Debtor's Revolt

Yves Smith of Naked Capitalism wants to stick it to the Man. Or at least that is what she says in A Shot Across the Bow (Debtors’ Revolt Watch). In the post, an embedded YouTube video by Rockerchic4God (aka Ann Minch) urges the audience to default on their credit card debt en masse, to protest unjustified rate hikes of up to 30% APR.

Let me make this clear, I believe that Minch is sincere and should be commended for attempting to stand up to an out-of-control, predatory industry. Unfortunately, her plan is fatally flawed due to the Federal Reserve subsidized securitization of revolving credit via the TALF program. TALF is essentially the bastard child of Geithner's PPIP concept, where retail debt is securitized and the Federal Reserve Bank of NY makes low interest, non-recourse loans for near 90-95% of the face value of the securitization to interested buyers. The buyer then pledges the newly purchased and likely overvalued securities as collateral for the loan. TALF has been accepting credit card debt since May and has potentially put the taxpayer on the hook for around $20.1 billion.
If any sort of organized default activity were to occur, the credit card companies would simply pile more debt into the TALF dumpster (The minimum loan amount is $10M and there is no maximum.) While I don't expect Ann Minch to know any of this, I find it difficult to believe that Smith is unaware of this. After all, she is an eminently qualified financial expert, just ask her:
Although I believe ideas should stand on their own merit, rather than on their author's credentials, I also recognize that readers want some assurance that they are not quoting a 13 year old or a dog. I have undergraduate and graduate degrees from Harvard. I have been working in and around the financial services industry since 1980 and have had over 40 articles published in venues such as The New York Times, Institutional Investor, The Daily Deal, U.S. Banker, Bank Mergers & Acquisitions, The Conference Board Magazine, BRW Magazine (Australia), and Boss Magazine (Australian Financial Review).

What Smith fails to mention in her bio is that she is also the President of Aurora Advisors, which is a financial management consulting firm serving Wall Street. Smith knows damn well that credit card lenders like JP Morgan Chase, Citigroup, and Bank of America (aka her potential and, perhaps, current clients) wouldn't be significantly impaired by Minch's debtor's revolt. The participants who would be harmed are the taxpayers, as usual, and the debtors. To be fair, Smith gives a half-assed warning about trashing your credit and statutes of limitations on the claims of creditors, but since she didn't look into the actual consequences to the debtor, it's fairly clear that's not where her sympathies lie.

In reality, if you walk away from a credit card debt, your account will go into collections after 30 days and your FICO score will be reduced dramatically. This may very will trigger drastic interest rate increases on your other cards. Eventually, the account will be sold at a deep discount to a collections agency that will harass you for payment for several months. Once they give up, they'll resort to legal means. You will be sued in civil court and if you fail to show up, a default judgement will be issued for the debt and the collector's legal fees and wage and asset garnishment will likely occur. If you insist on a trial, you won't have a leg to stand on, so the results will likely be the same, plus your legal fees. Don't underestimate the capacity of the civil courts, either. Every debt court that I've observed was a well-oiled machine in which default judgements were rendered at the pace of a standard auction.

Employers hate garnishment orders of any sort and view them as grounds for refusing employment. If you're already employed, they can't legally fire you for the garnishment resulting from a debt, but they can always manufacture another reason. In the video clip, Minch states that she is aware of the consequences, is
judgement proof, and is willing to take the heat. From what I observed in the 4:28 minute clip, under no circumstances would I screw with Minch without the benefit of a concealed straight-razor and a good pair of track shoes. For the rest of us, this strategy probably makes sense only if you are planning on filing for bankruptcy and can pass the means test for debt discharge (Ch.7 vs Ch.13).

Is Smith hopelessly naive or is she shilling for the Man? I really don't know. Everybody is here for a reason (including myself) and I doubt it's bloggers who are punching Smith's meal ticket. In fact, in Smith's position, writing a blog critical of Wall Street would appear to be one of the dumber things she could do. Is it possible that the adoration of anonymous strangers is worth risking your livelihood for? Who knows? T
he take away here is that it hasn't gotten any wiser to allow others to critically think for you.


  1. Isn't the real revolt to take on no more debt, to pay down existing debt ASAP, and pull all accts with lenders one thinks are 'userus'?

    That seems the best way to break this system to me.

  2. Emphatically yes, maybe, and yes. I'm on the fence about paying down existing debt which will we be the topic of my next post.