Why This Former Credit Card Chief Wants to Rein In Lending

When Richard Vague was a credit card executive in the 1990s and early 2000s, he considered loan growth an unqualified good.

Yet now he's written a book that warns of the dangers of runaway consumer and commercial debt — and he's betting that his old colleagues in the financial industry will listen.

A sharp increase in the ratio of private-sector debt to gross domestic product has precipitated the vast majority of developed nations' economic crises, Vague argues in The Next Economic Disaster: Why It's Coming and How to Avoid It, published this summer by the University of Pennsylvania Press.

That line of thinking might sound unusual coming from a man who founded two credit card companies — First USA, which was sold to Bank One in 1997, and Juniper Financial, which was acquired by Barclays in 2004. But Vague, who left his position as chief executive of Barclaycard in early 2007 and has since launched venture capital firm Gabriel Investments, says the financial crisis spurred him to look at private debt from a broader perspective.

"I never thought in my 25 years in the industry about the issue of overall aggregate system leverage—and nobody I dealt with focused on that either," Vague said. "There's not a genuine appreciation of this as a core issue."

Vague argues that the best way to rein in excessive lending and the downturns that are likely to follow is to impose cleaner, stricter capital requirements. They could come in the form of higher ratios, the elimination of loopholes in existing rules, or both.

That could be a tough sell to bankers, but Vague believes they can be swayed if they comprehend the risks.

"While banks are never in favor of things that constrain lending, the folks I've talked to see the merit in macroprudential policy once they understand the issue," Vague said. "Nobody wants to have to go through a crisis again."

More rigid capital requirements are far from the only controversial recommendation Vague is peddling. He suggests that a broad restructuring of consumer debt could help the U.S. and Europe kick-start their economies. And he believes he has a way to appease both critics who worry about moral hazard and banks concerned that mortgage principal reductions would mean big hits to capital and earnings.

"Our suggestion is, create a one-time window where any loan that gets restructured, the bank gets to amortize over 30 years and thereby avoid penalties to capital and reserves," Vague said.

Vague's central idea about the risks of consumer and commercial debt falls within the realm of mainstream macroeconomics, according to several economists.

"I think there's a link between the expansion of private credit and crises," said James Thomson, a professor of finance at the University of Akron and former economist with the Federal Reserve Bank of Cleveland. "But the missing element is that often this is preceded by an expansion in the money supply or the credit supply."

However, Thomson has doubts about the practical realities of implementing tougher capital requirements and debt-restructuring programs.

Bank and real estate lobbyists would oppose higher capital requirements "pretty actively," Thomson said. "They'll argue that if you give banks fewer breaks, the consequences will be a disadvantage in cost to European banks and world competitors."

On the other hand, Vague has a receptive audience in at least one of his former associates. John Tolleson, who co-founded First USA with Vague in 1985 and now heads Tolleson Wealth Management, said he's all ears.

"[Vague's] analysis is very interesting — it's something that hasn't really been studied in great depth in the past," Tolleson said. "It'll be a new factor in forecasting and evaluating economic activity."

Vague joins the ranks of other financial industry executives who have spoken out on political and economic issues in recent years — even when it might ruffle the feathers of their industry peers.

M&T Bank Chairman and Chief Executive Robert Wilmers protested income inequality and "stratospheric" executive compensation in a 2013 annual letter to shareholders. And John Allison, the former chairman and CEO of BB&T, blamed politicians and "crony capitalists" like Goldman Sachs for bringing about the Great Recession in his 2012 book.

Vague expects that his ideas will encounter resistance. But he also said that during his time in the credit industry, he and his colleagues were largely open to reform — as long as it was fairly applied.

"We were committed to ways to be capital-efficient," he said. "But what is also true is that we played within the rules and never minded if a rule changed, as long as it affected everyone."