US Crackdown on Credit Card Fees Coming

Good news in general although our skeptical sense is that the Fed is trying to stall the Democrats' effort in this area which is likely to be a little more rigorous.

No wonder the Wall Street Banks were so anxious to get that Visa IPO out the door come hell or high water or another wave of credit defaults.

The tide seems to be receding for the credit vultures.


US crackdown on credit card fees seen by year-end
18 Apr, 2008, 0016 hrs
The Economic Times

WASHINGTON: The Federal Reserve will soon unveil a broader plan to protect consumers from abusive credit card practices than a proposal it issued last year, a Fed official told lawmakers on Thursday.

The Fed's new plan, which it hopes to finalize by December, would restrict retroactive rate increases and other fees that consumer groups and lawmakers have criticized as exorbitant. In February, U.S. House of Representatives Democrats introduced a bill to stop arbitrary interest rate increases, penalties for consumers who pay only a portion of their balances on time, and excessive fees charged by credit card issuers.

Sandra Braunstein, director of consumer affairs at the Fed, acknowledged that a Fed proposal last June did not go far enough to help consumers. (How unusual. Let's give the Fed more power to do nothing effectual. - Jesse)

That plan would have required plain-English disclosures by credit card issuers to help consumers understand fees and rates. (What a draconian reform! The industry proposal was for the disclosures to be in an obscure dialect of the Anasazi Indians. PLAIN English! Wait! The Fed didn't specify what kind of English. How about plain MIDDLE English? The language of Chaucer. Ah! - Jesse)

"Careful measures that would restrict credit card terms or practices may, in some instances, be more effective than disclosure to prevent particular consumer injuries," Braunstein told a House Financial Services subcommittee hearing. (No shit Sandy, really? I've heard the State Police are going to stand on the edge of the highway and chastise reckless drivers with stern glares as they speed by. Did you design that reform too? - Jesse)

Chairing the hearing was Rep.Carolyn Maloney, a New York Democrat who wants Congress to adopt a credit card holder's bill of rights. Some lawmakers expressed concern that the regulators' efforts could conflict with congressional efforts to revamp credit card rules. "I'm very concerned about how we are doing this," said Rep. Mike Castle, a Republican from Delaware. (I am sure Mike is primarily concerned about the large contributions he receives from credit card companies operating out of his state. - Jesse)

Banks that offer credit cards, such as Bank of America Corp and Capital One Financial Corp, oppose the legislation. They have warned it could raise fees and reduce the amount of credit available to consumers. John Carey, chief administrative officer of Citigroup Inc unit Citi Cards, said new restrictions would penalize responsible customers. (How about a national usury law? We'll know its good if the CEOs of Capital One, BAC, and Citi blow chunks when they read it. - Jesse)

"The financial burdens associated with the higher-risk customers will be spread across all customers," Carey said in testimony prepared for the subcommittee. The Fed is aware that proposed restrictions could have unintended negative consequences, such as reduced credit availability and raised costs, Braunstein said. (Oh yeah but when it comes to bubbles the Fed can't find its own ass with both hands. - Jesse)

Also working on the proposed regulations to crack down on abusive practices are the U.S. Office of Thrift Supervision (OTS) and National Credit Union Administration, she said. (Oh great idea. If they ever write reforms for organized labor abuses can we conjure the ghost of Jimmy Hoffa to help? - Jesse)

OTS Deputy Director John Bowman said his agency shared lawmakers' concerns about the practice of increasing the annual percentage rate on an outstanding balance for reasons other than cardholder behavior directly related to the account.

"In our ... proposal we expect to place restrictions on some of these types of practices," Bowman said. Bowman called the practice of computing finance charges based on account balances in billing cycles preceding the most recent billing cycle "troubling." (Criminal and obscene were the ones that first came to mind. - Jesse)

For example, when a consumer makes a payment on a portion of his bill, the credit card company may still charge interest on the full amount, even though part has been repaid. (Gee, how could anyone object to that? I think we should start doing the same thing with corporate income tax payments, retroactive to the beginning of the Bush Administration. - Jesse)

"It is very difficult for consumers to avoid the increased costs associated with double-cycle billing because most consumers simply can't understand it," Bowman said. "This is another area that we address in our proposal." (I think they understand it all right. Its just that they can't do anything about it. - Jesse)

The OTS supervises credit card activities of thrift institutions. The agency is "at the beginning "stage of crafting tougher rules and will soon issue a notice of proposed rule making, Bowman said. But Braunstein said the Fed may use its unique authority to impose stricter regulations on the credit card industry. (These guys make FEMA look like Delta Force - Jesse)

How Phil Gramm and the Banks Helped to Destroy the US Financial System - An Insider's Perspective

A well-informed explanation of how we got to where we are. Relevant even more now perhaps since Mr. Gramm, among other things, is John McCain's economic advisor.

Fresh Air from WHYY, April 3, 2008 · Perplexed by the U.S. economy? You're not alone. Law professor Michael Greenberger joins Fresh Air to explain the sub-prime mortgage crisis, credit defaults, the shaky future of other types of loans and what we can expect from the U.S. financial markets.

Michael Greenberger Our Confusing Economy - Explained (Audio)


Michael Greenberger is the Director of the Center for Health and Homeland Security (CHHS) at the University of Maryland and a professor at the School of Law. In 1997 Professor Greenberger left private practice to become the Director of the Division of Trading and Markets at the Commodity Futures Trading Commission. In that capacity, he was responsible for supervising exchange traded futures and derivatives. He also served on the Steering Committee of the President's Working Group on Financial Markets, and as a member of the International Organization of Securities Commissions' Hedge Fund Task Force. He has frequently been asked to speak both in the media and at academic gatherings about issues pertaining to financial regulation, and has appeared on the ABC Evening News, The Jim Lehrer News Hour, and C-Span to discuss financial issues arising out of the Enron, Arthur Anderson, and WorldCom, and Refco failures.

Bankers Ask: Are the Bankers Rigging the Markets?

This is a particularly timely article. In essence, banks are raising the alarm that the LIBOR rates might be 'fixed' by large global banks providing false information. The banks are concerned because as a widely followed interest rate benchmark, LIBOR affects a signficant amount of financial activity in the real economy. And its bad for the banks' business, which is why it made the front pages of the WSJ and several leading economic blogs.

Categorize this under the title "Lack of Genuine Price Discovery in Manipulated Markets Leads to a Moral Hazard and Economic Distortion in the Real Economy."

The tricksters at Enron were able to manipulate the market for energy prices to the extent that they almost brought down the state of California, which is the size of most countries. Were the markets reformed? No, let's just move on.

The government has been manipulating key interest rate benchmarks pretty brazenly for years, such as CPI, through some of the most tortured and ridiculous of rationales imaginable. Some might say that this stealing from pensioners sets a rather poor example for the rest of the financial marketplace.

Just this morning the action in the S&P500 futures market was comparable to water running uphill. A recent ex-Treasury Secretary maintained its easier to fix "the problem" by manipulating the futures markets than cleaning it up afterwards. Not only was this NOT condemned, it was embraced by many academic financial types as clever and practical and cool.

Apparently some financial thinkers failed to learn the basic lessons of the schoolyard such as honesty and reputation and trust, because they were obviously hiding in the cloakrooms or library most of the time. Once you cheat or steal or lie, 'just this one time,' you often start doing it more and more for convenience until you do it all the time as a reflex. You parse the world into clever boys like yourself and stupid honest fools to be cheated. You become known as a cheat and a thief and a liar, and you hit the wall and fall from grace, and find yourself on the bottom.

(To the ex-Treasury Secretary's credit he did not use the word "manipulate," he used a more palatable euphemism which we cannot recall. But he is also not alone. Can you believe that there are some financial thinkers who maintain that by controlling the prices of key commodities and benchmarks the government can actually mask the impact of their reckless money printing? They call it 'managing the perception of inflation.' Take all this behaviour and put it on the schoolgrounds. What do you think about these boys now? Amoral little monsters. Yikes! - Jesse)

When the government gives a 'wink and a nod' to market manipulation, and either turns a blind eye and fails to prosecute, or bails out the miscreants using public money when they stumble and fall, or provides wristslaps without admitting guilt to the offending corporations when they get caught red-handed engaging in obviously illegal acts in the markets----

THAT IS MORAL HAZARD you fatheaded prunes.

There has been a lot of fuzzy thinking lately from economists who somehow have taken the posture that financial utilitarianism is the 'scientific approach' and that whatever 'fixes the problem' most quickly and cleanly is the optimum economic approach. Well, you might be able to build a career out of cheating, beating the system, invoking private privilege, and fundamental amoral lowness, but its a rough way to try and approach the problem of creating a sustainable, productive economy. It always and everywhere results in some form of totalitarianism.

"The President's Secret Working Group on Financial Markets" indeed. Future generations will think we were simply hypocrites or mad or deluded or all of it. Let's make reality a certain way by merely saying and acting as though it is.

What these fellows don't realize is that economic decisions almost always rest on the assumption of a moral judgement. There is no escaping it. It is better to cheat and break the rules one way and punish this group (usually of weaker innocents), than to hold some other more powerful group to account.

One has to do certain things when one is in a position of power. No, it when one is under stress in a position of power that they hold their whole selves in their hands, and their character is tested, and if they let go, they are lost.

Well, this is where that sort of thinking has brought us. We urge all economic students to take note of the slippery slope of moral retardation for the sake of expediency, and to start preparing now for the new wave of economic thinking that will come out of this period of economic vacuousness and lifeless neo-liberal madness.

Oh, and when this whole rats nest of dishonesty blows up in our faces, don't say you haven't been warned.


LIBOR FOG
Bankers Cast Doubt On Key Rate Amid Crisis
By CARRICK MOLLENKAMP
April 16, 2008
The Wall Street Journal

LONDON -- One of the most important barometers of the world's financial health could be sending false signals.

In a development that has implications for borrowers everywhere, from Russian oil producers to homeowners in Detroit, bankers and traders are expressing concerns that the London inter-bank offered rate, known as Libor, is becoming unreliable.

Libor plays a crucial role in the global financial system. Calculated every morning in London from information supplied by banks all over the world, it's a measure of the average interest rate at which banks make short-term loans to one another. Libor provides a key indicator of their health, rising when banks are in trouble. Its influence extends far beyond banking: The interest rates on trillions of dollars in corporate debt, home mortgages and financial contracts reset according to Libor.

In recent months, the financial crisis sparked by subprime-mortgage problems has jolted banks and sent Libor sharply upward. The growing suspicions about Libor's veracity suggest that banks' troubles could be worse than they're willing to admit.

The concern: Some banks don't want to report the high rates they're paying for short-term loans because they don't want to tip off the market that they're desperate for cash. The Libor system depends on banks to tell the truth about their borrowing rates. Fibbing by banks could mean that millions of borrowers around the world are paying artificially low rates on their loans. That's good for borrowers, but could be very bad for the banks and other financial institutions that lend to them.

True Borrowing Costs

No specific evidence has emerged that banks have provided false information about borrowing rates, and it's possible that declines in lending volumes are making some Libor averages less reliable. But bankers and other market participants have quietly expressed concerns to the British Bankers' Association, which oversees Libor, about whether banks are reporting rates that reflect their true borrowing costs, according to a person familiar with the matter and to government documents. The BBA is now investigating to identify potential problems, the person says.

Questions about Libor were raised as far back as November, at a Bank of England meeting in which United Kingdom banks, the firms that process bank trades and central bank officials discussed the recent financial turmoil. According to minutes of the meeting, "several group members thought that Libor fixings had been lower than actual traded interbank rates through the period of stress." In a recent report, two economists at the Bank for International Settlements, a sort of central bank for central bankers, also expressed concerns that banks might report inaccurate rate quotes.

ARMA spokesman for the BBA, John Ewan, said the trade group is monitoring the situation. "We want to ensure that our rates are as accurate as possible, so we are closely watching the rates banks contribute," Mr. Ewan said. "If it is deemed necessary, we will take action to preserve the reputation and standing in the market of our rates." Libor is expected to be on the agenda of a bankers' association board meeting on Wednesday.

In a recent research report on potential problems with Libor, Scott Peng, an interest-rate strategist at Citigroup Inc. in New York, wrote that "the long-term psychological and economic impacts this could have on the financial market are incalculable." Mr. Peng estimates that if banks provided accurate data about their borrowing costs, three-month Libor would be higher by as much as 0.3 percentage points.

A small increase in Libor can make a big difference for borrowers. For example, an extra 0.3 percentage points would add about $100 to the monthly payment on a $500,000 adjustable-rate mortgage, or $300,000 in annual interest costs for a company with $100 million in floating-rate debt. On Tuesday, the Libor rate for three-month dollar loans stood at 2.716%.

Libor has become such a fixture in credit markets that many people trust it implicitly. Concerns about its reliability are "actually kind of frightening if you really sit and think about it," says Chris Freemott, a Naperville, Ill., mortgage banker who depends on Libor to tell him how much his firm, All America Mortgage Corp., owes First Tennessee bank for a credit line that he uses to make loans.

The Libor system was developed in the 1980s. Banks were looking for a benchmark that would allow them to set rates on syndicated debt -- corporate loans that typically carry interest rates that adjust according to prevailing short-term rates. By pegging lending rates to Libor, which is supposed to represent the rate banks charge each other for loans, banks sought to guarantee that the interest rates their clients pay never fall too far below their own cost of borrowing.

Banks typically set their lending rates at a certain "spread" above Libor: A company with decent credit, for example, might pay an interest rate of Libor plus one-half percentage point. A risky "subprime" mortgage loan might carry an interest rate of Libor plus more than six percentage points.

Today, Libor rates are set for 15 different loan durations -- from overnight to one year -- and in 10 currencies, including the pound, the dollar, the euro and the Swedish krona. They serve as the basis for payments on trillions of dollars in corporate loans, mortgages and student loans. Libor rates are also used to set the terms of more than $500 trillion in "derivatives" contracts such as interest-rate swaps, which companies all over the world, including U.S. mortgage guarantors Fannie Mae and Freddie Mac, use to protect themselves against sudden shifts in the difference between long-term and short-term interest rates.

When banks want to borrow money, they contact banks directly or phone a loan broker, such as ICAP PLC in London. Much of the interbank lending takes place between 7 a.m. and 11 a.m. London time. In broker speak, a bank might ask for a "yard" -- one billion in a designated currency. Brokers communicate with bank clients by phone or through desktop voice boxes, which are faster. At ICAP, brokers track bids and offers by looking up at a big whiteboard above the trading floor, where a "board boy" posts information. The actual rates at which banks borrow from each other are known only to the lenders and borrowers, and possibly to their brokers.

Every morning by 11:10 London time, "panels" of banks send data to Reuters Group PLC, a London-based business-data and news company, on what it would cost them to borrow a "reasonable amount" in a designated currency. The dollar Libor panel, for example, consists of 16 banks, including U.S. banks Bank of America Corp. and J.P. Morgan Chase & Co. and U.K. banks HBOS PLC and HSBC Holdings PLC. Reuters uses the reported borrowing rates to calculate Libor "fixings." To reduce the possibility that any bank could manipulate an average by reporting a false number, Reuters throws out the highest and lowest groups of quotes before calculating averages.

Justin Abel, global head of data operations for Reuters, said in a statement that his company's role is solely to calculate fixings based on the information provided by banks. "It is their data alone we distribute. Reuters is purely the facilitator," he said.

Wary of Lending

The global financial crisis that began last summer has made it more difficult for banks to package and sell all kinds of loans as securities, as well as to issue bonds and short-term IOUs to investors. Increasingly, banks have turned to the interbank market to borrow cash. But their mounting losses on mortgage securities and other investments have raised fears that a major institution could go bust.

That's made banks increasingly wary of lending to one another.

Such jitters have made many banks unwilling to extend loans to each other for more than one week. As a result, the rates they quote for loans of three months or more are often speculative, because there's little to no actual lending for that time period, brokers say. "It amounts to an average best guess," says Don Smith, an economist at ICAP, the London broker of interbank loans and derivatives.

These bank problems are proving costly to other kinds of borrowers around the world. One way to measure the rough cost is by comparing the three-month Libor rate with an interest rate that doesn't reflect worries about banks' financial health -- such as the yield on a three-month Treasury bill, which is backed by the U.S. government. The gap between the two stood at 1.58 percentage points Tuesday, and has averaged 1.39 percentage points since the crisis began in August. In the five years before the financial crisis started, it averaged only 0.28 percentage points.

(This is a decent example of the problem of lack of true price discovery in rigged markets. - Jesse)

Citigroup's Mr. Peng believes banks could be understating even those abnormally high Libor rates. He notes that the Federal Reserve recently auctioned off $50 billion in one-month loans to banks for an average annualized interest rate of 2.82% -- 0.1 percentage point higher than the comparable Libor rate. Because banks put up securities as collateral for the Fed loans, they should get them for a lower rate than Libor, which is riskier because it involves no collateral. By comparing Libor with that indicator and others -- such as the rate on three-month bank deposits known as the Eurodollar rate -- Mr. Peng estimates Libor may be understated by 0.2 to 0.3 percentage points.

Other Benchmarks

In one sign of increasing concern about Libor, traders and banks are considering using other benchmarks to calculate interest rates, according to several traders. Among the candidates: rates set by central banks for loans, and rates on so-called repurchase agreements, under which borrowers provide banks with securities as collateral for short-term loans.

In a report published in March by the Bank for International Settlements, economists Jacob Gyntelberg and Philip Wooldridge raised concerns that banks might report incorrect rate information. The report said that banks might have an incentive to provide false rates to profit from derivatives transactions. The report said that although the practice of throwing out the lowest and highest groups of quotes is likely to curb manipulation, Libor rates can still "be manipulated if contributor banks collude or if a sufficient number change their behaviour."

The Fed Is Serving the Wall Street Banks Not the Republic

In times such as these we like to look past the bought and paid for house economists and over-eager-for-an-Undersecretary-of-the-Treasury-appointment academics for serious, seasoned, and meaningful commentary from those who have been in and actually understand the markets.

14 April 2008
The Fed Has Power, but No Will
By MARTIN MAYER
Barron's Online

THERE'S SOMETHING STRANGE ABOUT THE TREASURY DEPARTMENT'S suggestions for the reform of banking regulation and about the cascade of commentary on it. From one end to the other, there's an assumption that the Federal Reserve has somehow lacked the information and authority it could have used to prevent the insanity that has engulfed the credit markets.

The Fed, we are told, had access through its examiners to what the commercial banks were doing, but not to what the investment banks were doing. Yet the investment banks that mattered, including Bear Stearns (and Morgan Stanley, Merrill, Lehman and Goldman, not to mention the mortgage lender Countrywide), were all among the 20-odd primary dealers who help the Fed distribute Treasury bills in the weekly auctions that fund the federal government.

All participants in those auctions were supposed to keep the Fed informed of any significant changes in their balance sheets-on a continuous basis. When Joe Jett's purchase of strips and reconstitution of Treasury bonds led to a weakening of Kidder Peabody's financial position in 1994, there was all hell to pay at the Federal Reserve Bank of New York, because its government-securities division was not promptly informed.

Our present regulatory structure goes back not to the Great Depression, but only to 1999 and the Gramm-Leach-Bliley Act, which undid the Depression-era Glass-Steagall Act.

The great controversy as the repeal bill moved to passage was about responsibility for supervising the banks in their exercise of new powers. If nationally chartered banks were permitted to be brokers and dealers and underwriters and mutual-fund managers, their work would be supervised by the Comptroller of the Currency, whose examiners inspected these banks. But if the law gave the new powers only to the holding companies that owned the banks, everything would be controlled by the Fed, which was to be the umbrella regulator for the new financial-services institutions.

THAT'S WHAT THE FED WANTED. Rep. Jim Leach, who was chairman of the House Banking Committee, was a great admirer of Alan Greenspan and the Federal Reserve, so that's what the Fed got.

Most commentators on the current credit crisis have argued that the banking regulators and supervisors played no role in its inception, because the bad mortgages were written and sold and packaged by unregulated mortgage brokers and mortgage bankers. But all the bank-holding companies had subsidiaries that were active in the mortgage market, and virtually all the mortgages packaged for sale by private entities passed through some subsidiary of some bank-holding company or some bank-controlled investment vehicle at some time between the inking of the contract and its disappearance into a collateralized security.

There was plenty of opportunity for bank examiners checking out the holding companies to notice that some of the paper in the vaults had inadequate or dishonest documentation, and to "classify" it. When the examiner classifies an asset, he forces the bank to reduce its reported profits and discourages further investment in similar assets.

Of course, Fed examiners don't look at individual loans any more; they just ask banks whether they are living up to their own standards of due diligence, and if it's OK with the bank it's OK with the Fed.

MEANWHILE, THE FINANCIAL SECTOR under the Fed's umbrella regulation was building a highly unsafe structure that abandoned many private-sector security features that had been created in the 1970s. With the systems developed then and perfected more recently, the buyers and sellers of stocks or exchange-traded futures or options have no contact with each other once the trade is confirmed by both sides later that day. At that moment of confirmation, the entire market, in the form of the clearinghouse, becomes the counterparty -- the guarantor that the buyer will get his stock or option or future and the seller will get his cash.

Among the useful attributes of this arrangement for the options and futures markets is that most contracts are extinguished by the purchase of an opposing contract: A previous seller buys, or a previous buyer sells, and the contract with the clearinghouse disappears. At the end of every day, the clearinghouse reports trades and "open interest."

But as banks honed the profitability of derivatives trading, they made more and more individual over-the-counter trades that involved payment from buyer to seller, delivery from seller to buyer, no clearinghouse, and a continuing relationship of the two counterparties. This was presented as innovation, and the Fed was committed not to discourage innovation. Now it can be seen as the retrograde development it really was. Like the stock market of the 1960s, this over-the-counter system has blown up, leaving behind gaseous waves of mistrust.

In the OTC derivatives market, people who want to get out of their previous trades have to offset the obligations of that trade by creating a new instrument with a new counterparty. Take a credit-default swap, by which each party guarantees to accept the payout on a debt instrument held by the other party. It's an insurance instrument, with some differences: The holder of the insured instrument can sell it, and the new owner becomes the beneficiary of the insurance. And the insurer may find someone who will accept a lower premium to take the burden of the insurance, allowing him to lay off his risk at an immediate profit.

The one trade thus generates two new instruments, with four new counterparties, and as the daisy chain of reinsurance expands, the numbers become ridiculous: $41 trillion face value of credit-default swaps.

BEAR STEARNS APPARENTLY had created trillions of dollars of positions this way, which is why it had to be kept in business. Once you begin to remove individual flower girls from the daisy chain of credit swaps, you don't know who will wind up with obligations they thought they had insured against and they can't meet. Suddenly, all counterparties for all sorts of trade become suspect. We should note in passing that the big beneficiaries of the Fed's action on Bear Stearns were the sellers of credit derivatives insuring Bear's obligations. The counterparties' paper had been worth very little on Thursday night and quite a lot on Sunday afternoon.

The Fed could easily have prevented this ruinous expansion of OTC credit-default swaps by requiring banks to keep extra reserves against such holdings, larger than the margin requirements of the exchanges where derivatives were traded, cleared in a clearinghouse, properly settled and extinguished. Instead, the Fed promoted the false idea that the banks in their own interest would police the gambling of the mortgage bankers and the credit-gobbling quantitative traders and the leveraged-buyout fakirs -- and that the hidden trading of non-standard, bilaterally settled, opaque derivative instruments would improve the stability of markets. Such ridiculous claims are still being made.

Quite apart, then, from the philosophical question of whether bank examination and control of monetary policy fit well together (they don't), the Fed has done nothing to deserve Treasury Secretary Henry Paulson's recommendation that its role in supervising the markets should be expanded by new laws.

The truth is that the Fed had plenty of authority to take the steps that would have avoided today's dangers and its own embarrassments. The problem was that the Fed lacked the will to supervise. Before we can restore the self-confidence of the market, we will need to create a Federal Reserve that believes in its own regulatory mission more than it believes in prudence at the banks.

MARTIN MAYER is a guest scholar at the Brookings Institution and author of numerous books about banking and finance. "If anyone knows more about money, banking, and investments, that individual is keeping the information to himself," wrote James Grant of Grant's Interest Rate Observer in reviewing Martin Mayer's 1991 book Stealing the Market. In 1993, Publisher's Weekly described Mayer's Nightmare on Wall Street as "A landmark treatment of the money world." Martin Mayer has been writing about business and financial subjects for forty years. Mayer's latest book, The Bankers: The Next Generation, was published in January 1997.