Senator Dodd Is Trying to Save Lenders from Themselves

Senator Christopher Dodd is getting tough on his old chums in the commercial banking industry. The Connecticut Senator who heads the Senate Banking Committee, and was once the beneficiary of a Countrywide home loan himself, is turning on credit card issuers who have tried to wriggle out of an interest rate cap imposed on loans which goes into effect in February next year. Monday, Dodd asked for an immediate freeze on all credit card interest rates, just days before the committee votes on bringing the deadline up to December 1.

"No sooner had it been signed into law [in May], but credit card companies were looking for ways to get around the protections,” Dodd said in a statement. “At a time when families are struggling to make ends meet, jacked-up rates can quickly create crushing debt.”

Unsurprisingly, the news has not been well received by the banking lobby, which claims that it will be impossible to make the adjustments in time. Of course, what the firms really mean is that it will be impossible to make adjustments that allow them to stem the tide of losses originating from their consumer loans divisions. In the third quarter, banks’ consumer loans and credit card issuer units hemorrhaged cash, leaving large lenders such as Bank of America (BAC) deep in the red.

Given the extent of last year’s woes, 2009 has been a surprisingly easy year for conglomerate banks such as Citigroup (C), JP Morgan Chase (JPM) and Bank of America, most of which have used big trading profits to mask the grim reality underlying their consumer lending operations. Now it seems, things are about to get a lot tougher — if, at least, Dodd gets his way.

Dodd’s rambunctious approach might strike some as mere grandstanding, given that he is facing a tough re-election campaign next year. Still, even for those who don’t find themselves siding with populist financial policy all that often — and I count myself among them — the proposal to move the deadline for credit card interest rate caps up and to freeze rates right now makes a lot of sense: not just politically, but financially too. For in the process of aggressively raising their interest rates right now, lenders are effectively putting their long-term viability at stake in order to paint a prettier quarterly earnings picture.

It has been said over and over again this year that a true recovery of the economy will happen when the consumer starts borrowing and spending. Nowhere does this statement hold more true than in the consumer banking space, which relies on consumer confidence as much as retailers do in order to successfully expand operations. By punishing customers right now, banks might be able to eek out a few extra cents per share of earnings when they report next January. In reality however, operations will be shrinking as more consumers become suspicious of bank lending practices, and less inclined to borrow.

Bank executives must not confuse the remarkable performance of their share prices this year with the actual picture of their operations, or they will end up in the same situation they found themselves in a year ago (and maybe worse).

Senator Dodd is not just helping borrowers out: he is saving the banking lobby from itself.

Comments

[DonFurio:]

or he is a hack trying to get re-elected.

The banks are already ridiculously over-regulated, but C Dodd wants to look "tough" for his voters. Also, notice who gets a pass, Dodd's bread a butter donors, the hedge fund industry. Personally, I'm a capitalist, but just calling a spade a spade on Dodd.

Oct 27 03:09 PM

[NeverMind:]

The American public desperately needs to learn to live within their means... today, the vast majority of consumer debt can be accounted for by folks who just "want" a lot of "stuff" with some fringe elements that are just running things up until BK and a few that hit hard times but will bounce back. Given that, the greater good would be served best by allowing (or even forcing?) banks to raise rates to the point where carrying a balance is simply unattractive (unfortunately, sacrificing those who would otherwise bounce back).

Oct 27 03:24 PM

[notsosmart:]

our sen. is a phony.

Oct 27 04:01 PM

[mopacman:]

Some very good thoughts raised. We have a healthy and natural tension at work here.

Just as the economy needs (sic) a return of liquidity in commercial and consumer spending we hit a tight credit cycle.

Banks are losing money on consumer portfolios. So in hindsight, they should have charged more and further restricted underwriting.

Now prudent institutions are doing what they should have done all along and are raising rates and fees. They are doing so typically in a risk-based fashion, and certainly in concert with higher asset-backed costs of funds. They are also being more thoughtful in underwriting. It is about time.

But at the same time these institutions are told to shed assets and prop up capital and returns by regulators, the politicians are going the other way and constraining pricing.

What we keep learning is that the more limitations that are placed on institutions, the more likely the "good credits" will have to subsidize the "less good credits" and at the same time, the more challenging it will be for those with unproven credit to get credit at all. But perhaps that sort of thinking doesnt get votes.

Oct 27 04:07 PM

[Tony Petroski:]

From the article:

"Senator Dodd is not just helping borrowers out: he is saving the banking lobby from itself."

Senator Dodd is not helping borrowers out. First he helped himself to all the perks he could grab including favors from financial institutions that are under his purview, now he's trying to stay in office by buying votes.

It won't work, the Kennedy/Dodd axis is finished.

Oct 27 04:52 PM

[Free Market...:]

Well put "Mopacman". Kind of tired of Dodd and the others of his ilk talking out of both sides of their mouths. They will say, "stop gouging customers" and put on interest rate limitations that make continued credit availability for lots of consumers impossible. Then, they will turn around and say, "why aren't you loaning out money that we gave you to stimulate the economy?" As an investor, I would rather any bank I invest in not loan out money to those who can't/won't pay it back. Giving away other peoples money is the government's job, not the role of private business.


On Oct 27 04:07 PM mopacman wrote:

> Some very good thoughts raised. We have a healthy and natural tension
> at work here.
>
> Just as the economy needs (sic) a return of liquidity in commercial
> and consumer spending we hit a tight credit cycle.
>
> Banks are losing money on consumer portfolios. So in hindsight, they
> should have charged more and further restricted underwriting. <br/>
>
> Now prudent institutions are doing what they should have done all
> along and are raising rates and fees. They are doing so typically
> in a risk-based fashion, and certainly in concert with higher asset-backed
> costs of funds. They are also being more thoughtful in underwriting.
> It is about time.
>
> But at the same time these institutions are told to shed assets and
> prop up capital and returns by regulators, the politicians are going
> the other way and constraining pricing.
>
> What we keep learning is that the more limitations that are placed
> on institutions, the more likely the "good credits" will have to
> subsidize the "less good credits" and at the same time, the more
> challenging it will be for those with unproven credit to get credit
> at all. But perhaps that sort of thinking doesnt get votes.

Oct 27 05:10 PM

[Brian J. Do...:]

The Need for Comprehensive Credit Card Reform Legislation

The average interchange fee in the U.S. is seven times the interchange fee set by Visa and MasterCard in countries throughout the rest of the world. Using 2008 figures, if the interchange fee charged by credit card issuers was decreased (via comprehensive credit card reform legislation) from the current 2.10% to 0.60%, the result would be an annual savings of approximately $34.3 billion for U.S. merchants and consumers. Credit card issuers could retain 0.3% as a processing fee, the remaining 0.3% could be a "tax" used to fund a Natural Disaster Trust Fund (NDTF). In 2008, this would have generated $6.86 billion in funding for a NDTF.

Let

Oct 28 07:08 AM

[Brian J. Do...:]

The Need for Comprehensive Credit Card Reform Legislation

The average interchange fee in the U.S. is seven times the interchange fee set by Visa and MasterCard in countries throughout the rest of the world. Using 2008 figures, if the interchange fee charged by credit card issuers was decreased (via comprehensive credit card reform legislation) from the current 2.10% to 0.60%, the result would be an annual savings of approximately $34.3 billion for U.S. merchants and consumers. Credit card issuers could retain 0.3% as a processing fee, the remaining 0.3% could be a "tax" used to fund a Natural Disaster Trust Fund (NDTF). In 2008, this would have generated $6.86 billion in funding for a NDTF.

Let's be clear. The interchange fee is a hidden tax, just not a tax subject to political control or for which there is any discernible social benefit. Decreasing, and imposing a transparent tax on, the interchange fee would have the same stimulus effect of a tax break, but without an impact on the federal budget.

The following article discusses how comprehensive, standardized, simplified, and transparent credit card reform legislation may fund a Natural Disaster Trust Fund.

www.csnews.com/csnews/...

Oct 28 07:10 AM

[Tomos:]

Dod can

Oct 28 04:34 PM

[Tomos:]

Dod can't save his own ass. What an idiot.

Oct 28 04:37 PM

[a. palmer jr.:]

I'll go Dodd one better: along with credit card companies interest rate cap, the banking industry should have to pay savers a minimum rate of at least 4%. They and other institutions have been getting away with charging tremendous rates on loans but in the meantime giving savers a meager rate of sometimes less than 1%. Fair is fair!

Oct 28 08:53 PM