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Business
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“There is an old saying in capitalism: ‘What you abuse, you lose.’ ”
William J. Janklow,
former governor of South Dakota
Rebuilding the shaky house of cards
credit cards from G1
are based. Federal law allows banks to lend according to the rules of the states in which they are based.
Enormous profit
Once interest rates were al- lowed to rise as high as banks could push them, credit cards be- came a ticket to enormous profit. In the decade ended Dec. 31, 2007, credit card issuers together earned more than $50 billion. At J.P. Morgan Chase, cards account- ed for 20 percent of both revenue and profits in 2007. “The credit card business has been a critical driver for these companies; it was the single most profitable product in the lending arena next to mortgages,” said Richard Bove, an analyst at Roch- dale Securities in Lutz, Fla. Then the harshest economic decline since the 1930s crushed the job market, and a record num- ber of cardholders stopped paying their bills. The three biggest card- issuing banks lost at least $7.3 bil- lion on cards in 2009. Bank of America, after earning $4.3 bil- lion on cards in 2007 — a third of its total profit — swung to a $5.5 billion loss in 2009. J.P. Mor- gan Chase lost $2.2 billion last year on cards and, in mid-April, reported a $303 million loss for the first quarter. “We have a business that is hemorrhaging money,” says Paul Galant, chief executive of Citi- group’s card unit, where Citi- branded cards lost $75 million last year. The bank won’t disclose how much it lost on cards it issued un- der the names of retail stores. U.S. credit card issuers wrote
off a record total of $89 billion in card debt in 2009 after losing $56 billion in 2008, according to R.K. Hammer Investment Bank- ers, a Thousand Oaks, Calif.-based adviser to card issuers. For Charlotte-based Bank of America, the sea of red ink began to recede in the first quarter. It re- ported $952million in profit from cards after releasing reserves set aside in 2009 to cover defaults.
‘Feeling the squeeze’
As the economy revives, de- faults will ease. Washington’s as- sault on the industry might not. In February, the Credit Card Ac- countability, Responsibility and Disclosure (CARD) Act wiped out many of the banks’ most lucrative billing practices, including their ability to raise rates on existing debt at any time. Now the banks have to give cardholders 45 days’ warning on any rate rise and cannot apply a new rate on existing debt. J.P. Morgan chief executive Jamie Di- mon said during an earnings con- ference call in April that the changes will cost his bank up to $750 million in 2010. Banks over- all could lose $50 billion in rev- enue during the next five years, said Robert Hammer, chief exec- utive of R.K. Hammer Investment Bankers. “The banks are feeling the squeeze,” said Elizabeth Warren, the Harvard Law School professor who leads the Congressional
SUNDAY, MAY 30, 2010
THOMAS STRAND/BLOOMBERG MARKETS VIA BLOOMBERG NEWS
Former governor William J. Janklow brought Citibank to South Dakota in 1981 with a law that threw out limits on how much interest the state’s banks could charge borrowers.
Oversight Panel of the govern- ment’s Troubled Assets Relief Pro- gram. “Everyone has more credit cards than they want,” Warren said. “There is no more growth.” Credit card customers, mean- while, are still furious after years of rising rates, snowballing fees and less time in which to pay their bills. Citigroup’s Galant, who took over in April 2009, gets hundreds of e-mails a month. “They are angry at us; they are
angry at the system; they are an- gry at the government,” he says. “All they want to do is get back to a peaceful existence.”
Reinventing risk models
The lenders are busy reinvent- ing the risk models they used to justify passing out plastic to al- most anyone who would take it. “We have shifted to more judg- mental lending,” said Susan Faulkner, who took over Bank of America’s card operation in early March. That means they’re putting hu-
man eyes on applications and judging borrowers on, for in- stance, the type of mortgage they hold. “Instead of starting with the product,” she said, “we are start- ing with the customer.” The borrowers that card issuers want are richer and more-stable payers than the hordes they mar- keted to during the boom years. The big six issuers have
ROBERT GALBRAITH/REUTERS
Citi-branded credit cards lost $75million last year.
trimmed total credit available to their customers by about 25 per- cent partly by shrinking credit lines and not renewing expired cards, said Moshe Orenbuch, a bank analyst at Credit Suisse Group in New York. They’re all chasing American Express, which has long catered to a wealthier group. The firm made $2.1 billion in 2009, and its stock was the top performer in the Dow Jones in- dustrial average, returning 118 percent. “The business has to be right-
sized,” Faulkner said. “There was too much credit extended; cus- tomers overextended themselves in the use of that credit.” To Warren, pulling credit from the riskiest borrowers might be necessary. Many low-income cardholders, she says, were drawn in by “tricks and traps,” such as time-limited low rates. “Millions of American families
can’t pay off their credit card bills right now,” saidWarren, who esti- mates that they’re spending $100 billion a year on fees and interest-
Banks trim credit, and consumers trim debt
plastic from G1
shocked many people into slash- ing their spending. Not only did they save more, they also paid down debt and were reluctant to take on new loans. According to government data, the amount of disposable income that con- sumers must use to pay off their debt has dropped to less than 6 percent for the first time in more than a decade, an indica- tion that American’s debt load is dwindling.
The cholesterol analogy
The spike in late credit card
payments has also abated. The percentage of consumers more than 60 days delinquent in their payments dipped in March to 4.27 percent, while those who were 30 days behind fell to 5.74 percent, according to Fitch. Although those results are still high compared with historical averages, they reflect attempts to improve personal balance sheets. There is also a silver lining to stock market declines and low in- terest rates that have eaten into household wealth: It makes in- vesting less appealing. Instead, many consumers have found that their dollars are better spent pay-
ing off debt, said James Chessen, chief economist for the American Bankers Association, a trade group.
“I think people are consciously understanding that relationship and taking advantage of it,” he said.
Ulzheimer compared Ameri-
ca’s debt to a health problem: Of- ten, we don’t realize it exists until we get sick. “It’s like cholesterol. We don’t
pay so much attention to choles- terol until we get that test back from the doctor,” he said. “We have a responsibility to do it bet- ter than we did three years ago.”
Chastened by losses
Consumers are not the only ones scrutinizing their finances. Card issuers have restructured their business, lowering limits for many customers, tightening un- derwriting standards and re- vamping their risk models. They have lost billions of dollars on their credit card accounts, driven by consumers who were so far be- hind on payments that the com- panies wrote off those debts as losses.
According to government data, the charge-off rate for bank-is- sued credit cards hit 10.1 percent
“If we’ve learned anything from the credit nightmare, it’s that we were partially responsible for it ourselves.”
— John Ulzheimer, president of
consumer education,
Credit.com
of all accounts in the third quar- ter of 2009, then declined slightly before climbing to that level again during the first quarter of 2010. Five years ago, the charge- off rate was 4.6 percent. Such figures bolster arguments
that even though banks have be- gun to repair their credit card portfolios, consumers have yet to find solid footing. In addition, the charge-off rate typically mirrors the nation’s unemployment rate, which stands at 9.9 percent, be- cause credit card payments are often one of the first bills that dis- tressed consumers postpone. “You have to get people reem- ployed and get incomes boosted
before you see any significant re- ductions in credit card delin- quencies,” Chessen said. Financial experts also note
that people have few new re- sources to use in paying off their debts. Odysseas Papadimitriou, chief executive of the credit-card comparison site
CardHub.com, said that was also evident last Christmas, when his analysis showed that consumers in- creased their credit card debt. Tightened lending standards could also make it more difficult for charged-off consumers to re- build their credit. “Reverting back to pre-reces- sion debt levels is a horrible thing,” he said. “That would mean we’re just heading into another recession.” Experts said that although con- sumers and card issuers have made dramatic changes in the wake of the financial crisis, it re- mains unclear how long they will stick.
“I wish I could be more opti-
mistic,” Ulzheimer said. “But con- sumers generally have pretty short memories. So do lenders. It’s not just a one-way street.”
muiy@washpost.com
DANIEL ACKER/BLOOMBERG
“Don’t leave home without it” no longer applies to many consumers.
rate payments. “Are their eco- nomic lives better off because they are spending the hundred billion? I don’t think so.”
‘The other 90 percent’
Warren says most people, re- gardless of income, should still have some access to consumer credit. She is pushing for lower rates and fees and simpler, more transparent marketing of terms. “If the business model is to of- fer credit to every man, woman, child and dog in America in un- limited amounts, it just doesn’t work,” she said. “If it’s to offer a cheaper credit product to people who become more likely to pay, then that is sustainable.” At Citigroup, Galant is rethink- ing how revolving, unsecured lending relates to its customers’ other banking products. Among Citigroup’s ideas: the Forward card, which allows customers to earn a 0.25 percentage-point drop in their annual percentage rate for three months of paying on time. “Everybody now is saying, ‘We
are going to pick the clients that we think are really safe bets,’ ” Galant said. “But what about the other 90 percent of people?” Sioux Falls Citibank passed out $80 billion in new credit to bor- rowers in 2009, including $21 bil- lion in the fourth quarter, spokes- man Samuel Wang said. The com- pany is 27 percent owned by the
U.S. government. In Sioux Falls, Citigroup has grown to more than 3,000 em- ployees in 28 departments from those 400 employees promised to Janklow in the 1980s. They occu- py a 76-acre campus near the air- port, in three broad, low build- ings, which include a day-care center and kindergarten. About 1,200 people work in the 24-hour customer-service unit, where most sit in gray-fabric cubicles wearing headsets and taking calls from people who are having trou- ble with their credit cards. Citi has enhanced efforts that
let borrowers delay payments or reduce their interest rates, Wang said. The bank offers incentives and a consolidation program to help reduce card balances. About 490,000 people signed up for such help in the fourth quarter of 2009, compared with about 357,000 a year earlier, he said. Janklow is sympathetic to the woes of the industry that helped make his career. Yet he under- stands the public anger at the high rates and fees. He still uses an AT&T-branded credit card he got in the 1980s because he was guaranteed no annual fee for life. As he puts it, “There is an old
saying in capitalism: ‘What you abuse, you lose.’ ”
Lisa Kassenaar is a senior writer at Bloomberg Markets magazine in New York at
lkassenaar@bloomberg.net.
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