For people drowning in credit card debt, the hope that Uncle Sam's cavalry is coming appears to have been dashed. The Treasury Department nixed any type of a debt settlement program after a roundtable meeting of banks and consumers, leaving many debt-ridden consumers out of luck.

The federal bailout program doesn't appear to be quite as magnanimous as people had originally hoped. Just like the automakers who arrived at the federal government's doorstep with hat in hand, credit cardholders have received a cold shoulder from the Treasury Department. Specifically, the Office of the Comptroller of the Currency nixed a request by banks, brokerage firms, insurance companies, and consumer groups for some type of debt settlement for over-burdened cardholders.

Panning the plan

The cry for help came from the Financial Services Roundtable and the Consumer Federation of America, who pointed out the high level of defaults on credit cards by consumers. The crisis, it was noted, has affected even people with good credit.

The request fell on deaf ears. The Treasury Department refused to allow banks to defer losses for several years. The government instead stressed the need for "timely identification, reporting, and management of credit losses."

There's an obvious irony of a fiscally irresponsible government, floundering in deep debt, requesting fiscal responsibility on the part of credit card issuers. The question of whether the government imposes such standards on itself is being asked more and more frequently, but no answer has been forthcoming.

Feeling the pain

The government would be wise to look upon the bleeding of red ink in the financial industry as an omen. Giants-including credit card lenders like Discover Financial Services, Bank of America Corp., JP Morgan Chase & Co.-have suffered significant losses in the economic downturn. According to Moody's Investors Service, credit card charge-off rates rose 48 percent from the previous year. The Federal Reserve estimates that Americans carry nearly $900 billion in credit card debt.

This behavior ignores the root cause of the problem: What will the nation do about its debt-laden citizens? If heavy credit card debt appears to be the same sort of toxin as subprime mortgages, there may be a real need for some sort of debt settlement program.

To the government's credit, equating the two problems doesn't necessarily make sense. The subprime mortgage was caused when housing values declined, and homeowners were unable to qualify for a refinance of their adjustable-rate mortgages. Unable to pay the escalating rate, and without the ability to refinance, these homeowners lapsed into default.

Credit card debt could fall victim to similar market forces. Banks that issue plastic, frightened by rising defaults, could escalate interest rates. Massive layoffs, due to a yearlong recession, could impair consumers' ability to make regular payments on their debts. Americans would then face a crisis similar to the subprime mortgage mess. The big question is, after the last few months of financial bleeding, could the U.S. weather another financial storm?

Published on December 11, 2008