Has anybody read Sen. Dodd's bill to stop credit card abuses? Probably not.
What else can explain its enormous support in Congress, by the president and in editorial circles? Maybe they'll read it after it becomes law and a nightmare to our economy and the legislators who voted for it.
The "Credit Card Accountability, Responsibility and Disclosure Act" is astonishingly irresponsible. I've read it many times, and I think it will deepen and lengthen the ugly recession we are in.
It might even ignite a stock market plunge the likes of which we have not seen since Sen. Alphonse D'Amato introduced an equally reckless bill in 1991 to cap card interest rates.
The key problem with Dodd's bill is that it would abruptly shut off numerous, desperately important revenue streams that card issuers need to survive the recession. In doing so, it would set off a dangerous chain reaction that would severely reduce retail transactions, potentially threatening the jobs of millions.
It would also unavoidably saddle consumers with sharply higher APRs, higher taxes to fund creditor bailouts and significant investment losses for their portfolios and pension plans.
For the record, nobody has been more critical of abusive credit card practices than I have. It has consumed much of my career. I even got fired for it a decade ago. And in these pages since then, I have condemned card issuers time and again for dishonest pricing practices.
In short, I agree that legislative reform is justified. But not Dodd's way.
In comparison, the new Federal Reserve Board card regulations and Rep. Maloney's "Consumer Bill of Rights" reflect a more balanced reform. Dodd's bill makes a big mistake of confusing cardholders' anger about issuers with the products themselves — their Visa, MasterCard, American Express and Discover cards. They hate the former but love their cards.
Dodd's attempt to punish the industry would have the unintended consequence of making those cards more expensive and out of reach for millions.
Were lawmakers to look more closely at his bill, they would discover how truly Jacobin it is. In nine months after enactment it would force late, bad check, over-the-limit and foreign transaction fees to plummet, perhaps by 80% or more.
Has Dodd or his colleagues considered how much that might cost issuers and how they might make it up? My guess is it would cost billions, forcing them to raise APRs by several hundred basis points, reimpose annual fees, ditch or charge for reward programs and tighten credit to minimize losses.
It's not going to make consumers, retailers or investors happy, especially about Sen. Dodd and all those who voted "aye" for his bill.
It may be that Dodd's emphasis on these fees has not scared anybody, because his bill only requires that they meet a reasonableness standard, one that is tied to the cost the bank incurs to process the infraction involved. What's so terrible about that?
Unfortunately, the bill doesn't define the word "reasonable." And that means courts will do it in response to the thousands of class actions that lawyers will file on day one of its enactment.
We don't have to guess too much how they will decide. They will force reductions of late, OCL and bad check fees from the current $39 to $10 or lower — an almost 75% reduction.
Foreign transaction fees will fare no better. Courts will bounce them all over the map, dropping them to almost nothing in some cases and pushing them higher in others.
Their decisions will confuse consumers and present issuers with disclosure nightmares.
Add to these woes other features in the bill that will cut expiration dates to a year or less, squeeze profitable credit worthy 18-21 year olds out of the system, have a disparate impact on Equal Credit Opportunity Act protected minorities, and squelch other sources of revenues, and the industry could spiral into legal and financial chaos.
Ten years ago card issuers, bulging with profits, could have weathered Dodd's bill handily. But not now. It is a mess. Its customers — cardholders and merchants — are in revolt. Its bad debt losses are in the 10% range and getting worse. It has been forced to cut credit limits, and it is highly vulnerable to a staggering judgment in the tens of billions in the largest antitrust lawsuit in U.S. history.
Lest we forget, the plaintiffs in the interchange lawsuit are hot not just for damages, but interchange rates as close to zero as possible. That could mean an additional plunge in industry revenue of $20 billion or more a year well into the future.
As if to make sure that would happen, in the fine print of the Dodd bill, there is an order to the comptroller general to gather every possible piece of information quickly that shows interchange pricing in a bad light.
The official reason for the demand is to provide Congress with information about how, if at all, to regulate interchange fees. But I see something more sinister: the creation a treasure trove of biased data and positions, all with the imprimatur of the U.S. government, to help the plaintiffs extract the highest possible settlement or judgment from the defendant banks.
And it gets worse, paragraph by paragraph. It's as if the bill were written by a Cotton Mather with an AK-47 as a pen.
As I see it, there are three major beneficiaries of the Dodd bill: lawyers, liquidators and the Republican Party. The first two would make millions on it, and the third would ride the turmoil it creates back into power.