A Year After Durbin, Swipe Fee Battles Still Rage

Sunday, Oct. 1, marks the one-year anniversary of the Durbin Amendment, which capped the swipe fees that banks and card networks  such as Visa and MasterCard could charge merchants to process debit-card transactions. The amendment set off a fierce lobbying battle between retailers and banks; efforts to repeal the law failed last year.

If you thought the fight was over, think again. A year later, the battle over how much banks can charge to process transactions is still raging.

The Durbin Amendment, named after the Democratic senator from Illinois, would at first glance seem a clear victory for merchants. After all, the Federal Reserve capped the average fee at 21? per swipe, less than half what banks had been charging. While retailers are happy with the victory, they have insisted they are due more. “We’re halfway there,” says Mallory Duncan, general council for the National Retail Federation. Last year NRF and other merchants sued the Federal Reserve in U.S. district court, saying that the Federal Reserve itself had found that banks spend only 4? processing each transaction and had initially proposed a 12? cap. The case is still working its way though court.

Trish Wexler, a spokeswoman for the Electronic Payments Coalition, which represents banks and payment networks, says the Durbin caps are already too low and should not go lower. “From our perspective, the retailers got this legislation by promising consumers will save all this money,” she says. “To date, they are still not passing along savings.” Wexler says any idea that retailers are using the savings to offset potential price increases, as Moody’s (MCO) has suggested, “sounds like a convenient excuse.”

This legal battle is just for processing debit-card transactions. Things have also heated up with credit cards, which cost retailers far more. In July, Visa (V), MasterCard (MA), and a number of major banks agreed to pay more than $6 billion in a proposed settlement over price-fixing claims brought by merchants in a case that started back in 2005.

Since July, many large merchant groups have disavowed the proposed settlement, one by one. First convenience store owners, then large retailers, and finally, on Sept. 24, the National Restaurant Association joined the groups vowing to object to the settlement in court. The merchants say the settlement doesn’t change the market structure and still allows card networks to set prices. They also object to portions of the settlement that limit future legal challenges to the networks, even by merchants who don’t yet exist. “Our members are incredulous,” Duncan says. “It would be better if we went to trial and lost,” he says, because merchants would then be able to challenge the networks on different grounds.

Wexler says the merchants are merely rehashing old concerns. “They are acting like this is new information,” she says. “If they had strength with the arguments, then clearly this would have been part of the agreement. What does that tell you?”

Both sides expect a January court ruling to determine whether the credit-card settlement will gain preliminary approval. Either way, the issue is not likely to be resolved at that time. There may be additional legal objections—not to mention the prospect that interested parties will turn again to Congress for help, as with the Durbin Amendment. Rinse. Repeat.

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Charities Still Love Wall Street Bankers

The master of ceremonies made a mistake as he named John Thain one of the year’s best dads, introducing him as the chief executive officer of Citigroup (C). “Vikram Pandit will be very unhappy,” Thain responded, accepting an award from the Father’s Day/Mother’s Day Council on June 14. “I’m actually the CEO of CIT (CIT), which is similar, but not quite the same.”

The confusion was understandable. Pandit was saluted by charities three times in June. And in the past two months more than a half dozen current and former bank chiefs have been honored in New York, including Bank of America’s (BAC) Brian Moynihan, JPMorgan Chase’s (JPM) Jamie Dimon, and Morgan Stanley’s (MS) James Gorman. On May 1, a day of international protests against Wall Street, Goldman Sachs Group (GS) President Gary Cohn accepted an award for the firm from Friends of the High Line, which supports the park on Manhattan’s West Side. Hen-of-the-woods mushrooms and slow-braised short ribs were served. Cohn said Goldman Sachs and its employees have given more than $6 million to the park. “Look, the whole idea of these things is to raise money for the charity,” said Thain in an interview after accepting his Father of the Year award. “The demonization of Wall Street and bankers is very much a function of the press and of Washington, and not much more broadly held.”

Nonprofits often honor bankers because of their donations, says Naomi Levine, executive director of New York University’s George H. Heyman Jr. Center for Philanthropy and Fundraising. “Does this make me happy? No, it doesn’t. I look at what some of the banks and other insurance companies have done to the American economy and I’m not comfortable with it,” she says. “You try to balance your criticism of some of the things that Wall Street has done with the need.”

Pandit was the most frequently feted of the bank CEOs. A trio of June salutes began with Chaka Khan singing I’m Every Woman and Lionel Richie performing Three Times a Lady at a gala for Harlem’s Apollo Theater. Pandit got a corporate award in recognition of the company’s support—$1.6 million to the Apollo Theater Foundation since 2002, according to Elizabeth Fogarty, a bank spokeswoman. Former Citigroup Chairman Richard Parsons heads the foundation’s board.

A 22-piece Latin band and the singer Josh Groban performed when Pandit was honored on June 7 by Boys & Girls Harbor, which runs a music conservatory and school programs in Harlem. The bank and its foundation have given more than $500,000 to the group since 1972, Fogarty says. She says the lender has given the same amount since 2005 to the Museum of the City of New York, which presented Pandit with a leadership award at a June 18 black-tie dinner, where guests had a private viewing of an exhibition on the history of New York banking. Citigroup is sponsoring the show to mark the firm’s 200th anniversary, according to a press release.

“Citi has had a long and fulfilling relationship with these institutions, and it is especially meaningful to be honored during our 200th anniversary,” Pandit said in an e-mail. Citigroup shareholders rejected Pandit’s $15 million pay package for 2011 in a nonbinding vote in April. The company’s stock has plunged more than 90 percent since he became CEO in December 2007.

Dimon was named executive of the year by the University of Rochester’s Simon Graduate School of Business at its May 3 conference, “Economic Action and the Management of Risk.” The honor is given to a leader who “demonstrates a deep respect for our nation’s fiscal health,” according to the school’s website. A week later, Dimon disclosed a $2 billion trading loss in a division that helps manage the firm’s risk. “The developments don’t change our fundamental assessment,” Mark Zupan, the school’s dean, said in an e-mail. “If anything, the manner in which Mr. Dimon has handled the adversity only has increased our esteem for him.” The award wasn’t given because of donations, Zupan said.

Dimon was celebrated again on May 24 at the Salute to Freedom gala, an annual fundraising dinner for New York’s Intrepid Sea, Air, and Space Museum held on the hangar deck of the landmarked aircraft carrier. “To all the active military members and veterans in the room: I’d go into the foxhole with any of you, and I hope I wouldn’t let you down,” Dimon said, according to a transcript of his remarks. Last year the bank agreed to pay $56 million to settle claims that it overcharged soldiers on their mortgages and improperly seized the homes of active-duty military personnel. Dimon said then that he and the bank “deeply apologize.”

Morgan Stanley’s Gorman and Bank of America’s Moynihan were lauded the same day Dimon was named best executive. Wearing a tuxedo on the roof of the St. Regis Hotel, Gorman received an award from International House, a New York residence for graduate students. Moynihan was honored by the American Ireland Fund in a Lincoln Center tent.

At the Father of the Year awards at the Sheraton New York Hotel, host Mark Shriver apologized for bungling his introduction of Thain, who has been CEO of CIT Group since February 2010. “I thought it was a misspelling,” said Shriver, senior vice president of nonprofit Save the Children. “It said CIT—I’m like, this has got to be Citi.” As CEO of Merrill Lynch, Thain arranged its 2008 sale to Bank of America and left after Merrill’s $15 billion loss forced the combined firm to seek more government support. After the event, he said the importance of raising money for charity overshadows potentially awkward conversations about business. “I don’t really mind people asking me questions,” he said. “Whatever happened in 2008, 2009, there’s lots and lots of misinformation, and things that are just wrong, but I’ve never minded talking about it.”

The bottom line: Charities have honored more than a half-dozen current and former high-ranking Wall Street banking executives since May 1.

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Regulators Still Trying to Understand JPMorgan's Trading Flub

Just how did regulators miss the $2 billion trading loss at JPMorgan Chase (JPM)? And how can they prevent similar losses in the future? Those were the big questions Tuesday at a House Financial Services Committee hearing.

That five panelists were called on to testify shows the web of regulators that keep an eye on banks like JPMorgan. The Office of the Comptroller of the Currency oversees national banks, while the Commodity Futures Trading Commission regulates the type of derivatives trades that caused the bank’s loss. The Federal Deposit Insurance Corporation insures customer accounts in the event of bank failures, while the Federal Reserve Board of Governors keeps an eye on risks across the banking system. Then the Securities and Exchange Commission watches disclosures that banks make to their shareholders.

Responding to a grilling, the five regulators’ defense boiled down to three main points.

We didn’t get good info from the bank. Regulators said they needed better and more detailed information to spot how JPMorgan was taking on risk. Thomas Curry, the comptroller of the currency, said, “In hindsight, if the reporting were more robust or granular, we believe we may have had an inkling of the size and potential complexity and risk of the position.” Scott Alvarez, general counsel for the Federal Reserve Board of Governors, said that since JPMorgan’s own internal reports didn’t fully capture the risk, the regulators were limited. “We have to rely on information that we get from them,” he said.

We’re looking into it now. Curry, the primary regulator over JPMorgan, says the OCC is working now to examine what actually happened with the soured trade and is monitoring the “derisking” as JPMorgan unwinds its position. He also said the OCC is checking on its own procedures to see why it didn’t spot the trade in its ongoing examination of the bank. SEC Chairman Mary Schapiro said that her agency is looking into whether JPMorgan accurately reported changes to the model it used to measure risk in its first-quarter earnings. She said if those disclosures were insufficient, JPMorgan could face penalties. 

We won’t miss it next time. Schapiro and Gensler both say that pending changes as part of Dodd-Frank financial reform will help regulators spot problems in the future. While much attention has been giving to whether the Volcker Rule would have prevented JPMorgan from making these trades, regulators pointed to lesser-known parts of Dodd-Frank with wonky names like “722(d)” and “Title VII regulatory regime” that are bringing more transparency to derivatives markets. For example, Gensler says that the CFTC will be able shrink what he called “the London loophole” in its interpretation of the 722(d) provision that gives U.S. regulators some oversight of overseas trades.

The regulators hope that when financial reform is finally implemented, they’ll have more data and powers at their disposal — so that next time, they won’t be a step behind.

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Oil Drops, But the Energy Market Is Still Wacky

Oil prices got another push lower this week as talks with Iran over its nuclear program appear to be progressing. For the first time in five years, it looks like the International Atomic Energy Agency will have access to the country’s Parchin military complex, easing concerns about an eventual Iranian supply disruption.

Five months ago the market was terrified about the possibility of war with Iran and the effect this would have on the world’s oil supply. Just to be sure they were ahead of the curve, oil speculators piled into futures contracts like crazy, pricing at the equivalent of a nine-month Iranian supply disruption by early March. Now that the threat seems to be dissipating (and Europe is deteriorating again, further depressing demand), speculators are rushing for the exits, liquidating their net long positions by more than half since peaking in March. So in the span of eight months, largely because of threats that never materialized, the price of oil jumped more than 30 percent, only to fall about 16 percent. Isn’t that a bit like the boy who cried wolf? Or Chicken Little? Probably, but that’s the nature of the futures market. Better to discover the price early than late, or so they say.

As threats over Iran have waned, and the euro crisis has picked up steam, the oil market has refocused on actual supply-demand fundamentals—which don’t come close to supporting oil at its current price. “If you remove the speculators, supply and demand fundamentals support oil prices at barely $80,” says Fadel Gheit, an oil and gas analyst at Oppenheimer (OPY). On Wednesday the price of West Texas Intermediate oil, the benchmark for North American crude, fell to less than $90 for the first time since November, as U.S. oil supplies rose to a 22-year high. WTI has largely been immune from international chaos, which has been more reflected in the price of Brent crude, the international benchmark oil contract. Brent has shed nearly $15 this month and closed just above $107 on Wednesday.

But here’s where it really gets weird. From a pure science perspective, there’s still a total disconnect between the price of oil and the price of natural gas. A barrel of oil contains about 6 million BTUs of energy; 1,000 cubic feet of natural gas contain about 1 million BTUs. That means on a pure unit of energy measurement, a barrel of oil should be about 6 times more expensive than 1,000 cubic feet of natural gas, a 6 to 1 price ratio. So if natural gas is trading at $2.72 per million BTUs, which it is, then a barrel of oil should be about $16.

Of course, that’s a reflection of perfect parity and doesn’t take into consideration such things as transportation and extraction costs. Or supply and demand, for that matter. The world doesn’t function in a vacuum. But if you go back over the past 20 years, that price ratio stayed mostly consistent, hovering around 10 to 1 from the early 1990s until about 2009. During the past two years, though, as the price of oil has risen and natural gas has tanked, the ratio has spiked, peaking to almost 50 to 1 this spring.

“It’s a very quirky situation,” says Gheit. “It’s like having a hailstorm when the sun is shining. You cannot model it or make a bet on it. It’s completely unpredictable.”

That ratio has gone off kilter for several reasons. For one, natural gas supplies have far outpaced our ability to use the stuff. The U.S. is still in the early stages of retooling its economy around natural gas. Also, the warm winter cut way down on demand for natural gas, which has pushed supplies up and prices down. At the same time, oil rebounded steadily from its lows in early 2009 as global demand ramped up (the world was coming out of recession) and as chaos in the Middle East fueled fears of supply shortages.

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Debit Overdraft Fees Still Confound Consumers, Survey Finds

Two years ago, regulators imposed new rules to curb the fees banks charge consumers for covering overdrafts on debit cards. That was the idea, at least, but it hasn’t quite worked out as planned. A survey of more than 6,000 people from the Pew Center on the States found that consumers are still hit by fees that can be as high as $35 a pop. Pew found that nearly one in five people incurred an overdraft fee last year, nearly all of whom said they overdrew their account by mistake.

Those fees add up to big business for banks—an estimated $16 billion in ATM and debit card overdraft fees last year, just a 16 percent drop from the peak in 2009, according to Moebs Services, a banking consultancy in suburban Chicago.

The Federal Reserve’s reforms required banks to charge fees only to customers who “opted-in” to the overdraft programs. They launched aggressive—and at times alarmist—marketing campaigns telling consumers that if they didn’t sign up, their card might be rejected when they most need it. The Pew study shows that consumers didn’t understand what they were signing up for. Now more than half of overdrafters didn’t recall signing up for the coverage at all, and a third said they didn’t know their bank had an overdraft program until they were charged a fee.

Banks often say that consumers want to be able to overdraft their accounts in a pinch, but the Pew study found that three-quarters of overdrafters would rather have their transactions denied than processed and charged a fee for the service. The costs particularly hit the young and poor. Pew found that people under 44 are twice as likely to incur overdraft fees than older folks. Consumers who make less than $30,000 a year are also twice as likely to have the fees.

That consumers are confused fits with findings of an earlier survey by the Center for Responsible Lending. That study found: “Sixty percent of consumers who chose overdraft protection did so in part to avoid penalties if their debit cards were denied, even though such fees don’t exist. Similarly, two-thirds said they signed up to sidestep charges for bounced checks, which actually are covered under different programs.”

In February, the Consumer Financial Protection Bureau announced plans to look into overdraft fees, and in particular how banks marketed the programs to customers. They’ll try to see if the reforms went far enough.

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