Robert Reich: The Great Credit Card Battle To Come

[flpoljunkie]

THURSDAY, APRIL 23, 2009

The Great Credit Card Battle To Come

The next front in the banking wars will be over credit cards. Some of the nation's biggest bankers -- including representatives of Citigroup, JP Morgan Chase, and other recipients of billions of taxpayer dollars -- are meeting today with the President to ask him back off his move to reform credit-card lending practices.

What's happening to credit card lending is a smaller replay of what happened to mortgage lending. For years, banks used every gimmick possible to get the public to use their cards -- regardless of the credit worthiness of the customer. They lured borrowers with low "teaser" rates. They told borrowers they could get by paying minimum balances.

And now that tens of millions of Americans are poorer than they used to be, the credit-card bubble is bursting. Credit card delinquencies are soaring. At the Bank of America, the largest U.S. lender by assets, 7.8 percent of credit-card accounts were delinquent in February by more than 30 days, up from 5.9 percent last August. Yesterday, Bank of America reported a $1.8 billion first-quarter loss in its credit-card services unit.

As delinquencies mount and profits shrink, card lenders are raising fees and interest rates, including rates on existing balances. They're also charging higher fees when customers exceed their credit limits, and shortening the duration of the teaser rates. When a customer makes a payment in excess of what's owed, card companies now routinely apply the excess to balances with the lowest rates rather than those carrying the highest rates. And banks disclose very little of relevance: For example, most customers have no idea how long it will take them to pay off their balances if they make minimum repayments, or what interest they're actually paying on their balances.

As more and more Americans find themselves in the credit-card squeeze, they're complaining loudly. But the bankers have their own loud lobbyists on Capitol Hill, whose voices haven't been muzzled despite the giant bank bailout. Last month, the Senate Banking Committee reported a bill that bans rate increases for existing balances, among other things. But the vote was close -- 12 in favor, 11 opposed -- and its future in the Senate is uncertain. A House bill advanced yesterday, sponsored by Representative Carolyn Maloney, Democrat from New York, has only a fifty-fifty chance of succeeding. Meanwhile, the Fed is working on a set of watered-down reforms scheduled to go into effect a year from July, but that's way too far off to avoid the pending battle.

Enter Obama. The Treasury holds lots of cards given how dependent the big banks are on its solicitude. Meanwhile, the public has grown weary and suspicious of the bank bailouts. Knowing how unpopular the bailouts have become, the Administration is considering how to get additional capital to the banks without going back to Congress for the money. One big idea is to convert taxpayer-provided bank loans into bank equity -- even though the swap puts taxpayers at greater risk (after all, loans have to be repaid, but equity can continue to fall).

That's why getting tough on the banks' credit card lending practices has such appeal for the Administration, politically. It puts the White House on the side of the people rather than Wall Street, on an issue that the public is becoming more and more upset about. And the Administration's push could be enough to get reform legislation through Congress.

The bankers will tell Obama today that any new contraints on credit card lending will cause the banks to reduce the amount of credit card lending they do, which will hurt the economy. But it's a weak argument because it presupposes that any lending is good for the economy -- even lending to people who don't know what they're getting into and can't repay the loans. It's the same argument banks used two years ago, when precient observers warned that constraints had to be placed on mortgage lending practices. What may hurt the economy in the short term, we now know, may save it from even larger pitfalls to come.

posted by Robert Reich

http://robertreich.blogspot.com/2009/04/credit-card-battle.html

[Captain Hilts]

1. "...and profits sink." Are they? Bank of Am is certainly doing okay. nt

[Telly Savalas]

4. You believe their most recent quarterly report paints an accurate picture?

I'm not quite as trusting.

[Captain Hilts]

6. Didn't Bank of Am .have the cash to buy Wells Fargo or something?

I know they ate a medium-sized fish of some kind.

[Telly Savalas]

7. I believe they've recently gobbled up Merrill Lynch

but that acquisition isn't turning out as well as they thought it would.

Wells Fargo is probably the healthiest of the big banks, so it's highly unlikely anybody is going to buy them.

All of the big banks have reported profits for the last quarter, but accounting for banks isn't the most transparent thing in the world. A couple of things in particular cloud the picture for the validity of these profits:

1. The big banks took in tons of cash from the government via funky deals with AIG. (This argument was circulating around the blogs a couple of weeks ago, but I'm too lazy to chase down a link.)
2. The big banks have been able to write down the value of some of their liabilities because due to the higher likelihood that they will fail, these obligations are worth less in the open market. In short, they're showing larger profits because they're more likely to fail. (Krugman recently mentioned this on his blog, but this guy explains it in quite a bit more detail.)

And god knows what other sort of weird voodoo is happening in their accounting.

Credit card defaults are up. Mortgage defaults are up. The economy is in the crapper. With the frozen credit markets, large lenders aren't expanding their customer bases. So if a bank executive who personally has large holdings in his company's stock throws a bunch of confusing numbers at us and claims the bank is profitable, I'm going to be just a tad skeptical.

[PBS Poll-435]

8. BoA bought Countrywide and Merrill

Stress tests come out in May, and they will "pass."

Earnings were good though. And smartly, they are overestimating doubtful debt allowance on their assets.

[yourout]

2. CCs are fucking leagalized loan sharks.

Advanta tried to raise my rate to 23 percent from 9 percent for no reason so I went to the bank got the money and paid the rat bastards off. So now they get nothing from me and they keep calling with offers zero interest transfers.

[flpoljunkie]

5. Send your members of Congress an email and tell him what happened to you. Seven more R's voted for

the House bill this week--only two voted for Congresswoman Maloney's bill to regulate credit card companies the last time.

The average credit card debt is over $10,600 I read yesterday. The credit card companies have these people over a barrel. It ought to be illegal what they are doing, but it's not--thanks to Congress.

[Democrats_win]

3. CC companies are hindering the recovery. Obama, help them at your own risk.

In the long run, these credit card companies are forcing Americans to hunker down and spend less on the real economy by paying usury rates.

[flpoljunkie]

9. An excellent point.