Wednesday, February 25, 2015

Legal, Ethical: Not Synonyms

The reason we have two different words -- "legal" and "ethical" -- is that they are not synonyms. We do of course hope that they run together, but every now and then the divergence is breathtaking.

Object lesson #1: Steven Davidoff Solomon's DealBook column in today's New York Times, on "How loopholes turned Dish Network into a 'Very Small Business'".

As Solomon explains, the Treasury is about to receive more than $40 billion from the auction of wireless spectrum. Yay, us! Alas, that sum is also about $3.25 billion less than it should be, because Dish Network, a satellite TV provider, bid for those wireless licenses "through a newly formed vehicle that claimed to be a 'very small business' under the Federal Communications Commission rules and was entitled to a 25 percent discount."

Hunh, you say. Solomon understands:
At this point you may be scratching your head. How can Dish, a company with a $34 billion market value, be a "very small business"? Indeed, to qualify for the discount, a very small business must have revenue not "exceeding $15 million for the preceding three years." Dish in its last full fiscal year had almost $14 billion in revenue.
Millions, billions, it's all the same, right? No, of course not. So how did Dish manage this sleight of hand?

I won't take you through the whole sequence that Solomon lays out, complete with gory details, involving an "Alaska Native regional corporation" and a "former chief of the FCC's wireless telecommunications bureau". Even my eyes glazed over. Suffice it to say, it does appear to have been a completely legal process.

Solomon notes:
No doubt Dish and its lawyers are high-fiving one another and patting themselves on the back.... [With these maneuvers,] they have saved themselves billions.
Well, what's wrong with that, you may ask. After all, weren't the lawyers  doing exactly what they're paid to do -- crafting the best possible deal for their clients?

Yes.

But.

Solomon continues:
Taxpayers, however, may want to ponder what those billions of dollars could have done in the coffers of the government -- a new bridge or money for schools, perhaps.
Might this be the moment to remind Charles Ergen (the billionaire who controls Dish Network) that he too is a U.S. citizen. And that by cheating the government of that $3.25 billion, he was really cheating all of us -- including himself.

Solomon adds that
The "small firm" exemption has been know to be a problem at the FCC for years. The Congressional Budget Office in 2005 wrote a report highlighting how it was used mostly by big companies instead of the small firms it was intended to benefit. Moreover, the office found that the program provided little benefit to consumers while providing a big discount to companies. 
And yet... nine years later, nothing has been done to close that loophole. Wonder why so many of us are cynical about big corporations, high-priced lawyers, and government officials?

Legal, yes. Ethical, not even close.







Friday, February 13, 2015

What If Transparency Isn't All It's Supposed to Be?

Uh-oh. Anyone who's ever read even one of my posts knows my twin mantras of Trust and Transparency.

So what do I do when Jesse Eisinger writes a DealBook piece for the New York Times saying that transparency isn't all it's cracked up to be? (Full post, published 12 February, here)

First thing: Think.

Eisinger starts by quoting famed Supreme Court Justice Louis Brandeis: "Sunlight is said to be the best of disinfectants." And then he goes on:
Over the last century, disclosure and transparency have become our regulatory crutch, the answer to every vexing problem. We require corporations and government to release reams of information on food, medicine, household products, consumer financial tools, campaign finance and crime statistics....
All this sunlight is blinding. As new scholarship is demonstrating, the value of all this information is unproved. Paradoxically, disclosure can be useless -- and sometimes actually harmful or counterproductive.
Double uh-oh.

But then Eisinger, I believe, guts his own argument with a bad example: the "terms of service" agreements to which we all click "I agree" without ever reading the teeny-tiny print because we're on our way to doing something else, and it's like a Stop sign in the middle of nowhere: I'm just blowing through, OK?

Eisinger argues that
Our legal theoreticians have determined these opaque monstrosities work because someone, somewhere reads the fine print in these contracts and keeps corporations honest. It turns out what we laymen intuit is true: No one reads them...
In real life, there is no critical mass of readers policing the agreements. And if there were an eagle-eyed crew of legal experts combing through these agreements, what recourse would they have? Most people don't even know that the Supreme Court has gutted their rights to sue in court, and they instead have to go into arbitration, which usually favors corporations.
Why do I think this is such a bad example? Because the "terms of service" agreements are a perfect example of not disclosing. They're obfuscation pretending to be disclosure. I am confident that Brandeis would have been appalled by these "opaque monstrosities".

What we need isn't less disclosure, it's clear disclosure.

And we need to remember the second half of the Brandeis quote: "Sunlight is said to be the best of disinfectants; electric light the most efficient policeman."

In other words, insist on Plain English disclosure, but don't stop there: Enforce.

This would address Eisinger's further complaint:
The disclosure bonanza is easy to explain. Nobody is against it. It's politically expedient. Companies prefer such rules, especially in lieu of actual regulations that would curtail bad products or behavior. The opacity lobby -- the remora fish class of lawyers, lobbyists and consultants in New York and Washington -- knows that disclosure requirements are no bar to dodgy practices. You just have to explain what you're doing in sufficiently incomprehensible language, a task that earns those lawyers a hefty fee.
(Side note: I love that phrase, "the opacity lobby -- the remora fish class of lawyers, lobbyists and consultants...")

Eisinger's solution to the "bad products or behavior" problem:
Hard and fast rules. If lawmakers want to end a bad practice, ban it. Having them admit it is not enough.
Phew. I knew we didn't really disagree. Disclose, Regulate, Enforce.



Monday, February 9, 2015

Could We Replace Payday Lenders with Post Office Banking?

I've written before (here) about the special scumminess of payday lenders; today's New York Times gives me a measure of hope that the federal government may finally be doing something to rein in these guys.

According to reporter Jessica Silver-Greenberg, the Consumer Financial Protection Bureau is drafting regulations that will address all manner of short-term loans (full DealBook article, here):
The rules are expected to address expensive credit backed by car titles and some installment loans that stretch longer than the traditional two-week payday loan, according to industry lawyers, consumer groups and government authorities briefed on the discussions who all spoke on the condition of anonymity because the deliberations are private...
Behind that decision, the people said, is a stark acknowledgment of just how successfully lenders have adapted to keep offering high-cost products despite state laws meant to rein in the loans.
Essentially, state governments have been playing Whac-a-Mole, and their efforts have been stunningly unsuccessful.

If you are fortunate enough never to have needed a payday loan, here's a sample scenario: 

You're living teeny-paycheck-to-teeny-paycheck, when you hit a pothole on your way home from work, and not only blow the tire, but bend the wheel. Without the car, you can't get to work. Without work, you'll lose the roof over your head, not to mention the food in the fridge. Since your teeny paycheck has never allowed you to build any appreciable savings, you have neither an "emergencies" fund nor appreciable credit. Suddenly an interest rate in excess of 500% per annum can seem, if not exactly reasonable, at least a real option. Especially as the rate won't be presented in APR terms, but as "I'll give you $200 now, and you'll pay me back, plus $50, in two weeks." That sounds almost reasonable, doesn't it? And if, two weeks from now, you can't pay the full $250? The lender will "kindly" accept partial payment and roll over the loan. Next thing you know, you're down the rabbit hole.
At the center of the regulations being considered... is a requirement that lenders assess whether borrowers can repay loans -- interest and principal -- at the end of a two-week period by examining their income, other debts and their payment history.
Few people can, the data suggest, leaving borrowers to either roll over their loans, heaping on more fees, or take out new one altogether. The [Consumer Financial Protection] bureau found that during a 12-month period, borrowers took out a median of 10 loans. Borrowers paid median fees of $458. The median amount borrowed was $350. And more than 80 percent of loans were rolled over or renewed within two weeks. [Emphasis added]
That churn is central to many lenders' business, according to data from the bureau. Borrowers who take out 11 or more loans each year account for roughly 75 percent of the fees generated. 
In other words, the business model is based on the desperation of the working poor, most of whom are unbanked, and therefore have few options. According to The Economist, about one-quarter of all Americans are either unbanked or underbanked, "meaning they either lack a current or savings account, or they have one but still use alternatives to banks such as cheque-cashers and payday lenders." (Full Economist article, from April 2014, here)

The average underbanked household, The Economist reports, "has an annual income of only $25,500 or so, yet spends around 9.5% of that on fees and interest charged by these banking substitutes." (Silver-Greenberg reports that "the median income of payday loan borrowers was just over $22,400 a year.")

One possible policy solution that has been proposed is to allow US post offices to offer basic banking services, as many postal services worldwide do, and as the USPS itself did early in the 20th century. 

Post offices already sell money orders, and are located in many communities that have no bank branches at all, or one at most. As The Economist notes, "Providing small, brief loans at lower interest rates than payday lenders (not a hard thing to do, since annual rates on payday loans can exceed 800%) could save low-income consumers hundreds of millions or even billions of dollars in interest and fees."

Of course, this would require the Republicans who control Congress to ignore the dollars waved by payday lender lobbyists. How likely is that?


Tuesday, February 3, 2015

Want Some Primrose to Go With That Saw Palmetto?

Are you taking St. John's Wort to stave off depression? Gingko Biloba as a memory booster? Saw palmetto for prostate health? Or other herbal supplements?

And are you buying them from Walmart, Target, or GNC?

Then you should know this:
On Monday, New York State’s Attorney General Eric Schneiderman instructed Target, GNC, Walgreens and Walmart to immediately cease selling a number of scam herbal supplements. An investigation revealed that best-selling supplements not only didn’t work, but were potentially dangerous, with four out of five of the products not even listing any herbs in their ingredients–instead, the supplements contained fillers including powdered rice, houseplants and asparagus. 

(Full Salon article by Joanna Rothkopf, here; similar reports were carried by other major news organizations, including the New York Times, here, and CBS News, here)

In fact, tests showed that only about one in five products contained the herbs they were supposed to. I can get better odds in Vegas.

Still wonder why I believe in regulation?

Herbal nutritional supplements aren't subject to approval or review by the Food and Drug Administration; companies essentially operate on the honor system. If you think you're hearing snarky thoughts from me right now.... you are.

Why aren't supplements subject to the FDA? Because of a loophole in a 1994 federal law which was, as Salon's Rothkopf noted, spearheaded by Utah Sen. Orrin Hatch (R). Hmmm. You don't suppose that there could be any connection to the fact that nutritional supplements are Utah's third largest industry, do you? According to the Economic Development Corporation of Utah's 2009 analysis (the most recent I could quickly find), there are "more than 150 nutritional product companies within the state and revenues from this business range from $2.5 to $4 billion a year." (full analysis, here; note, opens as .pdf)

Nah, must be pure coincidence.

Bad enough that people are spending hard-earned money on supplements that aren't what they say they are, but, as the New York Times article points out, the DNA tests conducted for the New York attorney general's office "found such substances as rice, beans, pine, citrus, asparagus, primrose, wheat, houseplant, wild carrot and unidentified non-plant material — none of which were mentioned on the label." And what if you're allergic to wheat?

Please: could we get serious and close this loophole?




Wednesday, January 28, 2015

Regulating versus Licensing

If you've read even one of my posts, you've probably seen my twin mantra of Transparency and Trust.

To Trust, borrowing from a late president, I often add: "...but Regulate."

So you might think I'm a big fan of licensing requirements for various professions.

And I am. Sometimes.

But sometimes, licensing isn't about protecting consumers from the incompetent, it's about protecting the incompetent from competition.

In today's New York Times, Eduardo Porter evaluates the value of licensing, and its cost (full column, here):
Sometimes professional licenses make sense, ensuring decent standards of health and safety. I'm reassured that if I ever need brain surgery, the doctor performing it will have been recognized by the profession to be up to the task....

But ...state licenses required to practice all sorts of jobs often serve merely to cordon off occupations for the benefit of licensed workers and their lobbying groups, protecting them from legitimate competition.

This comes at a substantial social cost.

For one thing, the variation in licensing requirements across states is ridiculous. While almost every state requires that city / transit and school bus drivers, pest control applicators, and emergency medical technicians must be licensed, fewer than half require that animal trainers and breeders, chauffeurs, and opticians be licensed.

Even where two states agree that an occupation needs to be licensed, the variation in licensing requirements is ridiculous.

Porter gives two examples: "Iowa requires 490 days of education and training to become a licensed cosmetologist; New York requires 233."

And: "An athletic trainer must put in 1,460 days of training to get a license in Michigan. An emergency medical technician needs only 26."

(The details found in these example and the paragraph above come from the report, "License to Work", which can be found here; note that, as Porter writes, the report is produced by "a free-market advocacy group opposed to many occupational licenses".)

Licenses bring higher salaries to those who have them, and substantial revenue from licensing fees to the states, but they do not necessarily provide better outcomes for consumers.

The problem is, of course, that no one wants to say, "My profession should be licensed so that I can keep competition out and my revenues high." So instead we hear "the consumer needs to be protected from the  unscrupulous and untrained", all wrapped in motherhood, apple pie, and the flag.

Is it too much to ask that we apply a little common sense? Alas, it probably is.



Tuesday, January 27, 2015

Legalized Loan Sharking in Auto Loans

How important is your car to you? Unless you live in Manhattan, or downtown San Francisco, or a handful of other urban areas, the answer is likely to be: VERY important.

Without it, you can't get to your job, you can't take your kids to daycare (or to school, if they missed the bus), you can't do the emergency grocery-shopping run. You're trapped.

Which is why so many of us will pay a huge portion of our disposable income for a dependable vehicle. And for the poor, it's a particularly large portion, and particularly crucial.

I've written before about all the ways our society makes it hard to be poor. Adding insult to injury, we find all kinds of ways to make money from making their lives more difficult.

Today's New York Times has a depressing article that illustrates what I mean, as DealBook writers Michael Corkery and Jessica Silver-Greenberg explore the messy world of subprime auto loans. As they write,

Across the country, there is a booming business in lending to the working poor — those Americans with impaired credit who need cars to get to work. But this market is as much about Wall Street’s perpetual demand for high returns as it is about used cars. An influx of investor money is making more loans possible, but all that money may also be enabling excessive risk-taking that could have repercussions throughout the financial system, analysts and regulators caution.

Most of these loans are classified as "subprime", which means that the loan is made to someone with less than perfect credit, for which he or she pays significantly higher interest rates, to compensate the lender for the higher level of risk of default.

You remember subprime loans, don't you? Subprime mortgages, bundled, sliced, and diced, were sold off hither and yon, and damn near brought down the whole US economy in 2008. (Yes, I'm exaggerating and simplifying, but not wildly.)

I'd have thought investors and bankers would have developed a modicum of caution from their last foray into the world of subprime. Apparently not.

What happens when people are enticed to invest in a property with "guaranteed" high returns? They get lazy about doing a thorough investigation of that investment opportunity. And that gives a green light for another problem: "The intense demand for subprime auto securities may also be fueling ... a rise in loans that contain falsified income or employment information."

Why does that sound familiar? Oh, yes, the robo-signing of home mortgage loan applications and (later) of foreclosure proceedings (if you've been able to blank out the memory of that charming "process", read my post here). 

What does this growth market mean for actual consumers? Well, consider the case Corkery and Silver-Greenberg present:
Mandy Gray of Boiling Springs, Pa., is unemployed and depends largely on her partner’s $11-an-hour salary as a forklift operator. She says she has struggled to keep up with the $306 monthly payments on her Santander auto loan....
Stop there. Two people are living in rural Pennsylvania on little more than an $11 / hour salary. Gross -- let's forget about Social Security, local property taxes, etc. etc., that's less than $2,000 per month. From that, Ms. Gray and her partner are paying for housing, food, electricity, and a car loan that eats up more than two-thirds of one week's gross pay. And she's struggling? Of course she is. How did she get that loan in the first place?
In March, Ms. Gray, 35, received a $13,426.64 auto loan from Fifth Third Bank with a 17.72 percent interest rate.
Stop there. 17.72% interest rate. Meanwhile, my local Hyundai dealer ("We make the deals that other dealers can't make") is advertising interest rates below 1% (for those with sterling credit, of course).
[Ms. Gray] bought a 2009 Hyundai. But five days later, Santander Consumer told her that her loan was “now owned by Santander Consumer,” according to a letter from the lender reviewed by The Times. Ms. Gray, who has been taking online college courses, says she plans to use her financial aid money to catch up on missed car payments.
And when her financial aid money comes due? What will she have to do then?
Americans are so dependent on their cars that investors are betting that they would rather lose their home to foreclosure than their car to repossession.

Or in the words of a Santander Consumer investor, “You can sleep in your car, but you can’t drive your house to work.”
I have no words. 

Thursday, January 15, 2015

Least Surprising Headline of the Week!

Here it is: "Dimon Has Harsh Words for Regulators"

Wow - I would never have seen that coming; would you?

Jamie Dimon, chief executive of JPMorgan Chase, apparently feels that "banks are under assault."

According to a Nathaniel Popper article in today's New York Times, Dimon believes that
In the old days, you dealt with one regulator when you had an issue. Now it's five or six. You should all ask the question about how American that is, how fair that is.

I don't know about you, but when someone like Dimon starts wrapping himself in the flag, my antennae go up. Way up.

What had brought about this panic attack? As Popper wrote, it's because of "sluggish earnings and potential new legal costs", which makes Dimon's diatribe seem like a bit of misdirection.

(Meanwhile, in another article, by Jonathan Weisman, one could read that the Republican-controlled House "easily passed legislation to ease some of the banking regulations adopted after the financial crisis...")

Interestingly, some of the fiercest attacks Dimon faced on conference calls with reporters and analysts came from industry analysts who, according to Popper, "questioned whether the costs associated with JPMorgan's heft are outweighing the benefits." Several proposed that the bank be broken up into smaller parts; Dimon rejected that suggestion.... but "acknowledged that there could be a point when the additional costs could force it to spin off some businesses."

That's when he really lit into the regulators, while piously noting that "we can't fight the federal government if that's their intent."

But I wonder whether the size that JPMorgan has already reached doesn't explain some of the huge missteps it has experienced -- from the "London Whale" fiasco to the improper packaging of mortgage-backed securities to foreign currency manipulation to ... oh, you get the picture. If the bank were broken into smaller operations, perhaps Dimon and his fellow senior executives could keep a better eye on what their lieutenants and foot soldiers were up to.

That's assuming that they want to know.

P.S.: I don't usually recommend reading comments... but the ones at the Times are by and large quite entertaining. In response to Dimon's assertion that "banks are under assault", there are hundreds of variations on the theme of "about damn time"....