CitiGroup and the Credit Card

A power has risen up in the government greater than
the people themselves, consisting of many and various and powerful
interests, combined into one mass, and held together by the cohesive
power of the vast surplus in the banks.
- John Calhoun, 1836 speech

It
has to be put in perspective. If the employees are called upon to
sacrifice, the customers should sacrifice as well. And to get a feeling
of what Citigroup employees have sacrificed, one has only to see how
the economy has affected them.

Vikram Pandit, the CEO of
Citigroup, and Winfried Bischoff, its chairman, agreed to forego
year-end bonuses. That was especially gracious of Mr. Pandit. When he
joined Citibank a year ago he declined to accept a cash bonus,
accepting instead stock and options worth approximately $30 million, a modest sum for a new CEO, and a sum worth considerably less today, the stock price having declined by 77 percent
during 2008. Citigroup has fallen on such hard times that to its great
embarrassment it was forced to accept $45 billion in federal bailout
funds to preserve itself. (Notwithstanding the bailout it nonetheless
has had to divest itself of some of its assets.) If the executives had
received bonuses they would have come in part from the taxpayer since
Citigroup was not in a position to pay bonuses having had more than $10
billion in losses in 2008. (Mr. Pandit's refusal to accept a bonus was
a welcome contrast to John Stumpf, CEO of Wells Fargo, who refused to
decline a bonus. Wells Fargo received $25 billion
in bailout money. Mr. Stumpf probably felt that since he received so
much less in bailout funds than Citigroup, there was no reason to
decline his bonus even though the taxpayers were paying him for having
led the bank so well that it might have gone out of business but for
the taxpayers' infusion of cash.)

Messrs. Pandit and
Bischoff are not the only Citigroup employees foregoing bonuses.
According to the New York Times, bonuses for its leadership team will
be down by 40 percent in 2008 and Robert Rubin (whom many credit for
Citigroup's recent performance), declined his bonus. (Any pain he felt
was ameliorated by the $126 million he reportedly received during the
period he was with the bank. He resigned this month.)

What
the forgoing demonstrates is that there is enough pain to go around and
that is why Citigroup has given customers the opportunity to share in
the pain of an employee who said
he was a third vice president and changing the rules on bonuses so late
in the game was putting its employees in "financial extremis." It
might, said he, put some employees in the position of being unable to
make their mortgage payments. So as to reassure employees that they
were not the only ones suffering, the bank has changed its rules on
credit cards and interest rates.

As credit card holders
who carry unpaid balances know, most credit card companies reserve the
right to raise interest rates at most any time for most any reason.
When Congress was considering imposition of new rules on credit card
companies in 2007 because of perceived abuses in their practices,
Citigroup told Congress and any of its credit card holders who happened
to be paying attention, that it would forgo the right to raise interest
rates for no reason at all. Instead, it promised that credit card
holders who did not misbehave, as defined by the bank, would not have
their interest rates increased during the life of the card. Realizing
that promises are made to be broken, Citigroup has now changed its
mind. In November it sent out notices to customers advising them that
it was breaking its promise. That was not how it phrased it. What it said was, if the customer had not enjoyed a rate increase in two years, it could expect to enjoy one in January.

At first blush that seems like a promise broken. It is not. What it is is a response to what the bank calls a "difficult market environment." The promised policy was adversely affecting the bank's profits.

John
Carey, the chief administrative officer for the credit card division of
Citigroup, was quoted in the New York Times as saying: "We are carrying
out this repricing in order to continue lending in this environment".
"This environment" is the one in which hundreds of thousands of
homeowners are losing their homes to foreclosures or being forced into
bankruptcy. It would not occur to a non-banker that this is the time to
increase interest rates on credit cards for those who rely on them in
order to continue living in the style to which they have grown
accustomed. It's not all bad, however. Although they may be strapped
financially, those affected by the new policy can pretend that they,
too, are third vice presidents of what's left of Citigroup. That may be
a bit of consolation.