By Jonathan Spicer
NEW YORK (Reuters) – Top financial executives see no quick end to the global economic storm, warning this week that the current crisis could hold more surprises due to looming credit card debt.
The United States is leading the world into a recession, and perhaps worse, and executives at the Reuters Global Finance Summit said it was hard to make any predictions due to a dire mix of bruised markets, strained governments, and a worried public.
But some things are clear.
“You have to believe that we have frightened the American consumer pretty deeply here,” said Ed Clark, chief executive of Toronto-Dominion Bank (TD.TO: Quote, Profile, Research, Stock Buzz), North America’s seventh-largest bank.
“It’s hard not to believe that they’re not going to go on strike for a period of time,” he told the Reuters Summit. “And it’s hard to see the positive element that’s going to save us from having a deep recession,”
Executives told the Reuters Summit the mortgage-inspired crisis infecting markets will likely be followed by even bigger problems borne out of growing credit card debt.
A credit card crisis “is waiting in the wings,” said John Whitehead, former chairman of Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) and former U.S. Deputy Secretary of State under President Ronald Reagan.
“It’s so similar to the mortgage situation that it’s shocking when you think about it,” he said.
Banks are already reporting losses in both credit cards and home equity loans. “How far will housing prices go down? How high will defaults on credit cards go? How high will defaults on auto loans go?” asked Gary Parr, deputy chairman at investment bank Lazard Ltd (LAZ.N: Quote, Profile, Research, Stock Buzz).
A credit card collapse would further squeeze the financial sector. Americans had accumulated $971.4 billion in revolving consumer debt at the end of September, up 3.4 percent from the end of 2007, according to the U.S. Federal Reserve.
“Unlike collapses of the past, where the finance industry just brushed it off, kept going, they’re right there at the vortex of the storm,” Joseph Perella, CEO of boutique merger advisory firm Perella Weinberg Partners, told the Reuters Summit.
“The industry is the problem, it’s not a subset of it. It’s not a containerized explosion.”
Just how long consumers keep their wallets closed is a guessing game, particularly given the surprise that met the current crisis.
Last year’s collapse in real estate prices stung big banks that held mortgage-related securities. It toppled global institutions, such as investment bank Lehman Brothers Holdings Inc (LEHMQ.PK: Quote, Profile, Research, Stock Buzz), and forced governments to step in to save others.
The effect was a sharp drop in the value of homes as well as the savings portfolios of all types of investors.
Wall Street veteran Donald Marron, CEO of private equity firm Lightyear Capital, called it “the first 401(k) crash,” referring to the leading U.S. private pension plan.
But other executives believe the worst had passed.
They pointed to the coordinated moves of governments and central banks globally — including capital infusions and lowering interest rates — that have allowed the market to begin clawing back.
“We’re seeing the end of the fireworks post-Lehman,” said William Chalmers, head of European banks in Morgan Stanley’s (MS.N: Quote, Profile, Research, Stock Buzz) financial institutions group. “The intervention of the state has slowed that.”
A more sophisticated and interconnected global marketplace may have exacerbated the financial crisis, but it will also quicken the economic recovery, said Maurice “Hank” Greenberg, the former CEO of American International Group Inc (AIG.N: Quote, Profile, Research, Stock Buzz) and current head of C. V. Starr and Co, which had been AIG’s largest shareholder.
“Nonetheless, when things start going downhill as rapidly as we have, it’s not going to be a U-turn. It’s going to take much longer,” Greenberg cautioned.
Although few executives made hard predictions on the duration of the current downturn, most agreed it would not reach the depths of the Great Depression, which gripped the world in the 1930s.
One exception was Whitehead, 86, who was a young boy during the Depression, and who argued the current economic downturn is shaping up to be even worse.
“We’re talking about reducing the credit of the United States of America, which is the backbone of the economic system,” said Whitehead, who in 1947 began his career at Goldman, the Wall Street giant that converted to a bank holding company this year.
He said since big government expenditures are necessary and the U.S. public will not accept higher taxes, the deficit will grow, destabilizing the global economy for years to come.
“This is a road to disaster, and we must recognize this,” Whitehead said. “Maybe it’s too late.” See: [ID:nN12299518]
(For summit blog: summitnotebook.reuters.com/))
(Editing by Jeffrey Benkoe)