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Commentary: No 'Compassionate Lending' Please

Did you watch the the hearings held on Wednesday? Isn’t Congress stupid?

To wit: Representative Walter Jones, Republican of North Carolina who lit into Citigroup CEO Vikram Pandit.

(You can see him gesticulating madly in this video)

"Couldn’t there be a period of time that you would say to the American credit card holder, no longer am I going to ask you to pay 24 percent so I can make billions of dollars? What I'm gonna do for the American people is say, 9 percent. Why can’t you do something like that?"

"Have some compassion, because the majority of the people are not a member of the country club."

Vikram Pandit testifying before House Financial Services Committee
CNBC.com
Vikram Pandit testifying before House Financial Services Committee

Once again, a member of congress equates running a business well, with a lack of compassion. Nothing could be further from the truth. The most compassionate businesses are the best-run businesses. Think of this way, if the banks had been well run from the beginning, we wouldn’t be here, right? Giving away cheap money is what got us here. Does the current situation feel “compassionate” to you?

In fact, I think raising interest rates on credit cards is the most compassionate thing Vikram Pandit can do right now.

What if you ran a pizza parlor and your flour, cheese, and tomato sauce prices went up dramatically? What if your costs went up so sharply, that when you sold a slice of pizza, you actually lost money? You’d probably raise your prices or stop selling pizza.

This is a bit of an oversimplification, but Citigroup is no different than that hypothetical pizza parlor. Its costs of credit have gone up dramatically. They used to be able to borrow money very cheaply, and, in turn, lend it out to consumers.

Now, because of the credit crunch, the cost of credit has gone through the roof. Pandit, along with everyone else needs to raise the bank’s rates to cover their cost of borrowing. In addition, with the economy so weak, defaults are rising to record levels. He needs a cushion to cover losses he knows are going to come due to non-payments. He’s ensuring future profits (Finally. Something he should have been doing long ago.)

And here’s what Representative Jones seems to forget. Because there is so much taxpayer money in Citigroup, you, me, and everyone else in America are now shareholders. So Representative Jones wants Pandit to make money-losing-credit-card loans? WITH MY TAXPAYER MONEY? Guess he’s not interested in the taxpayer getting his or her money back.

Don’t get me wrong, Vikram Pandit has obviously made huge mistakes. The list of “should-haves” is so very long. And Citigroup , along with Bank of America , Morgan Stanley , Goldman Sachs , and JP Morgan , have been given a huge gift to save them, and the system, from their mistakes.

Frankly, I think they deserve some humiliation and I’ll be the first to admit I watched with a little bit of glee as they were raked over the coals. But members of congress need to remember that jaw-boning banks into giving away loans at a loss is also a huge mistake. It won’t help their constituents, it will hurt them.

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