July 06, 2005
Wednesday

The most sweeping bankruptcy reform in decades is now a fact. Legislation that President Clinton vetoed and President Bush supported has become the law of the land.

Its tireless promoters, most notably the major purveyors of credit cards, portrayed the change as necessary to curtail abuse of overly liberal bankruptcy protections they claimed had become epidemic.

It is a matter of record that their fervor was matched by their generosity - for many years credit-card issuers have ranked among the most lavish campaign contributors.

Credit providers such as MBNA, a leading proponent of the reform now enacted, send millions upon millions of solicitations to potential credit-card consumers annually. The criteria for issuing credit seem to be chiefly that the recipients possess a valid mailing or e-mail address and the wherewithal to complete an application for credit.

When credit is made too easily available, the market response would be an increase in bankruptcies painful enough that credit issuers would become more selective about their solicitation and acceptance practices. Despite claims of admiration for the workings of market forces, credit suppliers sought a different solution - make it significantly more difficult for people filing for bankruptcy to have credit-card debt wiped out.

With the aid of their massive spending, the credit issuers have succeeded. Credit-card debt, often a prime factor in a bankrupt's insolvency, will in future survive bankruptcy for many a stricken filer.

As a general economic principle, greater risk must be offset by higher rewards. With greater risk comes increased cost, and to encourage the willingness to tolerate higher cost, more substantial benefit must be a possible outcome.

Conversely, as risk is reduced so is reward. Investments guaranteed not to lose money are obviously less costly and so promise commensurately more modest returns. Now that credit-card issuers have been graced with legislation that substantially reduces their risk, one might think the costs they pass along to their customers would be reduced. That is, one would think so if one believed the motive of those issuers were rooted more in market forces than greed.

Clearly, the market force of increased bankruptcies failed to chasten credit issuers in terms of their solicitation and lending practices. Instead, they sought legislated protection to insulate them from their own excesses. Free-market effects, it appears, are not what they're after.

Shortly after the new legislation's passage, MBNA, at least, enacted sweeping measures that increased costs to their cardholders. Their notice to customers is blunt in its phrasing: "Your account will have variable APRs which are higher than your current APRs."

That's plain enough, I'd say. But there's more. We also learn that charges posted in a foreign currency will now be subject to a "transaction fee equal to 3 percent of the U.S. dollar amount of each such transaction."

MBNA is also "adding transaction fees for balance transfers and check cash advances, ATM cash advances and bank cash advances." Besides these and other new costs (I haven't recounted them all here), the grace period for repaying balances without accruing interest charges has been shortened.

For credit-card issuers, it is hard to imagine a more delightful marriage of circumstances: significantly mitigated risk joined with numerous sharp fee increases and terms guaranteed to produce greater interest income. How better to make historically profitable businesses impressively more so? And the solicitations for new credit cards, already among the most numerous pieces of regular junk mail and spam e-mail anyone receives, are certain to become even more prolific.

Bankruptcy reform is a gift to the credit-card industry bestowed by members of both parties. When currying favor with politicians, the smart money favors incumbency much more than party affiliation - Democrats and Republicans both enjoyed the industry's beneficence, and many on both sides supported the measure (the Senate vote was 74 to 25, and the House vote was 302 to 126).

It is a gift bought at the expense of those least able to afford it for the enrichment of those already rich. And it will deliver its rewards to the well heeled into the foreseeable future.

Bravo for the winners here. Sadly, consumers are not among them.

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