Consumer Debt Tsunami Alert

I’ve mentioned a couple of times in passing over the past two months that the deep amount of personal debt carried by banks as unsecuritized loans would bite them harder than credit swaps have bitten financial service organizations.

The reason being the bulk of the loans are not collateralized. There’s very little any bank will be able to do to collect on the profitable portion of these loans, and unlikely in this climate to sell to factoring organizations.

So, as job losses mount and money becomes tighter, the lines of credit many have used to maintain a semblance of middle class existance are starting to diminish. In a story on Reuters today, an Oppenheimer analyst is quoted as saying they believe credit levels will be reduced by up to 45% by the three main players (BoA, Citigroup and Chase).

As I’ve mentioned before, it’s unlikely most consumers will continue to make the required payments on interest burning loans which will amount to close downs, not when they can use the money for essentials. In this case the cure is worse than the disease. A clean FICO score – which can be revived – is no match for years lost – which can never be gained back.

But these are banks, not financial service organizations. Their liquidity is dependent on consumer investment. As consumers convert to cash, the banks may be left holding their own usurious bags.

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