Felix Salmon

America needs a modern payments architecture

Felix Salmon
Mar 30, 2012 22:40 UTC

I was sad that I had to miss Bruce Summers’s presentation at the Kansas City Fed’s payment conference this morning; I was a couple of miles down the road, at the Kauffman Foundation. But I did manage to grab five minutes to summarize his argument for the assembled econobloggers: it’s an important one, which deserves a lot more attention than it’s likely to get.

Summers’s paper is here. It’s a dense 32 pages long, which is positively laconic in comparison to his upcoming book, Payment Systems: Design, Governance and Oversight, which features contributions from no fewer than 23 famous-in-the-payments-world grandees. But the message of the paper is a very simple one. America desperately needs immediate funds transfer, or IFT. And we’re not going to get it.

Summers’s new paper is a longer and more detailed version of the paper I blogged back in August. That paper was co-written with Kristin Wells, of the Chicago Fed, and was published under the Chicago Fed’s auspices. At the time, I wrote:

What Summers and Wells don’t say, perhaps because they work for the Federal Reserve, is that it’s downright idiotic that the Fed doesn’t step up to the plate and take on its natural role as guardian of the national payment system. Why doesn’t it? I’m not sure, but I suspect it’s something to do with the fact that the Fed doesn’t really exist as a unified body: there’s just a network of regional federal reserve banks, with a board of governors in Washington.

In the new paper, Summers is speaking for himself, and makes explicit what was only implicit before. The regional Reserve Banks have the ability to implement IFT; the Federal Reserve Board has the authority to implement it. But somehow the two seem incapable of joining forces to actually do it.

IFT — the ability for me to pay you, and for you to receive the funds within minutes, rather than having to wait until the following business day — is already a fact of life in many countries around the world, from India to the UK. Where it doesn’t already exist, you can be pretty sure that someone is working hard on a plan to make it happen. Except in the US, where no one seems to have even started the process yet.

Summers explains that as economic connections between individuals, businesses, and government entities are being multiplied at an astonishing pace, and that the payments system is doing an atrocious job of keeping up. The problem is compounded by the fact that no one has introduced a new universal payments mechanism since the check, which clears slowly — and sometimes doesn’t clear at all — but which is extremely versatile and pretty much universally accepted. He writes:

The U.S. payment system does not currently support immediate completion of payments, and there are no plans for doing so despite long-standing evidence of the need for such a capability and development of these capabilities elsewhere around the globe. While there is innovation in immediate payments, it is limited to small closed systems operated by non-banks, or to small closed systems operated by individual banks or consortia of a handful of banks…

Effectiveness is influenced by speed, versatility, and universal coverage. The effectiveness of a particular method of payment depends on how well it meets the convenience and needs of individual and business consumers in the digital economy. Among the payment attributes that consumers look for, speed in completing transactions, versatility in the use of a given method of payment, and universal connectivity to accounts held in banks are of special importance in the digital economy.

Speed is an especially important consideration for payments in the digital economy. Consumers expect virtually immediate completion of their digital transactions. The idea that money in transit is digital information which can be processed immediately has not been readily accepted by the banking industry. Most bank-sponsored payment schemes depend on clearing and settlement systems that are designed around batch processing and delayed settlement, and these clearing and settlement arrangements are being nurtured as opposed to being re-designed around continuous, real-time processing.

The problem, he explains, is that there’s essentially no one in a position to implement a new architecture along these lines. There’s no real national governance of the payments system in the US; while it has historically been overseen by the Federal Reserve Banks, newer developments like the Durbin amendment capping debit interchange fees gave all the regulatory power to the Federal Reserve Board in Washington. If debit transactions had been governed by the regional banks all along, he writes, “arguably, the Reserve Banks would never have allowed non-par clearing and settlement for inter-bank debit card payments.”

But there’s a strong deregulatory impetus within the Federal Reserve system, and most governors have been quite enthusiastic about the idea of getting the Fed out of the business of clearing and settlement and payments regulation. The banks innovated credit and debit cards, which are very popular, so what’s the need? Summers concludes:

The Federal Reserve Board is not interested in leading or guiding the development of clearing and settlement capabilities for payments in the digital economy. Moreover, the Federal Reserve Board is satisfied to give up the Reserve Banks’ operational leverage as providers of inter-bank clearing and settlement services.

And if the Fed won’t do it, there’s no realistic way that the private sector is going to get its act together and implement something as ambitious as IFT on its own — the collective-action problems make such a cooperative endeavor effectively impossible.

Which means that the only possible way that we’re going to get IFT in this country is if Congress acts, and passes an act mandating that the Fed build an IFT system.

Congress has done this kind of thing before: in 1974, it created the National Commission of Electronic Fund Transfers, which in turn guided the development of the US payments system for decades. It needs to do so again — with the Fed playing a central role in drafting the legislation. In the meantime, says Summers, the least that the Fed can do is to just start taking payments innovation seriously, including non-bank players who are building platforms which might revolutionize the way we all send money to each other.

The Federal Reserve Board should develop a special-purpose bank charter for providers of specialized payment services, allowing in particular for the inclusion of non-banks that are payment system innovators and payment method providers in the nation’s money and banking system for payments.

This kind of invisible plumbing is rarely sexy, and it certainly doesn’t get a lot of votes, but it’s crucially important, and could easily create tens if not hundreds of billions of dollars in value for the economy every year. The fact that the market hasn’t done it is a very clear market failure; and where there’s a very clear market failure, the government — in the form of Congress and the Federal Reserve — should step in.

Should, but won’t. More’s the pity.


I agree with TaxWonk here. Concerning your comment, “And we’re not going to get it”, you’re clueless.

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Why Ngozi Okonjo-Iweala should run the World Bank

Felix Salmon
Mar 30, 2012 21:34 UTC

I first wrote at length about Ngozi Okonjo-Iweala in September 2005, when the magazine gave her its genuinely prestigious Finance Minister of the Year award. It’s here, on my Tumblr, since the original is behind a paywall. (Update: you can read it directly now, Euromoney has taken it out from behind the paywall.)

I think it’s important this story be much better known than it is, because it neatly encapsulates a lot of why Okonjo-Iweala would be a fantastic head of the World Bank. When she arrived as Nigerian finance minister in 2003, the country was what you might call an oil-poor kleptocracy, with virtually no credibility in the international community. Within two years, she had managed to use $12 billion of windfall oil profits to pay off $31 billion in bilateral debt, thereby not only massively improving the country’s debt dynamics, but also ensuring that money didn’t get stolen domestically.

It was an astonishing feat of negotiating prowess, not least because the Paris Club had never before allowed a country to buy back its debt below par, let alone 60% below par. Being able to pull it off involved Okonjo-Iweala leveraging her extremely strong credentials as an economist and finance minister (she has a PhD in regional economics and development from MIT); making full use of her high-powered contacts in the international community; and deftly navigating the labyrinthine bureaucracy surrounding World Bank classifications. Frankly, it’s impossible to imagine any other Nigerian being able to get this particular deal done.

Okonjo-Iweala’s qualifications for the job are well known; see the Economist, the FT, and also this Edward Luce column for good arguments as to why she would be a significantly better World Bank president than Jim Yong Kim. It’s worth reminding ourselves, in this context, of the Bank’s own description of the qualifications required by its president:

A proven track record of leadership;
Experience managing large organizations with international exposure, and a familiarity with the public sector;
Ability to articulate a clear vision of the Bank’s development mission;
A firm commitment to and appreciation for multilateral cooperation; and
Effective and diplomatic communication skills, impartiality and objectivity.

It’s hard to see how Kim can beat Okonjo-Iweala on any of these criteria. Meanwhile, Kim’s own FT op-ed, in which he tries to explain why he’s the right person for the job, is vapid in the extreme. “A more responsive World Bank must meet the challenges of the moment but also foresee those of the future. The World Bank serves all countries.”

Tim Geithner is lobbying for Kim, writing a letter to the Bank’s 187 governors saying that Kim “is committed to pursuing an agenda for the Bank that supports all the necessary components of development,” in a sign that the US doesn’t consider Kim a shoo-in for the job. And consummate Bank insider Lant Pritchett has laid out a credible, if admittedly improbable, series of possible events which could result in Okonjo-Iweala getting the job. “Everyone regretted letting the Americans ram through their choice of Paul Wolfowitz in 2005,” he writes. “The damaging consequences of that fiasco are still fresh in people’s minds.”

Kim is still the favorite for the job, just because he has the full and awesome power of US international diplomatic pressure behind him. But in any fair fight, Okonjo-Iweala would win. And if there are any signs at all that the European vote might not be completely in the bag, we might yet have a real contest on our hands here.


I understand her credentials, but accusations, true or otherwise, of corruption swarm around Nigeria and her.

See: http://saharareporters.com/news-page/wik ileaks-okonjo-iweala-ferried-50-million- jobs-brother

Though she may vow to fight corruption, she needs to first distance herself from it.

I heard her speak at the WEF in 2007 or 2008, and she sounded quite isolationist, saying to leave Africa to the Africans. This is not what is needed for a leader of the World Bank.

Also, if she is such a great candidate, why is Nigeria not doing better, given their wealth of natural resources. Certainly, there is a large hurdle of corruption to overcome, but she has had more than enough time to do overcome this.

I fail to see why she is a better solution, other than she is not an American and she is an African, where much of the World Bank’s initiatives need to be focused. Is there not a better African, who is not saddled with accusations of corruption?

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Ben Walsh
Mar 30, 2012 21:04 UTC

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Earlier this week, Mario Monti said the European crisis was “almost over.” What Monti certainly knows and what this week’s events have reminded us is that almost over is not the same as over. For example: Spain. (The very same country where more than 50 percent of young people are unemployed.)

Some 1.7 million Spanish citizens went on strike as the government released a budget with $36 billion in cuts and tax increases. Spain’s yields rose, and Madrid streets became increasingly disorderly, with pockets of violence amid the widespread protest:

The main streets of central Madrid were lined with trash containers and strewn with garbage on Thursday, with sanitation workers among those absent. There was no shortage of police, with picketers and policeman facing off and confrontations at Madrid’s main bus depot. A Molotov cocktail was thrown at a police car in Murcia and burning-tire barricades blocked some roads in Barcelona, according to reports.

The protests come at a time when the euro zone is building something of a rainy-day fund in case Italy or Spain needs cash. The ESFS-ESM announced that it would increase the size of its lending firewall to $1.1 trillion. In typical European Union fashion, the content of the statement was undercut by the bumbled logistics. Eurogroup head Jean-Claude Juncker canceled the press conference as a result of leaks from Austria’s finance minister.

Even contract law is up in the air in Europe; the ISDA is considering a rewrite of sovereign CDS contracts. A host of experts, IFR reports, warn that “sovereign credit default swaps are no longer fit for purpose and are in need of an overhaul if they are to remain a valid risk management product.”

Europe’s prolonged crisis makes the U.S. banking system’s latest troubles seem comparatively minor. There are now concerns about the creditworthiness of three huge banks, with Bank of America, Citigroup and Morgan Stanley each reportedly preparing for fresh downgrades. While many clients and lenders may have already discounted these potential credit-rating cuts into their business with the three banks, downgrades could be a boon for highly rated competitors JPMorgan and Goldman Sachs.

And on to today’s links:

Cohn: The Supreme Court’s legitimacy is at stake TNR

The junk bond market is now “nirvana” for both companies and investors WSJ

Three huge American banks are getting ready for a possible downgrade DealBook
Google will sell tablets on its own this year WSJ

And now there’s another huge data breach from Visa and Mastercard Gartner

The Greg Smith Files
Greg Smith’s massive book deal has been finalized NYPost
Choire Sicha: There’s no way Greg Smith’s book publisher will earn back its advance The Awl

DeLong: “Managing aggregate demand is the government’s job” Project Syndicate

Government salaries and wages fall by $200 in February BEA

New Normal
Why the world’s biggest cities will continue to dominate The Atlantic

Goldman partnering with hedge funds to buy non-agency MBS Bloomberg

An alternative measure of economic growth outpaced GDP in Q4 2011 Economix

Achtung EU
German unemployment dropped to a new low Reuters

In defense of cable television Wired

Apple, Foxconn promise their workplace will adhere to a modicum of standards Reuters

In 2004, Mitt Romney mocked John Kerry for his wealth LAT

Consumer budgeting around the world (hint: Americans spend a ton on healthcare) Economix

Jim Cramer gets up inhumanly early Business Insider




The evolution of prepaid debit

Felix Salmon
Mar 30, 2012 07:32 UTC

Maybe it’s a function of the Durbin act, which explicitly excluded prepaid debit cards from the massive decrease in debit interchange fees that it imposed on all other debit cards. But whatever the reason, prepaid debit cards are huge right now. One panel at today’s conference — a panel which wasn’t even meant to be about prepaid debit, but rather much more broadly about “Ensuring Consumer Access to the Payments System in the Connected Age” — had four people sitting next to each other, three of whom talked with great excitement about their prepaid debit cards.

One of them, Green Dot, was understandable — prepaid is what Green Dot does. The second, US Bank, was more interesting. Banks tend not to go in for prepaid debit cards very much: they’re not as profitable as checking accounts, and they’re worried about cannibalization. But US Bank’s Convenient Cash card is a notable development in the world of prepaid debit cards, because it’s very easy, if you’re near a US Bank branch, to reload the card for free.

Nearly all prepaid debit cards allow people to top it up using direct deposit — but of course we all end up with money from various different sources, not just the place which sends us a regular paycheck. And if you want to put some cash onto, say, Suze Orman’s Approved Card, then that’ll cost you upwards of $3.50 a pop. (And that’s a charge, by the way, which doesn’t appear anywhere on the card’s official list of fees.)

If you’re looking to get a prepaid debit card as a checking-account replacement, then, and you regularly deposit money into your checking account, then the US Bank offering is particularly attractive. The monthly fees for prepaid debit cards are usually very obvious; the amount you’re likely to end up spending just by reloading it, by contrast, is less clear ex ante.

So it’s encouraging to me that US Bank is offering a product where you can just walk into any branch and reload your card for free, just as you could your checking account. This, it seems to me, is a significant competitive advantage — so it’s weird that the feature isn’t mentioned anywhere, as far as I can tell, on the card’s website. As a result, I don’t know whether you need to go to a teller during bank opening hours to take advantage of this feature, or whether you can use any US Bank ATM which accepts deposits 24 hours a day. In any case, I’m quite sure that other banks are going to follow suit and issue other free-to-reload cards, which should in turn add some healthy competition to the space.

Most exciting of all, however, was the revelation that the US Treasury has been quietly running a pilot program where it issues tax refunds in the form of a reloadable prepaid debit card. It’s called My Account Card, and is a great step forwards in comparison to the non-reloadable cards used for things like benefits payments. Treasury has tried My Account Card in various permutations, and it’s clear that the one with no monthly fee is the most popular. What’s more, you can elect to get not only your tax refund but also your benefits payments on the same card — which means there’s no need at all for any other card.

If Treasury starts sending tax refunds and benefits payments straight to prepaid debit cards around the country, that will be a huge boost to the reputation of an industry which is still often dismissed as the kiddy slopes of banking.

And then, at some point, Simple will start sending its cards out en masse — and the world will see just how powerful and fully-featured such things can really be. Simple’s sales pitch is aligned with that of prepaid debit cards: no surprising fees, lots of predictability. And it’s aimed at a decidedly affluent demographic: you’re not even allowed to join if you don’t have an iPhone or Android phone. The web interface is state-of-the-art, and the card will allow you to do things that other prepaid debit cards don’t even dream of, like peer-to-peer payments and international wire transfers.

You won’t find the word “prepaid” anywhere on Simple’s website: the company is positioning the card as a fully-featured bank account, not as a gussied-up prepaid debit card. But increasingly it’s a distinction without a difference. I just wonder how much those cash reloads deposits are going to cost.


I read the whole post did you?

That part of the post specifically is about Simple, which despite being prepaid is not aimed at the unbanked.


The other products mentioned are for the unbanked.

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Mar 29, 2012 20:48 UTC

Welcome to the Counterparties email! The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website. Send us suggestions, story tips and complaints to Counterparties.Reuters@gmail.com

The House overwhelmingly voted down a bipartisan budget proposal, a mix of spending cuts and tax hikes, in favor of a partisan bill that has no hope of being enacted. It’s tempting, if you can forget the trauma of last year’s debt ceiling debacle, to chalk this up to the normal volleys of congressional politics, a sort of byproduct of democracy.

That view, unfortunately, steps outside of recent history. Peter Coy today has an apocalyptic  warning about what will happen on the very first day of 2013 unless Congress acts. Without action we could be in for instant austerity:

The automatic spending cuts, known as a “sequester” under the Budget Control Act, are only part of the austerity that’s slated to take effect on Jan. 1. That same day, the 2001 and 2003 Bush tax cuts will be over if current law stays on the books. The Obama payroll tax cut and emergency unemployment benefits are also slated to expire. Barclays Capital (BCS) calculates that if all those changes occurred as scheduled, they would subtract 2.8 percentage points from the economy’s annual growth rate in the first quarter of 2013, leaving growth at just 0.2 percent – a hair’s breadth from recession.

Coy suggests Congress will cut a deal to soften the blow – but says it’ll come at the expense of a whole new round of bickering and economic uncertainty. This is definitely not a new warning: No less than Ben Bernanke, Mohamed El-Erian, Martin Feldstein and Alan Blinder have used the same talking points, warning of the U.S. falling off a “fiscal cliff” in 2013.

All of which is to say, as Clive Crook suggests, the single biggest risk to the tentatively promising U.S. economy is from the very people we’ve elected to run it. (Yes, this is also Europe’s biggest problem). This has increasingly unpredictable and just plain bizarre consequences for the economy. Businesses, it turns out, can’t even get reliable political results from the GOP:

…a host of routine business tax breaks – from wind energy subsidies to research and development tax credits – cannot be passed because of Republican insistence that they be paid for with spending cuts.

“Business groups that worked hard to install a Republican majority in the House equated Republican control with a business-friendly environment. But the majority is first and foremost a conservative political force, and on key issues, its ideology is not always aligned with commercial interests that helped finance election victories.”

There’s an irony, then, in the conservative argument that the government just needs to get out of the way of the economy: Doing nothing, in this case, is the worst thing we can do.

And on today’s links:

The balance sheet recession, charted – FT Alphaville

Some businesses are starting to rethink that whole GOP-is-business-friendly thing – NYT

The House overwhelmingly votes down a bipartisan budget bill in favor of a partisan bill that has no chance – WSJ

New Normal
Unemployment decreases life expectancy, hurts your children’s future earnings – and even your ability to read – NYT

Must Read
Frat whistleblower reveals Dartmouth’s world of “vomlets,” ritual puking and hazing – Rolling Stone
Related: Jim Yong Kim and Dartmouth’s culture of sexual assault – Felix

Primary Sources
GDP growth the strongest since 2010 – BEA

BofA CEO takes a big pay hit after no-good, awful 2011 – WSJ

EU Mess

New data shows the UK economy continues to shrink – Economist

Germany’s jobless rate hits a new low – Reuters

Euro zone finance ministers are freezing funds in case they have to bail out Italy or Spain – FT

There are actually very rational reasons for high oil prices – Econobrowser

The MIT professor and parrot owner behind the individual mandate – NYT

How white people vote – Monkeycage
Related: Voters aren’t stupid, but they’re definitely poorly informed – Prospect

Seigniorage Rage
The cost of cash to society – Slate

Occupy’s middle-aged identity crisis – The Atlantic

Right On
State treasurers may be the ones to rein in Citizens United – TNR

Where the wind blows in America – a gorgeous live chart – Hint.Fm




“How white people vote” has a bad link – it goes to the destination of the link below. I suspect you want to point here:
http://themonkeycage.org/blog/2012/03/23  /voting-patterns-of-americas-whites-fro m-the-masses-to-the-elites/

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The stranglehold of payments networks

Felix Salmon
Mar 29, 2012 19:28 UTC

I’m mostly offline today, since I’m attending a payments conference at the Kansas City Fed. (And tomorrow I’m attending an econobloggers’ conference at the Kauffman Foundation: how jealous are you?) There’s a lot to digest here, but one thing already seems clear: if you look at the main players in the payments industry, whether they’re incumbents or new innovators who aspire to disrupting the status quo, everybody seems almost unthinkingly resigned to working on and within the present architecture, where consumers pay with their credit or debit cards, and merchants require some kind of way of accepting those payments.

Exhibit A, in this regard, is “The Credit Card Is The New App Platform“, a piece by Reid Hoffman and his colleagues at Greylock Partners, talking in a very smart way about all the value that can be added to credit cards as we move to a world of mobile apps and payments. The idea, basically, is that right now you have a dumb piece of plastic where all the real value is in that Visa or Mastercard logo; in the future, there’s a lot of opportunity in terms of making that piece of plastic much smarter.

Most of the most exciting innovation in payments, including companies like LevelUp, not to mention the iTunes store, is built on credit or debit card accounts: the first thing you do, when you download one of those apps, is type in your card number, and when you pay, the payment is ultimately made on your card — which means that it necessarily involves making substantial payments to those payments networks. iTunes, the conference was told this morning, has some 150 million card numbers on file, which is one reason why it’s so attractive to people looking to sell content or apps or music. Similarly, one of the great attractions of the Amazon Marketplace, for both buyers and sellers, is that Amazon already has the buyer’s card information on file. Other innovators, like Square and Stripe, are also innovating around credit and debit cards, specifically by making it much easier for the payee to accept those payments.

Visa and Mastercard, of course (and American Express, too) are very happy with this. They can work on innovations themselves, or they can outsource innovation to the likes of Reid Hoffman; either way, they get paid, because they’re the default payments architecture. But what we’re missing here is any kind of threat to their dominance. And that’s a great shame, because these dominant companies have an enormous amount of pricing power. The interchange fees that they charge merchants only ever go up; it took an unbelievably hard-fought act of Congress to bring those fees down just for bank debit cards. (Which is one reason why the number of prepaid debit cards is rising fast: they’re exempt from Durbin rules, and can charge very high interchange fees.)

The keynote speech at the payments conference today came from Joseph Farrell, the director of the bureau of economics at the Federal Trade Commission. He talked at great length about the importance of lowering the transaction cost of payments, and the way that would benefit both consumers and society; he also suggested that this was a key aspect of what the conference was about.

He’s right about the first: transaction costs are too high, and should come down, and there would be large positive externalities were that to happen. He’s wrong about the second, however: there’s actually precious little discussion at the conference about how transaction costs might come down. There’s much more talk about the way in which they go up far too easily: Visa and Mastercard have enormous pricing power, and can raise their prices as much as 30% without noticeably losing any customers at all. Merchants feel forced to accept such cards, no matter what the cost, while the costs to consumers, in the form of higher prices, are extremely well hidden. Visa and Mastercard essentially levy a non-negligible tax on a huge percentage of retail payments, and do so in a largely invisible manner; they then rebate some of that tax revenue back to consumers, bribing those consumers to force the merchants to pay the tax.

At one point last year, I got very excited about a new payments service called clearXchange, which promised the ability for people to pay each other without going through the Visa or Mastercard networks. And because it is backed by giant banks — Wells Fargo, Chase, and Bank of America — it has the potential to be really huge.

The problem is, it doesn’t actually work: it hasn’t taken off, for technical reasons I don’t pretend to understand. All I know is that when I meet executives from those three banks and bring up clearXchange, they tend to change the subject very quickly. It’s certainly not something which they seem to think is going to revolutionize anything, any time soon.

There is some innovation around payments which doesn’t involve Visa and Mastercard in some way. One peer-to-peer payments app I was shown today, which isn’t publicly available yet, is built on the EFT network, the one you use when you withdraw money from an ATM. And another delegate told me that fully 26% of revenue at Starbucks comes from its mobile app, which can be (and often is) funded directly from your bank account, without having to go through Visa or Mastercard.

But that kind of thing is laborious and expensive for startups: one of PayPal’s big competitive advantages, for instance, was the fact that it found a way to link PayPal accounts to individual members’ accounts at thousands of banks around the country. That’s non-trivial, and it’s much easier to deal with just two or three payments networks.

So color me pessimistic, here, at least in the US. There really is a huge public interest in bringing down transaction costs, and moving the locus of payments-related innovation away from the Visa and Mastercard networks, and towards cheaper and more direct bank-account connections. But I see no indication that’s going to happen. In that sense, I have the same view now that I had in 2010, when I said that there wasn’t much prospect of real competition in payments. It would be great were that to happen. But I’m not holding my breath.

As a consequence, the government really has to get involved here, lest the payments networks simply continue to raise their interchange fees and extract ever-higher rents from everybody else. But the obvious entity to do that is the Federal Reserve, and, at least judging by this morning’s remarks from Kansas City Fed president Esther George, that’s not going to happen any time soon. No one really wants new regulation. Which is surely music to the ears of Visa and Mastercard.

Update: One other intriguing idea I was given at the end of the conference: what about using the check-clearing architecture as a payments mechanism? With Check 21, in theory everything could be electronic, you don’t actually need paper checks. (Although some lawyers apparently say you do.) The problem, I think, would be ensuring funds were available. But if you can do that, it could work very well — and much more cheaply than the Visa and Mastercard systems.


I’m a PayAnywhere user. Their device plugs right into your phone and their app has easy to use features. I would definitely recommend it to anyone with a small business or salesmen on the go! http://www.payanywhere.com/home

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Jim Yong Kim and Dartmouth’s culture of sexual assault

Felix Salmon
Mar 29, 2012 01:00 UTC

What is it about the heads of the World Bank and IMF and their relation with sexual politics? Both Paul Wolfowitz and Dominique Strauss-Kahn lost their jobs because of the way that they treated women, while Strauss-Kahn’s predecessor, Rodrigo de Rato, resigned unexpectedly in the midst of what was described as an “acrimonious divorce”. No woman has ever headed the Bank, and Christine Lagarde is the first woman to head the IMF; they’ve historically been men’s clubs, and none the better for it.

For that reason alone, given the choice between Jim Kim and Ngozi Okonjo-Iweala for the next head of the World Bank, the latter would have something of a natural advantage. But it turns out that Kim’s weakness on the sexual-politics front is much greater than simply being a man.

Janet Reitman has a must-read article in the latest issue of Rolling Stone, detailing the hazing culture at Dartmouth College, where Kim has been the president since 2009. The piece went to press on the day that Barack Obama announced Kim’s nomination, so the news came too late for the story to be recast around Kim. But even as it stands, it’s damning enough.

I’d highly recommend that you read the whole thing, especially the gruesome details of fraternity hazing at Dartmouth, which seems to come very close to qualifying as torture under many definitions of the term. A propos the UN Convention Against Torture, for instance, there’s a case to be made that the severity of the hazing at Dartmouth — forcing youths to recite the frat’s creed while lying in a kiddie pool of ice, for instance, or forcing them to eat “vomlets” made of vomit and eggs — imposes severe suffering on people for the purpose of intimidating or coercing them.

Reitman’s article is centered on Andrew Lohse, who went public with what goes on in secret at Dartmouth fraternities, including forcing youths to chug cups of vinegar until at least one ended up vomiting blood. Here’s how his now-famous op-ed started:

We attend a strange school where a systemic culture of abuse exists under a college president who has the power and experience to change what can only be described as a public health crisis of the utmost importance: the endemic culture of physical and psychological abuse that occupies the heart of Dartmouth’s Greek community. President Jim Yong Kim’s sterling credentials in public health are fundamentally at odds with the pervasive hazing, substance abuse and sexual assault culture that dominates campus social life.

I understand these problems because I myself have endured them. If I were to fully enumerate all of the dehumanizing experiences my friends and I have survived here — experiences that were ironically advertised to us as indispensable elements of the “Dartmouth Experience” — I would have too few words left in this column to adequately explain how the Kim administration has not done enough to address these crises. They have yet to take decisive action to diagnose and cure the abuse that plagues Dartmouth.

Reitman fills out this picture, in the most alarming of ways. What we’re seeing here is not just brutal hazing; it’s also a culture of sexual assault which seems to have reached epidemic proportions.

Brothers aren’t the only ones injured by this unspoken pact around fraternity life. Sexual assault is rampant at Dartmouth; some female students say they circulate the names of men considered “dangerous” and fraternity houses viewed as “unsafe.” Between 2008 and 2010, according to the college’s official statistics, Dartmouth averaged about 15 reports of sexual assault each year among its 6,000 students. Brown, a school with 8,500 students, averaged eight assaults; Harvard, with 21,000 students, had 21. And those numbers are likely just a fraction of the actual count: One study showed that 95 percent of all sexual assaults among college students are never reported. In 2006, Dartmouth’s Sexual Abuse Awareness Program estimated that there were actually 109 incidents on campus…

Nearly every woman I speak to on campus complains of the predatory nature of the fraternities and the dangers that go beyond drinking. “There are always a few guys in every house who are known to use date-rape drugs,” says Stewart Towle…

One senior, who I’ll call Lisa, was “curbed” the second night of her freshman year. She’d been invited to a fraternity by one of its members. Thinking it an honor, Lisa enthusiastically accepted, and once she got there, she had two drinks. The next thing she remembers is waking up in the hospital with an IV in her arm. “Apparently, security found me in front of the house. That was my introduction to the frats: passing out from drinking, waking up in the hospital and not having any idea what happened.” What she did notice were bruises that looked like bites on her chest that hadn’t been there before. “To be very honest,” she says, “I didn’t really want to know what actually happened.”

How did Kim react to the fact that there were literally hundreds of sexual assaults taking place on and by his students while he was president? He “established an intercollegiate collaborative known as the National College Health Improvement Project to study high-risk drinking”, which even Dartmouth spokesman Justin Anderson admits is not designed to actually generate any solutions to the problem.

And as for the whole fraternity culture which spawns these abuses, Kim’s a big fan.

Kim, whose three-story mansion sits on Fraternity Row, is a strong supporter of the Greek system; he has suggested on several occasions that fraternity membership may have health benefits, citing studies that show that people with long-standing friendships suffer fewer heart attacks. In a strange abdication of authority, Kim even professes to have little influence over the fraternities. “I barely have any power,” he told The Dartmouth in a recent interview. “I’m a convener.”

In reality, Kim is one of the only officials in a position to regulate the fraternities. More than half of Dartmouth’s frats are “local” – houses that split off from their national organizations years ago, and are thus unaccountable to any standards other than those set by the college.

In this respect, Kim is much softer on the frats than his predecessor, James Wright, who tried to end the Greek system “as we know it” by requiring fraternities to substantially go coed. Obviously, he failed. But Kim seems to have no problems with fraternities at all: in the same interview, he went so far as to say that it’s “not just the Greek system” which does hazing, and that “you have to look at everybody”. What was he going to do about it? Well, he said, “we’re trying to understand what more we can do.”

Kim even went so far as to meet with Dartmouth’s fraternities to tell them they weren’t in his crosshairs, saying that “one of the things you learn as an anthropologist is that you don’t come in and change the culture.”

And when Lohse presented Dartmouth with copious evidence of just how bad hazing was at his fraternity, SAE, the result was astonishing:

On February 22nd, his 22nd birthday, Lohse received a call from Dartmouth’s office of judicial affairs, informing him that, based on information he’d provided the college, they were pursuing charges against him for hazing. The college has also charged 27 other members of SAE, stemming from events in the 2011 pledge term. While the other students all categorically deny doing anything illegal, the information that Lohse provided to Dartmouth officials may directly implicate him in hazing. As a result, Lohse – the only student to come forward voluntarily – may be the only student who is ultimately punished.

What does all this mean for Kim’s candidacy for president of the World Bank? That’s hard to say. On the one hand, the US basically has the nomination sewn up, since the European countries will always vote for the US candidate in return for the US always voting for the European candidate for head of the IMF. And Europe and the US together constitute an unbeatable voting bloc.

At least, that’s how it has worked until now. The convention that the next head of the IMF will have to be a European is eroding fast, and there are even many European politicians who don’t believe in it any more. And for the first time we’re having a contested race for head of the World Bank, with an incredibly highly-qualified candidate in Okonjo-Iweala; the FT, for one, says she’s “the right leader for the World Bank”. I agree.

So the key constituency here is the European countries, and what they think about Kim’s actions, or lack thereof, at Dartmouth. The college’s culture of hazing and sexual assault is tolerated in the US, but is likely to look unspeakably brutal to European eyes, and I can certainly see many European politicians being extremely uncomfortable voting for a man who did nothing to stop it. The question is: will they read the Rolling Stone article? And if they do, will they be shocked enough that they would be willing to get into a huge diplomatic fight with the US as a result?

The machinations of international politics are rarely particularly edifying, and I suspect that Europe will ultimately fall into line and vote for Kim, just as it has always voted for the US candidate in the past. But if by some miracle Kim loses, and Okonjo-Iweala ends up getting the job, there’s a very good chance that a feature article in Rolling Stone might turn out to be the reason why.


I’m no fan of Jim Kim, but I need to post here in order to correct some of the unfortunate premises of this article. In the US and over in the Northeast, everyone recognizes the Rolling Stone article as a complete hit piece on Dartmouth, filled with an inaccurate and attention-seeking account about what happens at the college. Andrew Lohse, the only source of the article, was kicked out of Dartmouth after doing cocaine and assaulting a security officer (look it up), and was apparently seeking to get revenge and publicity in a desperate plea for attention.

Citing the Rolling Stone as your factual source is regarded as ludicrous over here. To use an analogy, that would be like Reuters citing a story in one of the many British Tabloids and reporting it as an absolute fact. Dartmouth has episodes of drinking, sexual assault, and hazing…but it’s certainly not regarded as any worse than any other American institution. Unfortunate for Jim Kim that this has gotten blown out of proportion, but, well, maybe he deserves it a bit. He was a terrible President of Dartmouth

Posted by wheelock12 | Report as abusive


Mar 28, 2012 21:06 UTC

Welcome to the Counterparties email! The sign-up page is here, it’s just a matter of checking a box if you’re already registered on the Reuters website.

The Supreme Court is about to decide the fate of a $2.6 trillion market that represents approximately 18% of U.S. GDP. To put it differently, a group of judges is about to make one of the most consequential rulings on the economy in memory – even if they, at times, struggle with basic market concepts.

This is a damn big deal. If the court rules the bill’s individual mandate unconstitutional, healthcare costs could rise anywhere from 2  to 40%, according to economists’ estimates. And killing the legislation outright would mean “31 million Americans who otherwise would have health insurance won’t be covered at the end of this decade.”

At the heart of the case is a requirement that all Americans buy health insurance. “If the mandatory coverage provision goes, so does the whole program,” Noah Feldman writes in an impassioned plea for the Court to make economic sense. “Health insurance, it turns out, presents a classic case of market failure,” he adds.

Obama’s most influential legal critic, Randy Barnett of Georgetown, says the case is at heart about economic freedom: “What the government is claiming here is this power – and this ought to disturb people on the left – to make people do business with private companies when Congress thinks it’s convenient.” But Dahlia Lithwick says the case is about an entirely different kind of freedom:

This morning in America’s highest court, freedom seems to be less about the absence of constraint than about the absence of shared responsibility, community, or real concern for those who don’t want anything so much as healthy children, or to be cared for when they are old. Until today, I couldn’t really understand why this case was framed as a discussion of “liberty.” This case isn’t so much about freedom from government-mandated broccoli or gyms. It’s about freedom from our obligations to one another, freedom from the modern world in which we live.

Adam Serwer runs through the various steps the Supreme Court could take, including punting, striking down the individual mandate or tossing the whole law. Mark Thoma, resurrecting a November 2009 post, argues that an individual mandate, coupled with subsidies for the poor, is the only way to avoid “adverse selection” issues in the healthcare market. (Translation: It’s one of the only ways to make sure everyone is insured.)

You’d think something as consequential as basic healthcare would have an effect on the presidential election, but the AP isn’t so sure. David Frum, for his part, says repealing the law would be big trouble for the GOP:

If the Supreme Court doesn’t rescue them from themselves, they’ll be heading into this election season arguing, in effect, Our plan is to take away the government-mandated insurance of millions of people under age 65, and replace it with nothing. And we’re doing this so as to better protect the government-mandated insurance of people over 65 – until we begin to phase out that insurance, too, for everybody now under 55.

The economic consequences of the Court’s decision won’t be known for months. For the time being, we’re officially in full-on tea-leaf-reading mode, as legal wonks ponder broccoli references, stumbles by Solicitor General Donald Verrilli and Jeff Toobin turning into an odds maker.

For now, check out the transcripts and audio of oral arguments here and here.

How the “Sarkozy trade” swept through Europe – Dealbook

The Dallas Fed wants to break up big banks, in “a radical indictment of the nation’s financial system” – ProPublica

Everything thing you need to know about the Volcker Rule – Better Markets

“Tens of billions” of habitable worlds in the Milky Way – Reuters

Magic Johnson-led group buys the LA Dodgers – LAT

How the race to make Apple TVs is already influencing manufacturer’s M&A strategy – Reuters

The foreclosure settlement rewards banks for standard practices – NYT

EU Mess
Fringe political parties are gaining popularity in Greece – WSJ
Monti: The European debt crisis is “almost over” – Bloomberg

Welcome Developments
Inside Mozambique’s unexpectedly booming economy – Guardian

MF Doom
MF Global employees were aware of missing customer funds days before bankruptcy – DealBook

Sources: Goldman discussing splitting chairman and CEO roles, promoting Cohn to CEO – Reuters

The biggest threat to private equity is private equity itself – Fortune

21 And Under
The blackjack player who broke Atlantic City by targeting desperate casinos – The Atlantic

Unfortunate Because It’s True
The Supreme Court’s antique vision of freedom – Slate

For the first time, Asia has more “centa-millionaires” than North America – Bloomberg

Inside AOL’s $1 billion patent portfolio – All Things D

Toobin on Toobin, discussing the “Toobin Factor,” vis a vis himself, others – Politico



+1 to Morgantown Joe. Whether something is or is not a good idea is a different question than whether or not it is Constitutional.

Posted by realist50 | Report as abusive

Annals of art world skullduggery, Larry Gagosian edition

Felix Salmon
Mar 28, 2012 18:19 UTC

Randy Kennedy has a good overview of the litigation going on between Jan Cowles, a prominent art collector, and Larry Gagosian, the world’s most prominent art dealer. He doesn’t provide or link to any of the primary documents, however, which can be found here, and they’re where all the fun is.

In a nutshell, Jan’s no-good son Charles got desperate for cash, and so sold her Lichtenstein through Gagosian without her knowledge or consent. What’s more, his desperation was so obvious to Gagosian that he wound up getting spectacularly ripped off: while Gagosian had initially promised him $2.5 million for the piece, the final payment to Cowles was just $1 million. Meanwhile, another version of the piece, which is an edition of eight, sold at Christie’s in 2010 for $4.9 million.

A lot of attention is focusing on the smoking email from Gagosian director Deborah McLeod, who was based in Gagosian’s Beverly Hills outpost, to the collector who ultimately bought the work, Tom Dean. “Seller now in terrible straits and needs cash,” she wrote. “Are you interested in making a cruel and offensive offer? Come on, want to try?”

Eventually, Dean came back with an offer of $2 million, with generous terms allowing him to avoid paying most of the price for six months. McLeod then talked to Gagosian personally, and told Dean that the deal was on:

Larry says the $2 mm will fly only for immediate payment, so he will buy it. If he succeeds in buying it for 2mm, he will do the 6 month payout for you.

This is quite funny, in hindsight, because of course Larry didn’t buy the piece for $2 million at all. He sold the piece for $2 million; he bought it for just $1 million.

With all of the focus on the emails, however, it’s important not to lose sight of all the revelations in the original complaint, including the extremely serious allegation that Gagosian lied about the condition of the piece in order to justify its very low sale price. The complaint also accuses Gagosian of essentially stealing the work from Jan Cowles:

Although Gagosian knew the Lichtenstein Work belonged to Mrs. Cowles, and not Charles, Gagosian made no effort to contact her, or her attorney-in-fact, Lester Marks, to obtain either any authority to remove the work from the apartment or to offer the work for sale to any third party. Nevertheless, on or about October 10, 2008, Charles purported to consign the Lichtenstein Work to Gagosian. Gagosian took delivery of the work from Mrs. Cowles’s apartment, and listed it as a consignment with the understanding that it would not be sold for less than $3 million, with Charles to receive no less than $2.5 million.

This is all extremely reminiscent of the way in which Anthony Marhsall allegedly sold a Childe Hassam belonging to his mother, Brooke Astor; you’d think that Gagosian would be a bit more cautious about such deals after the Astor case got so much negative publicity.

But what’s absolutely clear here, no matter who wins the legal case, is that the opacity, skullduggery, and information asymmetry in the art world should put off anybody who ever thinks they’re dealing fair and square with a prominent dealer. Charles Cowes was an art dealer in his own right — an art-world insider — and even he ended up getting ripped off by Gagosian.

I’ve heard a few stories, over the years, of what happens when collectors who own art try to sell that art through a gallery. In the first instance, the gallery is always very bullish, and promises to sell it for a high price at a modest commission. But then it somehow never sells, and the consignor becomes increasingly desperate, and eventually accepts a sum of money from the gallery which is a mere fraction of the amount originally mooted. It’s a standard m.o. in the gallery world: never sell anything too quickly, and wait instead for the seller’s need for cash to be as urgent as possible. That minimizes the amount the gallery needs to pay the seller, and therefore maximizes the amount the gallery can keep for itself.

Which is yet another reason why art is not an investment. You might have a good idea what a piece is worth, but you’re unlikely to ever be able to realize that kind of sum. Not unless you don’t need the money — and if you don’t need the money, you won’t want to sell it in the first place.



Maybe it’s an addiction to the deal that explains Gagosian’s vast wealth ? You can see this in many walks of life, including finance. It is an addiction, and those with it will probably never kick it.

Also, bear in mind what happens in public auctions. I get catalogues, if I’m interested I pop along to the viewings. There’s usually a few items “withdrawn from sale”. And that’s quite often because of ownership disputes. It’s endemic.

Posted by kbd | Report as abusive