Behind The Consumer Credit Collapse

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Credit Crisis - Money Woes
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When Pamela Sande bought her new Ford Taurus, she was thrilled.

But like most consumers, she had no reason to care how her bank got the money to give her that loan.

Now, however, it is time to care.

For years, up to 40 percent of all auto loans, all credit card purchases, even student loans, have been bundled by banks and finance companies - the same way they bundled up risky mortgages - and then sold them off as securities.

That's the problem, CBS News correspondent Wyatt Andrews reports.

All the buyers - the global investors and pension funds that got burned by mortgage-backed securities - don't want anything to do right now with securities based on consumer loans.

"Investors are suspicious of securitized products, so they are no longer willing to buy those products," said Vince Reinhart of the American Enterprise Institute.

Since investors stopped buying, the market for consumer credit has collapsed by 80 percent and shocked the American credit system. Six-hundred and thirty-eight billion dollars from investors that was available last year isn't even in the pipeline this year - and isn't being used for new loans.

That leaves the big finance companies like GMAC struggling for cash, with GM now running ads sending customers to banks which might have cash.

"Their business model - make the loan get it out the door to the investor, make new loans - doesn't work anymore," Reinhart said. "And that's what's frozen."

To get the credit markets unfrozen, Treasury Secretary Henry Paulson wants to use the remaining bailout funds - up to $50 billion - to buy or prop up consumer credit. The lack of funds, he argues, is harming growth.

"This is creating a heavy burden on the American people and reducing the number of jobs in our economy," Paulson said on Nov. 13.

So with finance companies withering and investment capital drying up, banks, once again are where the money is, including that $159 billion they got from taxpayers. So are banks making more loans now?

"Well, I'd say that they are," said Diane Casey-Landry of the American Bankers Association.

The banking industry insists it is loaning money, but that the days of easy money, or non-stop credit card offers, are over. Just like car buyer Pamela Sande, a good credit score gets you a loan, a poor credit score gets you a higher interest rate.

"For the consumer it's a much tighter market out there," Casey-Landry said. "The credit standards have tightened and you've seen a retrenchment as the non-bank players have left the marketplace."

And now with even more bankruptcies, unemployment and delinquent loans of all kinds, the declining credit picture for millions of American is an obstacle for Treasury's new strategy. As one economist put it: even if Secretary Paulson can fix the credit markets, he can't fix the credit scores of all those borrowers.

  • Wyatt Andrews
    Wyatt Andrews

    Wyatt Andrews is a CBS News National Correspondent based in Washington D.C. He is responsible for tracking trends in politics, health care, energy, the environment and foreign affairs.