Battle the Next Credit Crisis Shockwave

For months, we've heard all about how mortgage defaults are tanking the economy.

We now know that brokers pitched millions of mortgages to borrowers who may never be able to meet payment schedules. Then they packaged these mortgages into bonds that have been traded back and forth on Wall Street so widely that virtually every major trading house owned billions of dollars of this dubious paper.

The fall out from this debacle is still ongoing. First of all, there was the damage done to the American home building business, which has pretty much ground to a halt.

Various corollary businesses that depend on the real estate market, including home improvement centers like Home Depot (HD: NYSE) and Lowes (LOW: NYSE), have been cut in half. The companies that supply everything from thermostats to washing machines were similarly decimated.

The Second Wave of the Credit Crisis

Then the crisis caught up with the banks and brokerages. Several of Wall Street's most venerable trading houses have gone up in smoke. Each day, we hear from Washington as to just how much it will cost merely to bail out the banks. (The current figure is somewhere between one and five trillion dollars.)

Retailers in general are now expecting the worst holiday season in years. One of the winners this season, WalMart (WMT: NYSE) has just cut back its outlook for the rest of the year. Meanwhile, the numbers look so bad, losers like Circuit City, have given up trying to remain afloat one more Christmas - and are already declaring bankruptcy.

The Next Piece of the Credit Crisis

The problem is, Washington has only just begun to look past Wall Street back to Main Street. And what we see there is increasingly ugly.

The Labor Department's latest report shows applications for unemployment benefits soaring to the highest level since the September 11th terrorist attacks paralyzed the country. Initial jobless claims shot up recently to a seasonally adjusted 516,000.

This is the highest total in seven years. But wait... the overall numbers are even worse. The labor department has just warned that in October, the unemployment rate surged to a 14-year high of 6.5%.

Now the next piece in this ugly game of dominos is teetering and ready to fall. After years of vigorously pursuing the same dubious sub-prime customer base as the wildcat mortgage brokers that started this whole mess, credit card issuers are starting to feel the deadly breath of collapse on the back of their necks.

Credit Card Companies Lose Billions of Dollars

Lenders have already written off roughly $21 billion in bad credit card loans in the first half of 2008. These losses already represent 5.5% of outstanding debt. Analysts estimate that the industry is exposed to additional default losses exceeding $55 billion. This would drive losses beyond the 7.9% of the sector's total portfolio that crashed during the Tech Bubble Collapse.

Keep in mind that unlike mortgage defaults, credit card debt is completely unsecured. The whole world is wondering what to do with sub-par mortgages and the houses that are attached to them. Credit card issuers don't even have that luxury. At best, they can attempt to sell off these debts to factor specialists at pennies on the dollar.

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How the Consumer Credit Crisis Hurts You

To make matters worse, there is no joy to be found at the front end of the pipeline either. Wall Street's credit crisis has dried up the pipeline of cash that these companies depended on to keep the whole industry liquid.

Cash is essentially the credit card businesses' raw material. When it becomes rare, it shoots up in price. This shortage is forcing the card issuers to curtail existing customers' credit lines, and cut back on new client offerings as well.

Lenders are now so panicked that they will not offer cards to anyone with the slightest blemish. And existing customers are seeing rate increases even if all they have done is fall behind on other debts.

With no new revenue coming in the front door, and massive defaults howling at the back door, credit card issuers are looking at imminent collapse.

The Best Way for You to Battle the Next Credit Crisis Shockwave

American Express (AXP: NYSE) has asked to be converted to a "Bank Holding Company," in the hopes that this fig leaf will allow it to access some $3.5 billion of the U.S. Treasury Departments Troubled Assets Recovery Program (TARP). There is still considerable question as to whether TARP administrators will allow American Express to participate in the program, as it will in all probability lead to a flood of requests from other lenders.

And even if Washington does bail them all out, the terms are likely to be punitive to both share and bond holders, who could find their holdings reduced to a fraction of their face value, if not eliminated all together.

The biggest credit card lenders include Discover Financial Services LLC (DFS: NYSE), Bank of America Corp. (BAC: NYSE), Citigroup Inc. (C: NYSE), JPMorgan Chase & Co. (JPM: NYSE), Capital One Financial Corp. (COF: NYSE), American Express Co. (AXP: NYSE) and HSBC Holdings (HCS: NYSE). If you have not already done so, I recommend that you purge these stocks from your portfolio immediately.

Taipan Publishing Group is exploring the next phase of the credit crisis - a consumer shockwave that will batter the global economy... and your wealth. Watch our Emergency Web Summit, The Consumer Shockwave: Survive and Profit From the Next Credit Crisis, to learn how today's consumer credit crisis affects you. In the summit you'll learn how you can protect your wealth... and even grow it with the single best company you should own in 2009 and beyond. View the Emergency Web Summit here...