Back in the 1980s, Citibank CEO John S. Reed looked at the bank’s earnings and said, more or less: This is really a credit card company with six other lines of business. That is, the card portfolio was making lots of dough, and carrying the rest. Commercial lending, real estate lending, clearing, foreign exchange, branch banking — all of them were flat or losing money, while the card business was cooking.
Membership has its privileges indeed. I am reminded of this today because this past week President Obama has been meeting with the CEOs of the big credit card companies and trying to jawbone them into giving up some of the power they enjoy to goose their earnings by opportunistic manipulation of terms of service to their customers. It’s as if Mobil or BP had the power to come back in the dark of night and siphon off some of the gas they sold you in the afternoon.
I wish the president well. He made it clear during his session with the card executives that he was familiar with their machinations from personal experience. We have come a long way since the first President Bush marveled at a bar code reader. But I have my doubts. Right now, the whole banking portfolio looks a good deal like Citibank did in those days. Commercial lending, mortgages, trading… all underwater.
Credit cards may or may not be making money—that shoe doesn’t drop all at once—but when you can squeeze your customers the way all that fine print allows, you don’t give up the franchise lightly. Let’s not forget, the credit card business already had its bailout, in the form of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which functions according to the Law of Goodfellas: Drowning in medical bills? “F* you, pay me.” Swamped by alimony and child support? “F* you, pay me.”
To that, add: Lost your job, house, and health insurance? “F* you!”
When I arrived at Citibank in 1980, one of the first speeches I wrote was for the opening of Citibank, South Dakota, which was created expressly for the purpose of lodging the credit card business. Citibank had transplanted this business from New York State because New York still had usury laws, which capped retail interest rates at 12%.
The bank was in big trouble. In the preceding years, Mr. Reed had flooded the nation with credit cards, a bold move in an era when people did their banking locally. A credit card was generally an extension of an existing banking relationship, replete with a credit history and some suasion of banker over customer. Reed’s folly, as it was occasionally called, entailed giving cards to total strangers by mass mailing—unlike retail banks, the U.S. Post Office could branch across state lines—many of whom were of dubious creditworthiness, or dubious character for that matter. With interest rates capped at 12% by New York law, and overnight money, borrowed as needed from other banks, floating north of that—this was when Paul Volcker was Fed chairman—something had to give. As Walter Wriston put it, “When you borrow money at 14% and lend it at 12%, you can’t make it up on volume.” When I was recruited as a Citibank speechwriter, among the perks my boss mentioned was that I could take out a loan at a low employee rate and buy a CD that paid a higher one.
New York State legislators never imagined that one of the most venerable of banking institutions would relocate the business to a more favorable venue, a practice called jurisdiction shopping. But armed with some combination of the Bank Holding Company Act and other legislation, and something called the Commerce Clause of the U.S. Constitution, they found their way to South Dakota and its accommodating four-term Governor William Janklow. Governor Janklow’s signature legislative accomplishments were the reinstatement of capital punishment, and lifting the State’s usury limits. (He was later convicted of running a stop sign and hitting a motorcyclist, killing him. The family was precluded from collecting damages because Janklow was heading home from a speech at a country fair, and thus on official business. He is now a practicing lawyer.)
But enough local color. Suffice it to say that the bank got what it wanted, and so did the State. The bank instantly became South Dakota’s largest employer, and, as we pointed out in our speeches, its college graduates found an employer where they could put their degrees to work without leaving home.
This was so soon after I started working at Citibank that I was denied my first credit card because I hadn’t been at my job long enough. “I’m writing speeches for the chairman of the bank and for your boss, Rick Braddock,” I told the phone rep. “That may be,” she said, “but you haven’t been employed long enough to qualify.” When I told Rick, he laughed and said, “At least they’re doing their jobs. What do you want, plain vanilla or preferred?”
Freed from the constraints of New York State law, Citibank survived its catastrophic loan losses and pioneered many now-standard innovations, including risk-based pricing, affinity cards, and a portfolio of cards targeted to different categories and classes of users.
Even then, the promiscuous marketing of cards and the potential resulting horrors were manifest. Like pornographers’ lawyers, we found the germ of redeeming social importance. We were providing consumers with a tool for managing their personal and family finances. We were freeing working people from the necessity of relying on loan sharks from payday to payday. We were dealing with consenting adults.
The bankers were fully aware, of course, that in spite of talk about sensible use of credit and managing the household budget, they were really selling liquor to the natives. Behind the scenes was a laboratory where young people with degrees in psychology were kicking the consumer behavior of millions around like a soccer ball, finding ways to hype the impulse to buy, buy, buy, and mining data to place “choices” in front of people based on their previous purchases. We take it all for granted now, with Amazon.com and a thousand other websites, but this took place in the years of the mid-1980s, one of which was 1984.
By the end of last week, the biggest story out of the credit card summit was that Larry Summers fell asleep, a serendipity that is almost a reenactment of regulatory behavior over the past eight years or more (I am aware of the role Summers played under Clinton). The New York Times reported, “One executive told the president that although her assignment had been to try to persuade the president not to support new restrictions, ‘it was pretty clear I won’t succeed.’” The biggest underlying argument is that with the banks’ other businesses so weak, they don’t want to give up the one cash cow.
My fear is that whatever new restriction is placed on this weasel industry, whether we have to wait for new Federal Reserve regulations in 2010 or they are expedited, the evil minions at the banks will find a way around it. This is the game they have long played. I have seen their tricks in my own accounts, including that first one that Mr. Braddock granted me. Lower the interest rate? They accelerate the repayment schedule, which means the customer has to pay just as much each month, resulting in lower repayment of interest as a share of the payment.
It reminds me of the way cigarette companies lower the tar content of cigarettes by perforating the paper. The poor addict drags more often and harder, just to maintain the accustomed nicotine levels. Or the time I paid my balance in full—thousands of dollars worth—when my interest rate was low, then used the card in an emergency, only to find that my rate had shot up to Tony Soprano levels. Why? Because when I had paid my bill in full, they hadn’t yet posted $6 in new interest charges, which went unpaid, and therefore I was now being charged at deadbeat levels.
Or, as Michael Corleone would put it, just when I thought I was out, they pulled me back in.
Henry Ehrlich has written speeches as a freelancer for both the new, white-knight CEO of Fannie Mae and the former, disgraced CEO of Freddie Mac. He is author of Writing Effective Speeches and The Wiley Book of Business Quotations.