May 05, 2010
-
News: Interest Rate Caps; An Explosion
Everything changed in the credit card industry back in 1981 when South Dakota's Governor William Janklow cut an historical deal with Citibank. Janklow wanted to bring big Citi to the country town o Sioux Falls. It took more than just fast talking on his part, it took a new law. A law that would eliminate credit card interest rates. A secret deal was cut where Janklow guaranteed Walter Wriston then Chief Executive Officer of Citicorp of a push on the new law in exchange for bringing 400 new jobs to the state; a large number in terms of a state population of less than a million. And so a new credit card environment evolved whereby consumers have become the victim of as high as 30 percent interest.
Today, financial institutions earn as much as 20 percent of their annual income off credit card interest rate proceeds. Over the past three decades, banks have gained significant earnings and top executives of them have been living the good life thanks to Governor Janklow. The recent recession changed the world of banking and credit card companies began feeling the pains of record breaking delinquencies and card write-offs. Some have felt a repeat of the great depression when cardholders began walking away from their homes and card bills. The top three U.S. banks alone lost over $7.3 billion during 2009 as a result of bad card debt. While banks were losing a percentage of previous profits, Americans were losing all the equity in their homes, retirement funds wiped out and savings dwindle down to nothing.
Now, one of the hardest hit banks during the recession, Citigroup‘s CEO Paul Galant said the company's credit card division lost a minimum of $75 million last year and continues to “hemorrhage money.” The number doesn't include cards it issued under its co-branded programs. Galant didn't mention the extent of loses in Citi's co-branded programs.
Read our series on Interest Rate Caps; The Beginning and the End to learn more about the developing events.