Tuesday, October 26, 2010

Dodging Fence Posts and Whacking Moles

Earlier this year, Bill Maher invited Elizabeth Warren, the new Chair of the Consumer Financial protection Bureau (much to the dismay of Republicans), to appear on his HBO show “Real Time” to talk about recent legislation regarding financial practices by banks and credit card companies. An interesting and funny exchange took place between the two. Speaking of the Dodd-Frank bill, which was being debated at the time, Warren said:

“I really thought . . . that we were on the brink of real financial reform, that we were going to change the system, that we were going to have a consumer agency to make sure that we rolled back the crazy abuses and the tricks and the traps.” Maher looked puzzled and interrupted her,

“You thought that? Boy, what do you smoke before the show?”

Warren, unamused, continued:

“I also thought that we would change the rules on things like derivatives and that we were going to change the rules on resolution authority, what we do with these big banks, that we were going to get rid of too big to fail. The problems could not be more obvious, and quite frankly, the solutions are just about that obvious but we can’t seem to get the two together.”

That the Dodd-Frank legislation and other attempts at corporate reform do not go near far enough has been well documented on this blog. CNN recently compared the corporate response to these new reforms as a game of “Whac-a-Mole,” that the minute one set of bank fees or practices is banned, a whole new creative set pops up in its place.

Similarly, the Credit CARD Act that went into effect earlier this year established a credit card holder’s Bill of Rights by outlawing 10 egregious practices by credit card companies that padded their bottom lines. However, as Elizabeth Warren pointed out in her interview with Maher, it doesn’t take much to get around these 10 regulations:

“The problem with the approach . . . is that it’s like putting fence posts on an open prairie. You’ve got 10 of them now and if you smack straight into one, you really will get hurt. But if you want to hire just one lawyer, much less an army of lawyers, you could just run a little to the left of it, or a little to the right of it, and it’s business as usual.”

A report by the Center for Responsible Lending confirms that as some credit card abuses are outlawed, new ones inevitably proliferate.

Below is a parody of how commercial banks are responding to the new regulations imposed by the Credit Card Accountability, Responsibility and Disclosure Act that Warren refers to as "fence posts on an open prairie":


  1. Can Elizabeth Warren save us? Seriously, as head of the Consumer Protection Agency, can she really do anything in the face of the power of the banks?

  2. Well, at least we can say that the Credit Card Act is a start! However, its too little too late! Our spending culture can be summarized by "if you can't afford it, put it on the credit card!" I remember my freshman year in college when credit card companies would set up in the student lounge to get all us 18 -year olds quick access to credit!!!!
    Unfortunately all that irresponsible overspending, tied in with the mortgage crisis, helped put us in the situation we are in now. While I agree that credit card companies are very much to blame, (I mean lets face it, they lured us in with interest free periods, deceptive interest rate plans, free debt transfers and increasing credit limits) many of us must also look at ourselves for the blame. Where is the individual accountability? It is true that credit card companies send us terms that were in 5-point type and were 20 pages long, that none of us neither had the time nor took the time to read. However, did they force us to spend well beyond our means?
    As I traveled abroad this summer, I couldn’t fail to notice that many of our counterparts in Europe find our credit card usage incredulous. Difficult access to credit, which we face now, is not something novel in other countries. Now, after the financial meltdown, those credit card offers have ceased coming to my mailbox. I am not sure that that’s entirely a bad thing.
    One action by credit card companies that I found extremely irritating, was the preemptive effort to mitigate the effects of new regulations. My credit card interest rate jumped up almost 10% from my current rate. So, I agree that this Act is not the right antidote. However, it might be the first steps of further legislation that will curb deceptive practices by our corporate community.

  3. The first time I heard about the CARD Act, I thought I would be out of a job soon. I work as a collector for a major bank and one thing I didn't want to see happen is another change in how we collect money from our customers.
    The credit card business is huge and we do make a lot of profit from it. I will admit that banks in general make a lot of profit from fees and interest charges. However, from my own experience, I can say that most of the people who fall into debts that they can't get out of, are purely financially irresponsible people. When you look at the charges people make within one billing cycle and they only pay a minimum payment just to get by for the month, wouldn't you think those people are also trying to beat the system as well? Why would you want to spend so much when you know you don't make that much money to pay it back in a decent timeframe? I am sure a lot of those consumers think they are smart when they make that $10 minimum payment, thinking they are using the bank's money. When the bank turns around and charges them, they turn around and blame it on the bank for abusing them.
    I do think many consumers are allowing the banks to make money of of them. It is just a simple concept: you don't have the money, don't spend it. But many commercials seem so tempting that any new electronics or whatever it may be that comes out, even if people can't afford it, they think of a credit card. I think it's a bad system overall and the banks alone are not to be blamed for the credit card crisis.

  4. I agree the banks alone should not be blamed for this credit card crisis. Americans have gotten quite comfortable with the idea of spending with credit. Part of the problem is the media and businesses themselves. Instead of encouraging consumers to purchase with cash many if not most/all of the ads playing every minute are encouraging purchases through finance. This has increased during the downturn of the economy and many consumers have fallen prey to it. I am guilty of this...so I have to somewhat conclude that purchasing on credit is not necessarily a horrible thing if one can manage, budget and ensure that they strive to repay the debt...the big line I draw is at essentials that are utterly expensive but yet a necessity such as a car or a home. Idle and irresponsible spending through credit on material things such as clothes, shoes, bags etc. is where the credit system becomes blurred with potential downfall...but overall if used wisely the credit system can be positive.

  5. The idea of "better the devil you know" is what is running through my mind. Having moved to the U.S. 9 years ago, i spent a great deal of time learning the credit system. The U.S. propensity to credit card spending is incredible and the rules and tricks that come with it, even more so.

    By imposing new regulation, it will merely forse the credit card companies to find different and sneakier ways to get their money. This will forse the average american to relearn the system and identify the pit falls all over again.

    One must remember that the credit card companies are there to make money. They are not a benevolent society put together for the convenience of the masses. If one rents a car rather than walking, one pays the price. The price for the insurance also varies based on ones driving record.

    The concept is the same as credit cards, if people choose to use credit rather than cash, then the fees and rates will fluctuate based on spending history.

    Once people understand that companies are in business to make money, there will be less focus on regulating the capitalist nature and more emphasis placed on education on how to use the system.

  6. I do not believe we can blame the banks for imposing fees on violators of credit terms and conditions, but I do not believe we can blame the card holders as “financially irresponsible people” either. It has become increasingly difficult to afford the everyday items on salaries that are at best stagnant, if not degrading. There are many reasons why a person may have a large balance on their credit card besides being a dead beat. What if they lost their job due to layoffs and now surviving solely on their available credit? They are going to be making their minimum payment for a long time considering it now takes months to find a job. By allowing credit card companies to impose these sometimes outrageous fees on individuals who are victims of a sour economy is essentially kicking them when they’re down. I am glad legislation was passed but saddened that the banks have already circumvented any chance of reform.

  7. The credit card holders supposed Bill of Rights is as much of a disappointment to Elizabeth Warren as it is to me. The fact that our legislature made the largely progressive move of even adopting such a thing, only for it to be lackluster and fall short of the standard for those with high hopes for regulation. The fact that the Chair of the Consumer Financial Protection Bureau admittedly knows that credit card companies can easily by pass the 10 rules with the help of an "army of lawyers" is astonishing. If she is so aware of the problem, why not fix it? Such a commanding position obviously commandeers some sort of authoritative or even persuasive uses that can be used to push Capital Hill to modify these rules. "If its broke, fix it" and that's exactly what Ms. Warren and legislature should do.

  8. Brian C. (FIU)

    "The whole country just sucks!" I'm not normally as negative as Maher, but by the end of that interview I felt the same way he did. Whack-a-mole is much more rewarding than the game we are playing with the banks (at least every now and then in Whack-a-mole you get a good solid hit on one of the moles!); but the reason I get frustrated isn't because the banks squirm and dodge regulations.

    I tend to have the attitude of, "if they're smart enough to figure out the loopholes then good for them." The banks are businesses and they wouldn't be good businesses if they weren't creative in finding new ways to make money.

    However, it's what Ms. Warren mentions toward the beginning of the interview that gets me; "...the banks have lobbiests in Washington in numbers I've never seen..." Now, its not that the banks are figuring out better ways to play the game; instead, they are getting the referees on their side! I have trouble taking any conversation about what to do with these abusive banks seriously. It's easy to point out what's wrong and what needs to be done to fix it, but it's impossible for most of us to grasp the extent to the control the banks have over law making. It seems like an impossible situation and frankly... it really just sucks!

  9. JULIE ST (FIU) Perhaps I am in the minority, but I think that when we insist on living beyond our means, then the credit card companies and banks will have carte blanche to do what they want. It is extremely easy to walk into Best Buy for a DVD and walk out with a home entertainment system, not having had to pay a dime. With that credit comes astonomical APR's and hidden fees. But, we needed a 60 inch television... I understand that we are in a "recession," and people are using credit to feed their families, but we also have many people who simply live beyond their means. The banks play games with us because they can appeal to our consumer driven society. I am aware that the banks play games and find loopholes, but how many people really read the fine print when they are signing their name to the credit application.

    Money is too virtual now. I have gone for weeks without touching or seeing a dollar bill. We don't "see" money anymore, we just hope that it really "exists." Maybe we shouldn't have gotten rid of the gold standard.

  10. That the credit card industry has found away around new laws is no surpise. In fact is it not a truism that for any specific action prohibited by a law there can usually be found another specific action to obtain the same results intended by the first specific action that was outlawed? How can anyone expect anything different? An eternity could be spent endlessly passing prohibitions against new specific actions and schemes that the banks could come up with to achieve the same results they desire.

    However, we all realize that banks are in the business of renting out money. They need to get it back and they need to make a profit or they can't exist. They are one of the legs of the economy. So any action to limit or control them would probably have a price that could be just as distasteful. Really, if anyone is expecting banking reform that is equitable for all they are probably headed for a lot of disappointment. So perhaps it really comes down to this; when it comes to money matters and decisions it's beneficial to become thrift savvy and learn self-sufficiency.

  11. The problem is that these big banks have a hand in the back pocket of our legislatures. As I like to refer to these banks as slippery snakes, I am compelled to refer to our legislatures as snake charmers. These so called corporate reform acts enacted by our legislature are filled with loopholes for these snakes to slither through. So our government is just as accountable, if not more, for the behavior of these banks as they instigate it.