From Business Week, January 28, 2008 issue:
http://www.businessweek.com/magazine/content/08_04/b4068022057662.htm
Tapped-Out Consumers
Blowback from the mortgage mess has average Americans struggling. And
that's spooking The Street
by Matthew Goldstein and David Henry
It's official.
The subprime flu has finally spread to the U.S. consumer.
Citigroup and JPMorgan Chase, two of the nation's biggest banks,
recently announced they are setting aside nearly $6 billion between
them to cover potential defaults on consumer loans.

From Business Week, January 28, 2008 issue:http://www.businessweek.com/magazine/content/08_04/b4068022057662.htm

Tapped-Out Consumers

Blowback from the mortgage mess has average Americans struggling. And
that's spooking The Street

by Matthew Goldstein and David Henry

It's official.

The subprime flu has finally spread to the U.S. consumer.

Citigroup and JPMorgan Chase, two of the nation's biggest banks,
recently announced they are setting aside nearly $6 billion between
them to cover potential defaults on consumer loans.

The news set markets roiling in what has already been a tumultuous
year.

And it has rekindled fears that the economy, if not already in
recession, is on the verge of one.

For months, Wall Street clung desperately to the belief that the
mortgage mayhem--which prompted a wave of home foreclosures and nearly
$100 billion in write-downs from big banks so far--might remain
contained to the financial and home building sectors.

But there's a grim new reality:

Already troubled consumers are struggling under towering credit-card
bills and auto loans.

The connection to real estate appears clear.

Rapidly falling home prices in many parts of the country mean
consumers can no longer draw upon the equity in their homes for extra
cash--something many had done with abandon during the boom.

"Their ATMs, their homes, are now spitting out blank slips," says
David Easthope, a financial services analyst at Celent.

Fearful bankers are making matters worse by tightening their lending
standards, which makes all sorts of consumer loans more expensive and
scarce.

The banks' caution comes out of sheer necessity.

Their balance sheets are devastated after the huge mortgage
write-downs of the last two quarters.

And the industry's new conservative lending posture will make it
difficult to resuscitate consumer spending with another jolt of
interest-rate cuts.

Banks are likely to keep raising rates on credit cards and other
consumer loans no matter what Federal Reserve Chairman Ben Bernanke
does.

The growing unease about the health of consumers is behind the stock
market's worst start in 30 years, with the Standard & Poor's 500-stock
index falling 6% as of Jan. 15.

Banking and brokerage stocks, many of which lost more than 20% of
their value in 2007, continue to get pummeled.

Shares of Citigroup, Bear Stearns, Lehman Brothers, and Charles Schwab
are all off 10% or more in '08.

Even tech stocks--many of which have good growth prospects and were
last year's bright lights--are getting smacked around on the fear that
consumers won't spend as much this year on iPhones or plasma TVs.

Shares of Apple sank by 5.5% on Jan. 15, even as CEO Steve Jobs
unveiled the computer company's latest gizmo, a superthin laptop.

The Nasdaq is off 9.7% for the year.

The parade of fourth-quarter earnings announcements by the nation's
top banks only bolstered bearish sentiments.

Citigroup Chief Financial Officer Gary Crittenden, in a Jan. 15
conference call, said the bank is looking at raising rates on its
credit cards to protect itself from a potential surge in late
payments.

JPMorgan Chief Executive Officer Jamie Dimon, whose bank has managed
to skirt much of the damage from the subprime meltdown, sounded a
particularly sour note on the housing market the following day.

He said prices could fall another 5% to 10% this year and further
crimp the home-equity-loan market.

Over at Wells Fargo, Chief Executive John Stumpf said:

"We expect the environment to remain challenging in 2008, particularly
in the consumer sector."

A SCARIER MONSTER

Investors' worries about the U.S. consumer are overshadowing Wall
Street's main bogeyman since the summer, those nefarious
subprime-linked securities known as collateralized debt obligations.

With Citigroup taking a massive $18 billion hit to the value of its
CDOs and other subprime mortgage debt in the latest quarter, there's a
sense that the worst of the write-downs from these complex investments
may now be in the past.

Sure, some surprises may lurk. Citigroup still has a jaw-dropping
$37billion in exposure to subprime debt on its books.

But most observers predicted Citi's big hit weeks ago.

The shock this time around was the large jump in reserves for bad
consumer loans at both Citigroup and JPMorgan.

Jeff Harte, an analyst with Sandler O'Neill & Partners, says
Citigroup's decision to set aside $3.3 billion in the fourth quarter
to cover consumer losses is an indication "consumer credit is
deteriorating more rapidly" than expected.

Trepidation over consumer weakness has been building for some time.

The December jobs number was particularly anemic, and retail sales
started to flag in the final weeks of the holiday shopping season.

During the ramp-up to election season, a raft of polls has shown that
voters believe the economy is far weaker than the statistics would
suggest.

But in early January those fears were finally realized.

Credit-card giants American Express and Capital One both warned on
Jan. 9 about a spike in customer defaults and confirmed a slowdown in
December spending.

The warning from American Express was particularly ominous, given that
the vast majority of its cardholders are affluent and among the
nation's biggest spenders.

"We are moving away from concerns about CDOs and subprime to broader
consumer issues," says Timothy Ghriskey, a co-founder of Solaris Asset
Management, a $2 billion investment fund.

"The credit issues are working their way deeper into the economy."

So just how much more damage will banks, and Citigroup in particular,
have to contend with from the consumer slowdown?

They may have to boost reserves again to cover problem loans.

And each time a bank is forced to sock away money, it eats into
earnings.

Already analysts estimate that the billions Citigroup set aside for
future consumer loan losses cut its fourth-quarter earnings by 50
cents a share.

Overall, Citigroup lost $1.99 a share, or $9.83 billion, in the
quarter--the biggest loss in its long and storied history.

And if the consumer continues to retrench, or more problems surface in
subprime, things could get a lot worse for the nation's banks and the
economy as a whole.

____________________________________________________

Americans struggle in the disastrous Republican administration's
economy.

Harry

From Business Week, January 28, 2008 issue:
http://www.businessweek.com/magazine/content/08_04/b4068022057662.htm

Tapped-Out Consumers

Blowback from the mortgage mess has average Americans struggling. And
that's spooking The Street

by Matthew Goldstein and David Henry


It's official.

The subprime flu has finally spread to the U.S. consumer.