Credit card companies collect on their investment

Buried in a front-page article in today's New York Times on how Americans are sinking ever more deeply into debt, thanks in large part to too-easy-to-be-true mortgages and bottomless credit from credit card companies, is an astonishing statistic.

"Since 2006, when the bankruptcy law was changed, the credit card industry has increased its earnings 25 percent, according to a new study by Michael Simkovic, a former James M. Olin fellow in Law and Economics at Harvard Law School."

Furthermore, while sponsors of the bankruptcy bill promised that consumers would benefit from lower borrowing costs as delinquent borrowers were held more accountable, the cost of borrowing from credit card companies has actually increased anywhere from 5 percent to 17 percent, says Simkovic.

It was a little more than a decade ago, in 1997, when a lobbyist named Jeffrey Tassey helped convince then-Rep. Bill McCollum, a Republican from Florida, to sponsor a bill to reform the bankruptcy system. Tassey had worked for the American Financial Services Association, a trade association representing credit card giants such as MBNA America, General Electric Corp., and Household Financial. The lawmaker was no stranger-Tassey had hired one of his former staffers, and he had also held a fundraiser for him. [American Banker, 2001.] (These days Tassey is still a lobbyist with his own firm, representing, among other clients, the American Bankers Association.)

At the time, I worked for Public Campaign, and we gave Rep. McCollum a "golden leash," a "symbol of the ties between special interest money and elected officials."

The credit card companies' lobbyists argued that consumers had become too irresponsible, declaring bankruptcy willy nilly. This was bad news for the credit card companies, which then could not necessarily collect on these consumers' debts. I remember marveling at how they could argue this point of view with straight faces, given all the come-ons these same companies sent to consumers, egging them on to spend, spend, spend.

For years after that, the biannual appearance of the bankruptcy bill proved an easy line of cash-no need for them to take out credit-for lobbyists and members of Congress. The list of K Street mercenaries who earned money from the bankruptcy bill was a bipartisan Who's Who of the powerful, including Haley Barbour, former Republican National Committee (RNC) chairman; Lloyd Cutler, counsel to Presidents Bill Clinton and Jimmy Carter; and Lloyd Bentsen, former Secretary of the Treasury under Clinton. Meanwhile, commercial banks and credit card companies poured more than $159 million into the coffers of federal candidates and political parties, nearly two thirds of that to Republicans, according to the Center for Responsive Politics.

Finally, in 2005, the commercial banking and credit card industries got what they wanted when Congress approved the Bankruptcy Abuse Prevention and Consumer Protection Act. And now we hear, three years later, from Professor Simkovic, that the "bankruptcy reforms profited credit card companies at consumers' expense." This while so many Americans are now as the Times puts it, "standing on the financial precipice," submerged in debt so deep there is no way they can climb out. Meanwhile, the same lawmakers we rely on to figure out a way to jumpstart the economy still collect piles of campaign cash from the same characters who brought us the bankruptcy reform law.

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