Opinion

Felix Salmon

Even the Fed can’t get credit-card language right

Felix Salmon
Jun 22, 2010 16:22 UTC

CardHub.com has an interesting survey of the literature surrounding penalty interest rates on credit cards. Many of the biggest card issuers rank as “poor,” on the quality and transparency of their disclosures, although Wells Fargo stands out as being particularly good.

Most distressingly, the Federal Reserve itself, in its sample statement language, fails on some key points. For instance, the Fed’s model flyer says this:

How Long Will the Penalty APR Apply?: If your APRs are increased for any of these reasons, the Penalty APR will apply until you make six consecutive minimum payments when due.

Sounds clear, right? Well, it is clear — but it’s also highly misleading. Because the fact is that once your APR is increased, the bank doesn’t need to bring it back down from the penalty level ever, at least for new purchases. CardHub explains that “for new transactions, the credit card companies are not restricted and the Penalty APR could apply indefinitely” — something you’d never guess from reading the Fed’s language.

The Fed, of course, is going to house the new consumer financial protection agency, and it would be great to see the Fed doing a better job of writing this kind of statement than Wells Fargo. But I fear it might take a while for the technocrats at the Fed to learn to speak in clear English.

COMMENT

It would come as more of a surprise if the Fed’s language were transparent, given the opacity of reasoning behind leaving the duplicitous Fed (of all people) in charge of civilian consumer protection. No conflict of interest could be more plain, yet remain undisclosed to all but those with magic decoder rings.

Even Fed members’ kids get the runaround. The question “What did you do in the war of plunder Wall Street waged against the US taxpayer, Fed Daddy?” provokes by way of response a litany of dumfounding flatulence, the gist of which being “As much as possible to help our side, the bad guys, of course!”

And there you have it, plain as daylight.

Posted by HBC | Report as abusive

The new wave of bank taxes

Felix Salmon
Jun 22, 2010 13:35 UTC

Maybe this was inevitable: the UK has moved from its clever one-off supertax on bankers’ bonuses to a much more permanent — and indeed rising — tax on bank balance sheets:

The government said on Tuesday it proposed to introduce a 0.07 percent levy on banks’ balance sheets, rising from an initial 0.04 percent tax to be applied from January 1, 2011.

Chancellor George Osborne announced the tax in his first budget on Tuesday. The levy, which will apply to UK banks and building societies and UK units of foreign banks, is expected to raise more than 2 billion pounds ($3.09 billion) per year.

The UK is in a fiscal crunch, and it needs to raise money anywhere it can, so this makes sense. The nation as a whole is deeply in debt, and rising taxes on all sectors of the economy are a way of enforcing savings to prevent that debt from spiraling out of control.

I would have liked, however, to see the tax be a little less flat. If the Fiscal Commission is looking across the pond to see what the UK is doing, then I’d urge them to think a bit more inventively: make the tax progressive, with too-big-to-fail banks paying a higher rate; and maybe link it to leverage, somehow, as well.

I do think it would be silly for UK banks to start thinking about how they might be able to relocate to get around this tax. The UK might be the first, but in these fiscal times this kind of thing will become very common all over the world.

Update: Peston goes down the list of losers and (relative) winners.

Update 2: GingerYellow says that looking at the details, the UK bank tax is actually quite close to what I’m looking for.

COMMENT

“I would have liked, however, to see the tax be a little less flat. If the Fiscal Commission is looking across the pond to see what the UK is doing, then I’d urge them to think a bit more inventively: make the tax progressive, with too-big-to-fail banks paying a higher rate; and maybe link it to leverage, somehow, as well.”

It only applies to too big to fail banks – ie those with liabilities over £20bn. And it is linked to leverage. Deposits and tier one capital are deducted from the measured liabilities. Moreover, it’s linked to liquidity – banks pay a lower rate for long term liabilities (defined as maturing in at least a year, which doesn’t seem all that long term to me, but it’s better than repo funding I guess). It’s certainly less flat than the Obama administration’s similar proposal.

Posted by GingerYellow | Report as abusive

The indignities of an investment banker in China

Felix Salmon
Jun 22, 2010 13:12 UTC

Whenever the subject of banker pay comes up, there’s always an apologist somewhere talking about how very hard these people work — nights, weekends, everything!

Which is why I had a good giggle this morning on reading Michael Flaherty’s story about the indignities facing the poor bankers working on the AgBank IPO in China: the data room is underground! And they might have to miss World Cup matches!

The AgBank deal is coming to a head just as investment bankers are used to taking time off for summer — or to watch the soccer World Cup. If they thought the workflow in Beijing may slow a bit in the last few weeks, they were mistaken.

Members of the Hong Kong underwriting group grumbled when they were summoned for a meeting in Beijing at 9.00 p.m. on a recent Friday.

Some AgBank executives have a habit of sending ideas to the core e-mail group very late at night, one of the sources said.

Worst of all, the banks have no idea how many millions they’ll be paid for their work:

While, for some, the prestige of being involved in what is likely to be a record IPO outweighs the pain of the tightly controlled process, the bankers still don’t know how much they’ll be paid.

Sources say the seven banks involved in the Hong Kong offering expect a fee of around 3 percent. If AgBank raises $12 billion for the H-share IPO, that would mean a fee pool of $360 million — an average of around $50 million each, though it’s unlikely each bank would be paid the same.

Doesn’t your heart just bleed.

COMMENT

The error is that there are some “investment bankers” who get a lot of money and glory and do not post about themselves all over the place, although they are not immune to bragging. They are relatively few in number, although visible. Let’s say they are Erin Callan pre-fall and on up. There is also a huge army of “investment bankers” consisting of most of us, our friends from school, second-year associates, some analysts, and the whiners we don’t want to be associated with. This group is the leverage that funnels value-add up to those who really make the bucks, when it all works, which is not always.

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Counterparties

Felix Salmon
Jun 22, 2010 05:08 UTC

Why has the SEC subpoenaed Sam Antar’s emails to journalists? And his recent divorce records? — Portfolio

Rosecrans Baldwin delivers 1,400 words on the phrase “Somewhere a Dog Barked” in novels — Slate

The Kindle is dead, long live the kindle! — GigaOm

Orszag Leaving as Budget Director; he’s done a magnificent job — NYT

NYC isn’t bigger than ever. It’s just everywhere else shrank faster than NYC did — MoJo

How to guarantee a leak to Dealbreaker: put “*** PLEASE DO NOT FORWARD THIS EMAIL ***” at the top. And make it stupid — Dealbreaker

Sources: Conde Nast to Revive Gourmet Brand — NYO

Jenny Holzer, in S Africa: “It’s better to give to children than to adults” — NYT

How Dangerous Is US Government Debt? The Risk of a Sudden Spike in US Interest Rates — CFR

Why Having a Toddler is Like Being at a Frat Party (make sure to read the comments) — Suburban Snapshots

McWilliams on good food: “we mustn’t allow the virtues of production to hide the dangers of consumption” — Atlantic

COMMENT

“Somewhere a blogger tweeted”

Posted by HBC | Report as abusive

Ken Feinberg’s other job

Felix Salmon
Jun 22, 2010 04:17 UTC

If anybody other than Ken Feinberg were in charge, this would worry me greatly:

In the end, one aim of the fund—and a prime reason BP agreed to it—will be to minimize lawsuits against the company. To do that, Mr. Feinberg will offer big lump-sum payments to workers and businesses as an enticement to stay out of court.

“At some point, I will have to make an offer—’You take this amount in full satisfaction of your claim, but only if you waive your right to future litigation,’” Mr. Feinberg said.

Funny, the “minimize lawsuits against the company” purpose of the fund was nowhere to be seen in the initial news reports about it, or the BP press release, or the White House fact sheet. It seems that Feinberg has two jobs, not one: he has to pay out legitimate claims and he also has to prevent those claimants from suing BP. Obviously, at the margin, the second job is going to make the first job more difficult: there will always be some settlements that people won’t accept unless they retain the right to sue.

What’s more, there’s an enormous information asymmetry here. Most of the claimants are individuals and small businesses who probably have no idea what their legal rights are or how much they could receive in a court of law. BP and Feinberg, by contrast, are legal sophisticates who are well versed in the arts of persuading people to sign away their right to litigate.

Feinberg is (mostly) beyond reproach and I trust him to do the right thing here. But if he were to fall under a bus tomorrow, I don’t trust his successor similarly. To err is human, and when Feinberg or his successor makes an error, there should be some kind of grounds to appeal, even after the offer has been accepted.

This isn’t the first time that Feinberg has discovered a second, hidden purpose behind his ostensible job. When he was setting bankers’ pay, he eventually came out and said that his “primary objective” was not setting bankers’ pay at all, but rather TARP repayment.

I particularly worry about the status of claimants who put in for one claim and then put in for a second. If they sign away their right to litigate when they receive their first payout, it seems to me that they will have no leverage at all when negotiating with Feinberg for their second. As a result, Feinberg’s going to find it much harder to settle claims quickly: people will want to wait to settle everything at once, if they’re going to waive their litigation rights.

So I hope that Feinberg doesn’t treat this secondary aim too seriously — and I trust that he does treat it as a secondary aim, rather than a primary one. More clarity on this front would be very welcome.

COMMENT

You missed the last part of his sentence, which may add a lot more meaning.

“And if I package it right, people will see that it makes no sense to fight it out in court.”

This is wise, given court costs can eat up the majority of your claim and there is no guarantee of an outcome. Businesses who claim they were ruined, should take a payout to compensate if it means the business is close to being bought out.

He said at one point, and that means once both parties are aware of the damages. If the payout covers your damages, then you would be wise to take the payout. Why would huge lump sums be offered unless there was a waiver? This is not a trough, it is compensation for those who are damaged and everyone who deserves it should get it.

In other words, payouts for damages won’t ask for a waiver, but huge payouts or ‘packages’ he offers in a lump sum will.

After reading about the Exxon Valdez this sounds like a much better plan then promising payout that never came and then having to go to court for damages and still be in litigation 20 years later.

Posted by hsvkitty | Report as abusive

The interchange win

Felix Salmon
Jun 21, 2010 22:37 UTC

It looks like interchange-fee regulation has made it through! That’s great news, and I’m not particularly concerned about the compromises that Dick Durbin made. The Fed can now consider fraud costs as well as transaction costs in setting the level of interchange fees — that’s OK, although it’ll probably just push further down the road the day when the U.S. will finally embrace the low-fraud EMV standard.

Kevin Drum “wouldn’t mind seeing some regulation of credit card interchange fees as well”, but that’s bound to happen, de facto, now that merchants are free to offer discounts to people paying with cash or debit: if credit-card interchange fees stay high while debit-card fees fall, then merchants will simply start offering broad discounts to anybody using cash or debit, essentially forcing customers to pay extra for all those frequent-flier miles and cash rebates.

The one place this might end up hurting consumers is in the travel area generally, and plane tickets in particular. I feel that we’re bound to move to a Europe-style state of affairs where it costs a significant extra sum to buy tickets on a credit card, and that as a result a lot of people will use debit cards instead. When they do so, they’ll lose a lot of consumer protections in the event that their airline goes out of business or otherwise fails to honor the ticket they’ve paid for.

Still, it always was a bit weird that we got these protections for “free”. I guess that going forwards it’s just going to be a lot more obvious how much they really cost. And that a lot of people, if they’re buying some kind of service to be delivered in the future, are going to quite deliberately use their credit card, even if they have the money in their checking account to use their debit card.

I think too that if discounts-for-debit catch on, that’ll have a positive effect in terms of minimizing the degree to which people delude themselves that if they buy this item today, they’ll be able to pay it off in full before the monthly credit-card statement is due. Mike Konczal sees

something unhealthy about a payment system that blurs the line, on purpose, between transactions and revolving lines of credit. The system is set-up to encourage you to use credit as much as possible, and then pay that credit off later. This is not an accident. The common phrase among credit card company people is that people are “sloppy payers”, and these sloppy payments function as a major profit center for businesses. This system also transfer money upwards in a regressive, tax-free manner and distorts prices so that shareholders of financial companies can get a cut.

The new interchange rules will definitely put a dampener on this kind of activity, although they won’t eliminate it entirely. If you want to use a credit card, that’s fine, but you’re going to have to want to use your credit card, and the distinction between credit cards and debit cards is going to me much more obvious. That’s got to be a good thing in terms of improving personal finances across the nation.

COMMENT

Jenn – I agree, I am skeptical that businesses will pass the savings on. I expect that businesses will actually have a really hard time monitoring and managing their card mix.

The friction of looking at a customers card, determining what kind of card it is, informing the customer of a surcharge, asking the customer to use a different card, charging the surcharge, etc is pretty steep and I doubt many retailers will bother.

Even if that interaction is smoothed out with very good implementation within POS software, influencing the card mix will be hard for the retailers to solve.

Most small and mid-market businesses don’t actually know their card mix. One reason is that many of the common billing formats that the credit card processors use (such as tiered billing and ERR) obscure the actual card mixes in order to allow the processor to hide the magnitude of the markup they are making above interchange.

For other people who are geeks about credit cards and interchange, a colleague of mine and I put up a little mashup at http://truecostofcredit.com We used a few data sources, including a BIN number database (the BIN number is the first 6 numbers of your credit card) and the interchange guidelines published on visa and mastercard’s websites. It’s a fun way for consumers to get a sense for how much their personal credit card costs the business when they shop.

The difference between using a debit card and credit card can already be pretty big. Ironically, most consumers tend to use debit cards for smaller purchases and debit cards also tend to be more expensive for smaller purchases (since they have a greater per-transaction component).

Posted by seanharper | Report as abusive

Time’s big new paywall

Felix Salmon
Jun 21, 2010 18:35 UTC

Is this new? Following a link from AR today, I ran straight into a Time Magazine paywall:

paywall.tiff

That’s it: lots of sharing tools, but just one paragraph of the article, and then an invitation to subscribe to the magazine ($40 per year) or download the Time iPad app ($5 per issue, which works out at $260 per year, or thereabouts). Either way, even after you’ve shelled out your cash, you still can’t read the story on Time.com, as far as I can tell.

I don’t get it: I thought that Time.com was all about maximizing pageviews, and was also a website happy to run stories talking about how “almost everybody who has ever tried charging for content has failed”.

It seems that Time has come to the conclusion that if it can’t make money charging for content on the web, it simply won’t publish that content on the web: it’ll just run a one-paragraph snippet, and force you to read the article elsewhere, if you’re so inclined. It’s an odd choice to make; I wonder how long it’ll last. And, can somebody tell me how long this has been going on? It’s certainly the first I’ve heard of it.

Update: AR says that the paywall wasn’t there this morning. Curiouser and curiouser.

COMMENT

@bryanX:
That’s just typical Reuters for you, there’s no point presenting complaints to Felix (I’ve tried). My best tips are: come back in a few days, or have an array of browsers to try (I now have five at the ready) – one or the other usually gets through.
It surprises me to this day that they would invest real money in their web content (e.g. F.S. can’t be cheap) yet hire neither competent webmasters or put any type of QA team in place. To me this seems inconsistent but I’m sure they have their reasons.

Posted by bxg5 | Report as abusive

Politics of subprime datapoint of the day

Felix Salmon
Jun 21, 2010 17:58 UTC

Atif Mian, Amir Sufi, and Francesco Trebbi report, in a new paper:

We begin with an examination of the pattern of campaign contributions toward representatives from districts with a high fraction of subprime borrowers. From 1994 to 2000, mortgage industry campaign contributions toward these representatives are relative steady. However, beginning in the 107th Congress (2001-2002), there is a sharp relative rise in mortgage industry campaign contributions toward representatives from high subprime share districts. The relative increase accelerates through 2006. The magnitude is economically significant: a one standard deviation increase in the fraction of subprime borrowers in a given district leads to an 80 percentage point increase in the growth of mortgage campaign contributions from 2002 to 2006. In contrast, we see no effect for non-mortgage financial industry campaign contributions.

Of course there’s a pretty chart to go with:

subprime.tiff

The authors conclude, based on this and other evidence, that both subprime lenders and subprime borrowers were responsible for successfully pressuring politicians of both parties to deregulate the mortgage industry.

This isn’t regulatory capture, so much as it is regulatory emasculation via Congress. And there’s really nothing that can be done, in terms of building a new regulatory architecture, to stop the same thing from happening again in future — especially with the rise of tea-party rhetoric. All we can hope for is that memories of the financial crisis will be long enough to prevent Congress from embarking on another fight against regulatory red tape and artificial restraints. I’m not hopeful.

(Via Guan)

COMMENT

Pretty sure “80% of repackaged subprime debt” wasn’t rated triple A. Don’t think a single person argued there was zero correlation between the mortgages and in boom times the correlation is no more likely to be zero than in a crash – both times the correlation is likely to be high and you are confusing mezzanine with equity tranches.

The demand was from investors who wanted the ***appearance*** of low risk with a higher yield. Anyone who ACTUALLY thought they were taking on no risk should have “I am a moron” tattooed on their forehead and be forever banned from every having an asset except cash.

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What would JP Morgan do with Arminio Fraga?

Felix Salmon
Jun 21, 2010 16:50 UTC

Citigroup famously paid $800 million for a young and doomed hedge fund, Old Lane, just so that it could hire its founder, Vikram Pandit. No one thinks that decision was a good one, in hindsight. But JP Morgan is setting its sights rather higher, looking to buy Gávea Investimentos, along with (one presumes) its founder, Arminio Fraga.

The price would certainly be higher than $800 million, but then again Arminio (as he’s universally known) is a much juicier catch than Vikram. After cutting his teeth successfully running large amounts of money for George Soros, he more or less singlehandedly gave much-needed credibility to the Brazilian central bank in the wake of the Russia crisis and through Argentina’s default. Facing a monster liquidity crisis and spreads of more than 2,000bp over Treasuries, Fraga navigated the markets and the multinationals masterfully, setting the stage for the improbable yet lucrative embrace of Lula’s left-wing government by the international markets.

Now that Arminio has become dynastically wealthy through setting up Gávea, he might just see one last act left in his life, taking over the House of Morgan and solving Jamie Dimon’s succession dilemma. But he’s only one year younger than Dimon, who shows no signs of wanting to leave, and in any case it’s hard to imagine Arminio moving back to chilly New York from his beloved Rio.

That said, I can’t imagine that JP Morgan would be happy simply leaving Arminio where he is; at the very least they’d be likely to give him some sort of oversight at Highbridge. That would quintuple Arminio’s assets under management at a stroke. My guess is that a JP Morgan board seat is probably on the table as well. Whatever makes Arminio happy: there’s really no point in JP Morgan buying Gávea if he just turns around and leaves shortly after the acquisition. His investors are loyal, and their money would be sure to follow him out the door.

One thing I can’t quite understand, though: why is JP Morgan putting what is presumably quite a lot of effort into trying to acquire Gávea now, given that they’re not going to close until after the financial regulatory reform bill has been signed and there’s a lot more clarity on what they’re allowed to do on the buy side? Why not wait and see how powerful the Volcker rule ends up being, before getting deep into negotiations? Is there urgency here to buy Gávea? And if so, what is it?

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