Larry Summers apparently nodded off yesterday as President Obama proposed new rules on credit cards. Who can blame him? Aren’t you tired of hearing about banks too?
This latest round in the love-hate financial-industry polka has the administration and Congress trying to outlaw the seemingly whimsical tendency of banks to slap even credit-worthy credit-card holders with huge hikes in interest rates and egregious new fees. This push is bound to be popular. Anyone who has been socked with outrageous charges because their payment was three days late, or found their gullible teenagers cashing checks sent them by banks seeking to inflate their credit-card borrowings will love these proposals.
As usual, though, the measures moving quickly through Congress are as much about optics as they are about helping consumers, and as usual they may bring damaging, unintended consequences. The Federal Reserve issued new rules last December – described as “the most comprehensive and sweeping reforms ever adopted by the Board … that will apply to one billion accounts” – meant to enhance protections for borrowers while at the same time not disrupting the flow of credit to consumers. These regulations cover fees, transparency, how the banks compute interest, disclosures and other issues. They take effect a year from now, on July 1.
For President Obama and some in Congress, that is not soon enough. They are so fearful of being tagged as FOBs (Friends of Bankers) that jumping on the credit-card bandwagon is just too tempting. Sen. Chris Dodd, who is currently struggling against bad press for his ties to Countrywide and other ethics issues and looks likely to lose his seat in 2010, wants to impose an immediate interest-rate freeze on existing card balances. Many industry observers expect the credit-card companies will respond by immediately boosting rates on all balances as a preventative against getting caught by such a rule. This would be terrible for borrowers – and for consumer spending. But it might buy some votes.
The good-cop/bad-cop dance with the banks is tricky for Congress and for the administration. Most of us can’t even figure out whether the banks are in trouble or not. On the one hand, several want to pay back TARP, but they still rely on another government program – the FDIC’s TLGP – to raise money. Recent earnings releases from the banks are completely confusing. Goldman Sachs, Bank of America and JP Morgan Chase, among others, posted better-than-expected results for the first quarter. But were the earnings real? Just as mark-to-market accounting had made results worse than they really were, the use of this approach in the first quarter oddly led some banks to devalue their debt and book income by so doing. Changes (mandated by the government) in fiscal years, and strong trading results added to the gains. None of these elements comforted the stock market, which still responds more to bank prospects than any other single factor.
Further adding to the general confusion and anxiety are the nearly completed stress tests. The results of these inquiries will be coming out over the next couple of weeks. Rumors have been flying, reflecting the conflicting desires by the administration to comfort investors while also appearing tough and credible. The current betting is that the Treasury will require some banks to raise additional equity capital, but not so much that Obama’s team will have to ask Congress for more TARP.