Bank Regulators Push Back Against Credit Card Junkies

November 13, 2008 by  
Filed under Debt and Credit

The credit card junkies (credit card abusers and their bank enablers) smelled bailout blood in the water and decided to strike.  They asked Federal Bank Regulators at the Treasury for some favors.  First, the banks want to write-off billions in credit card debt (up to 40% of unpaid balances).  That in itself is not a problem that bank regulators care about.  The problem arises from the other part of this request.  The banks want to delay showing the credit card write-downs on their books until after the defaulting consumers pay the remaining balances on their card.  In effect, the banks want to pretend that their balance sheets are in much better condition than they really are, allowing them to operate with less “real” capital.

Personally, I am not in favor of under-capitalized banks being allowed to operate as if their enormous credit card losses didn’t exist.  Haven’t we had enough of these bank balance sheet shenanigans?  I have. 

The corollary favor requested by the banks and by some consumer credit advocates is that deadbeat credit card customers not be required to pay taxes on forgiven credit card debt (which is reportable income under the tax law) until the balance that was not forgiven is paid.  In other words, the credit card deadbeats would receive an interest-free tax loan from the government, for an indefinite period of time.  Can you imagine how long it would take some of these folks to pay off their balances, making minimum payments? 

Mr. ToughMoneyLove is happy to report that this request was refused by the Treasury Department.  Yes, there is in excess of $900 billion in consumer credit card debt floating out there.  It is also true that credit card default rates have increased 48% in the last year.  But I don’t care.  Unlike mortgage defaults which can generate severe negative rippling effects through the entire economy, the damage from credit card defaults is largely confined to the respective lenders and borrowers.  It’s their problem, not mine.  As a taxpayer I had nothing to do with creating the problem, so I feel no obligation to contribute to the solution.  Let the banks and card holders sort out their own co-dependency issues.

If some banks go under because of their poor credit card lending practices, bye-bye.  If some irresponsible credit card customers pay more taxes because of their forgiven credit card debt, it’s better for the rest of us.  It also may be a good tough love lesson learned for all of them.

So thanks to the Office of Comptroller of the Currency for saying no to the credit card junkies.  Let’s hope that Congress doesn’t get all teary-eyed over this problem like they have others and try to legislatively override the Treasury.

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3 Responses to “Bank Regulators Push Back Against Credit Card Junkies”
  1. I’ve been saying that the Credit Card industry is the next possible meltdown. As more and more people get “squeezed” and it becomes more difficult to make payments, CC are going to take a back seat to putting food on the table.
    Take away the ability of people to consolidate credit card debt into home equity loans and refinances and you have a recipe for massive problem on the horizon.

  2. Curtis says:

    Of course, many credit card issuers are the same banks that had (or now have) the bad mortgage exposure. Asking for a bailout for bad credit card debt is just an opportunity to double-dip into taxpayers’ pockets.

  3. Curtis: According to today’s news, Paulson has trumped the bank regulators by deciding to use TARP funds to lend to investors who buy securities backed by non-mortgage consumer loans.

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