Gift Cards and Counter Party Risk

Posted 19 Nov 2008

Gift cards are a common gift during the holiday season.  Usually stores exchange at a 1:1 ratio.  Counter-party risk requires the financial ability to the counter-party to perform the contract.  Why anyone buys gift cards surprises me.

 Exchanging one asset for a less safe and less liquid and not requiring a risk premium seems awfully stupid.  Gift cards function like an unsecured non-interest bearing loan to the retailer (counter-party).  At least charge for the counter-party risk.  What a deal for the retailer!

Many of these retail institutions are in or near bankruptcy.  As the credit contraction continues and economic activity continues grinding to a halt many more victims will be claimed and many retail corpses will litter the malls throughout the nation.

 If a company knows they are near failing and still issue gift cards I question the integrity of their management and the applicability of fraudulent conveyance statutes.  Anyway, here is a list of retailers, with some preliminary research but not completely verified information, which may prove unreliable counter-parties:

  • Circuit City filed Chapter 11 November 10, 2008
  • Ann Taylor 117 stores nationwide closing
  • Lane Bryant, Fashion Bug, and Catherine's to close 150 stores nationwide
  • Eddie Bauer to close stores 27 stores and more after January
  • Cache will close some stores
  • Talbots closing down specialty stores
  • J. Jill closing stores
  • Pacific Sunwear closing stores
  • GAP closing 85 stores
  • Footlocker closing 140 stores more to close after January
  • Wickes Furniture closing down
  • Levitz closing down remaining stores
  • Bombay closing remaining stores
  • Zales closing down 82 stores and 105 after January
  • Whitehall closing some stores
  • Piercing Pagoda closing some or all stores
  • Disney closing 98 stores and will close more after January.
  • Home Depot closing 15 stores
  • Macys to close 9 stores after January
  • Linens and Things closing some stores (Update:  Linens-N-Things has filed bankruptcy)
  • Movie Galley Closing some stores
  • Pep Boys Closing 33 stores
  • JC Penney closing a number of stores after January
  • Ethan Allen closing down 12 stores.
  • Wilson Leather closing down some stores
  • Sharper Image closing down some stores
  • K B Toys closing 356 stores (Updated:  KB Toys filed for bankruptcy December 11, 2008)
  • Loews to close down some stores
  • Dillard's to close some stores

Additionally, keep in mind that any purchases made are also subject to counter-party risk should the product be defective, tortuous, have a warranty, etc.

 During this deflationary credit contraction individuals should be decreasing the risk and increasing the liquidity of their assets.  They should avoid counter-party risk with retailer gift cards, unsound banks and fiat currency.  There are alternatives, like GoldMoney, to the current monetary system. Happy holidays.  Please add any other risky counter-party retailers to the comments.

Additionally, big change is coming to America.



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