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)