Citigroup has now received $45 billion from the taxpayers in return for preferred shares of its stock. They have also received a guarantee from the government on $306 billion of risky assets it owns.
As taxpayer I would like to know what return the government is getting on its $54 billion. I have a suggestion for them – 32% plus late fees of course. Many of you may see where I am going with this. I was once the owner of a Citi credit card. I made every payment for 11 years. In 2003 I was late on a payment and Citi raised my interest rate to 32%. Of course this is not feasible because Citi would surely argue that at that rate they would never be able to get out of trouble and repay the taxpayers. No kidding?
Credit Card issuers claim the rationale for these usurious rates is its need to protect itself as those who are late on payments have an increased rate of default and therefore the increased interest (profit) is from taking on increased risk. Sub-Prime Lenders used the same argument for charging borrowers 14% on a mortgage at a time prime borrowers received 6% mortgages. This argument fails on so many levels. These companies charge these rates because they can, period. In fact Citi and other credit card issuers invented the concept of “universal default” in order to put as many customers as possible into this ridiculous rate. For those of you unfamiliar with the concept universal default means that if you are in default on any obligation (ie late on another card payment from another issuer) the card issuer can declare you in default on their card and the default rate would kick in. Citi actually discontinued this practice voluntarily in 2007 after some bad publicity, but the practice persists with other issuers.
If they truly believed that those who were late on a payment were likely to default would it not be better to maintain the existing interest rate and keep the payment affordable than to increase the rate to 32% and all but assure that those on the edge can not pay. (See Above)
If issuers believe these exorbitant rates were needed to hedge against defaults wouldn’t it have been prudent of them to segregate the extra interest they earned in a contingency fund to help them cope when these bad loans and credit card debts began to default. For example if a normal credit card was at 7% interest and others were upped to 32% because of risk factors, shouldn’t the 7% portion of the return on the 32% card be put in the companies operating capital while the 25% premiums being collected be put in a reserve fund to help offset losses due to defaults on these “risky cards”. Same with sub-prime loans, excess gets put into a reserve to help when these risky loans default.
Of course this did not happen. Any excess revenues were passed on as dividends and large executive bonuses. Then when things turned sour in credit issuing land the taxpayer is now expected to bail them out.
I am not saying that some of these loans were not risky, undoubtedly many turned out to be exactly that. I am saying that Citi and others either did not believe or failed to prepare for their own arguments.
Many States have usury laws that cap the interest that lenders can charge on a loan. In Florida, where I lived at the time of Citi’s raise to 32% the rate was 18% for loans of under ½ million dollars. Citi is able to circumvent this law because of in 1978 the Supreme Court ruled in Marquette vs. First Omaha Service Corp., that a national bank could charge the highest interest rate allowed in their home state to customers living anywhere in the United States, including states with restrictive interest caps. When it comes to credit card interest rates, the law in a lender's home state rules; It doesn't matter what kind of rate cap exists in a customer's state.
It did not take Citi (and many others) long to figure out what to do after this ruling. New York-based powerhouse Citibank moved its credit card business to South Dakota who has no interest rate cap, in 1981. Citibank went to South Dakota, not because South Dakota was a banking center but because it had that particular law
In 1982, the four largest banks in Maryland relocated their credit card operations to Delaware because of that state's lender-friendly credit card laws. Other states with lender-friendly credit laws include Georgia, Illinois, Nebraska, Nevada, Rhode Island and Utah. To hang on to the credit card business, many other states loosened state usury limits.
It is criminal that these companies are allowed these interest rates. One State resisted. My current home state of Arkansas Amendment 60 to the state constitution, approved in 1982, caps interest rates at 5 percent above the federal discount rate. The teeth has also been taken out of this law. The Gramm-Leach-Bliley Financial Modernization Act, which the U.S. Congress passed in 1999 allows state-chartered banks to charge interest rates equal to those charged by other banks operating in their state.
Our congress has been in the pocket of banks and credit card issuers much like these companies cards are in your pockets and wallets. If these issuers want bailouts now I say the following strings must attach.
1. A federal Usury law must be enacted on consumer debt limiting interest rates to no more than 18%. (Less would be better)
2. Another federal law which outlaws universal default.
3. Issuers must set aside a certain amount of revenue gleaned from above market rates to risky borrowers in a fund to cushion losses when things go south. This is much the same as insurance companies are required to keep reserves to pay claims.
Of course Congress does not need permission from the industry to enact any of these changes. Congress should also investigate ways to re-examine Bankruptcy laws to let Federal Judges re-write mortgages, and take away at least in part the student loan exclusion from Bankruptcy. This would be but a rollback to the way the law used to be before the 2005 revisions to the Bankruptcy Code was pushed through by the Banks and their lobbyists.
Rich Leonard, A federal Bankruptcy Judge from North Carolina speaks of Bankruptcy law reform in an excellent article found here. http://www.washingtonpost.com/wp-dyn/content/article/2008/11/27/AR2008112702051.html
I will close with an excerpt from that article
“I have twice participated in briefing sessions organized by the House Judiciary Committee, where I was lectured by lobbyists for the mortgage industry about the sanctity of contracts. I have listened to their high-priced lawyers make fallacious constitutional arguments based on discredited cases from the 1930s. (This is, incidentally, an industry that is not particularly concerned about its own contractual obligations as it tries, through various Treasury-aided programs, to stay afloat.)”
All you reading this that have credit cards insist your congressmen take up these legislative goals in conjunction to giving these banks money. Or we could just ask the banks pay 32%
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