American Socialism for the Rich

According to an excellent post by Mish, Citigroup has just raised the rates on 2 MILLION of their credit cards to 30%, regardless ofthe holder’s credit rating.  Not only does this indicate that Citigroup needs to raise revenue quickly due to bad news concerning their $1.1 trillion worth of “shadow assets“, but it also means that:

Citibank’s average yield year-to-date (consumer and plastic) was about 12%.  But they’re suffering 10% defaults, making their true margin about 2%.  That’s still a positive number…. if it’s accurate.

This spread, of course, has a lot to do with previously-issued fixed-rate 12.99% cards (they and everyone else had a lot) that were handed out like candy to everyone and their brother, frequently with $10,000, $20,000 or even $50,000 credit lines.

Huge numbers of small business owners – especially sole proprietors – use these cards as a means of financing operations.  They relied on that 10 or 12% interest rate, and most of them have huge balances outstanding.

I have since confirmed that this letter is not just going to people who have had credit “challenges”.  Indeed, this appears to be a blanket change on the part of Citibank.  I now have multiple copies from people who assert that they have 750+ FICOs and have never missed a payment on this or any other obligation – the “paragon” of so-called “responsible” credit use.  All of the letters are identical.

The problem should be obvious – for someone with one of the 12.99% cards that is now 30%, this is a radical change that more than doubles monthly interest expense.  Of those who have sent me copies of this letter and disclosed their previous rate, none were over 20%, meaning that these changes represent 50% or greater interest rate increases.  If you’re anywhere near the edge of being unable to pay, this will shove you off the bridge and into the deep, shark-infested water of bankruptcy.

In other words, Citigroup is sucker-punching the economy in a desperate bid to stay solvent.  If the consumer response to this move continues to build, we might be looking at the double-whammy of  a slew of small business and personal bankruptcies (which will trash fourth quarter unemployment and GDP figures), followed by another government bailout of Citi which would further weaken global confidence in the dollar by forcing the Feds to sell even more bonds into an already flooded market.  This will be an interesting story to follow in the next week as Citi’s PR machine inevitably starts trying to spin it to make it look like they’re not up sh*t creek without a paddle.