With President Clinton poised to veto legislation that would make it harder for people to file bankruptcy, lenders are bracing for a steep rise in personal and business filings over the next year, and credit card companies are anticipating higher chargeoffs and losses.
Bankruptcy filings have tapered down since 1998, when they hit an all-time high, but this trend has not elated bankers, who maintain that all economic signposts a cooling economy, a negative savings rate, profligate consumer spending suggest bankruptcies will begin to skyrocket. Indeed, the rate already seems to be ticking up: filings during the week before Thanksgiving were 19% higher than for the same week in 1999.
It is not surprising that people in the banking industry are forecasting a surge in bankruptcy. After all, the industry has been lobbying hard for the bankruptcy legislation that passed the Senate last Thursday, and evidence of more filings would support the bankers case. But several nonpartisan organizations and research firms have come out with similar projections, suggesting that political motives are not the only operative ones.
Though the bankruptcy bill passed the Senate with enough votes to override President Clintons veto, it is not clear if Congress will be in session to attempt an override. The White House is optimistic it has enough Democratic votes to sustain a veto, National Economic Council Director Gene Sperling told American Banker Friday.
The president will either veto or pocket veto the bill, Mr. Sperling said. If attempts are made to override the veto, we have reason to believe there is a good chance we can pull off four votes from Democrats who voted Thursday for the bill to sustain the veto.
The industry favors the bill because it would require bankruptcy filers to repay more of their debt. But Kenneth Crone, senior vice president of issuer risk at Visa U.S.A., said a forecast conducted by an accounting firm for Visa U.S.A. suggested that even a passed bill would probably not bring bankruptcy numbers down. The legislative impact will not be that significant, he said.
Anticipating more bankruptcies, credit card lenders are examining their underwriting criteria and collections operations. Some experts predict that a decline in creditworthiness among the general population will put a greater strain on subprime card lenders, some of which have already been experiencing higher-than-expected chargeoff and loss rates.
The wild card is the economy, said Samuel J. Gerdano, executive director of the American Bankruptcy Institute, a privately funded nonpartisan organization. Running up consumer debts is fine as long as you have the income stream to sustain it, but as soon as you run out of income, youve got a problem.
Statistics released last month by the Administrative Office of the U.S. Courts showed that in the 12-month period ending Sept. 30, there were 1.2 million personal bankruptcy filings, down 6.8% from the same period a year earlier. But even a statistical decline cannot disguise high figures, said James Chessen, chief economist at the American Bankers Association. You often hear people say that if it went down, it got better. But I would say that its slightly less appalling than last year, he said.
Visa U.S.A. forecasts that by 2002, the number of personal and business bankruptcy filings will reach 1.7 million, 300,000 higher than the record 1.4 million set in 1998. SMR Research, a financial consulting firm, predicts a 10% to 20% increase in filings in 2001.
Morgan Stanley Dean Witter & Co. projects filings will rise by 10% in 2001 and by another 13% in 2002, but Morgan Stanley analyst Kenneth A. Posner called this a moderate increase. He said, We believe that the card industry should have the pricing power to largely offset that negative impact on the income statement, however, it will be interesting to see if any individual issuers have problems or are unprepared for this rise in filings.
George Yacik, vice president of SMR, said subprime lenders are not likely to be hurt, since they are already in the business of figuring out how to select and then collect from delinquents. People dont write about this, but subprime lenders reject a lot of people, much more than other issuers do, he said.
More bankruptcy filings mean more customers for subprime lenders, and since there are fewer subprime lenders than there used to be, those still in business will do quite well, Mr. Yacik said. But other lenders may see their credit quality figures get worse.
The trend toward tighter lending criteria may have steeled lenders for problems ahead. Last week at the conference of Americas Community Bankers in New York, Federal Reserve Chairman Alan Greenspan reiterated that lenders need to be cautious in the wake of weakened borrower conditions, but added, it is important that the response of management to these concerns not be overdone.
Mr. Chessen from the ABA said he was encouraged by Mr. Greenspans remarks. Greenspan was basically saying, I like the way the slowdown is taking place, and the danger is if everyone overreacts and makes it worse. Mr. Chessen said that while he considers the bankruptcy figures alarming, he finds it hard to believe that a slowing economy is causing the increase. Certainly, people can be pushed to the margins, but it still doesnt explain why bankruptcy has risen with a rising economy, and with such low unemployment. One of the reasons must be that the laws are too lax.
There is some speculation within the financial industry that the profile of the average filer has changed from distressed worker to reckless yuppie. Daniel Dierker, vice president of analytics and consulting at credit bureau Equifax, noted one recent development. There seems to be a lessening of the stigma associated with bankruptcy. So I can charge and charge and charge and I have a lot more nice, personal playthings. If I have to file for bankruptcy, perhaps Id rather not, but I might not lose a lot of sleep over it, he said.
But again, the debate is charged with politics. It is in the best interest of the banking industry to prove that bankruptcy filers are predominantly people whose carelessness and recklessness have brought on financial distress, while consumer advocates want to show that bankrupt people are victims of circumstance.
Edmund Mierzwinski, consumer program director at the U.S. Public Interest Research Group, said the notion that bankruptcy filers are unconscionable spendthrifts is false. We are not talking about abusers here, he said. We are talking about single mothers who make under $25,000 and cant afford to pay their credit card bills. These are not people building castles in Florida.
Mr. Gerdano said research conducted by the American Bankruptcy Institute shows filers come from all income brackets. The common strand, he said, is that these are not people with substantial savings. They would be classified generally as poor.
Michele Heller contributed to this article.