Recent problems in the subprime sector spread around the world very quickly. Then the problems spread to Alt-A mortgages. Cash strapped borrowers with second mortgages and adjustable rate mortgages caught the attention of the world. By the morning of August 9, 2007, something else caught the attention of investors around the world. Questioning whether people can pay their credit card bills, investors are looking at asset-backed securities. Reports from Household – HSBC Watch show an alarming pattern. Unwarranted late fees, slow payment processing, and customer complaints beg investors to ask if HSBC Finance Corporation is artificially covering losses in asset-backed securities.
When the credit card issuing bank also has huge losses in subprime, or exposure to subprime, the red flag is flying high. When a bank or finance company has Shea vs Household in their history – read that as Household International and HSBC – the red flag is waving back and forth. Clearly HSBC made more on asset-backed securities than they paid out in the Shea settlement which was a mere $11 million (USD). But when late processing of credit card payments never stopped after Shea vs Household investors must ask why. Here is how part of it works:
Bubba applies for a credit card and gets one with a $300 credit limit at 10 percent interest. They charge Bubba $99 for issuing the card, $99 as an annual fee, and Bubba can actually buy one tank of gasoline without going over the limit. Bubba gets a bill, pays it immediately, and the payment gets procesed one day after the due date. Bubba’s rate goes to 29.99 percent, he gets a $39 late fee, a $39 overlimit fee, and a bad attitude. The bank, however, has a bogus $350 credit card asset, rolls it into an asset-backed security along with 100,000 other cards like Bubba’s, and sells $35 million as asset-backed securities. The problem is there are no assets to back the security. There is no collateral. Recognizing that they have been scammed, twenty percent of the Bubba account holders don’t even send a second payment. After six months forty percent of the Bubba accounts quit paying. The rest pay off the account immediately and talk bad about the bank for the rest of their lives.