Are Buffett and Paulson Betting On Your Credit Card Usage?

On September 19th, 2010, the National Bureau of Economic Research determined the recession officially ended in June 2009.  The trough in June 2009 supposedly marked the end of the “great recession”.  However, anyone looking at the current economic landscape can find plenty of reasons to believe we are still in a recession.  On Monday, the Federal Reserve Bank of New York released its Household Debt and Credit Report for the second quarter.  The verdict is in, Americans are still relying on debt to cover expenses.

According to the Fed data, credit card limits increased by $60 billion or about 2%, which is the second consecutive quarter of gains.  Open credit card accounts jumped by 10 million, to 389 million.  However, it appears that consumers are not exactly paying down outstanding debt.  Andrew Haughwout, VP in the Research and Statistics Group at the NY Fed said, “Outstanding consumer debt remained essentially flat, down just $50 billion, in what was basically a repeat of the previous quarter.  This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed.”  Although debt levels are remaining flat, consumers are getting better at avoiding late payments.  According to credit reporting agency TransUnion, the national credit card delinquency rate in the second quarter fell to its lowest level since 1994.

New regulatory measures are also adding to the increase in credit card usage.  Earlier in the year, the Federal Reserve implemented a cap on swipe fees that banks can charge retailers every time consumers use their debit cards.  Previously, the average swipe fee was 44 cents, but will now be capped at 21 cents.  As a result, banks are finding other ways to regain lost revenue streams, by nickel and diming consumers.  Wells Fargo (NYSE:WFC) said it will begin charging a $3 monthly fee for debit card usage to customers in Nevada, Oregon, Georgia, and New Mexico starting October 14th.  JP Morgan Chase (NYSE:JPM) is currently running a simlar $3 debit fee charge test in Wisconsin.  Other banks such as U.S. Bank (NYSE:USB) are charging monthly checking account fees if certain balance requirements are not met.  These actions are encouraging consumers to use credit cards more, as opposed to debit cards.

How are legendary investors like John Paulson and Warren Buffett capitalizing on credit cards?  According to recently filed 13F statements, these two billionaires are investing directly into banks and credit card companies.  In the second quarter, Paulson added $160 million (17.2%) to his Capital One (NYSE:COF) position, and $300 million (63.9%) to his Wells Fargo (NYSE:WFC) position.  Buffett is no stranger to holding Wells Fargo, and Berkshire Hathaway (NYSE:BRKB) added 10 million more shares of the bank in the second quarter.  Berkshire Hathaway also increased its Mastercard (NYSE:MA) holdings by 88% to bring the position to 405,000 shares.  Buffett’s third largest equity position is American Express (NYSE:AXP) at 151 million shares, and Buffett’s runner up top equity position is Wells Fargo.

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Disclosure: No positions.

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