Frontline: The Card Game

Regular airtime: Tuesday, 9pm ET (PBS)

Cast: Lowell Bergman, Timothy Geithner, Shailesh Mehta, Robert McKinley, Joe Nocera, Elizabeth Warren

US release date: 24 November 2009

By Cynthia Fuchs

PopMatters Film and TV Editor

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I didn’t think [the banks] would be as blatant as they were about doing this. There’s no justification for raising rates retroactively. This is really just a way for them to make more money.
—Barney Frank, 6 November 2009

“People treat you differently when you have a credit card!” No doubt. But what you don’t hear from the happy-happy character who makes this pronouncement in a credit industry advertisement is how differently you’ll be treated—especially by the bank that has issued the card.

This week’s installment of Frontline, The Card Game, looks at that treatment. Reporter Lowell Bergman turns first to Shailesh Mehta, the former Providian Prudential CEO who came up with the practice known as “stealth pricing,” also known as “penalty pricing.” The card is pitched as free in solicitations that come in the mail, but the price for no annual fee includes penalties for late payments and fluctuating interest rates. When Bergman interviews Mehta—no longer with Providian—at his estate (designed to “resemble the White House”), he asks him to describe the scheme. Mehta says it was designed to “meet the needs of these people who do not qualify” for usual sorts of credit, the so-called “un-banked market.” Bergman rephrases, wondering whether the banks are “going after the people who weren’t going to pay their bill often,” with the aim to “keep them paying almost in perpetuity.” Mehta can only agree.

On its face, the practice is much like the subprime mortgage schemes that enticed home buyers into contracts they could not afford. Given the fact that so many people use credit—the number of transactions is something like 100,000 per minute, producing some trillion dollars in debt—the potential for bank profits appears exponential. The most frequently stated rationale holds that because the risk is also high, because so many consumers end up unable to pay their bills at all, those who do pay, however slowly, must pay more.

Frontline interviews several consumers who have been victimized by escalating rates or surprise fees: a high school teacher charges a pizza for $7 and ends up paying over $300 in overdraft penalties (penalties that amount to a 24,000% annual interest rate). And a man is forced into bankruptcy following a bout with cancer and the loss of his job, which initiated “a downward spiral of missed payments and fees,” even though he made minimum card payments on time). While Mehta points out that banks regularly disclose how the system works in documents that also come in the mail, when Bergman adds, “Your average consumer isn’t going to be able to translate” the language in these documents. Mehta agrees: “The pricing was designed so it would require a degree of some sort” to understand it. And when one card raises rates, all the other companies contracted with that consumer tend to follow suit, within the system known as “universal default.” One aggrieved user sums up, “It’s not fair. It’s deceptive.”

According to Harvard law professor Elizabeth Warren (recently seen in Michael Moore’s Capitalism: A Love Story), “This is one of the dark secrets of the industry, [that] people who are operating closer to the margin, these are the people who get trapped. Those are the people who produce the enormous revenues in the system.” Indeed, as Bergman puts it, these are the people who are exploited—intentionally and repeatedly.

It’s not precisely news that the banks take advantage of customers and legal loopholes. Neither is the excuse articulated by legislators like chairman of Senate Banking Committee Chris Dodd (and onetime deregulation supporter), that is, “The banks are one of the most powerful lobbies on the Hill.” Likewise, Treasury Secretary Tim Geithner now says the free market system has not functioned to protect consumers, but has instead ensured profits for banks at “Main Street”‘s expense.

It’s easy to be mad at lobbyists, for instance the American Bankers Association’s Nessa Feddis, who smiles and nods her way through her interview with Bergman, asserting that the new rules imposed by Congress caused the current swift rise in rates, with the specter of ostensible limits looming in February of 2010. (Congresswoman Carolyn Maloney almost laughs at the banks’ suggestion that Congress has caused these increases: “Who are they kidding? What have they been doing?”) But the problem, as Frontline insists, is not simple to solve, and neither are the sides neatly laid out. For all the talk about adjusting the system, Bergman observes, no one in the Obama administration is arguing for limiting interest rates per se.

The credit card industry remains what Robert McKinley, CEO of CardWeb.com, calls “the Wild West,” in which “card issuers… do anything they want.” Just so, Joe Nocera of the New York Times makes the issue clear: at the same time that interest rates are at an historic low, when “treasury bills are practically at zero interest,” the banks continue to raise their APR pretty much however they want. “This is not the normal workings of the market vis-à-vis interest rates,” Nocera says. “These are phony rates that are ginned up by the banks to maximize their profitability.” While The Card Game doesn’t point out exactly who is in bed with whom inside this system, it makes clear that none of it is changing in the near future.

— 24 November 2009
 
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Comments

joe nocera’s point is intellectually dishonest - it is the FED who sets the fed funds rate, from which all other interest rates are established - it is certainly NOT the free market establishing the standard mortgage/t-bill/heloc interest rates.

if consumers don’t want to pay 29% credit card interest rates, then they should pay their damn bill on time.  and if they don’t have the money to pay off their credit card bill - in full - then they are to blame for their ignorance, foolishness, and lack of self-discipline.

imagine what low prices we *responsible* americans would be paying for airline tickets, and hotel reservations, and even food - if deadbeats weren’t allowed a line of credit.

this really angers me, because i work hard for my money - and i’m paying more for *everything* because of people who go bankrupt or default on their payments, who all the while have been taking the same vacations and eating the same restaurant meals as those of us who actually friggin’ paid for those things!

where’s the social justice there?

Comment by steve from newton lower falls, ma — November 25, 2009 @ 9:59 am

My own platform for reform would look like this:

1. A standardized chart that explains the terms of a credit card. The FDA mandates that packaged food has a chart showing nutritional info to make sure that consumers know what they are getting. The form in which this information is delivered is legally standardized. There are still tricks that can be played (the information on a coke can is for one serving, which is HALF of what is in the can), but an informed consumer can easily see around this. Credit card contracts, on the other hand, are really difficult to make sense of. I have no idea what’s in the contract attached to my credit cards. I can’t understand the form. I have a post-graduate degree and an currently working on a PHD in professional communication. I STUDY business documents professionally, and I don’t understand the damn contract. Credit card info should be delivered in a simplified and standardized format. There should be ONE chart that explains all of the expenses attached to the card. Anything too complex to fit on the chart should be illegal. It’s a credit card, not an investment fund.

2. Consumers should be able to cancel a card and establish a repayment plan at a lower interest rate (maybe 75% of the current rate?) at any time. It should be easier to simply move your debt from a complex and ever-changing system of escalating penalties into a stable, “you-pay-this-amount-for-this-many-months-and-you-are-clear-of-your-account” system. Right now, you CAN do this, but usually only after you go to collections.

There should be a “bailout and pay up” device attached to ANY credit card. This card in nearly maxed out and I can’t afford to deal with it anymore? I should be able to say “STOP” and set up a reasonable payment plan at a lower interest rate. The current system is just a trap that keeps people on a debt treadmill until they fall off. If you get in trouble, it’s really, really tough to get out. It should be easier. 

3. Whenever your interest rate goes up, you should be given to option to cancel the card and do the “bailout and pay up” thing. There should be a standardized, easy way to do this.

4. You should have an option to turn off the ability to overdraft of to exceed your credit limit. If you want the ability to overspend and then pay the fees, cool beans. But you should have to affirmatively say “yes, I am opting in to this service.”


The result of these changes would be that credit card companies would have to give you good information, and you would have the power to say “no” to anything that you found unreasonable. You’d still have to pay back your debts, but you’d have the right to do so in a manageable way should you ever object to the terms under which your card issuer wants to do business. The way the system works now, you take a card under a low interest rate, you run up some debt, and then the terms of the card change until you are in a cycle of debt. It’s essentially a more sophisticated version of the old “company store.”

I had a considerable credit card debt a few years back (it was bad, but not catastrophic), and I tried to get a loan from my bank to move the debt to a loan with a lower interest rate and a more manageable payment plan. Because my debt was so high, I couldn’t get the loan. To pay back the debt! Classic catch 22. I could have negotiated the terms IF I let the debt go into default and then settled up on the other end. That would have royally screwed my credit, defeating the purpose.

Fortunately, I had some savings I could dip into. But for people with more financial obligations and fewer resources, that would have been an endless debt treadmill or a credit catastrophe.


Steve from Newton Falls doesn’t really know much about how this industry works. THEY TRY TO GET BAD RISKS ON THEIR BOOKS. They make money on absurd interest rates and on fees. FEES are currently the most profitable part of the banking industry.

There aren’t a bunch of freeloading yahoos hopping on a system and screwing you over dude. It’s not a public system. If Visa doesn’t want to give you a card, they won’t. Certainly it’s irresponsible to take on debt that you can’t pay, but it’s pretty dumb to whine about “deadbeats” when the credit issuing companies are making a bundle off the status quo. Sure, some of these people default and cost the company money and make your interest rates go up, ect. But many more stay on the debt treadmill. If it wasn’t profitable, they wouldn’t do it.

Any how in the hell does any of this cost money to airlines or stores? It costs money to CREDIT ISSUERS, which is the point of a CREDIT ISSUER. Visa loses money on bad debt. But not so much that they don’t keep making bad loans.Of course, as exploitative as this is in the short run, it might not be profitable in the long term, and we could have another financial collapse.

Comment by Jamie — November 27, 2009 @ 7:54 pm

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