Frank Incensed

I've sort of been on the fence for a while about the Durbin Amendment (the provision of Dodd-Frank that restricts debit card interchange fees), but let me be frank.

"Hi Frank," says Virginia.

No, no, no, I don't mean that Frank. I mean the other one, with the little "f."

This past week, the Electronic Payments Coalition issued a study concluding that retail merchants haven't lived up to their "promise" to lower prices in response to lower debit card interchange fees. The study, which actually proved nothing at all -- oops, I'm getting ahead of myself, touted itself as settling the issue once and for all.

Its pretty charts, tables and puffball rhetoric almost pushed me off the fence. I don't like lobbyists and arguments that treat me like an idiot.

Let me summarize the "study." The "researchers" looked at the prices of several "baskets" of goods sold by 21 stores of four giant retailers -- Wal-Mart, Walgreens, Seven-Eleven and Home Depot -- located in five big cities -- Boston, Little Rock, Atlanta, Portland and San Francisco. The baskets included a subset of these items: Cheerios, a hammer, batteries, milk, eggs, bread, sugar, peanut butter, Coke 2L, duct tape, Slurpees, Mac&Cheese, Bud Light, paint and frozen burritos. The Coalition shopped these baskets the last week of September and then the first week of December. The conclusion? That these retailers, rather than lowering prices, raised their prices an average of 1.7% in the 2 months following the implementation of Federal Reserve Regulation II, which implemented the Durbin Amendment on October 1, 2011.

If my alarm clock rings every morning, does it cause the sun to "rise"?

"That's not fair," says Virginia.

All right. Here are some initial questions for the Coalition:

1. Over time, do prices tend to rise?
2. Could the prices have risen higher but for Regulation II?
3. Was anything else in the baskets you aren't mentioning?
4. Did you consider asking the retailers for their complete inventory pricing?
5. Did wholesale prices (that is, the prices paid for the baskets by the retailers) change between September and December?
6. What happened a year ago between September and December, or six months ago, between March and June?
7. Why didn't you have an impartial third party conduct the study? (The Coalition consists of banks, credit unions and payment services who have been opposing the Durbin Amendment since it was proposed).
8. Is 2 months a sufficient time period?
9. Would you supply brand names and product details so we can replicate your results?
10. What about retailers in my town?

"Stop," says Virginia. "I want to see the retailers' study."

Oh no, I hope not, but I suppose that's bound to come out soon. Let's see, what would they look at? Wheaties, nails, solar panels, Pepsi, Heineken...

"Minimum balances for 'free checking,' more likely," says Virginia, "debit card replacement fees, fees people don't notice."

Good point. Na-na-na-boo-boo.

The Truth Makes Free -- Not Today?

We live in a time of premature verdicts delivered by sponsored sound bites. Dodd-Frank is a failure, pundits cry, with burgeoning regulations driving small banks out of business, making “too big to fail” as certain as death.

To the contrary, the Secretary of the U.S. Treasury Department touts Dodd-Frank as the builder of a pro-growth, pro-investment financial system. Deputy Assistant Secretary Wolin attempts to dispel the “myth” that Dodd-Frank hurts small banks by saying that it helps to level the playing field between large banks and small ones and holds big banks to much stiffer standards than small ones.

So what’s the truth? Will Dodd-Frank spell the death knell for community banks? Is Dodd-Frank swamping banks with regulations, creating job security for compliance officers and attorneys? According to the General Accounting Office in November 2011, “little is known about the actual impact of the final Dodd-Frank rules, given the short amount of time the rules have been in effect.”

Several major criticisms of Dodd-Frank ring true. First, Dodd-Frank did not reinstate Glass-Steagall, the depression era legislation that separated commercial from investment banks, repealed during the Clinton presidency. Second, Dodd-Frank does not explicitly attack the credit default swap exposure that brought down AIG and now poses unclear risk regarding U.S. bank exposure to European sovereign debt.

Most important, if one were to assume that the Dodd-Frank provisions were designed to prevent another financial crisis on the order of the 2008 debacle, a year and a half has passed and most of the legislation remains unimplemented.

Well, say the doubters, banks still aren’t lending, sitting on their cash, all because of Dodd-Frank. That’s easy to say, but what in Dodd-Frank has caused this? Perhaps the specter of Dodd-Frank regulations (such as proposed ability to repay regulations), not yet adopted. More likely, concern about the loosey-goosey practices that led to the crisis and the resulting closer scrutiny of bank examiners, not Dodd-Frank. Even if Dodd-Frank hadn’t come to be, we’d most likely be working through the subprime fallout and banks would be reluctant to lend.

I’m not about to brag on Dodd-Frank. My biggest beef with the bill is its multitude of provisions that will, if they haven’t already, affect institutions that had nothing to do with the financial crisis Dodd-Frank was enacted to prevent. Most lenders did not make NINJA (no income, no job, and no assets) loans. It isn’t fair to treat them all as if they did. Dodd-Frank should have an exemption for the good guys. How to word the exemption and keep it constitutional is something I don’t know much about.

“When you do, let us know, will you?” says Virginia.

Yeah, sure.

"And, by the way, have you bought a Ninja blender yet?" she tosses in.

What?

Frost-Free Morning

Frost is free. It comes with no conditions, no fees. Kind of like toasters and certificates of deposit, we as consumers don't have any choice. Actually, with toasters and certificates of deposit, we have a choice -- take it or leave it. With frost, all we can do is take it (or leave it by remaining inside, I suppose).

"I think you're stretching this from nothing," says Virginia.

No, I think I need to tell you where I'm coming from, though. As some of you know, I've been reading a lot of articles about the Dodd-Frank Act (a/k/a financial reform or the banking bill), payday lending, and other sources of loans for folks who don't have accounts with banks (i.e., "poor" folks). Many of the authors talk about "free checking," except they don't seem to know that "free checking" has a specific meaning in the banking industry. If an account requires a minimum balance or imposes a per transaction fee, it isn't "free checking." The Truth in Savings Act and Federal Regulation DD make that very clear. The authors' misuse of the term "free checking" doesn't much matter, except it points out to those in the know that they aren't in the know.

"You're definitely stretching this from nothing," says Virginia.

All right. I give. Here's what I really had in mind for this posting, another garden tour.

Chinese Cabbage

Rouge D'Hiver Lettuce (I think)

Butterhead Lettuce

Beets

Doyle's Thornless Blackberry

Carrots

Parsnips

Rosemary

Frost has got to be among the best things that are free.

Put Your Money Where Your Mouth Is -- LocalMore

Are you upset about big financial institutions and their failure to show any remorse for the way they've been behaving, after taking us to the brink of financial disaster, getting the country to bail them out, then resuming giant salaries and bonuses, messing up mortgage servicing, ignoring the Servicemembers' Civil Relief Act, while watching the unemployment rate rise?

And now, Bank of America, again perched on a cliff -- with what some analysts say includes $200 billion of bad mortgage loans it may need to write off -- announces a $5 monthly fee for debit cards, blaming the "need" to impose the fee on the financial reform bill (Dodd-Frank), the very same bill whose unimplemented provisions were supposed to come down hard on too-big-to-fail institutions.

If you're out there complaining about the big banks, get with the program. Bring your money home, to local financial institutions. Go LocalMore! First, Localvore, now LocalMore! They're FDIC-insured, too, and they're not too-big-to-fail. Retire your Bank of America debit and credit cards. You've got plenty of other options. Bring CEO Moynihan to his knees, like NetFlix chairman Hastings after 1,000,000 customers quit, who had the good sense to admit: "I slid into arrogance based upon past success."

For more, check out my February 10, 2010 blog posting: "Keep $$ Local." You can find it easily by clicking on "Banking" among the list of topics on the right side of this blog.

"Enough, enough," gasps Virginia, still struggling. Her attention span is very short these days.

A Tit for a Tat?

You've probably heard or read that S&P downgraded U.S. debt from AAA to AA+.  AAA supposedly means the obligor has "extremely strong" capacity to meet its financial commitments, while AA+ means the obligor has "very strong" capacity to meet its financial commitments, differing from AAA only a tad.  I understand that earlier this year, four companies were rated AAA:  Exxon/Mobil (XOM), Automatic Data Processing (ADP), Johnson & Johnson (JNJ) and Microsoft (MSFT).  For more on S&P ratings, see http://www2.standardandpoors.com/spf/pdf/fixedincome/Ratings_Definitions.pdf.

To add a little perspective, I understand that yesterday S&P rated Ireland's debt as investment grade (AAA, AA, A or BBB), giving it a BBB+, a few notches above junk. Meanwhile, Moody's rates Ireland as junk -- Ba1.  S&P rates Greece as CCC -- very bad junk indeed.

But what exactly is S&P saying about the U.S.? The U.S., unlike Exxon or Microsoft, can print dollars to repay its debt. Does S&P think the U.S. Mint is about to explode?

"It sounds like a case of the pot calling the kettle black," says Virginia.

She's right. If I'm not mistaken, S&P was one of the credit rating agencies that rated subprime mortgage-backed securities as investment grade -- and remember what happened just three years ago! Some people place some of the blame for our current financial crisis on agencies such as S&P. Presumably the credit rating agencies have changed their practices since then.

Or maybe it's all politics. I don't know about you, but I'm finding it pretty hard to distinguish fact from fiction, honesty from dishonesty. If S&P were a child, I might suggest its latest downgrade is a little tantrum, thrown at the government that, in the Dodd-Frank Wall Street Reform and Consumer Protection Act, included a subtitle aimed at credit rating agencies, now called "nationally recognized statistical rating organizations" (NRSROs). That subtitle -- Subtitle C of Title IX (Title IX being the Investor Protection and Securities Reform Act of 2010) -- comes down very hard on the credit rating agencies that granted inaccurate or misleading AAA ratings to securities backed by subprime mortgage loans. Among other things, it empowers the SEC to regulate NRSROs and requires all government agencies to reduce reliance on credit ratings by removing references to credit rating agencies and NRSROs from their regulations.

"Slap me, I'll slap you back," says Virginia.