Senator Dodd Is Saving Lenders From Themselves

(MoneyWatch)  Senator Christopher Dodd is getting tough on his old chums in the commercial banking industry. The Connecticut Senator who heads the Senate Banking Committee, and was once the beneficiary of a Countrywide home loan himself, is turning on credit card issuers who have tried to wriggle out of an interest rate cap imposed on loans which goes into effect in February next year. Monday, Dodd asked for an immediate freeze on all credit card interest rates, just days before the committee votes on bringing the deadline up to December 1.

"No sooner had it been signed into law [in May], but credit card companies were looking for ways to get around the protections," Dodd said in a statement. "At a time when families are struggling to make ends meet, jacked-up rates can quickly create crushing debt."

Unsurprisingly, the news has not been well received by the banking lobby, which claims that it will be impossible to make the adjustments in time. Of course, what the firms really mean is that it will be impossible to make adjustments that allow them to stem the tide of losses originating from their consumer loans divisions. In the third quarter, banks' consumer loans and credit card issuer units hemorrhaged cash, leaving large lenders such as Bank of America deep in the red.


Given the extent of last year's woes, 2009 has been a surprisingly easy year for conglomerate banks such as Citigroup, JP Morgan Chase and Bank of America, most of which have used big trading profits to mask the grim reality underlying their consumer lending operations. Now it seems, things are about to get a lot tougher -- if, at least, Dodd gets his way.

Dodd's rambunctious approach might strike some as mere grandstanding, given that he is facing a tough re-election campaign next year. Still, even for those who don't find themselves siding with populist financial policy all that often -- and I count myself among them -- the proposal to move the deadline for credit card interest rate caps up and to freeze rates right now makes a lot of sense: not just politically, but financially too. For in the process of aggressively raising their interest rates right now, lenders are effectively putting their long-term viability at stake in order to paint a prettier quarterly earnings picture.

It has been said over and over again this year that a true recovery of the economy will happen when the consumer starts borrowing and spending. Nowhere does this statement hold more true than in the consumer banking space, which relies on consumer confidence as much as retailers do in order to successfully expand operations. By punishing customers right now, banks might be able to eek out a few extra cents per share of earnings when they report next January. In reality however, operations will be shrinking as more consumers become suspicious of bank lending practices, and less inclined to borrow.

Bank executives must not confuse the remarkable performance of their share prices this year with the actual picture of their operations, or they will end up in the same situation they found themselves in a year ago (and maybe worse).

Senator Dodd is not just helping borrowers out: he is saving the banking lobby from itself.