Good Money After Bad

So what do the credit card companies see in the sub-prime meltdown? An opportunity!:

"Direct mail credit card offers to subprime customers in the United States jumped 41 percent in the first half of this year, compared with the first half in 2006, according to Mintel International Group. Direct mail offers targeted at customers with the best credit fell more than 13 percent."

...So what happens when you reduce their exposure to bad credit risks by passing a bill that makes it all but impossible for people to declare bankruptcy and stop paying their credit card bills? The answer is obvious: banks start pitching their cards even more aggressively to consumers who are even worse credit risks. This was an easily predictable consequence of tilting the playing field in favor of credit card issuers by passing the egregious 2005 bankruptcy bill, and it's exactly what's happened. Thanks, Congress.

...Lew Ranieri, the so-called father of mortgage backed securities, has stated that the overheated phase of subprime lending started at the end of the third quarter of 2005 and extended through most of 2006. When did the new bankruptcy law take effect? October 24, 2005. There is no ready way to prove a connection between the new law and the explosion phase of subprime growth, but consumers became much more cautious in taking on credit card debt after the law became effective. And the ones that had above median incomes which would force them into a Chapter 13 (meaning they'd have to repay their debts) might be even more eager to tap home equity if they saw themselves at risk.

I don't know how likely this explanation is, but it certainly has a lovely circular viciousness to it. Credit card companies lobby Congress to pass a bank-friendly bankruptcy bill. Consumers in financial trouble respond by avoiding extra card debt and instead tapping the subprime lending market. When that turns sour, credit card companies turn around and offer yet more card debt to desperate subprime borrowers, secure in the knowledge that their shiny new bill protects them from default. It's almost too beautiful a theory to not be true.