The Credit Card Game (full documentary) | FRONTLINE

tonight on front line for 30 years Americans have played a game with the banks for the banks holding all the cards changing the terms raising interest rates changing the rules of the game consumers use plastic for 100 000 transactions a minute has produced billions in profits and nearly a trillion dollars in debt Americans simply cannot pay back the level of debt that has grown over the last 30 years and the credit card industry even played a hand in the economic meltdown we had consumers refinancing their homes to pay off all their credit cards apply now and then they went back out and filled their credit cards back up now as credit card losses are piling up the government is stepping in we need to fix the rules make them tougher with a simple clear single mission to protect consumers why hasn't there been credit card legislation to control some of these abusive practices why did it take a near depression lobbying power tonight on front line correspondent Lowell Bergman and the New York Times investigate the battle over the card game 20 years ago credit cards were a stable profitable part of the banking industry but then a brand new player arrived on the scene who would help change everything turning a relatively stayed business into a multi-billion dollar Bonanza it was a company called Providian Financial and its former CEO lives here in this estate modeled after the White House his name is shaelish Mehta and since he left pravidian he has never agreed until now to be interviewed about the company Providian was a very profitable business we make over 180 million dollars quarterly profit almost a billion dollars a year we were making billion dollars a year in profit in profit before tax and while previdian was successful their name would become synonymous with the tricks and traps that have entangled so many credit card customers it made you the poster boy for what's wrong with credit cards it made us the push to boy we were the poster boy correct Mata says he agreed to this interview because he thinks providian's reputation was unwarranted he believes they were Pioneers who gave credit to those who previously did not qualify the riskiest of Borrowers there were 30 to 40 million potential households prospects have no credit card so we said how do we meet the needs of these people who do not qualify for a regular credit card so the lower income people so they're lower income people they were bad credits they were bankrupts there were young credits there were no credits they were called unbanked people we labeled them unbanked that was the word came out of Providian the unbanked market and then it became like a industry standard world and so your business took off and our business took off I got a Visa gold with a thousand dollar credit line people treat you differently when you have a gold card and with pravidian my credit just keeps getting better these are from Providian we approve people jumped at the chance to get a credit card seeing it as a passport to a more affluent lifestyle and previdian was betting that these riskier customers were more likely to carry a balance so what you were going after were the people who weren't going to pay their bill often full are influence yeah right and if we do so then we will be attracting the profitable segment of the credit card industry and your Hope was to keep them paying basically in perpetuity right they're they're never one of them to really pay at all if they make the minimum payment yes then that loan will take almost 20 years to pay back absolutely and you make more money that we make more money when Providian began Mata ran the company with this man Andrew Carr already a legendary innovator in the world of Consumer Finance Carr spoke to us five years ago many of the things that I've been involved with were in the back room on the operating side Carr Had A peculiar genius for enticing new customers with gimmicks that were too good to be true when you're getting something in the mail several times a week that offers you zero percent for six months or whatever it may be they look at the headlines of the solicitation of the mail they spend 30 seconds on it and okay I'm going to be better off at the beginning they're going to give me something they're going to give me a zero percent rate people believe what they want to believe it was Carr who came up with the ideas and Mehta who implemented them and their Innovations would help change the nature of the credit card business so previdian wasn't alone absolutely not they may have started it and maybe were the innovators of these bad practices but they certainly were quickly adopted by everyone else they started seeing the profit margins Robert McKinley is a credit card analyst who followed the rise of providians I mean here they were giving away products with no fee and charging interest rates and making a ton of money and so hey uh let's do it too and so you know it quickly spread throughout the uh the entire industry one of the many Providian practices that spread was making people believe their credit cards were free by eliminating the then standard annual fee we made it look like it's a giveaway and took it back in the form of I call I used to use the word penalty pricing or stealth pricing so the competition increasing competition led to the use of penalty fees bigger penalties bigger penalty fees and you were operating with your penalty fees like everyone else but we all have to make up somewhere because everybody had to pay the annual fee to stay competitive where do you make your money so everybody increased the late fees everybody started increasing the over limit fees and the peop when people make the buying decision they don't look at the penalty fees because they never believe they'll be late they never believe they'll be over limit right we were having some Financial issues we changed careers Elizabeth blast Cruz learned all about Stealth pricing when she got a credit card from one of providian's competitors I got an offer for a credit card with a credit line of 500 dollars so I was happy to take that credit card and um that's kind of when it all started I remember when the balance was about 480 or so and I was laid on a payment they added on a late fee and increased my interest rate well that of course took it above the 500 credit line and with that they charged me over the limit fee that Bill had maybe 60 70 of fees and every month it was the same thing unless I paid all that and more which of course at the time I couldn't afford to do there was no way I could ever get ahead the last Cruz says she ended up paying three thousand dollars that's five times more in interest in fees than the original four hundred and eighty dollars she actually spent on purchases she was caught by the traps hidden in plain sight credit card companies are required by law to explain the rules of the game it's called disclosure it's in those solicitations that come in the mail even shilesh Mehta gets them open this one for me and tell me what you think that's from Bank of America and on the back it says zero percent intro APR but that is it asterisk or whatever the marks I have to Now read that footnote I will have to remove my glasses to read it so it says for this see disclosure summary in search for details and I have to find a disclosure summary which is the one here so on the outside zero percent intro APR in here and it says that my APR is 11.9 15.9 or 19.9 right and the API receive is determined based on your credit worthiness I have no idea which one I'm going to get when they approving so disclosure you say doesn't work they said I mean look how much time it takes for both of us I think that your average consumer is not going to able to translate what the real pricing is now you put out statements like this we did we did absolutely well the criticism is that it's exploiting the customer the fact that they don't really understand what's going to happen in a way I would say yes in a way the pricing was designed that it would require a degree of some sort to understand how many different ways I'm paying and what I'm paying you know I mean borrow on a credit card nobody knows what the real cost is that would be true for this man Don Bollinger I've always paid my bills but I was running very very lean and knew that if anything big happened that I'd be in serious trouble and eventually it did it really started when I found out I had a tonsil cancer Bollinger won his battle with cancer but then he lost his job it was just my train wreck because of uh delinquent payment on a totally unrelated debt that I had one of the credit card companies told me that they were going to increase my rate from like 8.9 percent up to 19 percent when I heard that I immediately made a phone call and attempted to protest it yes sir and I didn't understand it all I didn't understand how something not related to their loan the money I owed them would cause them to increase my rates soon after Don bollinger's other credit card Bank also raised his interest rate that made even his minimum payments unaffordable and started a downward spiral of missed payments and fees it's not fair it's it's deceptive [Music] but credit card companies say the practice has been a legitimate tool to limit their exposure to higher risk customers in my car door agreement I said that if you're delinquent somewhere else I have a right to increase your rate now you may be delinquent on someone else for whatever reason suddenly my rate will shoot up from 21 to 28 well that's universal default universal default because they need a more and more stealth pricing more and more penalty pricing there's a reason why credit card companies have been allowed to make these sudden changes to the interest rate in the United States credit cards have functioned within a system where it is legal for card issuers to charge any fee or any interest rate they want Without Limits the credit card industry has always been the Wild West that card issuers held all the cards they could do anything they want 39 late fees and 35 over limit fees and 30 percent interest rates and yes it got crazy competition ramped up to such a level that it created a an industry that was out of control the industry got out of control because over the last 30 years regulations on Banks and consumer lending that had been in place since the Great Depression were steadily eliminated the cops left the streets there was no one on the beat Christopher died of Connecticut is the chairman of the Senate Banking Committee where were the regulators and all of this he says that for decades both Republicans and Democrats voted for deregulation and look I voted for it I mean you voted for the deregulation yes but we were wrong uh and the message out there to the financials go ahead and do what you want the market will take care of this the market will protect people and that was the dominant ideology of the era supported not just by Congress and the white house but by the alphabet soup of Bank Regulators like the Federal Reserve the OCC and the FDIC all of whom rarely intervened on behalf of consumers some people have said that we had the appearance of Regulation so people thought somebody was watching but nobody was well that's the fact that we now know there was a lot of regulatory power and authority out there but they walked away from it it was an intentional decision where they literally knew they had the responsibility and made the conscious decision not to exercise the powers that they had and the result for credit cards was that a system developed in which the affluent paid the least and the most vulnerable people paid the most this is one of the dark secrets in this industry people who are operating closer to the margin those are the people who get trapped those are the people who produce the enormous revenues in the system in a strange way the banks were charging borrowers higher interest rate in order to give the wealthy people a break in a strange way if you look at it because the people who have money were paying in full and they were getting the break at the expense of the people who couldn't pay in full Mater resigned from Providian in 2001 after the company had to pay 300 million dollars following a rare investigation by federal regulators but if meta left the industry the practices he helped create would live on spreading throughout the world of consumer Lending and then the economy started to fall apart from the stock market yesterday represented more than a trillion dollars in losses the collapse of the stock market was triggered by a collapse in the consumer lending bubble more bad news on the housing front home foreclosures continue to Skyrocket we are focused on the current economic crisis as primarily a foreclosure and mortgage crisis Plunge but what most people don't realize is that when subprime lending was really taking off it was because people had credit card debt they couldn't afford and the outlet was to refinance that debt into a subprime mortgage find out how easy refinancing can be all your high rate credit card debt into one Easy Loan apply now you had consumers refinancing their homes and taking Equity out and they would pay off all their credit cards I've got a four bedroom house and a great Community there was a huge push to refinance through ads like this one like my car it's new how do I do it I'm in debt up to my eyeballs somebody help me what was happening is some of these consumers were already running out of rope this just gave him a little more rope by consolidating it and then they went back out and of course built their credit cards back up you know it doesn't take a rocket scientist to figure out that if you keep borrowing and borrowing in order to consume now eventually you crash and burn employers cut another 663 000 jobs last month forecasters have said unemployment will continue to rise and today with double digit unemployment those credit card borrowers increasingly unable to pay the truth and nothing but the truth so I hope you got I do Don Bollinger like millions of others had refinanced his credit card debt into his mortgage and so when he lost his job the extra debt he took on led him into bankruptcy that's all the real estate that you have yes it's been hard and it still is for some of us they just make it impossible to do the right thing I'm just you know some guy that's laid off live out in the country but from what I see it's just greed and you just struggle and you keep praying that Washington will pass something that's going to reach down and help me and it never happens in fact in the U.S Congress there have been some who have argued for credit card reform for decades the list of troubling practices the credit card companies are engaged in is lengthy and it is disturbing but passing legislation to reign in the industry proved to be impossible consumers are trapped because the banks are one of the most powerful lobbies on the hill the industry got carried away got arrogant and they could never be beaten so they could do whatever they wanted to and it was always when I counted noses I didn't have the votes Senator Richard Shelby is the ranking Republican on the Banking Committee while he has never been known as an advocate for credit card reform he's not always sided with the banks why hasn't there been credit card legislation to control some of these abusive practices why did it take a near depression to do that obviously it's the lobbying power lobbying it's a powerful Lobby group up here we need to proceed carefully but we do need to proceed it's really hard to get a bill through the U.S Senate when the industry is pouring money into Washington it's a very difficult environment to have a reform bill passed nearly every member of the Senate Banking Committee has received large contributions from the financial services industry including the chairman of the committee Senator Dodd the financial services industry apparently has given as much as 30 million dollars to the members of your committee over the last election cycle seven million to your campaigns a lot of good at them huh are you saying they're wasting their money giving you campaign countries no necessarily I listen to people but anybody who thinks they can come in and make a campaign contribution is going to get an outcome based on that is certainly a terribly mistaken the need to reform credit card practice has never been more important Dodd points to the fact that he introduced legislation to take on the credit card industry earlier this year as did his colleague in the house congresswoman Carolyn Maloney weekend I couldn't even go to the floor of Congress without hearing stories about credit card abuses and it was really getting out of hand we need to protect our consumers not times were different now many Americans were demanding change the Obama administration had done its own polling and seen that there was deep anger and hostility out in the country towards credit cards and the administration knew that this would be an easy political Target people are angry out there yeah justifiably angry I mean the system failed them Timothy Geithner is the Secretary of the Treasury you know we can't tell the American people that we're gonna forget the damage caused by this and leave this system basically as it was we're not going to do that but even with the new political realities it would still be a big battle to get the legislation passed I didn't even know whether it was going to get out of committee industry people we're coming up oh Carolyn you know we'll work with you on other things they were basically saying we know we've won you've lost everybody who smiles in the end the law made it through Congress it makes it more difficult for credit card companies to suddenly change interest rates something that might have saved Don Bollinger and countless others like him from bankruptcy it ends the most abusive practices like any time any reason retroactive interest rates increases practices that have trapped many Americans in debt but the real test of change ultimately is whether it makes a difference in the lives of the American people by the time the bill was ready for signing the Republicans had joined in having won major concessions from the Democrats this legislation while it is significant probably the most significant in the card industry's history it still doesn't go far enough to clean up a lot of the practices it was an important win in the sense that it said the banks may not completely own the legislative process anymore but it wasn't really A great win for consumers it's a set of very discreet new laws and the credit industry instantly set to work on how they could run around them by itself that set of rules won't change the game one battle the banks won was the ability to keep charging whatever interest rate they want this credit card bill does not regulate interest rates the credit card companies are able to impose an interest rate of whatever they want to charge for instance a penalty rate on a credit card if you're 60 days late so here we are in a period of unprecedented unemployment and everyone who loses their job is going to become 60 days late on their credit card bill what sense does it make to let someone when they're down get stomped on by increasing their credit card interest rate from 9 to 29 and even under this bill that would still be permitted another major loophole in the law was an eight-month gap between the president signing the law and when the law would go into effect Congress gave them eight months to put it into into uh Bill had to go to the original bill I authored said it's effective the day the president signs it that was my original bill but I never would have gotten out of committee with that bill so we had to change the dates on it I would have loved to have done it earlier than that but I didn't have the votes to do it the banks have used this time to full advantage they've locked their customers into higher interest rates on existing balances cut credit lines and imposed more fees and penalties Pam sawinski is a freelance book editor who recently received a letter from her credit card company I got was from Nordstrom Visa because you're such a valued customer we know times are tough we're making changes to your account and I thought hey this is great maybe they're going to lower my interest rate but the small print on the inside said that they were going to raise my interest rate and that it was going to be retroactive to any existing balance that I had that alarmed me but it didn't stop there soon after the rates went up on her other cards I will say that I panicked I called and asked them why they had raised my rates what had I done and they said we just changed our terms I was someone who regularly carried a balance so my minimum payments increased and as a result my expenses tended to be way higher than I had expected them to be credit card companies are also lowering their lines of credit that's what happened to this man Ben Collins a home builder who relies on his credit cards to run his small business in the middle of a billing cycle we received a letter that set our line of credit had been reduced from 35 000 down to exactly what was on the card that day kitchen we're all squared away on kitchen sink drain the cards were useless at that point and so the employees that I have all had to basically be issued petty cash which is very cumbersome and actually it's somewhat embarrassing it's embarrassing when you know you tell your employee oh don't use that credit card when you know you're perfectly solvent they start to think well is my paycheck going to be good on Friday hold and the next available specialist Collins called his credit card Bank Bank of America to protest the cutting of his credit line and there's nobody that I can speak with at this point okay well thank you very much they're having extremely high call volumes they can't even take your call right now so my guess is that the poor little six people in that department are busy now they're the few people who don't have to worry about their jobs at Bank of America Center here the new credit card Act is not going to help small business owners like Ben Collins their cards are excluded from the law it's a great oversight because companies like mine are the companies that are going to be the first line of hiring and the more difficult they make it for us to survive and thrive in this economy it's disappointing and it's left a bad taste in my mouth a national survey says that more than 50 percent of Americans have had similar changes to their credit cards of one kind or another this means that tens of millions of Americans are now facing much higher monthly payments on their bills which is especially tough and a bad economy I'm hanging on where I am doing as much as much as I can to increase my income but at this time I feel more precarious than I've ever felt in my life the banks have used this period of time to raise interest rates cancel credit lines what's that all about the banks are scared of credit card losses which have been piling up dramatically so one way to deal with those losses is is to try and make more money from everybody else to put the burden on the people who are still paying it's really that simple Frontline asked to major credit card banks for interviews and they refused referring us to their lobbyists the American Bankers Association NASA fettis is a senior Council and vice president of the association she says the increases in interest rates and The Cutting of credit limits shouldn't be surprising Congress understood when they adopted the rule that credit cards would be more difficult to get limits would be lower and interest rates would be higher for everyone but they made the decision that that result was an acceptable consequence an acceptable trade-off for the sake of the consumers the industry is now saying that that my bill is causing them to raise interest rates I mean who are you kidding what have they been doing changing the terms raising interest rates unfairly retroactively on balances changing the rules of the game the complaint that led to this legislation is that the credit card industry was abusing its customers well the card holders manage their credit well but there was a group that was confused and that's what Congress and the Press were reacting to and those people how many of them are there millions um they're confused I mean are those people going Banks well most of the people who end up in bankruptcy or end up with credit card problems the underlying problem isn't the credit card most customers manage their credit cards well understood them but there was a segment that was confused and they realized that it had to be addressed but Senator Dodd and others have said to us the industry got arrogant you started using all these practices that created this problem well once Congress and The Regulators identified the province they've addressed it and the industry's moving on end a story they'll redesign their model based on the new rules and based on the new they're moving on faced with record losses near collapse and a taxpayer bailout the banks have become desperate for revenue and increasingly dependent on a still unregulated source of profits in the card game the fees they can charge on debit cards like small business cards debit cards were not included in the new legislation one of the criticisms of the bill is that you didn't include the debit card which is a companion problem that's growing with consumers it was never in the bill but it was very very difficult to pass this bill and it was the feeling that including debit card reform would have killed the bill would that be debit or credit Miss there are now more transactions with debit cards than with credit cards debit cards right now are growing almost three times as fast as as credit card usages in the United States I have a 12-ounce single espresso because of the uncertainty that surrounds credit cards consumers are abandoning their credit products for debit cards and consumers feel that debit cards are safer with debit cards of course you're using your own money but debit cards can be under certain circumstances even more expensive than credit cards because just like your credit card there is a trap built into debit cards that trap has its Origins 20 years ago with an idea popularized by this man texas-based banking consultant Bill Strunk Strunk convinced bags that they should allow customers to overdraw their accounts and charge them a fee to do it what you saw 20 years ago right was that people were writing checks if they bounced they would often have to pay more than one fee to the bank absolutely plus to the retailer plus late fees so I'm saving them the 30 or 40 Merchant fee and the late fees and let alone the embarrassment of it you know it's not a nice thing to go home to your wife and tell you that well they bounced my check and strong took it a step further by convincing clients to make the checking accounts free to entice more customers but was it really free sure no service charge no not no maintenance fees nothing there was no charge whatsoever on the account except overdraft fees that's not in the fee schedules that's a separate fee but is that what in the end would pay for the free checking the fees from that it would the two best marketing words in the United States are free and all you can eat people love that so they love free checking and it brought in a lot of customers that didn't have a checking account before so it might not offer them pre-checking right and pick up the money otherwise the concept of paying overdrafts loaning customers money when their accounts are empty quickly caught on at Banks Across America because it was so profitable and those profits exploded when the banks began to attach debit cards to those free checking accounts producing billions of dollars in Revenue they don't charge a fee to give you a debit card they're free until you make a mistake and then you'll pay dearly deposit from my from my tenant and I didn't realize it bought a small pizza for seven dollars and ended up getting charged at 33 fee so it ended up being a 40 Pizza the bank covered the seven Dollar Pizza purchase even though her account was empty and then they charged her a 33 dollar fee the equivalent of over twenty four thousand percent annual interest rate for a one-week loan and not knowing she was incurring overdraft fees wermuth continued making purchases all the while she thought she was getting free checking when I'd sign up for the account they told me that it was free checking and I asked if there was any hidden fees and they said no but that month I ended up spending about 365 dollars in fees I really felt like I was being gouged and I called them and they just don't budge wormuth also tried to get the overdraft protection shut off but the bank told her it was an automatic service that could not be removed they just will not make any concession at all this bill's drunk Bill's drunk and the banks insist that despite complaints like were moves most customers want the overdraft service and most banks need it more income and I think there might be some improvement we can help you with Strunk says his idea was embraced by the Banks so they could compete with storefront lenders who offered short-term loans they're called payday lenders payday lenders were proliferating like you wouldn't believe there's a consumer demand for short-term financing that the bankers didn't realize I used to ask the bankers what are you going to do about them they go I don't know I don't know what to do about it you know I can't compete with those people because they were open 24 hours a day or seven days a week or whatever the case may be the point is that there's a demand for this thing Across America there are twice as many payday lenders storefronts as there are Starbucks they're not regulated by the federal government but they lend out over 40 billion dollars a year California Check Cashing CEO Rick Lake runs a chain of 100 stores like this one and he agreed to show us how a payday loan works you wanted my ID with ballot ID and proof of employment and a checkbook customers can come in for cash so I would write a personal check and the store holds on to it agreeing to cash it on the day they are paid it's a small short-term loan mental initial oh so there's a contract assigned correct you're not like one of those credit card agreements right they are contracts but we do make sure that there's 12 point type on then notes in Spanish as well that's it that's the whole thing so the aprs disclosed the fee you know exactly what the terms are there are no surprises and there's no accumulating interest this transaction is illegal for military personnel and is outlawed in 15 states and the District of Columbia because of those fees 255 that 255 dollars cost 45 dollars in fees that's the equivalent of an annual interest rate of 460.08 percent for a two-week loan and the big problem with payday loans isn't just the interest rate critics say it's that people get trapped in a cycle of debt [Music] see I haven't quite have enough to meet all of my bills so this woman told us she came to get a payday loan to pay off her credit card bill before she got a late fee not too good but you know if you're in a jam you do what you have to do whether you like the service or not wouldn't you like to have the choice of using it what people say is that this is a debt trap that you wind up at the end of every month taking out another loan to pay back last month's loan not true debt trap to me the common sense definition of that is that there's something Unknown about the product you've been in our stores you've seen our posters you've seen our disclosures did you at any time feel that there was something you didn't know but to the criticism that the most valuable customers for you are the people who evolve continuously that in the end the amount of money someone pays back may be far beyond the cost of the actual loans themselves well all I can tell you is that it's not the majority of our customers but it's the most profitable part of your customers it's not the majority of our customers now it's no different than someone who you know pays a late credit card would you say that they generate the most in fees those that overdraft their bank account generate the most in service fees I mean that that is the reality of it well the reality is that in a sense those who least can afford it right pay the most in the banking industry in general and credit cards in general and it sounds like it's the same in Payday Advance I would say it's true throughout the finance world Rick Lake says not only do the poor and those living paycheck to paycheck pay more but it's difficult for them to find out how much they're paying when they go to a bank because Banks intentionally never fully revealed to customers how their overdraft system works as long as you keep your account in good standing as a non-contractual courtesy that's a big word we're gonna we're gonna consider paying your checks up to 300 500 in the overdraft you can use two words in their non-contractual and courtesy right why those two words why not just simply say we're going to I don't know make a deal with you because we didn't want it to fall under other Tila regulations and so forth about lending that's the truth in lending truth in lending we didn't want to do that the federal truth and lending act requires an institution to reveal the annual percentage rate the cost of a loan and similar state laws do the same thing that's why you saw those posters in the payday lending store but the banks are careful to not call overdraft protection alone they call it a courtesy it falls outside of the truth in Lending Act and so it's basically unregulated yes and you can charge any fee you want yes theoretically theoretically that's correct just whatever the market bears so from your perspective if the banks were to be fair to their customers they'd have posters up on their walls I think that that is the direction that Financial Services needs to head in you know so everyone knows exactly what they're paying and why to me predatory means not knowing and I would say that anyone that lends money without telling the consumer exactly what they're paying that to me is my definition of predatory don't Banks charge these fees over and over again sometimes six seven eight nine ten times a month some banks do and the fees on the tiny transactions and the small transactions what you're doing is you're making somebody pay more in a penalty than the actual value of the thing that's bought and that's why people are irritated by it they are irritated by then it would it would it would irritate me too I get a 35 cup of coffee that's absolutely true that's what happens that's why it's the consumer's responsibility to keep up with this checkbook not the bank's response it never has been the bank's responsibility not from day why can't the bank deny the purchase at the point of sale they could if they wanted to if they wanted but they don't they use some do but you do agree that that if you apply this fee structure in a way that takes advantage of the individual seven eight nine charges in a day that's abusive I agree with that I agree with that Bill strong says that many of the big banks have taken his concept of overdraft fees too far they do that by not processing checks and debit charges to your account in the order they are received they use a computer program so the banks can pick out the biggest amounts first and charge them against your account this empties your account faster resulting in more overdraft fees for each of the smaller amounts there's no restriction on a bank ordering it that way that's correct and if they're going to make more money doing it that way that's correct if it's a big temptation to do it that's correct Scott Talbot is a Washington lobbyist for the financial services Roundtable which represents the largest banks and he defended this practice the program is set up to honor what the customers have told us they want we've set up on a high to low right we've told you that up front we weren't going to process them from high to low that's what customers have told us they want process my mortgage first process my student loan first process my car payment first and then all the other transactions the smaller ones which customers have told you this when no one ever asked me yeah that's as I told you you asked me if there was a survey there wasn't a survey this is the years of working with our customers to find out what they want and this is what they've told us even if they knew and you told them at the time that this may cost you more money in fees yeah I mean that that's we don't again there was no survey per se we didn't set out what is it based on there what are you it's based on the years and years of experience with customers telling us what they want the best feel and need to try and show profitability right now and they've gotten so hooked on fees that it's almost like a pavlovian reaction to a problem oh you know losses are losses are going up well we know how to solve that let's just put on some more fees the banks want to be able to continue business as usual indeed they're scurrying around right now trying to figure out what other tricks and traps they can put in so they can drive up their revenues and with no cop on the beat that's what they will continue to do Elizabeth Warren is a law professor at Harvard and an advisor to Congress who has proposed a new way to regulate the banks we need an agency rather than Congress gearing up every 25 years and writing a few specific rules we need an agency that is responsive to the changes in the industry in Washington today Warren's idea has been taken up by the Obama Administration and its Secretary of the Treasury Timothy Geithner thanks to a lot of bad things that should not have happened and we need to fix the rules make them tougher but you need to enforce some more fairly more evenly across everybody who's in the business of providing a kind of credit product to a consumer Geithner is a veteran of the Federal Reserve who once embraced Financial deregulation but now he's in charge of imposing tougher regulation on the banks I have to ask then you were at the Federal Reserve you had that Authority why didn't you do it then the FED got a lot of things right but the FED did not move early enough to use the authority the Congress gated to write stronger rules but even with better rules the system wouldn't have worked well enough we got to fix it make that better that is why many of us called for the creation of an independent Consumer Protection Agency whose sole focus is the financial well-being of consumers Senator Dodd and the Democratic leadership in congress have backed this new proposal has sent us a very bold plan for that agency the agency would have regulatory Powers across the entire industry credit cards debit cards prepaid cards as well as mortgages and even payday lenders the idea is to create a brand new agency because the current Regulators the FDIC the fed the controller of the currency have a fundamental conflict which is on the one hand they're supposed to look out for consumers that is part of their franchise but on the other hand they're supposed to look out for the safety and soundness of the bagging system and guess what when you gouge consumers you're actually helping the safety and the soundness of the banking system we have significant concerns with the parts of the proposed cfpa the very same Regulators who had failed to crack down on the banks lined up to criticize the proposed agency once we see little benefit to regulatory consolidation and the potential for great harm and it's just you have a lot of people who have the vested interest in what you call regulatory Turf and they're trying to protect that Turf is that we suggest as Bank regulars we can do it more effectively but that's behind closed doors at a meeting at the department of the treasury Geithner would take those Regulators to task the meeting included his former boss Ben Bernanke the chairman of the Federal Reserve Ben Bernanke was there Sheila bear was there the other top regulators and Geithner was using words that we couldn't print in the newspaper using expletives to express his frustration Geithner made it clear to them that in his eyes what they were doing threatened to undermine the legislation you got irritated with them well I'd like them to put the interest of the country ahead of the interests of their particular agency because you know you can't look at the system and say it serve the American people it basically failed and we are engaged in a just and necessary fight to basically change the things were broken in our system and to reform and put in place a stronger set of protections the breadth of this proposal is in many respects shocking but Geithner and the administration have more than The Regulators to convince the Republican leadership in congress and many in the banking industry are opposed well I don't like it because I'm not a liberal I don't like the government dictating to Bankers that's none of their business it's a free enterprise system let the market work and it'll take care of itself I think this is a tremendous overreach and and very disturbing this is a radical departure from the way we have regulated some in Congress say they fear that the new agency will stifle the free market damaging the safety and soundness of the banks I think the safety and soundness of our banking system should be the number one priority the Republicans are united in their opposition to this Consumer Financial Protection I think that the Republicans are interested in consumer protection we all are consumers but without safety and soundness strong Banks there's no banking system so you've got to have that I think that's Paramount number one and a close number two would be as us as consumers Senator Shelby says you cannot divorce protecting consumers from the soundness of the banks and if you divide it up it's just not going to work and you're going to create you recently said a nanny State I don't think he's right we live with a system where you had people responsible for safety and soundness doing consumer protection and they didn't do a good enough job at that consumer protection was diffused around a whole different set of agencies so it was just a complicated mess and we're trying to do it for a simple streamlining consolidation of that responsibility in one place but there's one major issue that neither the proposed agency or the new credit card law will address is there any chance the administration is going to back an initiative to cap interest rates for consumers a lot of people are now getting 30 interest rates there is some risk if you take that approach you're going to end up denying people who would otherwise be able to borrow responsibly access to credit so that's the trade-off and this is where secretary Geithner and the industry agree that there should be no cap no limit on credit card interest rates why shouldn't you be limited in how much interest or how many fees and how big those fees are if the government were to place caps on interest rates or fees then essentially what you have is the government setting the market the government is determining what the rate of interest the rate of return or the rate of fees should be and that will destroy our free market economy which is the heart of capitalism we are in a historic low interest environment right now historic treasury bills are practically at zero interest and yet credit card interest rates are outrageously high they have not come down as interest rates have come down this is not the normal workings of the market vis-a-vis interest rates these are in effect they're phony rates that are ginned up by the Banks to maximize their profitability no one's proposing capping interest rates no they're not and they're not going through it the Obama Administration is very unwilling to do anything truly radical that would hurt the banks nobody's saying you can't charge whatever interest rate you want at least at this point I don't I don't think that's going to change well the argument over regulation goes on the landscape for the consumer in America has already fundamentally changed it's simply harder to get a loan of any kind between the new rules and the economy we expect that it'll be harder for people to get credit cards so we do know we're already seeing it that small businesses and companies will have a harder time getting credit cards the limits are going to be lower and interest rates going forward are going to be higher when I hear from the industry oh you're going to remove access to credit I sort of shake my head and say yes that's exactly what's needed there needs to be less debt in this system Americans simply cannot pay back the level of debt that has grown over the last 30 years but they bought into this this is the American way well if the Great American economic value is translated to say we must provide debt to people who can't pay it back then the Great American way has lost its way a long way from the arguments in Washington about laws and regulations credit card Pioneer Shailesh Mehta knows that there are some fundamental truths about human nature and money and bankers Bankers will figure it out to comply and say as long as I'm in compliance with what the government says it's none of anybody's business to tell me what to do that's the kind of mindset with which some people work tell me the rules and then I love smart you all they'll find the loophole yeah because you guys are none of your smart enough you make the stupid laws I'll comply and I'll make money it's Market will bear you know and there are always some desperate people who will take the product lending money to people is never a difficult exercise people will take money if you're willing to give them [Music] next time on Frontline how did Bernie Madoff do it the harder was to get in the more you wanted to get in a lot of middlemen a lot of skimming and how did he keep it a secret for so long nobody could get to him that's how he built his Mystique you see a willful ignorance nobody wants to get in the way of all this money inside the Madoff Affair watch Frontline whatever front lines the card game is available on DVD to order visit shoppbs.org or call 1-800 play PBS foreign is made possible by contributions to your PBS station from viewers like you thank you with major funding from the John D and Catherine T MacArthur Foundation committed to building a more just verdant and peaceful world additional funding from the park Foundation [Music]

Channel: FRONTLINE PBS | Official

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Id: Rl-4zRU6wQw

Length: 54min 40sec (3280 seconds)

Published: Tue Aug 15 2023