Wednesday, November 24, 2004

Credit Risks On The Frontline

Excellent program on Frontline today - The Secret History Of The Credit Card - ref Steve Rhodes at blogcritics.org

In typical Frontline fashion, various facets of the credit card industry are explored, with interviews featuring consumers, lobbyists, industry insiders and regulators.

Bill Janklow, erstwhile governor of South Dakota describes how Sioux Falls, SD, became a leading credit card processing center in the United States.
"It's unbelievable, the lack of sophistication that we have as a society to deal with what I'll call consumer credit," he says. "It really is unbelievable. Do I think I helped foster some of that? The answer is yes, I do."
Elizabeth Warren's views are very interesting - she is the author of The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke. She points out that this is the only industry that can retroactively change the price of a product after it is purchased. She cautions that the American consumer might soon reach a tipping point and refuse to put up with usurious terms from the credit industry.

An individual named Yingling who is a lobbyist for the industry has a sinister air - straight-facedly defending the rights of the industry to do whatever they pleased unilaterally. He insists on being the spokesperson for the industry and considers the ending of usury ceilings a good thing for the consumer.

The Office of the Comptroller of the Currency, that regulates financial institutions, weighs in, describing how the OCC can enforce actions against fraudulent practices by banks and large institutions. The Frontline investigation, however, goes on to show how the state Attorneys General are being stifled and limited in their ability to deal with consumer issues by the OCC in a 'turf battle' between the federal agency and the states. The OCC's directive OCC AL 2002-3, is an interesting directive that provides "Guidance on Unfair or Deceptive Acts or Practices"
Banks and their operating subsidiaries should exercise diligence to ensure that, in marketing their products and services, they avoid violating applicable standards concerning unfair or deceptive acts or practices. Failure to comply with statutory and regulatory requirements may lead to administrative actions, including enforcement actions to address violations and to ensure appropriate corrective action; lawsuits; and civil penalties.
These guidelines however are tantamount to requesting a tiger baring its teeth not to eat its prey. Most terms are framed as guidelines, rather than explicit prohibitions.

The principle of more explicit disclosure, as pushed by Senators like Senator Chris Todd, has been stifled by financial industry lobbyists. He joins the crescendo of warnings, and hopes the industry will see sense before it is too late.

Probably the most interesting person interviewed in this compelling program is a secretive person called Andrew Kahr, who is a consultant for the credit card industry who came up with ideas such as lower minimum payments. He also invented the idea of a combined brokerage and checking account with a debit card. Some googling reveals that this individual was the founder of Providian, the giant San Francisco credit card company that was tarred and feathered for fraudulent and deceptive practices.

It is in fact interesting that a good portion of this Frontline episode is dedicated to describing Providian, and interviewing Andrew Kahr without connecting the dots.

An article describing some memos sent by Kahr to the Providian management states
In lending to the kinds of high- risk customers Providian specialized in, Kahr wrote, the "problem is to squeeze out enough revenue and get customers to sit still for the squeeze.".....
"Making people pay for access to credit is a lucrative business wherever it is practiced. . . . Is any bit of food too small to grab when you're starving and when there is nothing else in sight? The trick is charging a lot, repeatedly, for small doses of incremental credit.
Not surprisingly, Andrew Kahr opposes the concept of additional disclosures by the credit card industry in the Frontline program.

The excesses of the credit card industry have the potential to trigger a 'universal default' on the capitalist system. In a free-market economy, one that regulates itself, this might itself be just what the system needs. Then again, the lure of easy credit and the threat of being denied the same might mean a perpetuation of the current status quo for a long time to come.

Recommended Reading:
A Piece of the Action : How the Middle Class Joined the Money Class
Credit Card Nation: The Consequences of America's Addiction to Credit

Interestingly, googling "Credit Card Reform" for a strange reason returns most top 20 results in Australia - can Down Under be showing the way?

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