Next Debt Explosion

Will it come from credit cards, auto or student loans—or all of the above?

as Congress and the Treasury Department were just beginning to work out the details of the bailout, lawmakers quietly prepared for a new and possibly lethal collapse on the horizon: mass defaults in credit-card loans, auto loans, and student loans. lawmakers inserted a clause in the bailout package that redefined "troubled assets" to include not just junk mortgages but any kind of debt that may turn toxic. From now on, the treasury secretary has the power to buy up billions in every sort of debt imaginable—because, Adamske says, it's entirely possible that every other form of debt will go sour as well

the amount of outstanding car loans totals $199 billion, outstanding credit-card debt amounts to $356 billion, and student-loan debt totals $256 billion. And, in fact, a rise in credit-card default rates has already helped kill one of the country's largest banks: Washington Mutual. the percentage of credit-card debt that was written off as simply unrecoverable had risen from 6.5
percent to almost 11 percent, with no end in sight. credit-card default rates across the industry will approach Washington Mutual's numbers in a matter of months. Monday's Wall Street Journal reported that in September, American Express' rate of "uncollectible" loans reached 6.7 percent. Innovest predicts that the industry net charge-off rate will reach 10 percent, or twice what it normally hovers around, by the first quarter of next year. By the end of 2009, credit-card companies will have to write off more than $96 billion in credit-card debt.

car loans may be in even bigger trouble. Last week, GMAC, the behemoth of the auto-loan industry, announced that it would no longer lend money to car buyers with a credit score of less than 700, effectively freezing out one-fourth of the entire car-buying public. So far this year, GMAC has lost more than $3 billion. "GMAC is in huge trouble,"

Although credit-card, car-loan, and student-loan debt were all securitized in the same manner as mortgages, it's not at all clear whether the bailout will unlock these markets in the same way experts hope it will for mortgage-backed securities, in part because very little collateral backs up these debts. You can always take someone's house, and experts predict that by buying up mortgage-backed securities, the feds will re-establish home values and provide some stability to the housing market. But since there's nothing backing credit-card or student-loan debt, many think the task of unfreezing credit in these markets will be a little more complicated.