The day after the U.S. Senate voted to cap credit card interest rates at 14 percent, a Pandora's box of reaction roared from Wall Street to Washington as consumer advocates waxed gleeful, investors were in full retreat, and the furor over stubbornly high card rates turned into a game of political chicken between Congress and President Bush.
The country's biggest credit card issuer, Citicorp, defended its 19.8 percent annual interest rate, while Wachovia Corp., a North Carolina bank holding company, announced it would cut its lowest rate to 10.4 percent Dec. 1.
The market for bonds backed by credit card receivables was paralyzed, Reuters reported, and stocks of eight of the 10 biggest card issuers in the country fell as investors fled the risk of lower profits if the bill passes.
The biggest losers were MBNA Corp. of Wilmington, Del., which was part of Baltimore-based MNC Financial Inc. until early this year and whose stock fell $5 a share to close at $31.75, and Pennsylvania-based Advanta Corp., which fell $8 to $30.50.
House Speaker Thomas S. Foley, D-Wash., said that there is "a high degree of likelihood" the House will vote on a credit card rate cap bill of its own next week.
The Senate proposal was added to a banking reform measure that would recapitalize the Federal Deposit Insurance Corp. and allow banks to operate freely across state lines for the first time since the Depression.
Approved by a 74-19 vote, theamendment would cap rates at 4 percent above the rate the Internal Revenue Service charges on late taxes. That rate is currently 10 percent.
But if Congress sends a rate cap to the White House, it will get a frosty reception from President Bush -- even though he has called on card issuers to cut rates voluntarily in hopes of boosting the economy.
"We are against the bill," said Gary Foster, deputy press secretary at the White House. "The president feels it should be regulated by the marketplace."
Mr. Foster said that the White House hopes Congress "will realize the banking reform package is too important" to risk inviting a presidential veto.
The Senate's action got a warmer response from the Bank Card Holders of America, a Virginia-based consumer group. "We're thrilled about the bill. It's been an important issue for years," said Mary Beth Butler, a spokeswoman for the group. "Credit card interest rates defy the laws of economic gravity. [Consumers] are being robbed."
The Senate's action rekindled debate over whether credit card companies are gouging by keeping their interest rates high at a time when other key rates are falling sharply. The average rate charged by the top 10 card issuers, who account for about half of the money Americans owe on their credit cards, is 19.28 percent.
"Our cost of funds doesn't in any way reflect the prime rate, the discount rate or the CD rate," said Bill Ahearn, a spokesman for Citicorp, the nation's biggest card issuer and parent of Towson-based Choice Visa.
Instead, Citicorp funds its credit card business in the bond market by selling bundles of its receivables to institutional investors, he said. The cost of that money hasn't fallen significantly, he said.
He added that card issuers are also getting squeezed by a doubling of the number of bad loans over the last two years. "Rates have come down, but credit costs have soared," he said.
Bankers insist that high rates are needed to offset the credit losses and that low rate caps would force them to cut off credit to higher-risk consumers. "You'd have to have a portfolio of sheiks," said one Maryland bank lobbyist, who asked not to be named.
Mr. Ahearn insisted that most consumers like the convenience and service that come with the higher-rate cards. He pointed out that Citicorp's fastest-growing card program is its most expensive; Choice, Citicorp's lowest-rate card, is growing more slowly.
Consumers choose higher-rate cards because they are worth the money, he said. "You don't see many Yugos out there, and I haven't been in a bar lately that serves generic beer," he said.
Mr. Ahearn's comments were echoed by local banks.
"First Maryland Bancorp believes the proposed legislation would disastrous to the credit card industry," the company said in a statement.
After several quarters of losses, Provident Bank of Maryland raised its card rates 3 percentage points, to 17.9 percent, in March, said John F. Novak, Provident's managing director for consumer loans. Up to 9 points of the 17.9 percent rate consumers pay reflects Provident's cost of funds and another 3 percent Provident's write-offs on bad accounts, he said.
He said Provident would consider getting out of the business if the cap becomes law.
Other observers were skeptical.
"People who pay their bills and don't have credit problems shouldn'thave to subsidize Citibank's decision to issue cards to college students," Ms. Butler said. "I don't see how Citibank can defend its cost of funds when other banks can offer 9.5 percent."