Secret History of the Credit Card
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interviews: walter wriston
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For 17 years, Walter Wriston served as chairman and CEO of Citicorp/Citibank, which issues MasterCard and is the biggest of the four banks that dominate the credit card industry. In this interview, he defends the high interest rates the industry is charging cardholders, pointing out that consumers can always shop around for better rates. While acknowledging there may be a few problems with credit card solicitations, he maintains "the huge majority of things are handled responsibly" and that Americans' steep credit card debt today is not a problem. "I've looked at it for 50 years, and as soon as the credit card debt begins to decline, you know that the ordinary guy is worried about tomorrow," he says. "And so it's a self-adjusting market. Do people sometimes borrow too much money? Yes. [But] as a percentage of the total -- minuscule. People are smarter than people give them credit for." This interview was conducted on April 28, 2004.

What was the world like before credit cards, and why did you, why did Citibank, get involved in credit cards?

Well, the world was partitioned, and after the debacle of the Great Depression in the 1930s, a group of restrictive laws were passed, the net of which was that Citibank, for example, was prohibited from opening any offices outside the five boroughs of New York. And so the world [had] 30,000 banks in 1930, and by 1946, there were about 15,000 banks, and today there are somewhere in the order or magnitude, I suppose, of 6,000 or 7,000. Because each one was partitioned ... the object of the exercise on a credit card was to find a way to serve customers outside of the prescribed market area by the statutes, and so the driving force behind it was to create a delivery system for financial products to people across the country. ...

I'm against price and wage controls on everything.

We bought a piece of Carte Blanche in '65 or so, and then the Bank of America started a credit card called Bank Americard, and Citibank started one, and the wonderful name was the Everything Card. It was a regional card. And one day I was invited by a Midwestern bank to come out and talk to their board about whatever the issue was in those days, and walking home that night about midnight, the chairman of the bank said to me, he said, "Citibank's pretty smart, but ... if you're pumping gas in Palo Alto [Calif.] and you see Everything Card, you never heard of it, you'd throw it on the ground." And so he said, "If you want to succeed in the business, you have to have a national name." He was right. The next morning I picked up the phone and called Dick Cooley, who is the chairman of Wells Fargo, and he [had] just started a thing called MasterCard. And I said, "Dick, I want to join." ...

We mailed out 20 million cards across the country. ... I remember going to St. Louis and just about being stoned by the local banker. One of them said to me: "You sent my wife a credit card with a $1,000 credit line. What are you doing in my market?" And I said, "Where is it written that this is your market?" But out of that huge mailing and so forth, the momentum was created that produced what is now Citigroup [and] now has approximately 142 million cards in more than 40 countries. So that's what the early start was like, long before we understood the statistical use, [the use of] statistics for credit losses and all that sort of thing. ...

You're saying that after the Second World War, after the Depression, banks were restricted by federal laws. ... So it's in a sense an end run [of] those restrictions, with some imagination?

Yeah, you can call it an end run, but you could also have done it by writing letters to 20 million people saying, "Why don't you put your deposits in New York?" You could call that an end run, too, I suppose, but it was a way to start the process of going back to what [Bank of America founder A.P.] Giannini's dream was of nationwide banking, which every other country in the world had.

And what was the reason behind going to South Dakota?

Well, it was very simple: We were going broke.

... If you are lending money at 12 percent and paying 20 percent, you don't have to be Einstein to realize you're out of business. So the state of New York had this usury law, so we went to the governor and said, "We have to stop the business because we're losing money for our shareowners." ... We said: "Look, we want to continue our credit card, but we can't do it because we're losing too much money. And all you have to do is lift the usury ceiling to some reasonable amount and we'll stay here." And they said: "Aha! You really won't move. We're not going to do anything." So we went there three times, and the legislature refused to do anything.

So we made a study of the five states that had either no usury law or very high amounts. One of them was Hawaii, and that was too far away; one of them was Missouri; one of them was South Dakota. I forget some other ones. So there was a Supreme Court decision called [Marquette v. First of Omaha Services Corporation (1978)] which said that you could export the interest rate from the state from which the credit card was issued. ... So we went out to South Dakota, and the governor there was Bill Janklow, who later on has fallen on evil days. And we said, "Look, we'll bring a couple of thousand jobs out here." And the local bank said, "Well, you'll compete with us, and we can't stand that." And so we said: "Well, we'll open a limited national bank in which we will not compete with the local banks, and we'll put the facility in an inconvenient place for customers, and we'll pay different interest rates than you guys, and you can be happy. All we want to do is use it to issue cards."

And so after about a year and a half of negotiation, the comptroller of the currency, a man named [John G.] Heimann, issued us a charter of a limited national bank of South Dakota. And we went out and built a facility out there which is now the largest employer in the state of South Dakota. And that was the start, and they exported the interest rate that would make a profit for the bank right across the country.

And then the second thing that happened was that when we got a lot of cards out there -- I forget how many, maybe five or 10 million -- you couldn't afford to have all of those on the same tandem, because if there was a blackout in that area, you were in trouble. So we looked for diversification, and the governor of Nevada called me up one day and said, "I want to come and see you." And I said, "Fine." So he came in; he said, "We want you to come to Nevada." And I said, "OK, you have to pass a law." And he -- they have a unicameral legislature. It's very interesting; it meets once a year. And I said, "I don't see any way in the world you're going to pass that." And he did. ...

I've read some stories that in order to get your business in South Dakota, the governor took you on helicopter flights and pheasant hunting.

Well, yeah. When I went out there originally to try and negotiate it, and later on -- I'm not a shooter, [but] my partner, [former Citicorp President] Bill Spencer, is one of the great shots of the country, and he's held many, many records -- he'd go out pheasant hunting with the governor, and they had some hunt. I don't recall what it was, but it was a big deal. [Former Citicorp Vice Chairman] Charlie Long and Bill Spencer would go out every year, and then Bill Janklow, the governor, came to New York, and he talked to all of our people about what it was like. He was a pilot, and he had cracked up an airplane, and he had steel braces all over his mouth. He was like Jaws almost, and he scared people when you first saw him, but he was a brilliant lawyer.

And South Dakota -- the attraction was it was business-friendly.

Well, the legislature issued us a invitation, and that made it legal under the Douglas Amendment of the Bank Holding Company Act to go there. Without that, we couldn't have gone. And when we went there, there was a usury law; I think maybe it was 20 percent -- I've forgotten. But in any event, that was abrogated about a year later or so.

I grew up in the post-Depression era with regulations where bank interest rates were very low. You put your money in a savings account. So it's pretty radical to get rid of usury laws.

Well, it was. It was radical in the sense that it was back to the future. We went back to where it was before the laws were passed.

Before the Depression.


There were no usury laws then?

Well, there were some usury laws, yeah. ... Usury laws, I say, [are] price control.

With a biblical background.

Yeah, well, we had price controls, non-biblical, in Diocletian's time. The emperor of Rome had the death penalty for violating the price controls on bread, so it's a long history of government attempting to create a ceiling on the market. At the end of the day, it never has worked, and [in] the history of the world, never will. Nixon tried it, and it was absolute disaster.

So you have the ability to charge basically whatever you need to charge in the marketplace.

Well, you have the ability to charge what the market will bear, which may or may not be what you would like. But the market is so huge out there, and people are so sophisticated that they shop around from one place to another, where they get the best deal. ...

You have a credit card, don't you?

You bet I have a credit card. Funny enough, it's a Citibank credit card.

Do you shop around?

No. I don't shop around. I just figure the boys are as good a break as there is. Otherwise we wouldn't have 140 million cards.

Did you ever read the agreement that comes with a card?

Oh, yeah. Sure, I read it. It's an artifact of the current [legal system]. ... In today's litigious society, you have to have a legal disclaimer. ...

Essentially this is a contract that [says] we, the issuer, can change the terms, the interest rate, the charges and so on --


Give you 15 days' notice.


So it's a contract, but it's a contract where one side can change it.

That's correct. And if the other side doesn't like it, they cut their card up and go on their merry way to somebody else.

If they can get them to transfer the balance. If they owe money, they've got to keep paying, right?

Every credit card in the world should make it, will make it, very easy for you [to] transfer your balance, there will be no fees, so on and so forth. So it's a tough market out there. You know the people send flowers to these so-called banks that make mini-loans in Africa?


Yeah. And public television does big things about wonderful -- that's what a credit card is. You don't know how many companies in America have been started by guys maxing out their credit cards. But you go out to Silicon Valley and you'll ford up to Route 128 [in Massachusetts] or even downtown now, you'll find these kids, these entrepreneurs borrowing on their credit card. It's the only credit that they can possibly get.

It's democratized credit.

Exactly. It's just like the ones in Bangladesh. The numbers are larger, and the skill of the people probably is higher because of the educational level, but it's the same principle. ... In the town I grew up in ... we had one bank. And there was no interstate banking; there was no competition. The old guy with a green eyeshade gave you credit or he didn't, and if he didn't like you, where did you go? The answer is nowhere. The same with personal loans. So the usury laws were designed originally to prevent what was then a monopolistic market from monopolistic pricing. It was just that simple.

Because there was one bank in a small town or most cities, you needed to control how much interest they could charge.

Right, because there was no competition. Once you bring in competition, the thing becomes moot in a sense. ... The use of usury laws has shrunk right down as soon as you got a nationwide market in anything, whether it's bread or milk or wheat or credit. And so once the monopoly was broken in the small town, the advent of those laws became less and less relevant.

The market is dominated by four major companies, Citibank being the biggest. And there's no control over how much you might charge.

Well, Citi happens to issue MasterCard, but there's hundreds of banks out there issuing Visa cards. And so, yeah, we have a lot, a great, great number of cards, but if Visa has a different, lower structure of rates or fees or whatever, people are going to leave MasterCard and go to Visa. ... It is a tough world out there, and you can lose -- we went into consumer business and over three, four years, we lost $1 billion, which in those days was a fantastic amount of money, and we all remember because there were no bonuses for those three years. ... Well, we put $1 billion of losses into a business that now is an extremely good business all over the world.

You put $1 billion of losses into the consumer credit card business before it turned to profit.


But now it's the profit center.

Well, I certainly hope so. You have to recoup the billion dollars, plus everything else. ...

I guess the question is at what point -- how many billions do you need before, for instance, you bring interest rates down for credit cards? Most people have seen interest rates go down for mortgages or car loans, but not credit cards.

No. ... You have to make enough money to cover all of your losses. ... The interest rate is set basically by the Federal Reserve on what they charge on the discount rate and how much money that they print and so forth. When I joined the Citibank, the prime rate was 1.5 percent, [and it] didn't change for seven years. In today's floating market rate -- we have floating exchange rates now, not fixed rates, so interest rates can change every month or every week. Right now they've been stable for a long time, and people think that that's normal, but actually normal is moving much more rapidly than they have in the last few years.

But I think the question is that if the interest rate that the Fed has is 4 or 5 percent, and the average credit card is charging 14 or 15 percent --

About 15. And if you subtract 7 for your losses -- I don't know whether it's 7 or whether it's 9 or what it is -- and then your operating costs, you're not running away with any maximum profit on the thing and the marketplace. If the people think that you are, they'll just abandon you.

If they understand what they can do.

Sure. There's a lot of different places they can go. There are all kinds of finance companies; there's all kinds of credit cards; there are local cards; banks that are open seven days a week and no-cost checking. You name it, you can go down the street in New York and find any rate you want.

In '96, because of another court decision [Smiley v. Citibank], all caps were taken off of fees that could be charged -- late fees and other fees in the bank --

Oh, those things. Yeah.

Which have now become a profit center as well.

I don't know that, but I was long gone by then. But hopefully they took it off. I'm against price and wage controls on everything.

You think any controls on credit card fees or interest rates would create shortages in the availability of --

Create a shortage, just the way it did in New York state when we went to the legislature and said, "We're out of business -- sorry." The people in New York state couldn't get credit cards, because no one in his right mind would issue one.

Well, our understanding is that the major profit flow to credit card companies comes from people -- the perfect customer is a person who's making the minimum payment on the largest possible balance.


And those are the prime customers.

Yeah, it's like the --

I thought banks wanted responsible people who made their payments and paid everything off right away.

Sure. Well, we have lots of them that pay them off. But it's like, you get a mortgage on your house, you make it as long as you want to go on to get the minimum amount of payment. ... And you want to have a monthly payment that you can easily handle.

Well, assuming the bank wouldn't give me the loan unless I could handle it.

Well, you have a lot of faith in their judgment, but that's hopefully true.

But with credit cards it's different.

I don't see anything different in it. ... When I joined the bank, the chairman was a wonderful man from Indiana named Howard Sheperd. And he came to me -- his son was killed by a sniper on the last day of the war in Japan -- and he came to me one day when I was a kid. He said: "You should save your money, and when you get enough money you buy a refrigerator. What is this people wanting credit?" And I said: "Look, we just put five years of our life in a brown suit carrying an M1 rifle, and we want the refrigerator now." He could not understand that. It was the pent-up demand of the Second World War where you had nothing; you couldn't buy anything. That started personal credit and eventually moved over into a credit card which became a substitute for the old personal loan.

The question today is, has there been so much personal credit given to people, in part because it's so profitable to the banks to offer it, that we now have a bubble you could burst?

My experience has been -- and I've talked to the people in the Fed about it -- that if you want to know whether or not we're moving into a recession or a slowdown of the economy, the best indication is that people are paying off all their credit cards. The ordinary guy out there is smarter than any economist. And I've looked at it for 50 years, and as soon as the credit card debt begins to decline, you know that the ordinary guy is worried about tomorrow. And so it's a self-adjusting market. You say, "Well, how do people know when they're borrowing too much money?" Do people sometimes borrow too much money? Yes. As a percentage of the total -- minuscule. People are smarter than people give them credit for.

Even though you have indicators like bankruptcies are increasing.


Particularly amongst, apparently, women and single mothers.

There's been a lot of laws passed that make it attractive to go into bankruptcy. And there have been -- you see ads in newspapers: "Come to this law firm, and we'll get you in a bankruptcy. All your debts will be paid, and you'll start out fresh again, and we'll only charge you $150," or whatever it is. But as a percentage of the people who use their credit cards responsibly, it's very, very small. Statistically I think you wouldn't find it was significant.

What would you say to people who say this person who pays the minimum amount the longest amount of time is the one who is in a sense subsidizing the credit card industry; that is, providing most of the profit and also allowing for what they call in the business, apparently, the deadbeats, the people who, like myself, pay off their bill every month?


Who are not as profitable.


There's been a huge transfer of wealth, if you will, but it's to the advantage of people like me; that you're in a sense getting more money from those people who can't afford to pay more than the minimum.

I don't know how it's a transfer of wealth, because presumably the person who borrowed on a credit card bought some asset with it. He bought a car, he bought a refrigerator, bought a suit, bought something. And so he has a hard asset of some kind, [and] that's why he borrowed the money to begin with.

In many cases, apparently, those people who get in trouble, they borrow to bridge a period of unemployment or a medical bill or a crisis.

Some of them do get in trouble so that the business is now mathematical, in which you've got a bunch of guys that, through differential calculus, calculate what is the probability of losing X amount of money on this. And it hasn't changed much since Roger Steffan said: "I can go into a subway car in New York, lend money to the first 10 people I meet. One will stiff me; I'll never get it back. One will give us a hard time; it will take me two years. And the other eight will pay." I don't think we've learned a lot since then, except we've wrapped it up with mathematical stuff.

Do you know what Fair Isaac is? That's all they do, is mathematical formulas for your bank. You're saying 60 years ago, you knew that much just by looking at the average 10 people who walked in?

Yeah. That's what Roger Steffan said, and he built the whole personal credit business and the mortgage.

The difference, obviously, is that between a mortgage, a car loan, is that I know how long it will take me to pay that off.


Thirty years. And given laws and disclosure, I know how much it would really cost with interest.

Which is good.

But that doesn't happen with credit cards.

Well, credit cards -- we've got enough laws. ... When I left, the Truth in Lending Act had 20,000 pages of regulation, which was the size of the type, how you computed the annual interest rate -- I can't tell you the rest of it. But it's furnished a generation of lawyers' income for all these years. And what the Congress does is they pass a New Year's resolution called "Let's have fair disclosure." And then somebody, the FCC [Federal Communications Commission] or the Federal Reserve or the [Office of the] Comptroller of the Currency, starts writing rights. And that's what happens.

I understand that for mortgages --

No, it's for credit card billing.

Well, when you [get] your bill, does it tell you how much, if you made the minimum payment, it would cost you at the end?


Does it tell you how long it would take you to pay it off?

No. No one knows how long it would take you to pay it off because you have to do that yourself. How would I know how long you want to take to pay it off? Some guy may make minimum payments for a year because he's got two kids in school or whatever it is and then plan to pay the whole thing off the second year. There's no way we could know that.

So basically, the credit card, the contract that comes with it, the lack of regulation of the interest rate, the fees and so on, in many ways, this was your banking dream.

No, but I'm telling you, the bill is controlled on every single line by the law -- the size of the type, how you compute the annual interest rate, all of that stuff.

I guess what I'm getting at is that at least the success of the credit card, the fact that it has been so profitable --

Well, it is now, but don't forget the billion dollars that went down the drain.

OK. But it's now producing billions in profit for Citibank every year.

I hope so. Right. And it's helping millions of people buy the things they want to buy in a responsible way. And the fact that the credit is good overall shows you the intelligence of the people who are using the credit.

What I'm getting at is a more personal thing. Your investment in it, if you will, as the CEO of Citibank 20, 25 years ago, in a sense has paid off.


Your faith in the fact that an unregulated financial marketplace will benefit --

All, everybody. You know, there's a certain elite in the country that thinks they're smarter than everybody else and that the average guy needs a lot of help. My experience has been that I would rather have the judgment of the American people on something than all of the elite's regulation, and that goes for what we do on elections; it goes for everything. And people think that, quote, "If it's not regulated, there must be something wrong with it." But as long as you've got competition, the market regulates itself. And we have these booms and the bubbles, as you put it, and the IPOs and all that thing, which have happened in history since currency was invented. And that's human nature. But basically, our experience, as you mentioned -- we have some experience in credit since 1812 -- is that the ordinary fellow on the street is very intelligent in his use of credit.

Do you understand why some people find it unusual that if a person is close to bankruptcy, they get all kinds of credit card solicitations in the mail?

Sometimes they're badly done. There's no question about that. I mean, if you send out 20 million cards, do you send out 10,000 to people who all have the same Social Security number and haven't had a job in 25 years? The answer to that is yes, because nothing is perfect. But basically, the huge majority of the things are handled responsibly. Are there exceptions? Are there guys that beat you? Sure. Are there a bunch of crooks? Sure. That's all factored into the bad debt reserve and all that sort of thing. But should we say to somebody: "Say, you're 21 years old. You can carry a rifle and fight our war. You can vote in a presidential election. But unfortunately you're not smart enough to know how much money to borrow, so we want to help you"? I don't agree with that.

There's also bonds, stocks in your business, securities. There's a thing where the debts from credit cards are bundled as securities.


And there's some concern in the FDIC [Federal Deposit Insurance Corporation] and elsewhere that this is a way of creating even more potential danger or fragility in the market.

Yeah. Well, you say, are there excesses in a marketplace? And the answer to that is yes. How do you stop the excesses in the marketplace? The marketplace adjusts to it. And if too many bonds are sold, which they were back in the days of Mike Milken and that crowd, the market punished all those people by making their investment useless. It's a self-regulating thing in the marketplace. That bothers people because they know better than the market: "If only I were the regulator, I wouldn't have any of these problems. I would design a system that would be risk-free." Won't happen.

It's somewhat ironic, I think, to some people that you're talking like this. You lived through the Depression.

You bet I did.

You lived through the stock market crash.


There were no restrictions. There were no regulations to speak of. And there were no restrictions, really, on the behavior of banks or the extension of loans.

Oh, there was a lot of them, but never mind.

Well, the period where legislation, where regulation comes in is the Depression. And is it a period supposedly to protect us from another bubble, another meltdown?

The Great Depression, which came on in a failure of the Bank of the United States in 1931 and so forth, and Roosevelt closed the bank, was perpetrated -- any scholar will tell you now -- by the fact that the Federal Reserve didn't supply any liquidity. And so [Federal Reserve Chairman] Alan Greenspan will tell you that; [Fed Chairman from 1979-87] Paul Volcker will tell you that. They did exactly the wrong thing. They refused to lend any money to the banks, and it perpetuated 20 years of the Depression. We had 18 million people unemployed in 1933. And in 1939, after the whole New Deal, well, there's still 18 million people unemployed because the Fed just did the wrong thing.

Today when you have a crisis -- we've had a lot of them, but take the last one, [which] was Long Term [Capital Management], which was a hedge fund -- they made a bunch of bad bets, and the Fed put together a group of lenders to bail them out. And whether that was right or wrong is another issue. But the Fed flooded the market with liquidity the next day. People don't even remember it because they had learned that the way you create a depression is to extinguish the money supply, which they did in the 1930s. ... Monday morning the Fed flooded the market with liquidity, and you don't even remember that that was the biggest bankruptcy in American history at that time, probably. So it isn't the question of the regulation. We tried all that. The question is, how does the central bank supply a liquidity in a timely manner if there is a crisis?

I can remember my grandmother telling me, "Put your money in the bank, but put it in this FDIC-insured savings account."

Yeah. Well, in our little town there were two banks, and one of them -- I still remember it -- flew a bar of gold in, and a DC-3 landed in a field in front of the bank. Of course it didn't mean a damn thing, really, because there was no cash involved. That bank survived. The other one failed in our town. And it happened to my father, the little money we had in that bank.

It was a roulette game, but once again, the central thing is diversity. And no bank failed in Canada, because they had nationwide banking. And when the fish weren't biting in Newfoundland, the oil was flowing in Manitoba. And one of the dumbest things you can do is have all your eggs in one basket, which was what the American banking system was. All these little banks, 30,000 of them, half failed in the Depression; 15,000 went down. And every other country in the world has nationwide banking. Now we do, and so we're a lot safer.

But what happened -- my family went west in a wagon train and finally settled in Wyoming, but every place the wagon train stopped, somebody got off and had a saloon, a bank, and a general store. And that's how we got all of these banks, because of the westward movement. It's unique in any country of the world. And each one of those banks issued U.S. currency, mostly against nothing. And in 1863 at the Bank of the United States -- it was vetoed by Andrew Jackson [in 1832] -- they said that banks could still issue the currency. In fact, there was no central bank, obviously, but it had to be secured by government bonds 100 percent, and that's how they paid for the Civil War. And the result was in the 1880s, they paid off the debt of the Civil War, and the money supply of the United States shrank, and we had the crises in the 1880s.

You were saying we don't really need all these computerized systems to figure out who to lend money to, and you were telling me a story about who and what?

Well, I was telling a story about Roger Steffan. He was the vice president of the Citibank. And the attorney general came in and had lunch with the chairman of Citibank, and he congratulated the attorney general on closing up these shops that were charging 20 percent a day, and the attorney general said to the chairman, "That's nice, but who's going to take care of the people?" And the guy thought for a while and he said, "We will." And he turned to this fellow, Roger Steffan, and said, "You set up a program to lend money to ordinary working people in the city of New York." And it was opened at 42nd Street and Vanderbilt Avenue, and the first day there was a double line around the block. It was all on ledger cards. You can't believe the thing. I used to audit the thing. And Roger Steffan made this statement that he'd go on that subway and lend money to the first 10 people he met. And one would stiff him, and we'd write it off. And one would give him a hard time; it'd take a year to collect. And the other eight would pay. And I'm saying that statistically it's much more sophisticated these days, but the net of it is basically the same principle.

This was to end loan sharking in New York, or to help --

It would. We'd pretty well put it out. There's a lot of loan sharking that still goes on, but by going into the personal credit business that we did, the other banks followed, and today most people who have any credit at all can get credit.

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posted nov. 23, 2004

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