The idiot's guide to why the credit card crisis is next
Filed under: Credit, Simplification
One of the reasons the U.S. got into the current economic mess is because mortgages were bundled into complex financial vehicles and sold to investors and so on down the road. Everybody profited handsomely, until people started defaulting on their mortgages, which started a chain reaction of payments nobody could meet, which in turn started forcing banks into bankruptcy, which itself led to all sorts of other problems. Big problems.
And the problems aren't over yet.
This same practice is going on in the credit card industry, and Paddy Hirsch, Senior Editor of Marketplace, has taken to the whiteboard to help illustrate how this process actually happens. Turning a receivable into an asset-backed security is referred to as securitization, and is explained in detail at Wikipedia, complete with complex terms and acronyms. Thankfully, Hirsch cuts through the complexity and does a great job of breaking down an otherwise tricky financial process with the simplest of tools.
While Hirsch chose to use a champagne bottle and waterfall to illustrate how credit card receivables became asset backed bonds. I feel that a trough and pack of wild hogs would have worked out just as well, though it would have been harder to draw!
And the problems aren't over yet.
This same practice is going on in the credit card industry, and Paddy Hirsch, Senior Editor of Marketplace, has taken to the whiteboard to help illustrate how this process actually happens. Turning a receivable into an asset-backed security is referred to as securitization, and is explained in detail at Wikipedia, complete with complex terms and acronyms. Thankfully, Hirsch cuts through the complexity and does a great job of breaking down an otherwise tricky financial process with the simplest of tools.
While Hirsch chose to use a champagne bottle and waterfall to illustrate how credit card receivables became asset backed bonds. I feel that a trough and pack of wild hogs would have worked out just as well, though it would have been harder to draw!
This is only one of the videos in the Marketplace's collection of Whiteboard videos explaining our current economic situation. Other topics in the series include short selling, defaults, margins and the fallout surrounding a financial crisis. These short informational videos are an excellent way to gain a better understanding of what's happening in our economy without needing your own personal economist.
How credit cards become asset-backed bonds from Marketplace on Vimeo.
Reader Comments (Page 1 of 1)
12-07-2008 @ 4:59PM
Perry said...
The reason why Walmart's registers ring incorrectly is that their corporate resets all prices at all stores at one time. The store stockers can't possibly update thousands of price labels per day.. there for this will continue to happen when goods are restocked onto shelves, before the labels have been updated. Just another "gotcha". However, sometime's they ring less than the shelf label price and you won't bat an eye!!!
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12-07-2008 @ 5:06PM
Perryof1963 said...
On the issue of credit cards... what $$$ value are they based on when the US $$$ is almost an absolute zero (0). Many "credit cards are now actually debit cards tied to your worthless checking or savings account, which gives the banks major profits in charging NSF fees! Think about it....
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12-07-2008 @ 9:09PM
avcomm said...
Credit cards........ Like the ones from Chase...lol After missing one payment your next payment is huge !! then if you are near your line limit and with the 39.00 you get there they charge you another 39.00 making a 1,000 line credit card minimun into a 200.00 charge of just service charges not merchandise spent money ...JP you know where you can go now take your Learjet and go crying over to Obama........
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12-07-2008 @ 9:59PM
Robert said...
Avcomm I agree with you make one payment late and watch that interest rate go!!!! or perhaps pay it prior to before your billng gets to you and pay above your normal payment !!! watch this you can't pay it early????? I do have a good question and can't find the answer? with all the interest rates Americans are paying , What is the interest rate on all this bailout money???
All of you cc companies go broke!
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12-08-2008 @ 12:01AM
bill elrod said...
I was a great customer of advanta bank. I was one day late on my payments. they jacked my interest to 36.88 apr. this should be illegal' what happened to the usury laws in this country.somebody should file a class action law suit against these crooks, I would but I cannot afford it.Please some body out there with the money should do it' thanks Bill
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12-08-2008 @ 1:52PM
David said...
Excellent article, certainly the potential of the credit card debt mountain is being underplayed and is a ticking time bomb. I found a great site www.checkoutwithcash.com. It's basically an online 'virtual debit card'. It is great for online buying and easy to budget.... More people use sites like this, at least to buy online, would stick one in the eye for some of these compnaies that chrge too much...
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12-24-2008 @ 11:28PM
Itsmycall said...
Bank of America Bailout Mystery?
Check out FL Times Union editorial cartoon (12/24/08)
Well, I just got the results of the use of my part of the infamous bank bailout money. Thank you congress. I received a gracious letter from the Bank of America informing me that they will be more than doubling my finance charges beginning in February 2009 from 12.99% to 27.99% for my BUSINESS VISA card. I have been in business since February 1992 and a Bank of America VISA card holder since November 1993 with a high credit limit of $25,000 which I am nowhere near. They were, of course, very happy to give me an low rate for transfer balance’s just a few month’s ago. I have paid what has been required and I have had no differences in purchasing, and given no real reason by Bob (BofA rep). Of, course Bob could not do anything and does not make these decisions. If I got this notice I am sure many more will. I have never made it a habit of not paying my bills, but this is ridiculous. I am going to protest these greedy b*****’s with the only thing they understand. Maybe a few million would like to join me and get YOUR money back.
MERRY CHRISTMAS ALL!!
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