Saturday, April 11, 2009

Consumer Debt—Attack of the Zombie Banks

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Okay, They May Not Be Zombie Banks Yet, But They Sure Are Predatory

The realm of economics has given us some colorful new terms in this bleak season. My current favorite is “zombie bank.” You go in, the tellers seem real. Despite the vacant look in their eyes they are more than willing to take your deposit—or your credit card payment. But in fact, once your money is in the maw of the monster, it disappears, from your hands at least, forever. Is your bank a zombie bank? Is it undead? Is it headed for a zombie apocalypse?

It seems like we are numb to the numbers these days. A trillion is the new billion. Several hundred million is chump change. Well, I have a trill for you. At the end of December, according to, Americans were $2.56 trillion in debt—excluding home mortgages. Who’s holding that debt? Banks, like Citibank, and finance companies impersonating banks, like GMAC.

Credit Card Debt by the Numbers

According to Cardtrak, revolving credit card debt in the U.S. reached a record $977 billion in October 2008. Yup, nearly a trill for credit cards alone. Eighty-five percent of that amount was incurred on bank-issued credit cards. The Federal Reserve reported that consumer debt increased by $76 billion in 2007. Americans charge about $150 billion on goods and services each holiday season alone. The median amount of credit card debt racked up per borrower (not household) as of October 2008 was $5,710. According to a Cardtrack press release, 13% of cardholders with balances “carry total credit card balances in excess of $25,000.” Three percent of cardholders carry more than $40,000 according to Standard and Poor’s.

Bad Moon Rising

The number one cause of credit card default is job loss. According to AP, we’ve had 4.4 million of those lost, while simultaneously consumer debt has reached Himalayan proportions, since the beginning of the recession. And cracks are appearing in the consumer credit facade. Target Corporation’s credit card receivables written off as uncollectible are up 80% over a year ago—and Target still carries $9.3 billion in debt for last season’s Michael Graves kitchen collection. And that’s just one tiny slice of the credit card pie.

According to the Nilson Report, credit card lenders expect to write off $395 billion in bad debts over the next five years. That’s more than the first half of all TARP (troubled Asset Recovery Program) funds disbursed. And for every dollar written off, a dollar must go into the lender’s loss reserve. This is how zombie banks are built. And this is why stress testing a bank is, more or less, purely hypothetical. Because nobody knows how great the job loss will be, or how long the unemployed will be out of work, or how many credit card accounts will be written off as consumers give up on their credit.

Meanwhile, newly unemployed families are paying for groceries how? Credit cards.

So what’s on the horizon? Americans racked up 290,000 bankruptcy filings in the fourth quarter of 2008, and another 100,000 in February alone. So we’re on pace for a million bankruptcies in 2009, despite the fact that restrictive bankruptcy laws have made it much harder to file than in the past. So I guess if you are going to capitulate, you might as well run up a huge credit card debt before you commit financial suicide. Does America’s collective credit card debt carry the potential to transform weak banks into zombie banks? Absolutely.

How Banks Are Fighting Back

As a first line of defense, banks are covering their bad debt losses with exorbitant interest rates. The term “usury” used to be reserved for use by crackpots. Now, Senator Bernie Sanders (I-VT) is working on anti-usury legislation according to Arianna Huffington. What counts as usury? Chase cardholders, for example, with only minor credit infractions are getting hit with 27.99% interest rates. This at a time when the prime rate is at 3.25%. That is usury. In 2007, according to AARP Bulletin, Bank of America raised rates for some of its credit card customers to 28% for no reason at all! That is usury. In its defense, Bank of America said, “Oh, we really didn’t do it to that many people.”

You might think your government would seek to protect your interests as a consumer. Not so. States like South Dakota and Delaware and have no rate limits at all. Consequently, credit card companies base their operations in these states. This is why Sioux Falls, of all places, is booming. Such lack of governmental oversight allows rates to go as high as 32% to 41%. That is usury—a practical definition for practical times.

In one respect at least, the banking history was amazingly prescient when it lobbied so effectively to tighten bankruptcy laws five years before the meltdown hit. It was part of a very simple strategy for success—or servitude. Simultaneously ease credit while tightening bankruptcy rules. Some marquee names in the Senate voted for that bill. Democrats. It was about responsibility they said. Never mind that credit was literally foisted upon an entire generation of college students with no visible means of support. Never mind that. It’s about personal responsibility. Just ask the Senate Banking Committee. I know, they’ve changed their tune today. But they voted in favor of a host of laws that enabled predatory consumer lending on the part of the nation’s credit card issuers. And we won’t even mention the Republicans. Laissez faire.

Banks know that not everyone can declare bankruptcy, so they have been using a legal device known as a summary credit default decision in cases where homeowners are behind on credit payments but relatively up to date on their mortgages. Why? That’s were the money is. Last year in Minnesota, default judgments in favor of non-mortgage creditors soared 39 percent over 2007 levels according to the Minneapolis Star Tribune. These were mostly for credit card and auto loans.

In Minnesota alone, $462 million in default judgments were filed in 2008. Think Capital One’s ads are cute? They led the pack with $37 million in judgments. Remember Citibank? Their rate of increase in judgment filings was 344 percent. And this was largely before the real meltdown occurred. So you can imagine what is to come.

Banking analyst Meredith Whitney predicts, “credit cards are the next credit crunch.” “She estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010,” according to

Restoring Confidence in What?

So, how is it that in the current moment of bank bailouts, destructive predatory lending—and collection—practices on the part of banks are allowed to continue even as taxpayer dollars prop them up? That bailout money comes from the same people who owe these lenders $2.56 trillion.

How is it that when Omar Sadiq, of Hopkins, Minnesota, receives a $15,289 default judgment against him for credit card debts, $6,751 is for interest? And how much did it cost Mr. Sadiq’s credit card company to get that judgment against him? A $252 filing fee. And now he’s toast. Credit card “debt forgiveness programs” are a joke when you understand that a third of the total of any given debt can consist of exorbitant interest.

As this recession deepens, it becomes less and less about restoring confidence in our banks, or Wall Street, or AIG, or any other discrete segment of the economy. It’s about restoring confidence in our basic system—a system that should allow someone to borrow against future wages at a reasonable rate—like 12 percent. Restoring confidence in our basic system should be about eliminating the kind of contractual gotcha’s that allow a borrower to sign a lease with Ford Motor Credit Company, miss five payments out of 24 and be dunned for $13,000 in depreciation on the vehicle. Got that? You paid for 19 months on the lease. You paid for its depreciation. You have to pay twice. It is in the credit contract you signed. Pay up or have your wages garnished. You should have read the contract. Caveat emptor, right?

No. This is the story of how we become zombie bait—marks in a swindle. And how a national government and fifty states knowingly allow it to happen. And it is time for it to stop.

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