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.

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.

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?

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?