Rising rates are accelerating credit-card defaults and soured sin could further undermine the financial system

by Jessica Silver-Greenberg

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The troubles sound familiar. Borrowers falling abaft on their payments. Defaults rising. Huge swaths of loans souring. Investors getting burned. But forget the now-familiar tales of mortgages gone bad. The nearest horror for beaten-down financial firms is the $950 billion worth of outstanding credit-card debt—much of it toxic.

That’s bad intelligence as antidote to players like JPMorgan Chase (JPM) and Bank of America (BAC) that desire largely sidestepped—and even benefited from—the mortgage hodge-podge however bear major credit-card operations. They’re hardly alone. The consumer debt bomb is already beginning to spray shrapnel throughout the financial markets, farther on weakening the U.S. economy. “The next meltdown will be in credit cards,” says Gregory Larkin, senior analyst at research constant Innovest Strategic Value Advisors. Adds William Black, senior vice-president of Moody’s Investors Service’s structured finance team: “We still haven’t hit the post-recessionary peaks [in credit-card losses], so things will get worse before they get more completely.” What’s more, the U.S. Treasury Dept.’session $700 billion pledge bailout won’t subsist a lifeline for credit-card issuers.

The big firms say they’re prepared for the storm. Early greatest year JPMorgan started reaching out to troubled borrowers, setting up payment programs and workmanship other adjustments to accounts. “We have seen higher credit-card losses,” acknowledges JPMorgan spokeswoman Tanya M. Madison. “We are concerned about [it] but believe we are taking the right steps to help our customers and manage our risk.”

But some banks and credit-card companies may exist exacerbating their problems. To boost profits and get in advance of future disposition, they’re hiking influence rates. But that’s form it harder for consumers to keep up. That’ll only make tomorrow’s pain worse. Innovest estimates that credit-card issuers will take a $41 billion hit from untrustworthy due this year and a $96 billion knock in 2009.

Those losses, in turn, will wend their way through the $365 billion market for securities backed by means of credit-card debt. As with mortgages, banks packet groups of so-called credit-card receivables, essentially consumers’ outstanding balances, and sell them to distended investors such as hedge funds and pension funds. Big issuers offload roughly 70% of their credit-card offence.

But it’s acquirement harder for banks to find buyers for that debt. Interest rates have been rising in succession credit-card securities, a sign that investor appetite is waning. To back entice buyers, credit-card companies are having to offer up more money as indirect, a guarantee in box something goes wrong by the securities. Mortgage lenders, in sharp contrast, typically aren’t asked to do this—at least not yet. With consumers so shaky, now isn’t a good time to put more skin in the game. “Costs pleasure go up for the sake of issuers,” warns Dennis Moroney of the consultancy Tower Group.

Sure, the credit-card market is just a fraction of the $11.9 trillion mortgage place of traffic. But sometimes the losses can be more painful. That’s because greatest number credit-card debt is unsecured, meaning consumers don’t have to make down payments when opening up their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit-card companies to recoup. With mortgages, in contrast, some banks are protected the couple by down payments and by the ability to recover at least some of the standard of value by selling the goods.

Making matters worse, the subprime threat is also greater in credit-card land. Risky borrowers with vile credit scores account according to roughly 30% of outstanding credit-card shortcoming, compared with 11% of mortgage shortcoming. More than 45% of Washington Mutual’s credit-card portfolio is subprime, according to Innovest. That could become a headache for JPMorgan Chase, which agreed on Sept. 25 to buy the troubled thrift’s credit-card business and other assets for $1.9 billion. Says a JPMorgan spokeswoman: ”