. Fast.

This time, it’s credit card debt. More than $960 billion worth of poisoned plastic powering down on us.

And it will threaten the few banks and brokerage houses that remain solvent. Bank of America, the nation’s second-largest issuer behind JPMorgan Chase, said some $3 billion of its $184 billion credit-card portfolio has soured, a 50 percent increase from a year ago. And American Express, which targets wealthier borrowers, has increased its provision for credit card losses from $810 million to $1.5 billion.

Some estimates call for credit-card issuers to take a $40 billion hit this year and another one, worth $90 billion, in 2009.

And that’s before hedge fund managers start counting the losses from the more than $350 billion market for credit-card-backed securities. C’mon — you didn’t think the Wall Street of the last decade would let innocent debt lie without trying to trade it in some fanciful new way, did you?

Hey, it worked with mortgages. At least, until it didn’t.

And while credit card debt is worth only a fraction of the mortgage market, it’s going to hurt. Because when the debt goes bad, there are no assets to seize to offset the loss.

Oh, and the $700 billion mortgage bailout? No help for credit-card issuers.

In other words, pay off your credit cards and watch your interest rate. Because when more cries for more bailouts reach the government, the burden will once again fall on us.

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