Wednesday, February 25, 2009
Usury: Credit Card Companies Get Bail Out Money From U.S. Taxpayers, then gouge them with unconscionable interest rates. This is simply Wrong.
The Credit Card Debt Crisis: The Next Economic Domino
by Arrianna Huffington @HuffPo
Hot on the heels of the banking crisis, the employment crisis, and the mortgage/foreclosure crisis, the country is on the verge of experiencing a credit card crisis.
According to the Federal Reserve, the total outstanding credit card debt carried by Americans reached a record $951 billion in 2008 -- a number that will only climb higher as more and more people reach for the plastic to make ends meet. What's more, roughly a third of that is debt held by risky borrowers with low credit ratings.
Credit card defaults are on the rise and are expected to hit 10 percent this year. This will obviously drive many banks closer to failing their stress tests -- but it will have an even greater impact on the lives of people who find themselves sinking deeper and deeper into debt.
It's a particularly vicious economic circle: every day, Americans, faced with layoffs and tough economic times, are forced to use their credit cards to pay for essentials like food, housing, and medical care -- the costs of which continue to escalate. But as their debt rises, they find it harder to keep up with their payments. When they don't, banks, trying to offset losses in other areas, then turn around and hike interest rates and impose all manner of fees and penalties... all of which makes it even less likely consumers will be able to pay off their mounting debts.
And that's not the end of the economic downward spiral. As more and more Americans default on their credit card debt, banks will find themselves faced with a sickening instant replay of the toxic securities meltdown from the mortgage crisis. In another example of Wall Street "creativity," credit card debt is routinely bundled together into "credit-card receivables" and sold to investors -- often pension funds and hedge funds. Securities backed by credit card debt is a $365 billion market. This market motivated credit card companies to offer cards to risky borrowers and to allow greater and greater amounts of debt.
As these borrowers continue to default, banks and the investors who bought their packaged debt will take a serious hit. And how are the credit card companies trying to offset the rise in bad debts? By raising rates on the rest of their customers -- making it likely that more of them will end up defaulting, causing even more losses for the banks. And round and round and round we go.
And such is the paradoxical nature of the meltdown that Americans keep being encouraged to go back to spending in order to get the economy rolling again. But the problem is, more and more Americans are broke. So the only way they can spend is to charge it, running up balances on credit cards that are structured in a way that makes it harder and harder to pay them off.
Getting dizzy yet?
For years, credit card companies have been fattening their bottom lines with an ever-widening array of fees. Late fees, cash-advance fees, over-the-limit fees. In 2007, lenders collected over $18 billion in penalties and fees. JPMorgan Chase, the nation's top credit card lender, recently began charging many of its customers $10 a month for carrying a large balance for too long a time -- that's on top of the interest they are already collecting on those balances.
And interest rates are escalating. Earlier this month, Citibank warned customers that if they miss a single payment, they could see their interest go up to 29.99 percent (so nice of them to shave off the .01 to keep it from being 30 percent, isn't it?). The company also recently raised rates by 3 percent on millions of non-payment-missing customers. Citibank is not alone: Capital One raised its standard rate on good customers by up to 6 points, and American Express raised rates by 2-3 percent on the majority of its customers.
Sen. Chris Dodd, chairman of the Senate Banking Committee, accuses the banks of "gouging," saying, "the list of questionable actions credit card companies are engaged in is lengthy and disturbing."
Perhaps he should send the bankers a Bible bookmarked to Deuteronomy 23:19: "thou shalt not lend upon usury to thy brother." Indeed, Sen. Bernie Sanders told me last week that he is working on "anti-usury" legislation.
For their part, the bankers have tried to cloak their behavior with corporatespeak. A Citibank spokesman called the rate hikes the result of "severe funding dislocation," and said, "Citi is repricing a group of customers in our Citi-branded consumer credit card business in the U.S. to appropriately manage these risks." An AmEx spokeswoman chalked up its rate hike to "the cost of doing business."
Making such pronouncements particularly galling is the fact that many of the banks summarily raising interest rates and piling on the penalties have received billions in bailout money. Our money. We gave Citi $45 billion, Bank of America $45 billion, JPMorgan $25 billion, AmEx $3.4 billion, Capital One $3.6 billion, and Discover $1.2 billion. In fact, American Express, Capital One, and Discover all converted to bank holding companies to make themselves eligible for bailout funds.
Yet that money seems to have been delivered with no strings attached. Banks cash their bailout checks, then turn around and gouge their most vulnerable customers. Priceless.
One of the ironies of the credit card crisis is that the financial industry laid the foundation for much of the trouble we are seeing with its full-throated -- and deep-pocketed -- support of the cynically named Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a truly loathsome piece of legislation that opened the door to many of the banking abuses we are witnessing. It made it much tougher for Americans to file for bankruptcy -- even the millions of hardworking Americans whose bankruptcy is the result of a serious illness (fully half of all bankruptcies are the result of crushing medical expenses). It also did nothing to rein in the kinds of lending abuses that frequently turn manageable debt into unmanageable personal financial catastrophes.
The financial industry spent $100 million lobbying to get the bill passed -- and millions more in campaign contributions. The result was a sweetheart law for the financial industry -- with 18 Senate Democrats voting for it.
And the banking lobbyists are at it again.
There are currently several bills in Congress designed to roll back some of the worst provisions of the 2005 legislation. In the Senate, Chris Dodd has introduced The Credit Card Accountability, Responsibility and Disclosure Act ("the Credit CARD Act"). In the House, there is Rep. Carolyn Maloney's Credit Cardholders' Bill of Rights.
The banking industry is pushing back hard. But wait, you might ask, aren't the banks broke? So where'd they get the money to lobby against credit card reform?
From us. There may not be much transparency about the hundreds of billions of taxpayer dollars doled out through the TARP program, but we know where at least some of the money has gone: into making sure that none of the Bankers Gone Wild behavior that led to the current disaster is curtailed.
In December, the Fed approved new rules that will, among other things, limit arbitrary rate increases on credit cards, cap some fees, and require the credit card companies to more clearly disclose the often confusing -- if not downright misleading -- terms customers are agreeing to. But these rules won't go into effect until July 2010.
Why would the Fed make rules that won't go into effect for a year and a half? We can't afford to wait until then.Congress needs to tell the bankers that their Beltway credit has been denied and pass laws reforming the credit card mess -- before the credit card blaze turns into another economic conflagration.
“Due to extraordinary changes in the economic environment, we’re reviewing our existing credit card accounts. Having considered these economic conditions, your account’s purchase rate, and the length of time you’ve had this account we will be increasing your purchase rate. We’re also raising your Cash Advance and Default Rates”
Translation: We’ve completely mismanaged our business, loaned money to people who could never pay it back, and, despite successfully lobbying congress to keep people from filing for bankruptcy and taking $3.55 billion in taxpayer-funded federal bailout money, we’re still in deep doo-doo. Oh, and the fact that our CEO received $379.57 million in compensation over the past 5 years has nothing to do with our troubles. His superior management skills have gotten us to where we are today.
But, seeing as you’ve got great credit and have always paid your bill on time, we’d like to require you to pay usurious rates to make up for those who we’ve already driven into bankruptcy. We know you can get a 5% home equity loan if you really needed the money…so you’ll have to be really dumb to take us up on this offer….but, hey, people fall for those ridiculous Nigerian internet scams, so we thought we’d give it a shot.
“The following changes will be effective for all billing periods that begin after April 17, 2009: [for Purchases and Balance Transfers] a variable rate equal to 17.9% as of 1/28/2009.”
Translation: It’s not just money we have trouble with, we can’t keep track of dates, either. In our calendar, January comes after April. Our CEO’s a talented guy, but numbers have always confused him. Speaking of numbers, we gave our salaried staff average bonuses of over $16,700 each last year for their fine efforts. They’re not so good with numbers either.
“Cash Advance APR: A variable rate equal to 24.9% as of 1/28/2009. Your cash advance rate may vary monthly. The rate will be determined by adding 21.65% to the Prime rate.”
Translation: We got a new random number generator and this is what it came up with. Might be a different number next week…who knows? Did we mention we’re not very good with numbers?
“A variable default rate equal to 24.9% as of 1/28/2009. Your default APR will vary monthly….If we receive your payment three or more days after your payment due date twice within any 12 billing periods, we may increase your APRs immediately to the above Default APR. Please note that if your rates have increased to the account’s current Default APR prior to the effective date of this change, your rates may be increased again to the new Default APR if you make another payment that is at least three days late after the effective date of this change.”
Translation: Our CEO’s not very good at English either. What he means to say is you must pay us whatever rate we decide, whenever we decide. We’re not sure we can run a profitable business taking free money from you, the taxpayer, and then loaning it back to you at 25%, so we may need to ask you for a higher interest rate. The last guy who could add left our company to work at a truck stop in Tuscon…and he took our calculator. We’d buy another one but we spent your $3.55 billion on party favors. We need the rest of your cash so that we can retain our top-notch executives.
“You can choose to decline this rate and close your account.”
Translation: If you’re not going to give us everything we want, when we demand it, you’re no use to us anymore. Get lost.
Usury rates can be capped because of Federal Government assistance to banks, and because of the TARP bail out funds.
It doesn't make sense not to.
In fact, if nationalizing the banks is advisable, nationalizing the companies selling American jobs offshore makes even more sense.
Could there be a bigger lesson in insult and humiliation than the one Americans are living through now? For whom the country is run makes all the difference. If companies want to become foreign companies as Halliburton did after the Bush administration, let them - but use the excise tax system for what it was intended to control foreign goods from flooding American markets. Treaties and Customs taxes were made especially for that control.
Americans can always start new companies to replace the defectors.