Richard Whalen

My Bank of America Visa charges 32.24 percent on unpaid balances. Why? Because they can.

And because, in these credit-squeezing days, Bank of America is so computer-driven and afraid of default that it is lumping together their regular “good pay” accounts with the people who are skipping payments. In New York City, interest rates at this level are usually associated with guys with flat noses who work for the Mob.

As consumer debts go sour, bankers belatedly squeeze credit and tighten access for individuals and small businesses, causing a delayed ripple-effect. This weakening trend can prompt panicky creditors into extreme responses – for example, Bank of America.

The credit card industry, which is being investigated by the Senate’s Government Operations Subcommittee, is a tight oligopoly of five financial giants. In addition to Bank of America, the Plastic Gang includes J. P. Morgan/Chase, Citigroup, BankOne and Wells Fargo Corp, which together control 80 percent of consumer credit cards in the U.S. This vast aggregation of financial power has exercised proportionate clout on Capitol Hill and within the Bush Administration.

Senator Carl Levin, the veteran Democrat from Michigan, is unimpressed with the bankers and their lawyers in the $1000 custom-made suits who come to his hearing room. Looking down from the dais through his signature half-moon glasses, the savvy, unflappable investigator Levin and his hard-working staff have assembled a vast amount of information on the inner workings of the credit card industry. They’ve learned that no human being is involved in the computer-automated “scoring” of a consumer’s all-important FICO rating. Anything the computer is programmed to disapprove, such as an underpayment, late payment or even an application for another competing card, pushes up the cardholder’s FICO score. Once it rises above 600, watch out.

The contagion spreading from the subprime mortgage crisis to the banking credit squeeze into other sectors of consumer debt seems to be both cyclical and structural – a double-whammy. The housing cycle is correcting after five years of over-expansion; at the same time, the typical consumer’s balance sheet is weakened by the unseen but acutely painful destruction of phantom residential housing equity “wealth.” Not only is refi borrowing to sustain consumption cut off by falling house values; consumer credit card companies are belatedly cutting back on access to cash advances and even cutting off cardholders whom the computers deem likely to default. Thus, the most reckless consumer credit expansion in modern U.S. history is being driven toward the cliff of default by the panicky creditors.

Eventual write-offs of uncollectible consumer debts by the mega-banks and credit card companies are just beginning, and estimates of the eventual write-down of bad assets run as high as 70-80 percent of trillions of dollars. Even the largest banks and credit card companies are enormously under-capitalized to absorb future losses of this magnitude. In the process, legal battles will persist for years and perhaps decades. Everyone underestimates the factor of time to heal the excesses and write off the losses.

Recently, a friend told me to just call and protest and threaten to get a Visa card somewhere else and they will quickly lower your rate rather than lose your business.

Well, it didn’t work!