Credit card defaults are soaring. In response, lenders are hiking rates and slashing credit lines. Meanwhile Obama wants to throw money at the problem by increasing small business loans.



Let's take a look at how the above facts interrelate starting with U.S. credit card defaults rise to 20 year-high.



U.S. credit card defaults rose in February to their highest level in at least 20 years, with losses particularly severe at American Express Co(AXP) and Citigroup(C) amid a deepening recession.



AmEx, the largest U.S. charge card operator by sales volume, said its net charge-off rate -- debts companies believe they will never be able to collect -- rose to 8.70 percent in February from 8.30 percent in January.



In addition, Citigroup -- one of the largest issuers of MasterCard cards -- disappointed analysts as its default rate soared to 9.33 percent in February, from 6.95 percent a month earlier, according to a report based on trusts representing a portion of securitized credit card debt.



Analysts estimate credit card chargeoffs could climb to between 9 and 10 percent this year from 6 to 7 percent at the end of 2008. In that scenario, such losses could total $70 billion to $75 billion in 2009.



"People underestimated the severity of the downturn we are experiencing and I wouldn't be surprised to see them north of 10 percent," said Todd, who added American Express was most exposed to higher credit card losses, given its sole reliance on the industry.



Credit card lenders are trying to protect themselves by tightening credit limits, rising standards, and closing accounts. They have also been slashing rewards, raising interest rates and increasing fees to cushion further losses.



Meredith Whitney, one of Wall Street's best known and most bearish bank analysts, estimates that Americans' credit card lines will be cut by $2.7 trillion, or 50 percent, by the end of 2010 -- and fewer Americans will be offered new cards.

Business Owners Tear Up Cards

Susan Woodward isn’t renewing the lease on her music boutique and internet cafe in Jackson Hole, Wyoming, after nine years. The reason: doubling interest rates on her credit cards.



Woodward, 41, said three other stores along the main square in Jackson Hole are already empty, an unprecedented sight in her more than 20 years living there.



“My business is seasonal, so we count on credit to stock the store at the end of the slow season and prepare for the busy season,” said Woodward, who canceled her Citibank and Capital One credit cards in February after learning that rates would climb to 19 percent from 10 percent. She said she always made timely payments and kept low balances.



Almost three-quarters of U.S. companies with fewer than 500 employees are experiencing a deterioration in credit or credit-card terms at a time when half of them depend on credit cards as a primary source of financing, according to a December survey by the National Small Business Association, a trade group with more than 150,000 members.



Charge-offs, which are loans the banks don’t expect to be repaid, were 7.1 percent on average in January compared with 4.6 percent a year earlier, according to data compiled by Bloomberg. Consumers are falling behind on credit-card payments as U.S. unemployment reached 8.1 percent in February, the highest level in more than a quarter century.

Obama Pushes Small Business Loans

President Barack Obama and Treasury Secretary Timothy Geithner said the U.S. will free up credit for small businesses by raising loan guarantees and spending $15 billion to bolster the secondary market.



To help entrepreneurs and business owners, the administration announced the Small Business Administration will step up lending guarantees. The SBA currently guarantees payment on 85 percent of a loan up to $150,000 and as much as 75 percent on loans of more than $150,000. The administration is raising the guarantee to 90 percent, reducing lender risk as an incentive to make loans.



Fees Waived



In addition, fees of as much as 3.75 percent of the loan’s face value are being waived effective today, and people who obtained loans and paid fees since Feb. 17 qualify for a refund of those fees. Canceling fees will lower the cost of money, administration officials said in a conference call with reporters.



Obama ordered the Treasury Department, effective March 31, to begin using as much as $15 billion from the $700 billion bank rescue fund to purchase SBA loans on the secondary market, freeing up bank liquidity to make more loans.



The administration also announced new reporting requirements on lending. The 21 largest banks getting government bailout money must provide monthly reports on how much they are lending to small businesses, and all other banks must make quarterly reports on such lending, under the plan.

Punished For Prudence

Joseph A. Petrucelli is one of the most cautious bankers in America. In fact, Petrucelli is so cautious that the Federal Deposit Insurance Corp. recently criticized his bank for not lending enough. The FDIC’s negative review of East Bridgewater Savings Bank’s loan volume is an anomaly in today’s current banking scene as lenders reel from their role in offering too many cruddy mortgage products to borrowers with weak credit.



Bad or delinquent loans? Zero.



Foreclosures? None.



Money set aside in 2008 for anticipated loan losses? Nothing.



“We’re paranoid about credit quality,” Petrucelli said. The 62-year-old chief executive has run the bank since 1992.



Still, the FDIC slapped East Bridgewater Savings with a rare “needs to improve” rating after evaluating the bank under the Community Reinvestment Act. FDIC examiners also faulted East Bridgewater for not advertising and marketing its loan products enough.

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