Category Archives: Credit cards

What Happens if the Consumer Financial Protection Bureau Has No Director By Its Start Date?

A useful article in CNN Money (hat tip SA) describes what happens if the Consumer Financial Protection Bureau does not have a director in place by its official start-up date, July 21. That outcome looks certain, given that the House Oversight Committee has scheduled its ritual flogging of its defacto head, Elizabeth Warren, for July 14, and Senate Republicans have vowed to nix any candidate lest they get to strangle the agency by controlling its budget.

Even if Obama were to have a brain transplant and do something so out of character as to get in a fight with banks and the Republicans, the logical window of opportunity for breaking the Senate’s planned pro-forma sessions (a device to forestall a recess appointment) would be the four week end of summer Congressional break. That starts August 8. So it looks like a sure bet that the CFPB will go past July 21 with no chief in place.

Contrary to popular opinion (and bank lobbyist fond hopes) the CFPB is not stymied if a director has not been installed. What would happen is:

Fortune Confirms Pervasive Defects in Bank of America Mortgage Documents

Do you remember the brouhaha over testimony by a senior executive in Countrywide’s mortgage servicing unit last year? It called into question whether mortgages had been conveyed properly to securitizations, which in turn would impair Bank of America’s ability to foreclose.

Let me refresh your memory. As we wrote last year:

Testimony in a New Jersey bankruptcy court case provides proof of the scenario we’ve depicted on this blog since September, namely, that subprime originators, starting sometime in the 2004-2005 timeframe, if not earlier, stopped conveying note (the borrower IOU) to mortgage securitization trust as stipulated in the pooling and servicing agreement….

As we indicated back in September, it appeared that Countrywide, and likely many other subprime orignators quit conveying the notes to the securitization trusts sometime in the 2004-2005 time frame. Yet bizarrely, they did not change the pooling and servicing agreements to reflect what appears to be a change in industry practice. Our evidence of this change was strictly anecdotal; this bankruptcy court filing, posted at StopForeclosureFraud provides the first bit of concrete proof. The key section:

As to the location of the note, Ms. DeMartini testified that to her knowledge, the original note never left the possession of Countrywide, and that the original note appears to have been transferred to Countrywide’s foreclosure unit, as evidenced by internal FedEx tracking numbers. She also confirmed that the new allonge had not been attached or otherwise affIXed to the note. She testified further that it was customary for Countrywide to maintain possession of
the original note and related loan documents.

Countrywide tried, in a thoroughly unconvincing manner, to retreat from the damaging testimony.

Abigail Field, an attorney who has regularly written on the mortgage mess at Daily Finance, published an article at Fortune that looks into whether DeMartini was simply being truthful and the notes were not conveyed correctly, which would mean Bank of America has a very big mess on its hands. Her conclusions are damning:

California Establishes Mortgage Fraud Task Force

In further proof that attorneys general are abandoning the 50 state attorneys general investigation, California AG Kamala Harris announced that she is establishing a 25 person mortgage fraud task to look into abuses across the spectrum, from the individual borrower level to practices, such as questionable transfers to trusts when the securitizations were formed, that hurt investors.

Note that the defection of a second Democrat (Harris follows New York’s AG Eric Schneiderman in creating her own effort) from the AG investigation is particularly significant. A number of Republicans joined at the 11th hour and were never on board with the premise of talks, so their defection is expected. By contrast, the AGs from solidly Democratic states were expected to stay the course. The fact that the AGs from two major states have effectively left the talks confirm what we have said all along: that the negotiations were not serious precisely because no investigations had been conducted.

We applaud this step forward by Harris, since it shows at least some public servants are taking mortgage abuses seriously. From the Los Angeles Times (hat tip reader Denotis):

Guest Post: Not far enough – Recommendations of the UK’s Independent Commission on Banking

By Charles A.E. Goodhart and Avinash Persaud. Cross posted from VoxEU

The UK’s Independent Commission on Banking was set up last year to consider reforms to promote financial stability and competition. This column reacts to the commission’s interim report released on 11 May 2011. It argues that the commissioners have a lot to ponder before the final report is due in September – they have not gone far enough.

The Booger Rule of Antitrust in the Debit Card Fight

Although we were big fans of the HuffPo piece yesterday on the DC war over debit card regulation, Adam Levitin was a bit less happy since the article focused on the politics and was on why the card fees were burdensome to merchants.

Although a few readers tried arguing the bank position and did not get a terribly enthusiastic reception, Levitin explains the real problem: the actions of the Visa/MasterCard duopoly are pretty clear antitrust violations, but as he pointed out via e-mail, the US pretty much does not do antitrust any more. The Chicago school of economics indoctrination of judges via an orchestrated “law and economics” movement (see ECONNED for an overview) has resulted in judges not seeing competitive problems anywhere. The Department of Justice has lost a slew of recent antitrust cases at the Supreme Court, so they’ve lost the appetite to pursue them.

But (to give an indication of how bad the behavior of the card networks is), the normally supine DoJ has been active in payment cards.

HuffPo Expose on the Biggest, Ugliest Fight in DC: Debit Card Fees

If you want to understand inside the Beltway politics, proceed immediately to a superb article by Zach Carter and Ryan Grim at Huffington Post, “The Swipe Fee War”. It is a meticulously reported piece over the number one fight in the nation’s capital, which contrary to headlines, is not the budget battle but proposed regulations over debit card fees, otherwise known as “interchange” fees. As Felix Salmon, Katie Porter, and Adam Levitin have written, the reason this battle is so hard fought is that it pits two big spending constituencies against each other: banks versus retailers, or as one Senator broke it down further:

The big greedy bastards against the big greedy bastards; the big greedy bastards against the little greedy bastards; and some cases even the other little greedy bastards against the other little greedy bastards

S&P Negative Watch for US Flagged Financial Sector as Major Risk

Yes, I know I dissed the S&P report as fundamentally wrongheaded, but as we will discuss shortly, it contained some interesting commentary on the US financial sector that has gotten perilously little notice.

But I’d first like to address the way the media and some blogosphere commentators have hopelessly muddied the issues on the downgrade scaremongering. One is the “we depend on foreigners to fund our budget deficit” hogwash. As Michael Pettis pointed out, the idea that the US is funding its federal deficit from foreigners is a widespread misconstruction.

Faulty Reasoning Behind Calomiris Post Dodd Frank Reform Proposals

I hate to take issue with a post by Mike Konczal on some Dodd Frank reform ideas posed by Charles Calomiris in “Beyond Basel and Dodd Frank“, since Mike is usual a source of reliable analysis. But that’s why it’s particularly important to let one of the rare times he goes off beam not to lend credence to reform ideas that are sorely wanting.

The problem in general with Dodd Frank and subsequent fixes is they don’t come close to doing what needed to be done, which is dramatically reduce the ability of financial players to wreck the economy for fun and profit. The fact that the banks howl bitterly over some half-hearted measures should not be mistaken for effectiveness. The big dealer banks have realized that they’ve emerged more powerful and better able to extract rents than before the crisis, so why not press their advantage? Their new position is that any restriction on their profit-seeking is an intrusion and should be beaten back. Witness some recent evidence: their foot-dragging on clearinghouses for swaps. The normally accommodating New York Fed is forming a group to “compel” the banks to live up to their commitments. Of course, with enablers like Timothy Geithner, who has signaled that he is leaning toward exempting foreign exchange derivatives from Dodd Frank implementation, the banks don’t have to fight all that hard.

Let’s turn to the current debate.

Do We Need Big Banks?

Yves here. I normally let VoxEU articles stand on their own, but this topic, of whether the bank PR that bigger banks are essential stands up to scrutiny, is near and dear to my heart.

Note that the authors point to a 1990s study that finds that a $25 billion in assets bank was the optimal size. There were a fair number of studies done then of bank size versus efficiency. I’m a bit surprised that this is the one that is most often cited, since it also came up with the biggest size threshold at which a negative cost curve kicked in (meaning the bank became more costly to run). One study found that the slightly negative cost curve started at $100 million in assets (!); more typical was somewhere between $1 and $5 billion. And remember, these studies were done in the days when banks returned checks, and check processing was believed to have strong scale economies (ie, if check processing was a bigger proportion of total costs then than now, it could arguably have increased scale economies).

Some academics were frustrated with these results. I recall reading a paper where the author argued that there were theoretical cost savings to being bigger (duh) and basically contended that the empirical data had to be wrong.

Should We Buy Geithner’s Resistance to Naming “Systemically Important” Firms?

According to the Financial Times, Treasury Secretary Timothy Geithner is trying to duck the assignment given the Financial Stability Oversight Council under the Dodd Frank legislation, namely, that of identifying “systemically important” financial institutions:

Tim Geithner, the Treasury secretary, has questioned the feasibility of identifying financial institutions as “systemically important” in advance of a crisis, just as the regulatory council he chairs is supposed to start doing precisely that…

Pending Massachusetts Supreme Court Ruling May Invalidate Securitization Mortgage Transfers

Bloomberg has a bombshell today, that a case before the Massachusetts Supreme Court may invalidate certain types of mortgage transfers, a central process in mortgage securitizations. A ruling for the plaintiffs would render some past foreclosures invalid, raising the possibility that the borrowers could sue for damages. It would also have far reaching implications, since […]

Banks Desperate for Profits Seek Out Risky Credit Card Customers

anks, having trashed their once-sound model for the credit card business, are back trolling to find credit junkies, albeit of a somewhat safer type than the ones that blew up on them in the credit crisis.

Back in the 1980, the credit card industry, despite being more fragmented than now, had what looked a lot like oligopolistic pricing.

Stockman Savages Buffett Op-Ed, Bailout Canards

One of the annoying and persistent Big Lies of the financial crisis is that the rescues were a really good thing because they saved the world as we know it. That argument is dubious for a host of reasons: the world as we know it is the very same one that went off a cliff, […]

Guest Post: Currency Wars and Emerging Markets

By Richard Portes, Professor of Economics at London Business School and President of CEPR, first posted at VoxEU The threat of a currency war between the US and China is one of the main concerns for the G20 ahead of this month’s meeting in Seoul. This column say that while policymakers appear to grasp some […]