The Corporate Observer Blog : Consumer Protection, Corporate Abuse : Class Action Lawyer & Attorney : Steven Berk Law Firm

Regulators in bed with the regulated: ho hum, business unfortunately as usual.

This time, the CFTC is investigating the CME Group for their “oversight” of MF Global, which recently lost $1.2 billion in about half the time you can say: “Commodity Futures Trading Commission.”  Head of MF Global and former New Jersey Sena-governor Jon Corzine says he “can’t find” the money.  Folks, we are not talking about the pocket change we have in our pants pockets.  Meanwhile the CME, aka the Chicago Mercantile Exchange—MF Global’s primary regulator—says blithely the books have been cooked.  “Really,” as if that tells us anything.

So a dollar short and a day later, the CFTC is going to investigate the CME and its failure to—well—regulate.  The CFTC is also investigating the dozen-plus largest futures brokers for similar improprieties, yet another example of regulatory bodies swinging the bat with the ball already in the catcher’s mitt.

“Fellas, to hit the ball, you must swing earlier and at pitches you can hit.  Are we asking too much?”  Regulators come out of the industry they regulate.  These guys are in the industry, they should know, or at least be able to find out what’s around the corner.  A regulator is not akin to a prosecutor who comes in like a baseball closer to finish the game; a regulator is the Commissioner.  He or she sets the rules of the game and then lets them “play ball.”

I understand that global financial markets move at hyper speeds.  But regulators, jump out of bed with the regulated and spot the next issue before it surprises us on page A1 of newspapers around the globe.

Assisted by David T. Martin

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At least once a week a new report comes out detailing inadequacies or improprieties by one or more of the companies involved in the housing bubble and financial crisis...  While we read the reports and follow the news, the foreclosures continue, along with the unregulated credit ratings, robo-signings, and predatory lending.  Nothing material about our current practices has changed.

If you listen to candidates for President, regulation is the greatest threat to our democracy.  (Actually it's never just regulation it's overregulation.)  The Chinese owning our debt and growing at five times our rate… nahhh; Al Qaeda gaining nuclear weapons?  Nope.  Okay… steadily declining scores in math and science for high school students?  No, sorry.  It’s regulation.  We need less regulation, more democracy, and more prosperity.  Or maybe just no regulation, absolute democracy, and absolute prosperity.  Hmmmmm...  Can it be that easy?

No.  It's time to look at the facts.  At least once a week a new report comes out detailing inadequacies or improprieties by one or more of the companies involved in the housing bubble and financial crisis.  On Monday we learn Standard and Poor’s refused to downgrade AAA-rated companies despite damning evidence.  By Friday, we’ve forgotten S&P because news surfaces that banks had robo-signers executing their foreclosure agreements.  And early the following week, the focus shifts back to S&P as U.S. credit is downgraded and the DOJ brings suit against the credit rating agency.  Yesterday, as TCO hero Gretchen Morgenson reports, the FHFA released a report detailing the timeline of Fannie Mae’s discovery of abuses by the teams of law firms assigned to oversee foreclosures.

The takeaway: Fannie was aware early of its lawyers improprieties. Shocking.

While we read the reports and follow the news, the foreclosures continue, along with the unregulated credit ratings, robo-signings, and predatory lending.  Nothing material about our current practices has changed.  Dodd-Frank hit an impenetrable political wall and credit rating agencies have indemnified themselves by declaring their ratings “mere opinions”.  The Boston Globe reporting that “Alex Rodriguez is an overrated ball player” is afforded the same protection as credit agencies saying “U.S. credit is no longer the safest investment you can make.”

So while it is important to assess our past failures, at this point we must take the next step. We need substantially more oversight.

Here are a few modest proposals:

• Call the CRAs what they are—oligopolistic pseudo-government agencies—and establish straightforward accountability standards for the ratings they produce.
• Separate investment banking and “plain old banking”, as the venerable Paul Volcker has called for.  This limits the risk to which regular banks are exposed and allows them to engage in simple money storage and loans.
• Limit corporate compensation at institutions that have required infusions of taxpayer money, and require better disclosures to the public as to the risks taken and compensation awarded.
• Most importantly: Actually empower the agencies charged with regulating the industries with the authority and resources to do so.

Now that would truly be news.

Assisted by David Martin

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What happens when a consumer needs to pay bills, but doesn’t have a credit or debit card? A new and increasingly popular answer is prepaid debit cards. This new business is booming. The New York Times reported on October 5^th that over $8.7 billion was loaded onto prepaid cards in 2008 alone. These cards offer the convenience of a debit/credit card without the credit check or bank account fees. Unfortunately, this is not the whole story. There is, quite often, a long list of fees including:

·      Activation fees

·      Convenience fees

·      ATM withdrawal fees

·      Balance Inquiry Fees

·      Purchasing Fees

Keep in mind; this is by no means an exhaustive list of fees connected with most prepaid cards.  I am not the first to raise the issue that some large companies may be taking advantage of their target markets: college students, and the uncreditworthy.

Of course the companies issuing the cards (small upstarts like Green Dot, Net Spend, and Account Now) have the right to a reasonable profit. We should also remember that without charging interest, fees will certainly be included in any of their schemes. My problem with the current system is that consumers are generally unaware of these fees which often end up considerably devaluing the money put on a card. This is a growing problem in the financial world and I think it’s time we found a solution.

Let’s look at an example:

This is a short sample of the fees that a consumer would incur with normal use of the MiCash prepaid MasterCard.

A deposit of $500

- $9.95 activation fee

- $17.50 (10 ATM withdrawals)

- $5 (5 ATM balance inquiries)

- $10 (20 purchases)

-$8 ($4 per month for “monthly maintenance”)

_________________________________________

Net Value: $449.50

A consumer using this card would have lost 10% of his or her initial payment just in fees by using this card normally for a two month period. Is this fair? Well, there certainly is precedent in the check cashing and pay-day loan industries for charging outrageous fees just for people to access their own money. However, even these questionable industries seem more willing to disclose fees than prepaid credit card companies.

Though prepaid cards may still be a better option than high interest credit cards or certain bank fees, many consumers rightfully feel that they are being charged fees without being made explicitly aware of them. The MiCash program in particular discloses the fees in the “terms and conditions” which are not directly posted on the application page – rather a user would have to follow a small link at the bottom of the application. This method of disclosing fees is perfectly legal, but is still deceiving. Nowhere on the application page does MasterCard mention any fees. In fact the only mention of fees is in reference to a lack of outrageous overdraft fees. However, it is clear in the fine print of the “terms and conditions” that overdraft or “negative balance” fees do indeed exist with the MiCash program.

We are not seeking an end to prepaid debit cards, nor are we seeking an end to all fees. All the common person is seeking is a fair representation of products, a clear warning that fees will be deducted from a prepaid card. Federal oversight should be the next step towards ensuring full and fair disclosure of fees. The industry is relatively new and has not been subject to a substantial amount of governmental review. Perhaps legislation will be the best way to guarantee disclosure. The card should warn customers that any initial deposit will actually have a lower net value. Hopefully, this clear warning will help assure that consumers are not tricked into allowing big banks and credit card companies to take their hard-earned money.  

Assisted by: Zach Kady 

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Finally, a Federal regulatory commission out front (not after the fact) protecting main street from predatory, unsound fiscal practices.

Yesterday I responded to Gretchen Morgenson’s New York Times piece, which calls for scrutiny of soaring banking stocks; because the banks’ actual performance (lackluster) hardly match the robust share value manufactured on Wall Street.  Differing a bit from Ms. Morgenson, I am not ready to panic ; I believe heightened enforcement and regulation will hold greed and rampant speculation to a minimum.  In the 8/22 Wall Street Journal, Brian Baskin calls attention to such an instance.

Mr. Baskin describes the effort by the Commodity Futures Trading Commission (CFTC) to curb a new $50 - $100 billion dollar market for paper: derivatives again, this time on commodities.  These securities are called exchange-traded funds (ETFs) and they are all the rage.  The promoters of this newfangled investment vehicle (read Wall Street fees, broker fees, and no actual product being produced) claim these funds are the only way for small investors to access commodities futures markets.  Please.  The market is for professional speculators, who don’t need to hedge the price of a commodity like natural gas, but rather see an opportunity to make some serious money taking positions contrary to the market. 

Not so fast, says the CFTC’s enforcement staff.  They have been placing new and formidable regulatory curbs on ETFs – enough so that operators of ETFs are getting in trouble with their own investors.  Lawsuits have been filed alleging the ETF operators are failing to abide by the disclosures they made to their investors.  (But that’s a subject for another day). 

As Mr. Baskin details, the CFTC is concerned that rampant speculation causes price inflation.  That means higher prices for end consumers.  The CFTC’s goal is not to eliminate ETFs.  Its goal is to protect main street consumers, and for that reason it is to be applauded.  Finally, a Federal regulatory commission out front (not after the fact) protecting main street from predatory, unsound fiscal practices and another bubble that when it bursts—and it will burst—main street pays the freight.

About time.

(Post was prepared with the assistance of David Martin, University of North Carolina 2010)

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At best, I fear a muddled effort—this after main street spent trillions to bail out those interests.  At worst, we may see reforms that actually subtly favor these industries.

I was taught not to write using clichés.  But I couldn’t resist.  As the July 29, 2009 New York Times editorial, entitled The Financial Truth Commission cautioned: the important Financial Crisis Inquiry Commission set up by Congress to investigate last year’s near-complete meltdown of the financial system is being led by two veteran politicians who have received significant campaign contributions and have longstanding ties with – you guessed it – the “financial, insurance and real estate interests”.

Those are the interests that main street had to bail out in the first place.  They will now have considerable influence on everything the Commission decides.  At best, I fear a muddled effort—this after main street spent trillions to bail out those interests.  At worst, we may see reforms that actually subtly favor these industries.  There is definitely cause for concern and like the NYT, we will be watching.

Let’s hope that as with the Watergate Commission and the Church committee hearings of the 1970’s, this Commission can rise above politics and act professionally and diligently to create reforms that put our financial and banking system on firm ground.  Only then can folks on main street thrive again.

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