After writing off record sums in '09, credit card issuers get more selective

Former governor William J. Janklow brought Citibank to South Dakota in 1981 with a law that threw out limits on how much interest the state's banks could charge borrowers.
Former governor William J. Janklow brought Citibank to South Dakota in 1981 with a law that threw out limits on how much interest the state's banks could charge borrowers. (Thomas Strand/bloomberg Markets Via Bloomberg News)
By Lisa Kassenaar
Bloomberg Markets Magazine
Sunday, May 30, 2010

William J. "Wild Bill" Janklow's law office in Sioux Falls, S.D., is crowded with mementos from his 16 years as a Republican governor. On a low, wooden bookcase, near bottles of hot sauce custom labeled for his annual Buffalo Roundup, he keeps a four-foot length of red ribbon festooned with Citibank credit cards.

Janklow is the politician who, in 1981, brought Citibank to South Dakota.

When he cut that ribbon to welcome the New York-based bank, he blew the lid off the U.S. credit card business.

The law inviting Citibank to South Dakota threw out limits on how much interest the state's banks could charge borrowers. In a secret meeting at the governor's residence with Walter Wriston, chief executive of Citicorp, Janklow agreed to drive through the legislation in a swap for 400 jobs.

"That was the deal," Janklow says. "You have no idea, in a state of 750,000, how many 400 jobs is, all in one place."

The business Janklow and Wriston set in motion with a handshake that evening transformed U.S. consumer lending. A year after South Dakota lifted its rate caps, usury rules were relaxed in Delaware, where the credit card businesses of J.P. Morgan Chase and Bank of America are based. Federal law allows banks to lend according to the rules of the states in which they are based.

Enormous profit

Once interest rates were allowed to rise as high as banks could push them, credit cards became a ticket to enormous profit. In the decade ended Dec. 31, 2007, credit card issuers together earned more than $50 billion. At J.P. Morgan Chase, cards accounted for 20 percent of both revenue and profits in 2007.

"The credit card business has been a critical driver for these companies; it was the single most profitable product in the lending arena next to mortgages," said Richard Bove, an analyst at Rochdale Securities in Lutz, Fla.

Then the harshest economic decline since the 1930s crushed the job market, and a record number of cardholders stopped paying their bills. The three biggest card-issuing banks lost at least $7.3 billion on cards in 2009. Bank of America, after earning $4.3 billion on cards in 2007 -- a third of its total profit -- swung to a $5.5 billion loss in 2009. J.P. Morgan Chase lost $2.2 billion last year on cards and, in mid-April, reported a $303 million loss for the first quarter.

"We have a business that is hemorrhaging money," says Paul Galant, chief executive of Citigroup's card unit, where Citi-branded cards lost $75 million last year.

The bank won't disclose how much it lost on cards it issued under the names of retail stores.

U.S. credit card issuers wrote off a record total of $89 billion in card debt in 2009 after losing $56 billion in 2008, according to R.K. Hammer Investment Bankers, a Thousand Oaks, Calif.-based adviser to card issuers.


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