Begin forwarded message:
From: dasg...@aol.com
Date: March 1, 2009 1:14:16 AM PST
To: ramille...@aol.com
Cc: ema...@aol.com, j...@aol.com, jim6...@cwnet.com, l...@legitgov.org
Subject: Next, the Credit Card Debt Meltdown [Just Before the Pension
Fund Meltdown]
THE CREDIT CARD DEBT CRISIS:
THE NEXT ECONOMIC DOMINO
Arianna Huffington
Huffington Post, February 24, 2009
http://www.huffingtonpost.com/arianna-huffington/the-credit-card-debt-cris_b_169657.html
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 and Discover 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,
Robert Menendez has put forth the "Credit Card Reform Act," and 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.
* An earlier version included Capital One among the companies that had
converted to bank holding companies to make themselves eligible for
bailout funds. In fact, Capital One became a bank holding company in
2004.
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