Signs for American Express, MasterCard and Visa credit cards are shown on a New York City store's door
A popular president taking on a reviled industry should get what he wants, in principle, especially when he's working with a sympathetic Congress. But it's not so clear Barack Obama will be able to deliver on his promises of clamping down on credit card abuses, thanks to the banking industry's experienced Washington lobbyists and their plans to limit proposed restrictions on their business.
Obama laid down his marker for reform last week, outlining general principles like simpler forms and more flexible rules for borrowers. And he pressured industry bigwigs at a White House meeting to agree to limit sudden interest rate hikes. But the real fight begins this week, and it's about to get ugly, as Democrats enter negotiations with banks and both sides test the resilience of each other's initial, aggressive postures. (Read a brief history of credit cards.)
Senate banking committee chairman Chris Dodd of Connecticut, facing daunting odds for reelection in 2010 and determined to show his independence from Wall Street, has produced a tough bill that would largely prevent issuers like Bank of America, Citibank, JP Morgan Chase, Capital One and American Express from raising rates on customers even when cardholders miss payments or their credit rating tanks. "Americans do not deserve to be pushed down the economic ladder by credit card companies," Dodd said as he rolled out the bill, "It's wrong, it's unfair, and it must end."
The banks have fired back, arguing that they'll get paid one way or another: they say Dodd's recipe is political posturing that will only produce higher initial rates for everyone and diminished credit for an ailing economy. "The American people can't manage their credit," says one industry heavyweight, "If you change the rules, guess what, we'll just start at a higher rate and you'll see a decrease in availability of credit and an increase in the cost to everyone else." (See the top 10 worst business deals of the past year)
That threat would carry more weight if the banks weren't so politically vulnerable right now. "They're trying to figure out the best way to screw the people that are bailing them out," says one Democratic leadership aide. "It's unacceptable." Even if they can't force through a bill as tough as they would like, top Democrats promise to make life painful for the banks.
Credit card leaders have powerful friends on Capitol Hill, though, and neither side expects a clean victory. Moderate Democrats and those with major banks with big presences in their states are receiving particular attention from the banking lobby. These include Tom Carper of Delaware and Tim Johnson of South Dakota: Johnson voted against Dodd's bill in committee and Carper is a longtime bank backer.
But for all their bluster, and supporters, the banks understand that they are in political hot water, and that they will need to compromise — a little. In Congresswoman Carolyn Maloney, who represents much of Manhattan's armies of financial service workers and is head of the joint economic committee, they have found someone more to their liking. She has moved a bill that is less draconian than Dodd's, allowing rate boosts for existing and future
balances in most cases. The bill does incorporate into law many regulatory changes the Administration has already pushed through, like partially applying payments to highest interest rate balances.
But top Senate Democrats want more. "There's a desire to see something much closer to Dodd out of committee than Maloney," says the leadership aide. And if the banks manage to water down Dodd, and only Maloney's bill passes? The Dems have a plan for that: humiliate the banks and the Senators protecting them by bringing a tougher version to the floor and making them vote against it. Republicans for their part realize the political tide is against the credit card industry, but are working with them to limit Dodd's bill. "The bill won't go anywhere as it is" ranking Senate Banking Committee Republican Richard Shelby said Friday.
The most likely outcome is a bill somewhere between Maloney's and Dodd's that prevents credit card companies from boosting rates on existing balances but allows them to jack them up for future purchases, eliminates a variety of unfair billing and payment gimmicks the card companies use to jack up fees, and gives the consumer more ways out if the card companies do try to squeeze them.
And what if the banks ultimately deliver on their threats, simply jacking up initial interest rates on everyone thereafter and constraining credit? "Then you'll continue to see us changing the law and the regulations so that eventually they're out of options," says the Democratic leadership aide.