Category: regulation

Capitalism at Its Finest: Debit Card Edition

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Andrew Martin exposes how Visa and the banks have colluded to increase the interchange fees charged merchants for debit cards.

Basically, because Visa can use its market share to force merchants to accept its products, and because it splits the interchange fees with the banks, it creates a situation where fees in the US are the highest in the world, and every merchant, and by extension every buyer, pays to shovel money to Visa and its client banks.

The reason for this is because Visa and MasterCard do not compete for end user consumers, they compete to get banks to offer their cards to end-user consumers, and they compete by raising prices, which they split with the banks:

As debit cards became the preferred plastic in American wallets, Visa has turned its attention to PIN debit too and increased its market share even more. And it has succeeded — not by lowering the fees that merchants pay, but often by pushing them up, making its bank customers happier.

In an effort to catch up, MasterCard and other rivals eventually raised fees on debit cards too, sometimes higher than Visa, to try to woo bank customers back.

“What we witnessed was truly a perverse form of competition,” said Ronald Congemi, the former chief executive of Star Systems, one of the regional PIN-based networks that has struggled to compete with Visa. “They competed on the basis of raising prices. What other industry do you know that gets away with that?”

This is only possible because Visa has a near monopoly, and even after it settled an anti-trust lawsuit, and agreed not to tie its expensive debit cards to all Visa products, merchants still cannot afford to diss the product, because the market share is too high.

This is, of course, what the Chicago School’s “perfect markets” create: Monopolies and near markets that create market “stickiness” that ill serve anyone but the monopolist.

It’s a capitalist’s dream, but a consumer’s nightmare, to the tune of about $427 per household per year.

Paul Krugman Destroys the Fannie/Freddie CRA Myth

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Paul Krugman looks at both home and commercial real estate, and notices that they had a virtually identical trajectory.

So the bubble in commercial real estate, where Fannie and Freddie do not lend, and where the Commercial Reinvestment Act held no sway, had just the same sort of bubble.

From my perspective, the CRE bubble is highly significant; it gives the lie both to those who blame Fannie/Freddie/Community Reinvestment for the housing bubble, and those who blame predatory lending. This was a broad-based bubble.

While I agree that the graph shows that government involvement in the US residential real estate market did not produce the crisis, I do think that the bubble was an artifact of excessively lax lending standards and excessively low interest rates, and these were an artifact of government policy, at least if you consider the actions of then Federal Reserve Board, and its Chairman Alan “Bubbles” Greenspan to be government acts.

More Ass Covering by the Fed

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We are now getting whispers that the Federal Reserve is planning to get tough with the banks:

If the Fed chairman’s speech didn’t worry investors, his timing is interesting. Ben Bernanake now flies to Switzerland for a meeting with the world’s other central bankers.

Saturday’s invitation from the Bank of International Settlements specifically questions whether banks—using cheap money—are returning to the aggressive behavior that prevailed during the pre-crisis period.

What we will see is a lot of fake toughness, because Bernanke is trying to do everything that he can to kill the Fed audit bill.

Economics Update

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first time unemployment claims rose slightly this week, up 1,000 to 434,000, down from the 490,000 at this time last year, and the 4 week average fell to 450,250.

I would note that this number needs to be below about 400K before non-farm payroll increases, and if the December numbers show an increase in NFP, it’s seasonal adjustment bull sh$#.

The numbers are better, but it’s still, “better in a not getting worse as fast,” way.

That being said, retail sales surprised on the upside, with December sales up 3% over the 2008 numbers, though still down by about 2-3% FROM 2007.

We also had some big news in central bank land, with China’s central bank raising its benchmark rate, with 3-month bills increasing to 1.3684%, up 4.04 basis points (0.0404%) from the rate that it had maintained for the past 4 months.

It indicates that they will be tightening on the money supply, which could get interesting, because much of the Chinese stock market is smoke and mirrors. Additionally, it may be a first step in allowing the Yuan to drift higher, as higher returns make the currency more attractive.

On the less surprising side of stupid central bank tricks, the Bank of England left both rates and policy unchanged, which means that they are still printing money hand over fist.

Also, Treasurys fell slightly, though I think that this is concern regarding the NFP payroll data.

Energy and currency surprised. The surprise increase in Chinese rates would normally presage an increase in oil prices, because there is the assumption that there is additional demand that is being tamped down, and the dollar down, because the Yuan becomes more attractive, but in fact, oil fell slightly, to below $ 83/bbl, though that might be profit taking, and the dollar rose fairly sharply.

A Very Good Idea

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The FDIC is looking to use a formula for its insurance fees that is driven by banker pay:

U.S. regulators are set to consider a plan that would tie the amount banks pay for deposit insurance to the riskiness of the institutions’ pay structures, a source familiar with the matter said Thursday.

Under the proposal to be considered next week by the board of the Federal Deposit Insurance Corp, banks that base compensation on solid performance metrics and include measures such as “clawbacks” would pay less for deposit insurance, the source said, speaking anonymously because the proposal has not yet been released.

Banks with riskier schemes that reward short-term gains would have to pay higher fees.

This is a good start, but it’s too easy for the bankers to game, and gaming financial contracts is what bankers do.

Set the fee based on total remuneration of the highest paid person at the bank, including bonuses.

For each multiple of the President of the United State’s salary ($400K) raise the insurance fee by 1 basis point (0.01%).

If your highest paid guy gets $4 million in a year, the surcharge is a manageable 0.1%, if he gets $40 million a year, it’s 1%, if it’s $70,324,352, which is what Lloyd Blankfein received in 2007, then it is 1¾%.

That should cut down on banker bonuses.

Hell, make it a payroll tax, and apply it to businesses across the board. It would cut down on overpaid athletes too.

John Taylor Calls out Ben Bernanke

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Ben Bernanke in his younger days

He politely says that Bernanke is full of it, and that low rates caused the bubble:

John Taylor, creator of the so-called Taylor Rule for guiding monetary policy, disputed Federal Reserve Chairman Ben S. Bernanke’s argument that low interest rates didn’t cause the U.S. housing bubble.

“The evidence is overwhelming that those low interest rates were not only unusually low but they logically were a factor in the housing boom and therefore ultimately the bust,” Taylor, a Stanford University economist, said in an interview today in Atlanta.

Taylor, a former Treasury undersecretary, was responding to a speech by Bernanke two days ago, when he [Bernanke] said the Fed’s monetary policy after the 2001 recession “appears to have been reasonably appropriate” and that better regulation would have been more effective than higher rates in curbing the boom.

The Taylor rule, from the Wiki:

In economics, a Taylor rule is a monetary-policy rule that stipulates how much the central bank would or should change the nominal interest rate in response to divergences of actual inflation rates from target inflation rates and of actual Gross Domestic Product (GDP) from potential GDP. It was first proposed by the U.S. economist John B. Taylor in 1993.

I’m not sure of the value of the Taylor rule, there seem to be some “miracle occurs here” bits in the coefficients used, but it is significant that someone with his sort of academic credentials (he has a fracking rule named after him) is coming out hard against the Fed Chairman’s excuses.

Normally, I Don’t Quote Paul R. La Monica…………

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I find him rather to excessively optimistic, glib, shallow, and thoroughly conventional in his journalism.

That being said, his review of Federal Reserve Chairman Ben Bernanke’s speech at the American Economic Association meeting in Atlanta, nails it in the title, “Surprise! The Fed says don’t blame the Fed.”

That pretty much captures the substance of what Bernanke said in a nutshell.

Again, No Surprise

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The single most important criteria determining whether or not a bank was bailed out by was the personal and political closeness to the Fed or to the Congress of its senior management:

A new study by Ross professors Ran Duchin and Denis Sosyura found that banks with connections to members of congressional finance committees and banks whose executives served on Federal Reserve boards were more likely to receive funds from the Troubled Asset Relief Program, the federal government’s program to purchase assets and equity from financial institutions to strengthen its financial sector.

Further, their research shows that TARP investment amounts were positively related to banks’ political contributions and lobbying expenditures, and that, overall, the effect of political influence was strongest for poorly performing banks.

Hoocoodanode?

The process of bailing out the banks was an artifact of corruption and self-dealing.

H/t zero hedge

Another Nail in the Lead System Integrator Concept Coffin

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As I have said before, with the LSI model, you have the contractor supervising their own performance, which is almost literally a fox in the henhouse:

Defense contractors developing the Army’s largest modernization program — the Future Combat System — also were paid $91 million in 2007 to report back to the Pentagon on how well the program was performing, according to a new inspector general report, adding fuel to demands for tougher conflict-of-interest rules.

The Nov. 24 Defense Department inspector general report, reviewed by POLITICO, was sparked by an anonymous tip. The probe found that the $100 billion FCS program contained numerous conflicts that went unreported and that, between 1987 and 2007, the Pentagon increased its reliance on contractors for quality assurance and other tests by 375 percent.

……………

For instance, SAIC, a prime contractor doing systems engineering along with Boeing, received $2.2 billion for development of the FCS program, but in 2007 it also received $25.8 million for testing the program. Computer Sciences Corp., General Dynamics, Lockheed Martin and Northrop Grumman also received money to create elements of the FCS at the same time they were helping to test it, according to the report.

(emphasis mine)

I worked with folks from the SAIC when I was at FCS, and got very little “L” from the LSIs: they simply did not provide direction to the contractors.

It’s no surprise that the inspector’s report was marked “For Official Use Only”, because the powers that be in the Pentagon want this buried, but someone, probably someone who actually thinks about the soldiers who use the product, leaked it.

Note that this is an artifact of a number of administrations:

In addition to pursuing specific allegations of conflicts of interest, the inspector’s report looked more broadly at the trend toward using services contracts for testing. The review found that before the 1990s — when the Pentagon embraced the trend of cutting government employees and instead contracting for services — the Pentagon spent about $8.9 million a year on contractors for testing. In 2007, it spent $42.6 million.

The Pentagon started doing this under Bush I SecDef Richard Bruce Cheney, though it is fair to say that it was expanded under Clinton, and went, as did defense procurement generally, completely haywire under Bush II.

The problem is that when you have contractors testing for you, they lie, they self-deal, and they cheat.

That’s capitalism, baby: Cheating is a profit opportunity.

Unfortunately, the capabilities that the government has shed over the past few years will take much longer, but if the development of new systems is curtailed until the internal governmental testing capabilities, it will result in a exodus of people in private testing, because their jobs will be gone, and return to government.

News Flash: Bernanke is an Idiot

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The Kaplan Test Prep Company Washington Post actually does some reasonably good news gathering now and again, even if their OP/EDs are complete crap.

Case in point is this history of the Federal Reserve’s mis-steps in dealing with the housing bubble and the related sub-prime debacle.

Their lede is a speech that Bernenke gave in 2007, where he, “Assured the bankers and businessmen gathered at the Westin Hotel on Michigan Avenue that their prosperity was not threatened by the plight of borrowers struggling to repay high-cost subprime loans,” because, most banks were not involved at all with sub-prime lending, which was false, and transparently so:

He was wrong. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed. Even as Bernanke spoke, the spillover from subprime lending was driving the banking industry into a historic crisis that some firms would not survive. And the upheaval would shove the economy into recession.

Just as the Fed had failed to protect borrowers from the consequences of subprime lending, so too had it failed to protect banks.

(emphasis mine)

So, it’s clear that the Fed, and Ben Bernanke were clueless, but it gets worse:

A warning ignored

In January 2005, National City’s chief economist had delivered a prescient warning to the Fed’s board of governors: An increasingly overvalued housing market posed a threat to the broader economy, not to mention his own bank and others deeply involved in writing mortgages.

The message wasn’t well received. One board member expressed particular skepticism — Ben Bernanke.

“Where do you think it will be the worst?” Bernanke asked, according to people who attended the meeting, one in a series of sessions the Fed holds with economists.

“I would have to say California,” said the economist, Richard Dekaser.

“They have been saying that about California since I bought my first house in 1979,” Bernanke replied.

This time the warnings were correct, and the collapse of the California real estate market would bring down the nation’s fourth-largest bank, the largest casualty of the financial crisis.

(emphasis original)

This is egregious enough that one of Bernanke’s most stalwart supporters, Paul Krugman calls him out, with charts:

The point is that there was indeed a huge CA bubble in the 80s, which burst painfully. Nor was this an obscure bit of knowledge: in fact, people like Calculated Risk and yours truly were quite explicitly using the great California bubble of the 80s as a model for what was going to happen nationally.

This whole episode makes me think considerably worse of my former department head.

(emphasis mine)

Bernanke was saying that there had never been a housing bubble and crash in California, despite the fact that there had been one that popped and bottomed out just 10 years before.

This man should not be in charge of a pastry shop, much less the Federal Reserve Bank of the United States of America. I’m not sure how he even became the head of the econ department at Princeton….He seems far to feckless for that.

Elections Have Consequences: Aerial Cattle Car Edition

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The Transportation Department has now forbidden airlines from keeping passengers on a plane for more than 3 hours while it waits on the tarmac.

This is a long overdue change.

And yes, I realize that there appears to be some dissonance from my prior post, lambasting Obama and His Stupid Minions™ on cutting another taxpayer funded giveaway to AIG fat cats.

The thing is, Obama is not every special interest’s bitch, just the FIRE (Finance, Insurance, and Real Estate) sector.

Airlines are not part of FIRE, so they don’t get a pass.

Not Enough Bullets: Credit Card Companies Edition

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In particular First Premier Bank Credit Cards, which is charging 79.9% interest:

Here’s something you don’t see every day: A credit card with a $75 dollar annual fee, a $300 limit, a $29 penalty for being late or over limit… and an interest rate of 79.9 percent? Welcome to First Premier Bank, a sub-prime credit card issuer.

First Premier is just following the new regulations found in the Credit Card Reform Bill passed by Congress and signed by our President this past year. Apparently, Congress set out to curb the abuse that has become all-too-common in the credit card industry… you know, like exorbitant fees and interest rates from 20-40%… so they asked the banking lobby to come up with something acceptable and this is the result. So, there should be no one surprised when other credit card issuers follow suit as expected.

You know, it’s this kind of crap makes cynicism rule in politics.

It’s Bank Failure Friday!!!!

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And here they are, ordered, and numbered for the year so far.

  1. RockBridge Commercial Bank, Atlanta, GA
  2. Peoples First Community Bank, Panama City, FL
  3. Citizens State Bank, New Baltimore, MI
  4. New South Federal Savings Bank, Irondale, AL
  5. Independent Bankers’ Bank, Springfield, IL*
  6. Imperial Capital Bank, La Jolla, CA
  7. First Federal Bank of California, F.S.B., Santa Monica, CA

Full FDIC list

*I think that my parents had an account there in the mid-1980s, when my step-mother was dean at the University of Illinois at Springfield.

Bankers Offer to Overpay on UK Bonus Tax

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No, really, I am completely serious:

Some of the most senior bankers in Britain are planning to convince the Treasury to drop the new 50% tax on bonuses by dangling the prospect of a combined contribution to the exchequer of £2bn. The promise of the boost to Britain’s depleted coffers has been made in recent days and is almost four times the £550m Alistair Darling has said he intends to raise through his payroll tax on bonuses. The Chancellor has been met with anger in the City since he announced the one-off tax in his pre-budget report last week and been warned of a mass exodus of high-flying bankers to countries with a less punitive tax regime.

(emphasis mine)

I don’t know what is going on here, but when Britain’s own little vampire squids wrapped around the face of humanity,* decide that it’s time to overpay their taxes by a factor of 4, something very hinky going on.

Somewhere in these bonus pools that Chancellor Darling wants to tax is something bad….Something Really, Really, Really, Really bad.

We are talking something murder-for-hire and laundering drug money through child prostitutes bad. Something is rotten in the Street City,† and they, whoever exactly they are, very badly want it covered up.

*Alas, I cannot claim credit for this bon mot, it was coined by the great Matt Taibbi, in his article on the massive criminal conspiracy investment firm Goldman Sachs, The Great American Bubble Machine.
†The UK equivalent of Wall Street. Corrected my error on edit.

Stop Ben Bernanke

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I know that there are a lot of people who think that Bernanke did the right thing, and I know that I am not one of them.

That being said, the real question is whether or not Bernanke is the right person for the path forward, and it is clear from his testimony before the Senate Banking Committee that he is completely unsuited to the task.

The fact is that it was clear from his earlier testimony, when he endorsed gutting Social Security, which was completely inappropriate for a Fed Chair, that he is a conservative (though not necessarily crazy).

But at the confirmation hearings, he was asked a very good question by, of all people David “Diaperman” Vitter.

Vitter did not come up with the question, Brad Delong came up with the question, and it’s why he’s on my blogroll, but it is a good question, and his response is telling:

Q: Why haven’t you adopted a 3% per year inflation target? [Note, the target is 2%]

Bernanke: The public’s understanding of the Federal Reserve’s commitment to price stability helps to anchor inflation expectations and enhances the effectiveness of monetary policy, thereby contributing to stability in both prices and economic activity. Indeed, the longer-run inflation expectations of households and businesses have remained very stable over recent years. The Federal Reserve has not followed the suggestion of some that it pursue a monetary policy strategy aimed at pushing up longer-run inflation expectations. In theory, such an approach could reduce real interest rates and so stimulate spending and output. However, that theoretical argument ignores the risk that such a policy could cause the public to lose confidence in the central bank’s willingness to resist further upward shifts in inflation, and so undermine the effectiveness of monetary policy going forward. The anchoring of inflation expectations is a hard-won success that has been achieved over the course of three decades, and this stability cannot be taken for granted. Therefore, the Federal Reserve’s policy actions as well as its communications have been aimed at keeping inflation expectations firmly anchored.

(emphasis mine)

When you translate this from Fed Speak, it reads as follows, “If inflation threatens to rise above 2%, I will slap it down, and I don’t care if unemployment remains above 10% for the next decade.”

We are in a liquidity trap, and the only way out of it is to create the expectation of inflation, so people worry about their money losing value and spend it.

That’s Econ 101, and I believe that Ben Bernanke has written things to this effect too.

Regulators Sell Out To Banks

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This time, it’s international regulators, who have pushed back the so called Basel requirements on capitalization:

Global regulators will give banks a grace period before forcing them to implement stricter capital rules, three people said on Wednesday, easing concerns that lenders might need to issue massive amounts of shares in the near future.

……………

The committee is expected to publish proposals this week for stricter financial regulations in response to the credit crisis. There had been fears that if banks implement the new rules quickly, they would have to raise substantial capital.

The three people with knowledge of the matter said the committee would stick to its plan to gradually implement changes starting in 2012, but will give banks a transition period to help them adjust to the rules.

My bet is that in 2010, start will be pushed off to 2013, and in 2011, it will be pushed off to 2014.

Rinse……Lather……Repeat.

Economics Update

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Rent-price ratio h/t Calculated Risk

So, the Open Marked Committee of the Federal Reserve left rates unchanged, though they do seem set on ending their quantitative easing over the next few months:

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009.

Full FOMC statement is after the break.

The bond markets responded with Treasurys falling, and yields rising.

We actually saw a non trivial inflation rate in November, with the Consumer Price Index rising 0.4% in November, though that was energy and food, the core rate was 0%.

There is a troubling data point in the data though, rent, and owners’ imputed rent both fell, which is not a problem in terms of inflation, but is in terms of real estate.

Basically, even with house prices having fallen in the past 2 years, they are still above the traditional price-to-rent ratio trend, and as rents, fall, homes have to fall further to get back to the traditional (and sane) range, so there is more pain in real estate.

In more real estate news, new home construction jumping 8.9% from October to November, though it is down 12.4% year over year, (PDF link) while mortgage applications, and the rate for a 30-year fixed mortgage, rose marginally last week.

The statements on the unwinding of quantitative easing pushed the dollar up.

In energy, oil rose again, on reports of falling inventories.

Press Release

Release Date: December 16, 2009

For immediate release

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

Corruption Update: Another Bailout for Bob Rubin’s Old Firm

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Seriously. The fact that the IRS, or let’s be clear about, Timothy Geithner’s Department of the Treasury is allowing Citi to get an additional $32 billion in tax breaks so that it can repay the TARP more quickly:

The Internal Revenue Service on Friday issued an exception to long-standing tax rules for the benefit of Citigroup and a few other companies partially owned by the government. As a result, Citigroup will be allowed to retain billions of dollars worth of tax breaks that otherwise would decline in value when the government sells its stake to private investors.

By way of comparison, the government invested $45 billion in Citi, which has, through various means, converted into common stock at above market valuations.

So, it now appears that we are paying Citi to pay us back the TARP money, $32 billion in tax deductions, so that they can pay back the $20 billion that is still owed as debt, overpay their next CEO.

With the top corporate tax rate at 35%, this translates to about us paying them $11.2 billion to get back our $20 billion, which was earning us 8%, or $1.6 billion a year……Lovely deal, huh?

I’m calling corruption on this.

I’m not sure if anyone in the White House is personally getting rich on this, but, much like the recently deceased Yegor Gaidar in Russia, they are creating and maintaining a corrupt system.

I’m sure, like Gaidar, they see themselves as heroic, but they are looting the United States.