Banks are typically borrowing money to lend to you on a credit card.  They may borrow the old fashioned way — by taking in deposits from customers — or from the Federal Reserve or on Wall Street, but typically the bank is making money on the difference between what it pays its creditors (like depositors) and the interest and fees it gets from lending you money on a credit card.  That margin is getting squeezed, so you’re going to feel the pain too.

Banks are being hit with a triple-whammy in this regard.  They’re having trouble finding anyone who will lend to them and most of the rates are going up, not down, except from the government.  More people are defaulting on paying back credit cards — Bank of America reported its losses on about $184  billion of credit card loans increased to 6.4% from under 6% three months earlier.  And they are having more trouble finding investors who want to take these loans off their hands.

An unused, available credit limit to you “costs” the bank something.  It has to keep a certain amount of capital — hard money — on hand for credit it extends, to keep the regulators happy.  That capital is harder to come by.  And an unused credit line to anyone is a potential risk to them — with losses growing every month on consumer loans, the risk of having large credit limits out to you may eventually exceed the possible profit from you.  It’s another example of the old saw:  Bankers only want to lend to you when you don’t need it.

So expect more cuts in credit limits in the future and don’t count on the bank being there when you need it.  Cash is king.

We are being sold a bill of goods that will only benefit some banks and Wall Street.  To be perfectly honest with you, my clients and everyone I know is against this bill.  Our leaders in Washington actually listened because the American Public threatened to hold them accountable by voting them out of office.  We will have to wait until Thursday for a vote by the Senate.

Secretary Paulson, who I am sure has been working very hard lately, is naive if he thinks that a bailout of Wall Street will save Main Street.  But that is the message that is being touted now by all of the talking heads on the news shows.  Secretary Paulson refuses to start where the problem is, people are losing their homes on a daily basis all over this Country.  I cannot believe that our leaders do not understand our  financial system.  In other words, let the market take care of itself.  If you want taxpayer money, you need to help the taxpayer save their homes.

Secretary Paulson’s speech was laced with disappointment.  I think our elected officials need to go back to work, speak with some of the best economists in the nation and figure out a way to make this bill work.  In my opinion, they need to reinsert the bankruptcy provisions and allow the modifications of first mortgages in the Bankruptcy Court.  But, what do I know, I only deal with people who are involved with these issues daily.  Maybe if I moved to Wahsington D.C. and shoved my head as far up my butt as it would go, it would make more sense to me.

In the second quarter of 2008, GM and Ford posted combined losses of over $24 billion.  Sure, you can say whatever you want about statistics, write-downs and accounting procedures, I will agree that the number may be higher due to these items.  Let’s say $10 billion off the mark.  Would that be fair to GM and Ford?  So, now these two huge automakers are only bleeding somewhere over $14 billion a quarter.  Yea, that sounds much better.  Chrysler could not renew all of its short term debt, thereby leaving a gap of $6 billion on the table.  Have you seen their stock prices lately?  As a side note, their stock, credit worthiness and heartbeats are also being downgraded by every big and small ratings agency in the world.  The only other entity that can lose money faster than these entities and still stay in business is the Federal Government.

In the year 2008 when your company is hemorrhaging  cash, and you can no longer borrow money on the open markets without selling your soul for a decent interest rate where do you go?  Well, before 2008 that would have been a tough question:  Maybe Japan, China or the Google Guys have the liquidity to bail the big three out, but in 2008, you just call your local representatives and put pressure on the Federal Government for a Bailout Loan.  Since the beginning of 2008, the Federal Government has bailed out Bear Stearns, Fannie Mae and Freddie Mac.  What’s another $20 billion, $30 billion, or $40 billion of taxpayer money?  What the heck, make it $50 billion.  I just hope that we are charging the big three more in interest than we are paying in interest to the Chinese.  If not, that would be really sad.  Even sadder is that the Federal Government keeps borrowing money and trusts that the average American worker will keep paying taxes, but is having a real hard time helping those same workers save their homes.  Where is the Federal Government Bailout for the Little Guy?

Interestingly, if the Federal Government made cash available to the big three automakers, what would the big three do with the money?  Obviously, we would want them to invest it in research and developement, right.  But, I think the smart money would be on them reducing their short term debt and restructuring their long term debt and credit lines.  Why not, they would be getting Federal Government backing.  This way they would have additional opportunities to keep borrowing money and operating inefficiently, rather than finding a way to operate profitably.

Citigroup reported that it lost $176 million on credit card securitization operations in the second quarter of 2008. That is on top of setting aside $735 million for credit losses and over $345 million in North America alone in additional costs of credit. Even if you don’t know what all those things mean, that’s a lot of money!

Keep in mind this other tidbit: Citigroup earned $243 million in the year-ago period on the same credit card lending activity.

OK, so Citibank is losing money on credit card lending. Boo-hoo. Anyone dealing with their default interest rates and collection department is probably not shedding a tear right now. But in reality this is important. As the credit card banks have to set aside reserves for losses and as their costs of borrowing money to lend out to all of us, there is ultimately less lending to trickle down to keep our financial houses in order.

The same problem is hitting car lending. And of course home lending.

In some circles this is referred to as “The Great Unwinding.” By which, we mean the unwinding of a lot of the “leverage” — debt — that has become the driving force of Western economies on the grand scale — and American families on the small scale. Appropriately, earlier this year Citi’s own economists were discussing this problem. It may takes years and a cut in everyone’s lifestyle before it is finally resolved.

In the meantime, the lesson is becoming clear: Cut your fixed costs to live within — or below — your means. And the sooner, the better.