FOOL ON THE HILL
While peddlers of bankruptcy reform often make the disingenuous claim that it's being driven by cries from middle America, it's really "Big Credit" behind the curtain pulling the levers. Credit card companies have poured money into campaign coffers, and now they're being richly rewarded. The real problem is not abuse of bankruptcy, but ignorance of personal finance. Help spread the word.
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I heard an interview with Sen. Charles Grassley on National Public Radio recently. Grassley (R-Iowa) sponsored the Senate version of the bankruptcy reform bill that now waits in committee for lawmakers to iron out the details. Passage of the reform bill is not in question, just some of the details. About three-fourths of the House and four-fifths of the Senate voted for it, so you can see that it's a bipartisan issue, though President Clinton vetoed a similar bill last year. President Bush has indicated he'll sign it. I started out listening to Grassley with a sympathetic ear, since I invest in some of the companies that will benefit from the reform. It will, among other things, make it more difficult for people to declare Chapter 7 bankruptcy. That's the kind that requires filers to relinquish all but their essential assets, such as a portion of the equity in their homes and cars, furnishings, cash on hand, clothes, and so on. Once all other assets have been liquidated and the proceeds turned over to creditors, all remaining debt is erased. The main alternative is Chapter 13 bankruptcy, in which working debtors pay off as much debt as possible over a three- to five-year period. At the end of the agreed-upon time, the remaining debt is forgiven. You can see, then, what the argument on behalf of reform is. It boils down to the "personal responsibility" argument. These people got into this debt, so they can get themselves out. It's not unlike the message of the Motley Fool: Take responsibility for your finances. If you blow it, pay off as much of your debt as possible. It's an argument that can generate sympathy -- when it's not you who's filing. Grassley used this argument in the interview, but he didn't attribute the sentiment to himself. He actually claimed that pressure to pass the legislation was coming from "small town America," where Mom & Pop stores were getting stiffed by deadbeats, who weeks later would turn up with new cars. I kid you not. He said this without any hint of irony. I'll bet the man didn't even blush. Ludicrous straw men and simplistic conclusions drawn from anecdotes are nothing new in politics, of course. Ever since democracy was invented, demagogues have tried to pass off special-interest boondoggles as populist legislation. But this was an embarrassingly obvious bit of insincerity. It's sad that Grassley has such little respect for the intelligence of average Americans, but he's no different from myriad politicians and commentators of every stripe. Everyone, and I mean everyone, should know that this bill came from lobbyists. The Washington Post and the New York Times (registration required) have reported as much. The sponsors in Congress have even admitted that lawyers and lobbyists for the banks and credit card companies were involved in drafting it. And why shouldn't they be allowed to? MBNA (NYSE: KRB), the world's number-one credit card issuer, gave $3.5 million total to politicians in 2000 and was among the top contributors to Bush's presidential campaign, along with Citigroup and Morgan Stanley (NYSE: MWD), the nation's second- and third-largest credit card issuers. Credit card companies paid for this bill. That's why it's going to be passed, not because the public cries out for reform. Be straight with us, Chuck. Don't think I'm just a bleeding-heart observer. I own shares in Citigroup (NYSE: C), the second-largest credit card issuer in America. I own some American Express (NYSE: AXP) by proxy, since it's a significant holding of Berkshire Hathaway (NYSE: BRK.A), and I've had my eye on Capital One (NYSE: COF). The credit-card business has great characteristics in general, and I'm happy to own these companies. They are, however, among the ones paying for bankruptcy reform. As is their wont, politicians are using a sledgehammer to fix public policy that needs fine-tuning. Yes, some people abuse the current Chapter 7, just as some people abuse welfare. They are the exception, not the norm, yet they are the ones we hear about, and they are the ones that somehow manage to drive legislation -- or so the politicians would have us believe. Whether Grassley's emblematic new-car man exists or not is irrelevant. The reform doesn't affect only those with new cars and $5 million homes. It affects everyone who is desperate enough to have to file for bankruptcy. The bigger problem, the one that has caused the number of bankruptcies to balloon, is that people have more credit than they know how to use. They acquire several cards and slowly accumulate debt without realizing how precarious their situation is. Then something happens -- divorce, accident, job loss -- and the trouble starts. It's an oppressive feeling to be beholden to your creditors, to receive constant calls from collection agencies. Bankruptcy is humiliating, painful, and in most cases expensive. No one in his right mind chooses it. If some do, they need education, not punishment. If credit card companies want fewer defaults, they should stop marketing to people with bad debt or multiple credit cards in use. They should lower Draconian interest rates. They should lower available credit lines to people who carry a balance. They should educate their customers about responsible credit use. (Yes, I too have seen the recent barrage of commercials telling people to use credit responsibly -- Danger Kitty, cat in the tree, etc. Do you think it was coincidence that they began running as bankruptcy reform legislation was before Congress? It probably was. Surely. No one could be that cynical.) But don't hold your breath waiting for them to make a serious effort to do these things. It's too profitable a business. Congress won't do them either, because no one will pay them to educate the nation's citizens. It looks like it's up to us: GET OUT OF CREDIT CARD DEBT. If anyone you know is in over their head, slap them upside it and tell them to get a grip. The pain of living beyond your means is about to go from bad to worse. Bankruptcy is not a safety net; it's a punishment. Don't let your financial life get out of your control. Brian Lund has no credit card debt and can't stand even to have a balance for a month. He'd rather eat rat. He owns Citigroup and Berkshire Hathaway. The Motley Fool is investors writing for investors.
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