ANOTHER ROUND TO THE CONSUMER
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Posted by John
(216.78.168.212) on November 21, 2002 at 01:25:48:
Business In The Beltway
Is MBNA Wasting Its Money?
Ira Carnahan, 11.20.02, 11:15 AM ET WASHINGTON - With Congress' failure to pass a bankruptcy reform bill that would make it tougher for consumers to walk away from their debts, credit-card companies and banks must be wondering if their big investment in Washington will ever pay off. MBNA (nyse: KRB - news - people ), the largest independent credit-card issuer in the U.S., has doled out a whopping $4.7 million over the 2000-to-2002 election cycles, according to the nonpartisan Center for Responsive Politics. In addition to its congressional largesse, it was also the single largest donor to the presidential campaign of George W. Bush, giving over $240,000, according to the CRP. Right behind MBNA in the money race is another huge credit-card issuer, Citigroup (nyse: C - news - people ), which has given $4.6 million over the 2000-to-2002 election cycles, says CRP. Other big givers include J.P. Morgan Chase (nyse: JPM - news - people ), Bank of America (nyse: BAC - news - people ), Bank One (nyse: ONE - news - people ) and American Express (nyse: AXP - news - people ). Yet the six-year-long drive to rewrite U.S. bankruptcy law fell short again last Thursday when the House of Representatives voted down a House-Senate bankruptcy compromise. Dozens of conservative Republicans who normally would have supported the bill bucked their own leadership and came out against it because of a provision intended to prevent anti-abortion protestors from using bankruptcy to get out of paying court-ordered fines. The House later passed another version of the bill without the abortion provision. That, of course, was just posturing. Senate Democrats won't even consider this version. This latest failure is no minor matter. About 1.5 million U.S. consumers now declare bankruptcy every year, up from 900,000 a decade ago and 290,000 in 1980. In 1950, consumer bankruptcies totaled just 25,000. Credit-card issuers are now forced to write off about 7% of outstanding debt each year. Some of these losses are swallowed directly by card issuers, but even more are passed on to borrowers in the form of higher interest rates and fees. That's true of consumer lending generally. With lenders losing roughly $40 billion annually to personal bankruptcy, the average borrower ends up paying an estimated $500 extra per year. But as bad as things are now, they could get worse. That's because the number of people who could potentially benefit from filing bankruptcy is far larger than the number who actually do so. In fact, under current law, 15% of U.S. households could come out ahead by filing bankruptcy--that is, they could erase more in debts than they would have to give up in assets, calculates University of California-San Diego economist Michelle White. And with just a little bit of pre-bankruptcy planning such as maxing out credit cards, one-third of U.S. households could benefit by declaring themselves broke. With the stigma of bankruptcy filing eroding, the bankruptcy rate is likely to climb further, unless the law is changed. Lenders, well aware of all of this, have been shoveling dollars to politicians to try to tighten the rules. But are they wasting their money? Last week's vote might seem to suggest they are. But a careful analysis of campaign contributions and voting patterns on bankruptcy reform by Princeton University's Howard Rosenthal and Stephen Nunez of Stanford finds that the big financial institutions' money has indeed bought substantial influence, though so far not quite enough. While the crucial factor in most decisions by Congress is political ideology--it "correctly classifies over 90% of all roll-call voting decisions in recent Congresses," according to the academics--voting on bankruptcy reform is something of an exception. When a corporate political action committee writes a member of Congress a check, its odds of getting his vote on the bankruptcy bill rise substantially. "A moderate Democrat receiving $30,000 from the credit-card coalition would have an 80% chance of supporting the House bill as against only a 30% chance if the representative had received no money," say Rosenthal and Nunez. While ideology is still very important--you can predict pretty well how a member of Congress is going to vote on bankruptcy reform just by knowing how he or she stands on other issues--campaign contributions are much more influential in shaping votes on bankruptcy than on most other issues. The lesson for the big credit-card issuers discouraged in the wake of defeat and uncertain what to do next: Keep whipping out those checkbooks.
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