credit card defaults

(9848 professors called it).

Citigroup Posts Loss on Credit-Card Securitizations (Update1)

By Bradley Keoun

Aug. 4 (Bloomberg) -- Citigroup Inc. reported its first loss since at least 2005 on credit-card securitizations, signaling that risks may be growing in a business that generated $3.5 billion of revenue in the past three years.

The biggest U.S. credit-card lender lost $176 million in the second quarter packaging card loans into securities, the company said in an Aug. 1 regulatory filing. The New York-based bank completed fewer deals and was forced to mark down its own $9 billion stockpile of the debt instruments and other stakes the company amassed while selling them to investors.

Led by Chief Executive Officer Vikram Pandit, 51, Citigroup manages about $202 billion of credit-card loans worldwide, about $111 billion of which have been turned into securities and sold, according to the filing. Delinquencies on the securitized portion have jumped by 16 percent since the end of last year to $2.16 billion as of June 30, Citigroup said. The firm's results may portend similar losses for rivals.

Banks and other card issuers ``are predicting higher net charge-off rates across the credit-card industry,'' said Meghan Crowe, a Fitch Ratings analyst who tracks credit-card issuers including American Express Co., Capital One Financial Corp. and Advanta Corp. ``Things have been worse than anticipated.''

Citigroup spokeswoman Shannon Bell declined to comment. The company's shares fell 73 cents, or 3.9 percent, to $18.14 at 10:30 a.m. in New York Stock Exchange composite trading.

Funding Costs

Job losses and higher food and gasoline prices have squeezed consumers, causing more of them to fall behind on bills and damping a market for credit-card debt that has so far withstood the collapse of the mortgage-backed securities industry. Wachovia Corp. analyst Glenn Schultz predicted in a July 18 report that loan charge-offs by credit-card securitization trusts industrywide may climb to 7 percent in coming months from 5.6 percent currently.

Charlotte, North Carolina-based Bank of America Corp., the second-biggest card lender, had about $2.9 billion of interests in securitized card loans as of March 31, according to a regulatory filing. No. 3 JPMorgan Chase & Co., based in New York, had about $2.9 billion of so-called subordinated interests, according to a filing.

On July 18, Citigroup posted an overall $2.5 billion net loss, mostly stemming from writedowns on mortgage-related securities including so-called collateralized debt obligations, which are bonds backed by other debt. The bank also reported higher costs to set aside money to cover bad consumer loans.

Shrinking Pool

In its Aug. 1 filing, Citigroup said that ``higher funding costs and higher credit costs flowing through the securitization trusts'' were the primary reasons for an 11 percent revenue decline to $2.93 billion in its North American credit-card business.

In the year-earlier period, credit securitizations produced a $243 million gain. Net gains from securitization of credit- card loans totaled $1.27 billion last year, $1.08 billion in 2006 and $1.17 billion in 2005, according to the firm's most- recent annual report, filed in February.

Like other banks, Citigroup packaged credit-card loans into securities so it could tap into the pool of fixed-income investors looking for bonds not tied to corporate debt, municipal bonds or mortgages.

That market has slowed, according to data compiled by Bloomberg. In July, banks and securities firms issued $2.1 billion of credit-card securities, the lowest monthly volume in two and a half years. The industry issued $6.8 billion of them in July 2007.

Vulnerable Interests

Banks' interests in securitized credit-card loans are vulnerable partly because of the way the deals are packaged, according to Fitch's Crowe. Security holders typically are granted senior interests, meaning they stand first in line to get repaid if loan losses climb or the instruments default. Banks often retain the junior interests, meaning they're first to absorb the losses.

``These guys hold the lower pieces,'' Crowe said, declining to comment on Citigroup specifically.

Citigroup has about $6 billion of ``trust-issued securities'' backed by credit cards, according to the Aug. 1 filing. The bank said it has another $3.1 billion residual interest in credit-card securitization trust cash flows.

To contact the reporter on this story: Bradley Keoun in New York at
Last Updated: August 4, 2008 10:32 EDT
It's very surprising for me to hear. Credit cards master trusts usually have huge excess spread. If WAC on issued credit cards is 12% and LIBOR now less than 3% it's almost 10% of excess spread. In other words, pool has to hit 10% loss before anyone starts loosing money.
It is true that spread of Credit Card Master Trusts is huge ( though I like should compare with LIBOR, say around 7%, but it's still a big one).

Those wrotedown by Citi are basically IO, which is no other than cash flows. With increasing number of deliquency in the pool, this Equity Tranch got wiped out first. Though the senior tranches have higher attachment points, if the delinquency number is too big, it will still triggered. Yet delinquency itself will push up the yield.

Correct me if I am wrong.


Quant Headhunter
I guess it is not the spread that's screwed with them, but the securitisation process.
They've used historical data to determine which tranche has a given % of default.
One can make some AAA out of even the worst pile of toxic debt, but of course that is a zero sum game.
There is always a residual in securitisation which has both the greatest volatility and opportunity to make money, if you get it right.

The bottom tranches are going to be really bad, and you can easily lose 90% of value with almost no effort.

I have seen the implementation of models used by some household name banks.
They are shociking. Really simplistic, and buggy.

How do I scale "shocking" without giving away proprietary info... ?
OK, here's one. Imagine a model built by someone who confused VBA integers with doubles.
How do I scale "shocking" without giving away proprietary info... ?
OK, here's one. Imagine a model built by someone who confused VBA integers with doubles.

This brings to mind something I trust gets little attention because of the "ot-oh" factor -- and that's binary rounding conventions in VBA, which introduce the "cumulative rounding error." We have a fix here but have seen little discussion of it elsewhere.

Can't recall from my models in 9848 if the cumulative rounding error would be an issue in Structured Cash Flow models but given the simple worksheets I've seen them on -- ones that have nothing to do with securitizations -- I would be impressed if they did not.