Uncle Sam Just Winked At Citi’s Credit Card Rate Increase

Did Citigroup (C) just pull a fast one?

An issue impacting more Americans than their monthly mortgage payment is their monthly credit card payment. Obama has proposed legislation to limit banks’ ability to increase these rates. That legislation is not scheduled to be implemented until 2010.

In the interim, Obama is working on implementing a Consumer Financial Literacy Program to protect consumers from usurious type behaviors by financial institutions. An example of this behavior is reported by the Financial Times, Citi Raises Card Rates on Millions:

Citigroup has sharply increased interest rates on up to 15m US credit card accounts just months before curbs on such rises come into effect, in a move that could fuel political anger at the treatment of consumers by bailed-out banks.

People close to the situation said that Citi, which is about to cede a 34 per cent stake to the US government as part of its latest rescue, had upped rates on between 13m and 15m credit cards it co-brands with retailers such as Sears.

Read that again. Uncle Sam has a 34% stake in Citigroup. Suffice it to say without Uncle Sam’s bailout, Citigroup would be nonexistent. Uncle Sam is clearly the major shareholder in Citi. As such, management can not make any substantial decisions without Uncle Sam’s blessing.

Then how is it that Uncle Sam just winked at this rate increase? The FT adds:

After FT.com broke news of the hike, Citi issued a statement saying: “We have adjusted pricing and card terms for some customers as part of our regular account reviews. This is an ongoing process to ensure we offer terms, interest rates, credit lines and products based on individual needs and risk profiles. These changes also reflect the dramatically higher cost of doing business in our industry as we work to preserve the broad availability of credit.”

Dramatically higher cost of doing business? Citi can borrow Fed Funds at 0-.25%. That is not exactly dramatic.

Citi’s move came as the economic downturn caused record defaults among US card users and prompted many issuers to raise rates, both to cushion their losses and pre-empt the new restrictions set to come into effect in February.

However, Citi’s increases have been larger than those of its main rivals, according to Lightspeed, which tracks about 12,000 US credit card accounts.

What’s wrong with this picture? Citi is flush with taxpayer cash on one hand and dramatically jacks its credit card rates for the same taxpayers on the other hand.

As a taxpayer, do you feel like we are getting squeezed both coming and going? Yep, me too!!

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