Consumer Credit Drops Sharply

Highlights include Citigroup Inc. (C - Analyst Report), JP Morgan Chase & Co. (JPM - Analyst Report), Capital One (COF - Analyst Report), Sallie Mae (SLM - Analyst Report) and Nelnet Inc. (NNI - Analyst Report).

U.S. consumer credit (outstanding) decreased at a rate of 3.5%, or $7.5 billion, to $2.5 trillion in February 2009, according to a report by the Federal Reserve, released today. The drop was much larger than expectations of a $1 billion decline. It was the fourth decline in six months.

However, the growth in consumer credit for January 2009 was revised to $8.1 billion, up from the previous estimate of $1.8 billion. The decline in borrowing in December 2008 was also revised to $5.6 billion from the earlier estimate of $7.5 billion.

As the economy continues to be in recession and job losses continue to rise sharply, consumers are cutting back on spending.

Further, credit-card lines continue to be reduced by the lenders. It is estimated that available lines were reduced by nearly $500 billion during 4Q08 alone. The balances on consumers' credit cards fell at a rate of 9.7% in February 2009 -- the fastest rate of decline since 1976.

Federal Reserve has recently implemented Term Asset-Backed Securities Loan Facility (TALF) to facilitate the extension of credit to households and small businesses.

The $200 billion facility (in joint effort with the Treasury), which could be expanded up to one trillion dollars,  provides 3-year term loans to investors against AAA-rated securities backed by recently originated consumer (credit cards, auto loans and other types of consumer credit) and small businesses loans. Apart from the banks like Citigroup (C - Analyst Report) and JP Morgan Chase (JPM - Analyst Report), the facility is expected to benefit the credit card issuers like Capital One (COF - Analyst Report) and student lenders like Sallie Mae (SLM - Analyst Report) and Nelnet (NNI - Analyst Report).

However, it has been reported that the participation in TALF has been less than enthusiastic, as the investors remain wary of legislative interference, tedious paper work and other issues.