Maxed Out: Hard Times, Easy Credit. James Scurlock D.
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the applicant’s financial situation and thereby determined their ability to repay the loan; and two, the government, acting in its traditional role as consumer protector—a role that had grown out of the massive bank failures in the 1920s and 1930s—regulated how much banks could both pay and charge in interest. So not only was there only one product, but by law every bank had to sell exactly the same product.2
Furthermore, banks were forbidden from crossing state lines and, in some instances, city lines. A bank in New York City, for example, could not open branches outside of the city. A bank in Texas could only operate one branch in the entire state. Accumulating millions of customers was next to impossible, even if they could be managed profitably. All of the conditions that make the modern credit card industry so profitable—high rates, a national market, efficient processing—did not exist.
But the greatest obstacle facing Hock was not regulation or technology: It was tradition. Handing a customer the “noose with which to hang himself financially,” as one of his peers at Seafirst put it, was generally acknowledged to be immoral. More than anyone else, bankers understood a simple truth of human nature that Hock, in his zeal to create a brave new world, never seemed to appreciate: If you give someone credit, they will probably use it. The banks had learned this lesson in the Roaring Twenties, when Americans had overextended themselves buying all of the shiny new trophies of the Industrial Revolution on credit. So had begun the first race to create an American middle class—or at least the appearance of one—and its violent crash in 1929 nearly took down the American banking system. Since then, the role of the government regulators and the banks themselves was primarily to ensure that the Great Depression was not repeated. Indeed, the banker’s most sacred duty was to rein in his customer’s appetite—in other words, to say no.
There are two things that make consumer credit in general and credit cards in particular different from any other product. One, demand is a function of supply. In other words, the more credit you supply, the more demand you create. The more people become dependent on credit, the more they need to keep going. Once Americans began using one credit card, for example, they tended to need another. And then another. And then higher credit limits. And then they needed to refinance their homes to pay off the credit card bills. And so on. No other product creates that cycle (well, crack and heroin come to mind, but …).
The other difference is that a credit card is the only product whose price changes after the purchase has already occurred. Is there any other product for which, after you’ve purchased it, you are suddenly told that you have to pay more? Or that the terms and conditions of the product have changed? Imagine that someone calls you one evening, just as you are sitting down to watch your favorite television show, and tells you they need another twenty bucks for the suit you bought last month or five bucks extra to cover the meal you ate at Red Lobster three years ago. Presumably you’d tell them to go to hell, or maybe you’d be more diplomatic. What you wouldn’t do is pay them. Yet, the cost of credit and its terms are changed constantly. And not very many people protest, by the way. Why? Presumably because they know that agreeing to this bargain is a condition for getting more credit. This became Hock’s greatest weapon.
Visa was what economists like to call a “natural” monopoly. Its growth was limited only by the reluctance of consumers to spend. In fact, one of Hock’s most daunting challenges in the early days was convincing retailers to pay Visa its 5 percent transaction fee, but that reluctance was overcome by studies showing that customers spent far more—usually 30 percent more—when they used plastic rather than cash. This is the same argument that finally convinced fast-food companies to accept credit cards—a frightening thought in a country already confronting record levels of obesity. (Suze Orman’s favorite guest is a young woman who claims to have accumulated nearly $30,000 in credit card debt by eating at Kentucky Fried Chicken.)
Citigroup Center consumes an entire block of midtown Manhattan between Third and Lexington. Its trophy is a fifty-nine-foot brushed-steel-and-glass tower designed by the late Cambridge architect Hugh Stubbins Jr. The tower’s distinctive angled roof, which has been featured in countless Citibank ads, is supposed to resemble a gigantic number one; however, the building can just as accurately be described as the world’s tallest—and shiniest—erection. When it was built in 1975, a seventy-year-old church had to be destroyed and neighbors tried to block its construction. But Citicorp prevailed, with one director assuring the community that the complex was designed “as a life force … as a source of energy and commitment back to the city and the people.” The day I visited, Citigroup Center was a fortress guarded by dozens of New York police and National Guardsmen toting M16s and Starbucks Caramel Macchiatos. The public spaces had been closed indefinitely due to one of those catch-22s of the war on terror that many Americans find so disconcerting. Although the bank’s largest shareholder, Prince Alwaleed bin Talal bin Abdul Aziz Alsaud, is a Saudi citizen, Middle Eastern terrorists were apparently bent on car-bombing the place as well as several other Citigroup facilities around New York City.
Citigroup Center was the brainchild of Walter Wriston, who retired as Citicorp’s chairman in 1984. Wriston was a gigantic man physically, a man who literally stood out, who had to have his suits specially tailored to his odd and outsized dimensions. He was hyper and always uncomfortable in his skin. But he was also an intellectual, the son of a history professor who became president of both Lawrence College and Brown University. Though Wriston grew up in considerably plusher surroundings than Hock, his parents had raised him with the same frugal sensibility and he’d developed a similar, almost obsessive, hatred of bureaucracy. In other words Wriston, like Hock, saw himself as an outsider and would ultimately become a revolutionary. Unlike Hock, however, Wriston realized that it was very much to his advantage if the rest of the banking world stuck to tradition: It would give him a head start. Wriston was probably the first modern American banker to realize that his job was not to teach his customers how to save but how to spend as much as possible.
In his early years Wriston tried to work within the industry’s framework. He earned his chops at Citibank loaning money to airlines and shipbuilders, forging close friendships with Ari Onassis and several American presidents, nurturing those relationships on private yachts and exclusive golf courses. It got him the CEO job in 1970 but, once installed in the corner office, Wriston’s appetite for growth proved insatiable. He promised his shareholders 15 percent annual increases in profits—unheard-of in the banking business3—just before a perfect economic storm of inflation, war, and technology bust ravaged the economy in the midseventies. Wriston weathered the storm by reaching out to smaller and riskier customers.
While, because of banking laws, Wriston could not expand beyond the boroughs of New York City, he could expand everywhere else in the world with few to no restrictions. Indeed, other countries were delighted to receive his credit. They were used to being treated with condescension and caution by the ivory towers of American banking. Which made a lot of sense: After all, the countries that needed the most tended to be the poorest. Who wanted to lend to a bunch of peasants? Wriston stepped up to the plate and smaller banks followed him. If he felt any of the traditional banker’s intuitive sense of caution, he purged it by endlessly repeating his new mantra: Countries can’t go broke. The mantra seemed to satisfy Wriston’s conscience, attracted a devoted circle of shareholders and dictators, and, most important, allowed Citi and the rest to lend more and more money to countries that could afford it less and less. Pretty soon, the “less-developed countries,” as Wriston was fond of calling them,4 were using new money to pay off old debt. The trouble was that a large chunk of the money was coming from the same source: Citibank and its partner banks. The familiar term for what Wriston’s strategy became in practice is a “reverse pyramid scheme”, so named because larger and larger liabilities must be piled on top of the original debt in order to avoid default. Eventually the amount of new cash needed to service the old debts and the new debts becomes too burdensome and the whole thing collapses beneath its own weight. The only exception is where the player prints the currency with which the game is played, which makes the United States government unique among debtors.
When the inevitable happened, there were only two solutions: one, squeeze the working classes of these countries harder (the wealthy made sure that their own assets were not available when the bills came due, which seems to happen a lot in “developing” countries); and, two,