Jay Walker’s Financial Traffic

We now all have heard of subprime credit.  It even was recently introduced in the venerable Oxford dictionary.

It’s now time to introduce a new term.  Subprime credit.  To award credit, usually in the form of a credit card to someone unworthy.

American Express saw it’s shares fall by 11 percent today after withdrawing their 2008 earning forecasts.  Second quarter profits fell 37 percent.

And it’s no coincidence.

People all over America have been extracting equity from their homes effectively betting that the real estate value of their property would be in a perpetual increase.  That extracted equity helped maintain a lifestyle.  It financed filling up the SUV to stop at Starbucks for an overpriced latte and also financed overspending by the use of credit cards.

Now the SUV’s are for sale, Starbucks is closing 616 of their locations and American Express is crying uncle.

I predict that the other credit card companies, Visa, MasterCard and Discover will also be having difficulties within the next year.

This is because the business model of these companies can only function when the economy is in a sufficiently good shape as to allow people to pay what they owe.  Unfortunately for American Express, people want to generally prioritize the roof over their heads as opposed to credit card bills in a financial crunch.

This is a direct result of the dollar’s collapse and of the mortgage crisis.

But empathetic I am not.  American Express, like other major credit card issuers has been issuing credit too quickly and easily.  Just like mortgage brokers and banks, American Express will have to pay the price of their lack of judgement.