Tag: Banking

Choking the Porn Money Chicken

Hmmm:

Despite being in good financial standing, adult film performers and others in the porn industry have had bank accounts abruptly terminated—and the U.S. Department of Justice (DOJ) may have had something to do with it.

Under “Operation Choke Point,” the DOJ and its allies are going after legal but subjectively undesirable business ventures by pressuring banks to terminate their bank accounts or refuse their business. The very premise is clearly chilling—the DOJ is coercing private businesses in an attempt to centrally engineer the American marketplace based on it’s own politically biased moral judgements. Targeted business categories so far have included payday lenders, ammunition sales, dating services, purveyors of drug paraphernalia, and online gambling sites.

Here are the details on Operation Choke Point:

The “chokepoint” in this operation is the nation’s payments infrastructure, the means by which merchants process nearly $5 trillion in consumer purchases in the U.S. each year. Federal law enforcers are targeting merchant categories like payday lenders, ammunition and tobacco sales, and telemarketers – but not merely by pursuing those merchants directly. Rather, Operation Chokepoint is flooding payments companies that provide processing service to those industries with subpoenas, civil investigative demands, and other burdensome and costly legal demands.

The theory behind this enforcement program has superficial logic: increase the legal and compliance costs of serving certain disfavored merchant categories, and payments companies will simply stop providing service to such merchants. And it’s working – payments companies across the country are cutting off service to categories of merchants that – although providing a legal service – are creating the potential for significant financial and reputational harm as law enforcement publicizes its activities. Thus far, payday lenders have been the most frequent target. Whatever the merits of payday lending – and there are valid arguments on both sides –it is legal in 36 states. And if payday lenders are today’s target– what category will be next and who makes that decision?

To anyone familiar with the way our thuggish government does business, this is not a surprise. When they can not get something outlawed — like payday lending or medical marijuana — they use the tools at their disposal to harass them to death. They threaten banks and financial services into not doing business with them. They pass onerous regulations. They launch inspections and raids to insure “compliance” with whatever regulations they’ve imposed. And they come down like a ton of bricks on anyone who has broken the rules to even a minor extent.

In this case, it appears that someone at the DoJ may have abused that power to go after an industry that is popular and legal. But … that’s what fucking happens when you give the government this kind of power. We shouldn’t be at all surprised that this power is being abused. We should be shocked if it isn’t abused every damned day. Think about it: through a campaign of subpoenas and legal demands, the DOJ can effectively impose massive fines on industries that have broken no laws. All that needs to happen is for someone in Washington to get a bug up their ass about an industry and they will be targeted for potentially millions in compliance costs.

Operation Choke Point needs to be ended immediately. It may turn out that this has nothing to do with Operation Choke Point. But the existence of a program like his is antithetical to the notion of rule of law. If the Obama Administration doesn’t like pay day lenders or porn sites, they can try to outlaw them through legislation (good luck with that). Allowing this kind of lawless harassment is simply wrong, no matter who is being targeted.

Update: To clarify something: the connection of this incident to Operation Choke Point is speculation at this point. It’s possible Chase is just engaging in some good old-fashioned slut shaming (in which case, fuck you, Chase). It’s also possible that the porn industry inadvertently triggered Operation Choke Point protocols since they are targeted at businesses that have high charge rejection rates and it’s likely a lot of porn users experience buyer’s remorse and try to reverse the charges (or that porn sites are a favored test bed for stolen credit cards).

Nevertheless, my criticisms stand. We have been here before. The reality that many drug dealers have lots of cash has been used to assume that anyone with lots of cash is a criminal and the cash can be taken without trial. The reality that some criminals structure bank deposits has been used to make structuring itself a crime, even when the money involved is legitimate.

The government is pressuring banks into shutting down accounts because they meet a profile of fraudulent business dealing. How is this anything more than an extension of the already abusive structuring laws?

Libor

I’ve been lazy on the Libor scandal because it made my head spin. It seemed like an obscure financial scandal confined to the UK. But I was wrong not to pay attention. As Matt Yglesias explains, this scandal — involving interbank loan rates — isn’t some obscure financial bullshittery:

Even though the typical American is never going to seek an interbank loan in London, the number is used as a benchmark for a wide range of other financial instruments. Credit instruments with variable interest rates—private student loans, auto loans, adjustable-rate mortgages, credit cards, etc.—need to be indexed to some underlying marker of the overall cost of funds within the financial system. Often that’s something called the “prime rate” set here in the United States, but it’s also frequently the Libor. So growing evidence that Libor numbers have been deliberately manipulated by banks for years means that millions of people have been paying the wrong interest rate on all manner of financial products. Vast sums of money have been wrongly snatched from innocent people and created equally vast undeserved windfalls for others.

Essentially, Libor is an estimate of what it costs for banks to lend each other money. Those interest rates feed … everything. They are based on banks reporting data on borrowing. And it turns out that banks tailored their reports to under- or over-estimate Libor so that their financial arms could make huge profits on the information asymmetry. The banks knew what the real libor was but made sure a bogus libor was put out so that they could make millions. Then, when the financial crisis hit, both the banks and the regulators conspired to keep the rates low so the economy and the banks would seem healthier than they actually were.

A few heads have started rolling — put a pin in that for a second — but I think people are missing the forest for the trees. The corruption of Libor was inevitable. An informal system like this may have worked when all the bankers knew each other and agreed not to manipulate the system. But as Mark Calabria notes, it was never going to be as good as a system based on actual market performance. It was precisely the sort of cosy insider bullshit that has been exploding in our faces for the past five years.

And this is bigger than the billions or maybe trillions these guys ripped out of our pockets. What this really is, when you think about it, is a suicidal attack on the financial system itself. The financial system functions on trust. If we come to believe the game is rigged, we might as well just rename ourselves New Zimbabwe. So far, Barclay’s is the only bank implicated, but that’s because they’re cooperating (sorta). This will spread and spread until banks across the world are engulfed.

Now, returning to the head rolling: I’ve frankly lost patience with these fuckers in the banking industry. When they make me agree with an op-ed by Robert “The Littlest Communist on Slate” Reich, they’ve gone too far. Rolling out the heads of a few mid-level executive is simply not going to cut it this time. Entire boards need to be fired. People need to be jailed. This business of shrugging shoulders and offering a few ritual sacrifices is insufficient for this crisis.

Let’s be clear: we don’t need some new huge slate of regulations and capital restrictions. Stephen Baindbridge points out how often these crises result in bad laws that hurt the economy and do nothing to prevent further scandals. No, what we need to do is enforce the laws we have to the fullest extent. What these guys did was fraudulent. We’ve had laws against that for centuries.

FHA Is Next

Oh, come on. Admit it. You’re not surprised:

Concerns are rising that the Federal Housing Administration could run out money if the economy doesn’t recover soon, raising the risk the agency would seek a taxpayer bailout for the first time in its 77-year history.

Since the mortgage crisis erupted five years ago, the FHA has played a critical role in housing finance as private lenders retreated. It backs about a third of all new mortgages originated for home purchases, up from around 5% in 2006.

But, as the FHA prepares to release its annual financial report next week, a forthcoming study by Joseph Gyourko, a real estate and finance professor at the University of Pennsylvania’s Wharton School, estimates that the FHA faces around $50 billion in losses in the coming years.

The FHA could potentially push these loses back to the originators of the loans. And frankly, I wouldn’t mind if they did, since the banks have so far suffered little in the way or moral hazard. But this was as predictable as it was inevitable. When the housing industry collapsed, FHA stepped in to try keep the loans flowing. They massively expanded their portfolio and everyone who wasn’t a media idiot knew thy were taking on too much.

We may have no choice about bailing them out but we should do what we should have done with Fannie and Freddie: use it as an excuse to ditch the agency.

The Law of Intended Consequences

Who could possibly have foreseen this?

Bank of America will become the first major bank to charge customers across the country a monthly fee to shop with their debit cards, part of a wave of changes that are eroding the low-cost model of banking that consumers have long enjoyed.

The $5 fee will debut next year for the bank’s basic checking accounts. It will apply only to debit card purchases and not to ATM withdrawals, online bill pay or mobile phone transfers. A spokeswoman said the bank is “adjusting our pricing to reflect today’s economics.”

The move is just one of the ways banks are overhauling consumers’ accounts in the wake of the financial crisis, which resulted in a regulatory overhaul for the banking system and a fundamental shift in the industry business model. Rather than charge the riskiest consumers the heftiest fees, banks are now spreading their costs more evenly among their customers.

“Spreading their costs more evenly among their customers”. We knew Obama was going to “spread the wealth around” with government. But who knew he’d make the banks do it too?

What’s going on here is that the Dodd-Frank had a provision inserted by Dick Durbin (D-Best Buy) that cut debit swipe fees from 44 to 24 cents. This shifted several billion dollars from evil banks to wonderful retailers. So the banks are pushing the costs back on us.

Well, you never know what’s going to happen when … actually we fucking did know. I said it. So did everyone else who wasn’t completely in the pocket of retailer lobbyists. But the glorious Democratic Party, defender of the little guy, made sure that retailers got a break on swipe fees at the expense of bank customers.