In the months prior to the Argentine sovereign default of 2001 and, more recently, during the debt crises in Greece and Portugal, the governments of these countries faced tough political battles when they tried to implement the fiscal adjustments, required to avoid sovereign default. Greece, for example, has implemented several fiscal austerity packages since 2009. Nevertheless, these adjustments have been insufficient to bridge the budget gap and solve the debt crisis.
Between 1980 and 2002, the average annual growth rate of consumer credit (93% of which is in the form of credit card receivables) was over 12% (Federal Reserve statistics reported in Deutsche Banc Alex. Brown 2002). Growth rates prior to 1987 averaged upwards of 15%. After 1987, securitization became integral to credit card industry growth. Citicorp led the sector through the capital crunch of the early 1990s, increasing its credit card accounts 42% between 1990 and 1992 by securitizing nearly two-thirds of its $33 billion portfolio (Card Industry Directory). Securitization helped restore the consumer finance sector to double-digit growth in 1993 and pushed growth to 18% in 1994 and 22% in 1995. By 1996, securitized credit card receivables exceeded $180 billion, at which time credit cards comprised 48.4% of the non-mortgage ABS market. By 2001, credit card securitization had grown to $339.1 billion. In 2001, credit cards accounted for 28.2% of the non-mortgage ABS market (Bond Market Association 2003), and securitized credit cards amounted to about half of all consumer credit.
It is well known that credit card banks have been among the most intensive and innovative users of new market-oriented tools for financing their loans. Credit card bank reliance on these innovations has been an entirely private matter. Unlike the mortgage market, there are no government-sponsored agencies (GSEs) purchasing credit card receivables.
A wave of defaults by US homeowners with tarnished credit histories cascaded through the global financial markets in 2007 and 2008. Mortgage lenders "imploded," hedge funds were forced to close their doors, investment banks collapsed under the weight of subprime mortgage-related losses, a leading insurer was driven to the brink of bankruptcy, and government sponsored mortgage giants Fannie Mae and Freddie Mac were seized by regulators.
Forced to write down three quarters of a trillion dollars in securities backed by subprime mortgages, and with further writedowns likely, financial institutions around the world became far more cautious in their lending, sparking a global credit crisis unparalleled since the Great Depression. Hundreds of lawsuits have been filed, with almost every participant in the subprime mortgage origination and securitization process a potential target.
