Monday, November 05, 2007

The Banks Misguided Fee Adventure (

Citigroup Inc.®* deflected its attention from prudent financial management and instead became greedy.

This Reuter's
picture of CitiGroup's leaving Charles Prince is "price-less."

Anatomy of Greed

Look back at the bank sponsored bankruptcy reform law of 2005; it made clearing consumer debt much harder. Fewer people were able to file for Chapter 7 protection, which was aimed to add further stability and protections for the financial institutions. Or, was it just a another sweetheart deal from Washington to its hefty campaign contributors and lobbyists? It helped the credit card industry and handed them billions of dollars while debtors had to pay back these "loans." The "Bankruptcy Abuse Prevention and Consumer Protection Act" was little more than a payoff to the banks. Read more.

While the credit card associations and its member banks were cheering, they lost sight of a much bigger storm - sub prime loans that enabled people earning just $40,000 annually to "buy" $800,000 homes and others to with few assets to flip homes. They became little more than renters who were teased with low or no upfront down payments and no income verification requirements.
Once the intoxicating, phony interest-only mortgages turned into a devilish nightmare, the banks lost billions. It just cost Charles Prince, Citigroup's CEO his job. But, it already ruined millions of dreams and destroyed lives, except for the few with titanium "golden parachutes." Click here for Reuter's update.

Reuters is
reporting that "Citigroup may write off $11 billion of sub prime mortgage losses, on top of a $6.5 billion write-down last quarter." Even MasterCard, had set aside $650,000,000 to help cover its legal liabilities.
Where is the leadership? Where is the ethics? Rather than covering these huge losses, the inexpensive solution was to not to be greedy in the first place.
The new must-read manual for the banking executives are a new edition topic of: The Idiots Guide To Common Sense, and especially The Idiots Guide To Understanding the Sherman Antitrust Act.

Barron's has a feature profile (Nov 4) on MasterCard® that explains more, including what it asserts is the card association's "low balling earnings indications."

Today, the thousands of banks, which control[ed] MasterCard and own Visa® were thought to have more greed than even the oil companies. The "Bankruptcy Abuse Protection" scheme was wrought with one-sided greed. Now, the mortgage collapse faces similar greed. Both cost billions to address and the newest round, the ongoing misguided fee adventure with anti-competitive merchant interchange rates can become the banks' newest way to squander billions more.

Interchange fees are no longer cost-based - only about 13% of interchange fee costs are used to cover its transaction costs. Along with Visa and MasterCard, the banks too are being accused by us and members of the class action of market power to illegally fix prices. With all their other leaking dikes, a new round of billion-dollar floods is unpreventable and they could again turn to wield their unbridled greed by raiding their interchange cash cow, raising rates and causing more hardship.

The banks rich piggy bank are interchange fees - a $40 billion annual hidden tax on the economy. They schemed in their misadventure to dump their legal liabilities by selling off part of MasterCard on the public. Now a much larger IPO is on the horizon to do the same with Visa. Washington and our economy should take notice. Like with MasterCard, Visa is warning that they too could face insolvency if our litigation is successful.

With the loss of leadership jobs at Merill Lynch and Citigroup and many newly homeless customers in defaults and billions in existing fiscal mismanagement, we urge our readers to prepare for the next economic bail out. This time, it is not about mismanagement, but monumental greed. The new looming concern are those corporate chieftains who are looking more Al Capone-like as a modern day "untouchable" symbol of the collapse of law and order. But, don't look for the banks to be robbing themselves to cover their misadventures; interchange fees are their hedge that we must all be very worried about.
*[Citi is is a named defendant in our merchant antitrust litigation]
Background Links

"Visa's IPO Use of Proceeds Plan and Interchange Overview (commentary,

Consolidated Amendment to Class Action Complaint (

Letter to Judge John Gleeson, Re Challenge to MasterCard's Stock Reclassification (