Credit Card Reform Will Be in Your Wallet

We know what's in your wattet: the government's hand. But there's nothing to take credit for in the credit card reform bill. Sure, it's tough to sympathize with the credit card industry, but to hear President Obama tell it, you'd think they were as bad as -- gasp! -- those evil hedge funds that held out on Chrysler's bailout.

Still, the reforms wending their way through Congress are pretty much pointless. They virtually mirror new regulations imposed by the Federal Reserve last year but which take effect in July 2010. Since the congressional proposals would go into effect nine months after they're approved, that means they'll happen maybe six months earlier. This is change we can believe in?

The banking lobby says the new regs will limit consumers' access to credit, but it's not like we really need our own backstage VIP pass anymore. It was the easy terms Bank of America (BAC), Citigroup (C), and JPMorgan Chase (JPM) previously showered on us like baubles at Mardi Gras that got us into the financial mess we find ourselves.

Although I'm a firm believer in the slippery slope effect of government regulation -- what you allow the government to do today is not nearly as bad as what it will do down the road using today's actions as precedent -- I'm not quite so sure what the credit card industry is upset about.

The regulations and legislation would both essentially do the following:

·       Bring back the grace period. You'd be able to drop your payment in the mail on the day it was due and not be considered late because the credit card company didn't receive or process it till several days later.

·       Pay down higher interest balances first. Currently you pay off the lowest cost debt first before tackling higher interest rate debt. That would flip when the new rules took effect.

·       Limit student borrowing. The promos that litter most college campuses these days would be restricted. Under-21 students would need to prove they have an income or would need a cosigner.

·       Prohibit universal default. This one's up for debate as the Senate comprise bill eliminated it, but if you miss a payment on your Visa (V) bill Mastercard (MA) won't be able to raise your rates too, even though you might now be a higher risk to them.

Not that the regulations or laws are good, because it will lead to limited credit and when the economy improves we're going to sorely miss it, but with the two versions fairly similar complaining about the one but not the other is disingenuous.

Then again, why is Congress acting to be redundant? I'm sure it has nothing to do with one-third of the Senate being up for reelection next year and Banking Committee Chairman and prime credit card bill sponsor Chris Dodd facing his toughest campaign in years. Taking on the straw men of the industry makes a good campaign foil, though some of the more outlandish ideas Dodd had injected into his original version -- forbidding any rate increases, any time, ever, for example -- were stripped out.

But we certainly won't find weak-kneed congressmen standing tall with the credit card companies against this measure. After all, many of the issuers are the same banks that put taxpayers on the hook for billions of dollars when they got their bailouts: BoA, Citi, and Morgan all have substantial credit card business.

While the industry may have greased the skids for us sliding deeper into debt, the regulations, the legislation, and even the President's speech don't put enough of the blame where it really belongs: on us!

Capital One Financial (COF) and American Express (AXP) may have given us the means, but there was no one forcing us to run up our cards to the limit. Now that the good times have gone, and everyone is reeling and scaling back on what they charge (and allow us to charge), we're tilting the scales in favor of one group and against the other.

We've badgered the financial institutions to hand out money willy nilly to people who couldn't afford it, and now that they're pricing the debt we have based on the risk we represent, we excoriate them for that too.

It's not necessary for us to love the moneylenders, though when we want the flat-screen TV and shiny new set of wheels we're all too ready to forgive them any sins. But we shouldn't vilify them either for taking the steps necessary to ensure that the greatest amount of credit is available to the greatest number of people who are able to pay it back. Expedience from politicians is expected, but that does not mean we should support them when it rears its ugly head.  

I do not have a financial position in any of the stocks mentioned in this article.

Executive Greed Will Sink Chrysler Financial

Executives at Chrysler Financial are just plain greedy. So just why did we bail them out? It's okay for the taxpayers to pony up money but they won't accept pay cuts. That's the exact reason these government bailouts are a joke. We're putting the taxpayer at risk and those who ran the company into the ground don't want to shoulder any.

But Chrysler Financial's maneuvers aren't so unique. General Motors (GM) finance arm, GMAC, was given a free pass to convert to a bank holding company. So did American Express (AXP). But those conversions were done before the pay cap rules were passed so they didn't need to rein in corporate excess.

And that's just fine. Chrysler Financial was looking for another handout, though. $750 million worth, and their execs didn't want a pay cut. Seems to me they're not so bad off if the bosses don't think they need to reduce their pay to save the company. And if they're not so bad off then they shouldn't get the money. Nor should they have gotten the TARP money to begin with. 

So they've lined up private financing they say and can make do without the government's assistance. That's as it should be. But it also points out just how greedy these people really are and why they should have been allowed to fail if it came to that. Greed will ultimately sink Chrysler Financial.

I have no financial position in any of the companies mentioned in this article.

Separating the Good Debt From the Toxic

Separate the good debt from the toxic.

Why didn't we just realize this before? All it apparently takes to solve our current economic malaise is just to separate the "good" parts of a company from the "bad," the stuff we like from that which we don't. Like a good farmer, all we have to do is separate the wheat from the chaff.

Bank of America (BAC)  looking weak? Separate its "good" assets from the bad "toxic" debt! American Internatonal Group (AIG) invest in risky mortgages? Separate the "good" investments from the "bad."General Motors (GM) on the brink of bankruptcy? Yep! Separate the "good" car companies parts from the "bad!"

This is the thinking that is now in vogue in Washington. President Obama and Treasury Secretary Tim Geithner have decided that all we gotta do is just get rid of the "bad stuff" from our companies and we can return our economy to health. Of course, like waste from a nuclear reactor, no one really wants to talk about what we do with all this toxic stuff. Where are we going to bury it?

Of course we hear that we'll just package it up and sell it off to investors, or whatever doesn't find any takers, we'll "wind it down." Oh, is that all? Gee, why didn't Goldman Sachs (GS), Citigroup (C), or Ford (F), for that matter, think of it? If it's really all so simple as just removing a decade (or more) of bad decisions from the balance sheet -- while still leaving those who made the bad decisions in the first place in their positions -- don't you think the companies would have done that themselves?

We wouldn't have had to bailout out AIG three times or more; Citibank wouldn't have been suckling at the taxpayer's teat, and the President wouldn't have had to fire Rick Wagoner and dirty up his hands. 

This seemingly "simple" solution will do only one thing: saddle taxpayers with even more debt to pay off while exposing us to runaway losses. If private enterprise was unable to find a willing buyer, what makes the government think it will do any better? The only way that can happen is if they remove the risk associated with it and that can only happen if the taxpayer shoulders more of the burden. 

This is just a wildfire ready to burn, but only waiting for the right tinder to set it off. It will be our children and grandchildren who will be stuck sweeping up the ashes and paying the bill.

Disclosure: I have no financial interest in any of the companies listed in this article.