Red Ink Rising

How the press missed a sea change in the credit-card industry

One of the paradoxes of the business press is that while everyone should read it, since we all live in the economy, not everyone does. In fact, most people don’t. I suspect, if they look at financial publications at all, they flip through with a sense of disconnect. Forbes, Fortune, the Financial Times, and the agenda-setter for the financial community, The Wall Street Journal, and others are usually sophisticated and informed and often interesting. But they can seem strangely remote from the reality that people live day to day or sense is happening to friends, neighbors, and strangers in far-off states.

Nowhere is this disconnect more pronounced than in the story of credit cards and personal debt. Reading back over the last several years, one can detect two parallel narratives on this subject. One body of work, compiled by nonprofit groups, academics, documentarians, and others, has marshaled data to make visible what readers already sense: a dramatic qualitative and quantitative—and recent—shift in the relationship between the credit-card industry and its customers. Yes, this narrative says, something has changed, and, no, the change does not benefit you. The credit-card exchange, we are told, has shifted from a lending and underwriting paradigm to a sales paradigm; penalties, fees, and default interest at rates that were illegal a generation ago are no longer regrettable outcomes to be avoided but central to the business model.

These non-business-press sources place their credit-card story within a broader context, that of a besieged American middle class caught in an iron vice of stagnating incomes; shrinking disposable income; rising costs for health care, housing, and education; the aforementioned usurious and rapacious practices of the credit-card industry; a growing, consolidating, and increasingly sophisticated debt-collection industry; and, to add insult to injury, a new bankruptcy law that closes the courthouse door to formerly eligible debtors.

This narrative, as we will see, is fully supported by credible anecdotal and aggregate data and happens also to be true.

The business press did not ignore these major shifts in the credit-card industry over the years and actually did several fine stories that documented the changing relationship between the industry and its customers. But those stories were all but unavoidable for business publications under the circumstances and did not come close to reflecting the dramatic reordering of a marketplace. With notable and important exceptions, financial publications as a whole stuck to their usual formula of chronicling the (stellar) financial performance, strategies, and intramural competition of corporate actors and of profiling their leaders:

CHARGE! American Express CEO Ken Chenault is about to launch a huge credit-card war. Backed by an antitrust ruling, he’s gunning for Visa and MasterCard. Let the fight begin.
(Business Week, August 9, 2004)

This is a fine story, by the way, but it comes from a stock-investor’s perspective. It is a Wall Street narrative, the one with which rank-and-file business editors and most reporters are most comfortable. Such coverage, while competent, interesting, and necessary, is in the end insufficient. In retrospect it looks blinkered and out of touch.

I’m talking about a question of emphasis, really. The credit-card and general consumer-credit industry shifted radically in just a few years, faster than the financial press recognized. As a result, news organizations were caught unprepared when the reckoning came.

The full story of the credit-card industry’s growth, transformation, and impact has been piling up for the better part of a decade and can be found in Credit Card Natio, by Robert D. Manning, a Rochester Institute of Technology professor; in the work of Elizabeth Warren, a Harvard law professor, bankruptcy expert, and popular author; and in reports from the Center for Responsible Lending, a Durham, North Carolina, nonprofit that did important and prescient work on subprime mortgage lending. Lately, independent documentarians, including James D. Scurlock, creator of the film Maxed Out, have capitalized on an unmet public demand for information on the subject.

By way of background, as these sources explain, the modern credit-card industry is just a couple of decades old and has two founding fathers: Dee Hock, an obscure employee of an obscure Seattle bank, who in 1970 formed the banking cooperative that would become the modern Visa, which allows banks to share fees charged to merchants; and Walter Wriston, chairman of Citigroup’s predecessor from 1970 to 1984 and a banking visionary who steered the bank into consumer lending, fought tirelessly for deregulation, set a then-unheard-of 15 percent growth target, and outmaneuvered competitors to become the biggest issuer of early Visas. Both men were instrumental in radically transforming banking’s cautious post-war lending culture (a result of huge losses suffered after a consumer-lending binge of the 1920s).

As always, irresponsible and unethical business practices were preceded by a regulatory rollback. In the case of credit cards, the U.S. Supreme Court started it with a 1978 ruling that allowed banks to override state usury laws and offer whatever rate was allowed in the bank’s home state. (This is why so many banks’ credit-card operations are now in South Dakota.) In 1996, the court cleared the way for even higher fees.

With no adequate regulatory regime to replace what had been lost, an increasingly sophisticated industry transformed the market from a convenience product to, in the phrase of Demos, a nonprofit New York-based research group, the American family’s “plastic safety net.” And the safety net proved a costly one:

• Americans’ credit-card debt now stands at $900 billion, up 9,000 percent from $10 billion in 1968, adjusted for inflation.

• It rose by a third in the five years ended in 2006, even during a housing and stock market boom, and as consumers shifted card debt to home-equity lines.

• Low and middle-income Americans average $8,650 in credit-card debt.

• The percentage of families that pay more than 10 percent of their income on credit-card payments rose to 23 percent in 2004, from 13.5 percent in 1989.

What’s more, as Harvard’s Elizabeth Warren documents, struggling borrowers have become the industry’s bread and butter. More than 75 percent of credit-card profits come from people who make minimum monthly payments. It is not too much to say that creating more such strugglers has now become a common industry goal.

The nontraditional journalistic sources, I believe, did a better job than their mainstream counterparts of documenting the havoc all of this wreaked on the balance sheets of lower- and middle-income families. These sources emphasize that:

• Bankruptcies tripled between 1989 and 2004, to 1.8 million.

• For the first time in 2004, more people went bankrupt than were divorced or were diagnosed with cancer or graduated from college.

• For every household that files for bankruptcy, another ten would have benefited economically from doing so.

The financial press, I would suggest, did not rise to the journalistic challenge presented by this radical shift. Focused on traditional earnings and marketing stories, it didn’t really ask how it was that retail banking, of all things, the maturest of mature industries, had become a phenomenal driver of earnings growth and share price performance. Instead, it stuck to the script:

KEN CHENAULT RESHUFFLES HIS CARDS Bye-bye, financial-advisors division. Hello, supercharged credit card business! That’s what American Express’s CEO is saying. Here’s how he’s planning to make it happen.”
(Fortune, April 18, 2005)


IN THIS CORNER! The Contender— Jamie Dimon—The New CEO of J.P. Morgan Chase Taking a Shot at the Title of World’s Most Important Banker and Trying to Whip a Sprawling Financial Conglomerate into Shape.
(Fortune, April 3, 2006)


REWIRING CHUCK PRINCE Citi’s chief hasn’t just stepped out of Sandy Weill’s shadow—he’s stepped out of his own to make himself into a leader with vision.
(Business Week, February 20, 2006)

These lengthy stories don’t even wave at the idea that these leaders are presiding over a sea change in the marketplace. Where readers needed simple muckraking, the business press offered hypersophistication:

LOSS OF BALANCE Credit-Card Issuers’ Problem—People are Paying Their Bills. As Users Juggle Their Debts, Revenues to Banks Fall; the Home Equity Effect—Ms. Bode Seeks a Fresh Start.
(The Wall Street Journal, May 25, 2006)

Or “whaddya know” marketing stories:

BRANCHING OUT Citigroup Courts A New Clientele—Mexican Workers. Once Focused on the Ultrarich, It Now Eyes the ‘Unbanked’; Overcoming Fear of Debt—Competing With Loan Sharks.
(The Wall Street Journal, July 27, 2004)

Or, more corporate strategy stories, like this one last October in Forbes:

Credit card losses surged 43% to $2.1 billion from the year before. Still, this is a profitable business. Credit card gross profit (interest income less interest cost) was $4 billion in the second quarter.

Readers, $4 billion for a single quarter’s profits (even before taxes) for a single unit of a single bank, coming after a surge in losses, is a staggering sum. It’s what all of McDonald’s earned pre-tax in its most recent year. It could buy Forbes’s parent many times over. Business reporters—experts at seeing stories behind numbers—too often passed along figures like this without asking how they were earned.

Again, I do not mean to imply that business and general-circulation publications ignored changes in the credit-card industry, a reality that was obvious to millions. A spate of excellent stories, for instance, appeared in 2003 and 2004. Business Week, for example, did a fine job on corporate America’s new fee addiction in September 2003:

FEES! FEES! FEES! Companies can’t raise prices, so they’re socking consumers with hundreds of hidden charges—and that’s creating stealth inflation and fueling a popular backlash.

And in July 2004, the Journal’s Michelle Pacelle offered a pointed look at new and underhanded credit-card practices:

FINE PRINT—Growing Profit Source for Banks—Fees From Riskiest Card Holders. Late Payers and Big Borrowers Are Becoming Cash Cows; How Interest Rates Balloon—A Nasty Surprise on Page 54.

In November 2004, The New York Times and Frontline combined forces for “The Plastic Trap: Soaring Interest Compounds Credit Card Pain for Millions,” an excellent and clear-eyed exposé.

There was more. A Journal story in August 2004 revealed how credit cards contributed to the creation of a surprising new class of bankrupts, while last May Business Week contributed a devastating look at the credit-card industry’s unattractive stepsister, the high-fee, high-interest payday and consumer-product lenders that prey on the poor.

But while the press did augment its normal corporate coverage with good work, in retrospect none of the outlets displayed the editorial vision to step back and see the big picture that was described with such urgency or foresight by the non-traditional outlets.

And beyond sins of omission, business publications routinely transmitted an utterly bogus and credit-industry-sanctioned myth—that recent increases in consumer debt were due mostly to discretionary spending, as though American consumers in recent years spontaneously and for no reason other than some unspecified general cultural decline suddenly became profligate and undisciplined borrowers, mindlessly piling up debt for flat-screen TVs and other frivolous consumer items.

The Journal wrote this in 2002, in a typical example, which included an anecdote about a thirty-one-year-old Denver salesman:

Yet like many Americans Mr. Stouder doesn’t have any qualms about going deeper into debt, and his lenders are encouraging him to borrow… “I want to enjoy everything and not worry about cutting back,” says Mr. Stouder.

The twin myths of over-consumption and the immoral debtor, to use Elizabeth Warren’s phrases, have been debunked for years. Warren documents that the average American household today actually spends less than in the 1970s on clothing, food, and major appliances, and that, after paying for education, housing, insurance, and health care, it has less disposable income, even though the household now has two wage earners.

Research shows, for instance, that nearly 30 percent of low and middle-income people with credit-card debt reported medical expenses to be a major contributor. And in a study cited by Warren, 87 percent of families with children filing for bankruptcy listed one of the “big three” reasons—divorce or separation, job loss, or medical expenses—as the cause.

In its 2004 documentary, “Secret History of the Credit Card,” Frontline quotes Stephen Brobeck, executive director of the Consumer Federation of America, whose point now seems obvious: “People are people. People don’t change. What’s changed is the marketplace.”

Today, as the credit crisis unravels, the business press can be fairly blamed for inattentiveness to the growing strains on middle-income borrowers. Maybe that’s why so many middle-income people don’t read it. 

Has America ever needed a media watchdog more than now? Help us by joining CJR today.

Dean Starkman Dean Starkman runs The Audit, CJR's business section, and is the author of The Watchdog That Didn't Bark: The Financial Crisis and the Disappearance of Investigative Journalism (Columbia University Press, January 2014). Follow Dean on Twitter: @deanstarkman.