Tuesday, February 26, 2008

2009: Revenge of the Debt Junkies

Here is a scenario which I call "The Revenge of the Debt Junkies." Many other observers also anticipate this scenario, but some might well be surprised by the fierce power of the tsunami of bankruptcies which I see heading for shore in 2009.

The scenario (which might also be called "turnaround is fair play") begins with this notion: For every action, there is an equal and opposite reaction. In this case, the action is unrestrained bank greed, which was protected by changes in the bankruptcy law adopted by the Republican Congress.

The idea behind these changes was simple: consumers could all too easily renounce debt, and the lending industry pushed Congress into making it more difficult to renounce what had been borrowed in good faith. Unsurprisingly, the reformers made no effort to explore who had been dumb enough to offer credit to those consumers who were so predictably uncreditworthy.

In other words, the banks formulated the status quo in this way: We the lenders can be utterly irresponsible in offering credit to consumers who show little or no evidence they can responsibly pay off the debt we have extended them. We are utterly blameless when the easily foreseen defaults emerge; the fault is all the consumers.

Wait a minute: doesn't it take two to tango? Who forced the banks to offer stupendous loads of credit to uncreditworthy consumers?

This tightening noose didn't satisfy the bankers' greed, however; they also instituted an array of immensely profitable policies designed to gouge unwary consumers.

Chief among these strangleholds is the "deposit-debit shuck and jive." Your deposit to the bank only clears in 3 to 5 days, but your checks (debits) to your account clear instantly. Thus the hapless consumer can deposit funds far in excess of the checks and charges he/she intend to make, but still be nailed with three, four or even five $35 "overdraft fees" as their debits are recorded against "insufficient funds."

For reasons far too mysterious for mere mortals to grasp, deposits seem to languish in some sort of financial purgatory for days (and no, these are not checks drawn on foreign banks) while charges are amazingly recorded in real time.

Our credit union doesn't seem to have this peculiar "differential" in processing, but plenty of commercial banks seem to suffer from this odd affliction--for example: Isle bank fees up 14.2%, to $117.6M:

An Advertiser review of filings with the Federal Deposit Insurance Corp. and the Securities and Exchange Commission shows that Hawai'i's eight largest banks collected a total of $117.6 million in fees in 2007, which was up 14.2 percent from the previous year's $103 million.

The increase comes as banks' profits from their core business of making loans to businesses and homeowners has cooled.

Gosh, do ya reckon that 14% increase in fees flows to the bank's bottom line?

Another classic revenue enhancer is the "we stick together gotcha." If the consumer makes a late payment to credit card 1, then he/she may well find a huge jump in the interest rates being charged on credit cards 2 and 3, even though those companies always received timely payments.

The reason given is "a change in risk characteristics," but why does this policy give off such a noxious stench? As a matter of fact, credit card issuers need not give any reason for jacking up interest rates; they can do so at any time without any other reason than, well, because we decided to.

There are many other examples of pure, distilled, heady greed which the banking industry has managed to codify or protect via their lapdogs in Congress.

But now the "equal and opposite reaction" is making itself known. In response to howls of outrage from consumer advocates, the Democratic-controlled Congress is making noises about rewriting some of the more onerous (to consumers) sections of the bankruptcy laws.

And before you blame the lawyers, please note the "banker written and approved" bankruptcy laws actually increased the costs of declaring bankruptcy, making the process longer, harder and more expensive for the consumer. Simplifying the bankruptcy laws would actually lower legal fees for those declaring bankruptcy.

What is the psychology of debt renunciation? I suspect the average consumer tries to hold the whole game together as long as possible, but the loss of a home via foreclosure might well trigger a desire for complete renunciation of all debt and a "fresh start."

I also have to wonder if consumers might well begin rebelling against being a debt serf/debt junkie for the foreseeable future, and decide that "turnaround is fair play," i.e. renouncing the debt owed to rapacious bankers and lenders is merely an equal reaction to the industry's greed.

The bankers/lenders hold most of the cards in this game, but the consumers have one ace up their sleeves: they vote. Will the new president and Congress of 2009 hear the roars for relief, and perhaps for revenge?

That seems like a reasonable bet; and if so, the vast stone moats which protected the bankers' unlimited ability to increase profits at the expense of consumers may well be turned into barriers which lock the bankers into a prison of their own greed-obsessed design: for every action, there is an equal and opposite reaction.

NOTE: I will be away from my desk until March 3, but will try to post regardless.Email will be read but I may not be able to respond in a timely fashion; my apologies in advance.

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