Risky-Business Blame Game

Cold Feet of Investors in Bonds Backed by Credit-Card Debt Don't Trace to Bank Timidity It has become fashionable to lay a good deal of the blame for the mortgage mess on lenders' unwillingness to retain much, if any, of the credit risk. There is something to be said for that view, even if it is rather simplistic. Still, it doesn't explain why investors in bonds backed by credit-card loans seem to have suddenly gotten cold feet. After all, its proponents should like the fact that financial firms keep more skin in the game in credit-card securitizations. Credit-card lenders generally retain a portion of the risk -- usually the first loans to go belly up. What is more, unlike many of the now-defunct one-trick-pony mortgage lenders, credit-card companies sell loans into a securitization vehicle as a financing tool rather than relying on the practice itself as a crucial revenue stream. So it is in their interest to keep such vehicles' bondholders happy, even to the point of swapping bad loans out of the pool if necessary. That keeps loss rates down on the pool as a whole, helping reduce the chance of a more significant occurrence called an early amortization event. That is a fancy way of saying credit-card companies have to either take all the loans back on their balance sheet -- an unpalatable prospect even for a well-capitalized bank -- or quit the business. Yet even with this added protection, and with much better historical data at their fingertips than were available for subprime mortgages, buyers are pulling back. After a record first half, issuance of new securities backed by credit-card loans in July fell to half the year-earlier level, and five-year funding costs have increased 25% since the end of June, according to Deutsche Bank. Perhaps it is just general concern about consumer credit. But it could also be that after the calamities of the past year, bondholders don't trust financial institutions' ability to recognize the risks they are taking. After all, keeping exposure to subprime mortgages on its books didn't help HSBC Holdings avoid billions of dollars in losses. And many subprime-mortgage lenders ignored the risk lurking just off their balance sheets -- investors in early-defaulting loans had a right to sell them back. Credit-card securitizations look far safer. But deciding whether to sell or hold the risk is no proof a lender understands it.