Obama Weekly Address on Financial Regulation

In case you missed Obama's address this past weekend on financial regulation, here it is:

No more taxpayer bailouts because a financial company is too big to fail was one of the key messages. Can this really happen? I am skeptical, but I guess we'll have to wait and see what the politicians agree to. Obama is correct in his assertion that something has to change in order to prevent the same crisis from reoccurring. Apparently, there will be much more coming on this issue in the near term.

- JSM

Federal Reserve Consumer Information on Overdrafts

With its new focus on being consumer-friendly, the Federal Reserve has published a circular on what consumers need to know about the new debit card overdraft rules. Remember, as of August 15th, banks cannot include customers in their overdraft services for ATM/Debit card transactions without their opting-in. The rules apply to new accounts opened beginning July 1. The Fed has even provided a copy of the standard form disclosure that it approved for banks to use, so that consumers can (hopefully) recognize the form when they get it in the mail (see Form). With an emphasis on consumer "choice" and education, it is good to see the Fed getting the word out.

Will consumers understand what this is all about? I suspect so. Just this last week, our 20 year old baby-sitter commented that she wished her bank, Chase, would follow Bank of America and give up on overdraft fees (See Hooray for Bank America). Apparently the word has gotten out positively for BOA. She'd been hit $35 on a debit card overdraft of less than $5. Expensive lesson, yes, but just one example where the new rules will help. Better to be denied at the counter, rather than get the hefty fee. I told her not to worry, the new rules are coming soon.

- JSM

Hooray for Bank of America's New Overdraft Rules?

Is the end of the $39 cup of coffee in sight (See How Your $4 Cup of Coffee Can Cost You)? Today, Bank of America announced that it is doing away with debit card overdraft fees and will just decline consumer transactions that result in an overdraft on their debit card (See Bank of America to End Bank Overdraft Fees). Seems that is just what consumer groups have said for some time that banks should do, but that some banks claimed they couldn't technologically do. Bank of America is crediting itself with listening to consumer preferences on debit cards and their desire to help customers avoid unexpected fees. Bank of America has turned into the kinder, consumer friendly bank? Apparently, they are even notifying customers now when an ATM withdrawl will result in an overdraft (and a $35 fee), rather than just pushing the transaction through. But not to worry, Bank of America will continue to have overdraft coverage that most consumers want on their checks and routine account payments. Rather than trying to convince customers that they really want the $39 cup of coffee, Bank of America has apparently caved on this one. Good for them. Doing the right thing by customers (even if under pressure from the Federal Reserve) is a big step. Hopefully, this will set the tone for other large banks to follow suit. Apparently Citibank has stopped charging overdrafts on debit and ATM transactions.

For those banks not doing away with these fees, the Federal Reserve's new opt-in rules on debit cards are due to come into effect on July 1, 2010. The Federal Reserve’s Final Rules came down on the side of the consumer on many issues. Because the Truth-in-Lending Act applies to credit cards, but does not apply to debit cards, the Federal Reserve’s Final Rules are under the Electronic Funds Transfer Act (15 U.S.C. 1693 et seq.) (EFTA). The thrust of the Final Rules is primarily disclosure and consent based, rather than tackling some of the troublesome banking practices involved in the processing of overdrafts for enrolled customers and the amount banks charge for overdraft services. Specifically, the Final Rules ensure that:

(1) banks cannot enroll customers in overdraft services for ATM and one time debit card transactions without their consent (an opt-in);
(2) banks do not condition the payment of overdrafts on other items, such as checks and ACH transactions, on the customer opting-in for ATM and debit card services and cannot decline overdrafts on checks and ACH transactions for this reason;
(3) banks provide the same account terms, conditions and features to customers whether or not they opt-in; and
(4) the opt-in approach applies to existing and new accounts beginning July 1, 2010.

The Final Rules specifically declined proposals regarding the practice of debit card holds, suggesting instead that banks, networks, and merchants should address this problem.

With any luck, we'll see other large banks doing away with the debit and ATM overdrafts over the coming months. Seems easy enough just to deny the transaction at the counter. Not sure I'd say this, but good job Bank of America.

- JSM

FunnyorDie.com Presidential Reunion

In case you've not seen it, former Presidents Bush, Clinton, Bush, Ford, Carter and Reagan wake up President Obama in the middle of the night to urge him to pass the Consumer Financial Protection Agency (CFPA). One of the funniest parts is President Bush commenting that he had no idea that when he put the Iraq war on his credit card, he'd be paying 28%! Here it is:

- JSM

New Sales Survey Available!

I've just put the new Sales Survey up on SSRN. It will be out in the Business Lawyer sometime next summer. An excerpt regarding a a fun warranty case, Nigro v. Lee, 63 A.D.3d 1490 (N.Y.A.D. 3 Dept. 2009) about a car sold on Ebay:

Whether a seller’s statements made during negotiations or through advertising constitute an express warranty is a common point of contention between disgruntled buyers and their sellers. The Supreme Court, Appellate Division, of New York upheld summary judgment in favor of the defendant seller from Nevada who advertised a 1995 Mercedes Benz automobile on Ebay as “gorgeous” and with just minor blemishes, but sold the car “as is.” Upon arrival of the car to the buyer in New York, the buyer discovered the car had been damaged in an accident and had been painted, the upholstery was stained, the undercoating was worn out and parts were rusted, and that body work would cost $1,741.66. While the court recognized that any description of the goods could create an express warranty, the seller’s generalized expression was merely the seller's opinion of the car and constitutes “no more than ‘puffery,’ which should not have been relied upon as an inducement to purchase the vehicle,” particularly in light of the fact that this was a used car transaction. Moreover, the plaintiff could have discovered any deficiencies in the car by performing a routine inspection, which he did not do.

See U.C.C. 2-313.

- JSM

New Credit Card Rules Go Into Action

Happily, the CARD act provisions are in full effect now. So, what to look for on your statements? I think the disclosure about how long it will take you to pay off your credit card if you only pay the minimum is helpful, especially when coupled with how much you need to pay in order to pay off the debt in just three years. But, consumers must actually read the statements to get the disclosure . . .

CNN has a good piece on credit card reform (click here, as I could not embed it). With card companies increasing rates, there has been a greater proliferation of high rate cards. First Premier has a card for high risk customers that carries a 59.9% interest rate! Yikes! Interestingly, the National Credit Union Administration caps credit unions at 18% interest on credit union cards by law, but private card companies have no such similar limit (See LA Times, Seattle Times). Of course, its all about access to credit, according to the American Banker's Association. While I can understand access to credit and the need for people to build credit, 59.9% is over-the-top and at that rate perhaps some people should not be getting credit, as the cost is too high. Perhaps there is a role for the traditional usury statutes again.

Whose to blame for all this mess? Well, the Supreme Court had a part to play with its 1978 decision in Marquette vs. First Omaha Services making it legal under the National Bank Act for banks to locate in states without interest rate restrictions. Although the Court recognized that this would impair the effectiveness of state usury laws, the problem is "better addressed to the wisdom of Congress than to the judgment of this Court." Despite the passage of the CARD Act, Congress has not addressed the interest rate differential. Perhaps the increases in rates after the CARD Act might provide some impetus for changes to the extent banks overreach in their charging of customers.

- JSM

UCC Legislative Update

It has been a fairly quiet eight months on the UCC legislative front since my last update.

Revised Article 1

As of March 1, 2010, Revised Article 1 was in effect in thirty-seven states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Minnesota, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, and West Virginia.

State legislatures continue to grapple with the definition of "good faith," although the uniform § R1-201(b)(20) definition has the upper hand. Of the 37 enacting states, 26 have adopted the uniform definition, while 11 have retained the pre-revised definition that, in conjunction with § 2-103(1)(b), imposes a different good faith standard on merchants and non-merchants. Effective July 1, 2010, one of those eleven minority states (Indiana) will join the majority as SB 501, enacted in 2009 primarily for the purpose of amending Articles 3 and 4, also revises Ind. Code § 26-1-1-201(19) to require all parties to act honestly and to observe reasonable commercial standards of fair dealing. (At present, Indiana's Revised Article 1 requires only “honesty in fact.”) This change will take effect July 1, 2010, and further tip the balance among enacting states in favor of the unitary good faith definition in uniform R1-201(b)(20).

With many state legislatures occupied with more pressing issues of the moment, 2009 yielded only three new adoptions -- Alaska, Maine, and Oregon -- down from five in 2008, and seven in 2007. While a downward trend in new enactments eventually becomes inevitable once two-thirds of the states have signed on, 2009's three enactments were the fewest in a year since 2003 (when Idaho became the third state overall to enact Revised Article 1).

As of March 1, only two states -- Mississippi and Wisconsin -- appear to be serious candidates to enact Revised Article 1 in 2010.

Mississippi SB 2419, introduced and amended (to replace a choice-of-law provision that appeared to have derived from the original § R1-301 that all 37 enacting states have declined to adopt and the ALI and NCCUSL have disavowed with one that reflected the substitute § R1-301 the ALI and NCCUSL promulgated in 2008) in January, unanimously passed the Mississippi Senate on February 10. It is presently before the House Judiciary Committee.

Wisconsin AB 687, introduced on January 25 and amended on February 16 to replace the uniform R1-201(b)(20) "good faith" definition with the pre-revised 1-201(19) version, received the Assembly Committee on Financial Institutions's unanimous approval on February 26. It is presently before the Assembly Rules Committee.

Two other bills, Massachusetts HB 89 and Washington SB 5155, seem less likely to produce results.

Massachusetts HB 89, the fifth attempt to enact Revised Article 1 in the Commonwealth, was assigned to the Joint Committee on Economic Development and Emerging Technologies on January 20, 2009. No further action had been reported as of March 1, 2010.

Washington SB 5155, introduced on January 15, 2009, appeared to be drawn directly from the language of official Revised Article 1 circa 2001, including the original version of § R1-301. At an initial public hearing on January 23, 2009, all those testifying in support of and in opposition to the bill opposed the choice-of-law provision. The Washington Senate appears to have taken no further action except to "reintroduce and retain [the bill] in present status" on January 11, 2010.


Article 2 and 2A Amendments

As of March 1, 2010, only three state legislatures (Kansas, Nevada, and Oklahoma) have considered bills proposing to enact the 2003 amendments to UCC Articles 2 and 2A. The Kansas and Nevada bills died on the vine.

In 2005, Oklahoma amended Sections 2-105 and 2A-103 of its Commercial Code to add that the definition of “goods” for purposes of Articles 2 and 2A, respectively, “does not include information,” see 12A Okla. Stat. Ann. §§ 2-105(1) & 2A-103(1)(h) (West 2009), and amended its Section 2-106 to add that “contract for sale” for purposes of Article 2 “does not include a license of information,” see id. § 2-106(1). The net effect is similar to having enacted Amended §§ 2-103(k) & 2A-103(1)(n), both of which exclude information from the meaning of “goods” for purposes of Article 2 and 2A, respectively. Otherwise, no state has enacted any of the 2003 amendments.

While the list of states enacting any of the 2003 amendments may not change in the near future, the number of amendments Oklahoma enacts may. Introduced on February 1, 2010, Oklahoma HB 3104 proposes amendments to forty-nine sections of Article 2 and four sections of Article 2A. The bill includes neither the reformulation of Sections 2-206 and 2-207 nor the addition of Sections 2-313A and 2-313B included in the 2003 Article 2 amendments. Many of the amendments appear designed to facilitate electronic signatures and transactions and to accommodate the terminology surrounding them that grows out of UETA, E-SIGN, and Revised UCC Articles 1 and 7, or to otherwise align Article 2 and 2A terminology with that used in Revised Articles 1 and 7. That is not to say that HB 3104 proposes only cosmetic changes to Oklahoma's versions of Articles 2 and 2A. Several of the proposed amendments alter existing substantive rights, obligations, or remedies. Some of those alterations (e.g., raising the § 2-201 floor from $500 to $5,000) do not seem to be inherently controversial; some (e.g., granting/recognizing a right to cure after a justifiable revocation) may or may not be controversial depending on how courts have interpreted the current Article 2; and some (e.g., giving sellers the right to recover consequential damages) do seem inherently controversial. More on this if the bill progresses.


Article 3 and 4 Amendments

As of March 1, 2010, the 2002 amendments to Articles 3 and 4 were in effect in eight states: Arkansas, Kentucky, Minnesota, Nevada, New Mexico, Oklahoma (for a second time), South Carolina, and Texas. They will take effect in Indiana on July 1, 2010.

As of March 1, 2010, the only pending Articles 3 and 4 bill is Massachusetts HB 90, which has been languishing for more than a year.


Revised Article 7

As of March 1, 2010, Revised UCC Article 7 was in effect in thirty-six states: Alabama, Alaska, Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Hawaii, Idaho, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Maryland, Minnesota, Mississippi, Montana, Nebraska, Nevada, New Hampshire, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Dakota, Tennessee, Texas, Utah, Virginia, and West Virginia.

Additional bills are currently pending in Georgia, Massachusetts, Washington, and Wisconsin; but only the Wisconsin bill appears to be making any progress.

First introduced on February 18, 2009, Georgia HB 451 won unanimous approval in the Georgia House on March 12, and the Senate Judiciary Committee recommended passage on March 26. However, the legislature adjourned on April 3 without a third reading and final action in the senate. HB 451 was "recommitted" to the Georgia Senate on January 11, 2010. No further action has been reported.

Massachusetts HB 89, which also proposes adopting Revised Article 1, was assigned to the Joint Committee on Economic Development and Emerging Technologies on January 20, 2009. No further action has been reported.

Washington SB 5154 was introduced on January 15, 2009, scheduled for a public hearing on January 23, 2009, and then stalled, like its Revised Article 1 counterpart, but without as compelling a reason. It was "reintroduced and retained in present status" on January 11, 2010. No further action has been reported.

Wisconsin AB 688 was introduced on January 25, 2010. On February 22, the Assembly Committee on Jobs, the Economy and Small Business unanimously recommended passage. The bill is now before the Assembly Rules Committee.

ESPN on How to Create Markets

Humorous link on supply and demand. Though I must agree. Mike Greenberg is far more valuable than Kenny Mayne!

The Roller Coaster Ride of Bankruptcy

When this news story popped into my feeder today, I knew Google understands me. Roller Coasters, Fixtures, Bankruptcy, Creditor priority challenges... Its all there.

Six Flags Inc., currently in chapter 11 Bankruptcy, has decided to close its Louisville Park -- Kentucky Kingdom. The dispute relates to the ownership of certain rides in the park. The creditors are Six Flags America and the State of Kentucky. The state of Kentucky (in what appears to be a futile argument) alleges that the rides are affixed to the realty and therefore belong to the state of Kentucky. (The park leased the real property from the State of Kentucky for a term of years). The state also argues that the lease provides that if Six Flags terminates the lease with the state, the landlord will accede to the ownership of the rides.

Taking these issues separately, its clear that the lease agreement between Six Flags and the State of Kentucky establishes certain privileges to personalty on behalf of Six Flags (the tenant). Under the common law trade fixtures doctrine, a tenant has the right to remove those things he attaches to the realty in furtherance of his trade. (I believe its pretty clear that amusement rides would be in furtherance of Six Flag's trade). The single caveat is if the fixtures cannot be removed without damage to the realty. Thus, the rides are not treated as realty, but rather as personalty.

Taking the state's argument that a provision in the lease grants it an interest in the rides if Six Flags terminates its contract with the state, there seems to me to be a question of what type of interest the state obtains. First, in theory the state could obtain such a right, at least in as much as lessees may grant an interest in its property to its lessor. The question is what kind of transaction does this grant create. It seems that when a creditor (in this case a landlord) reduces its claim to a debtor's (in this case a tenant's) property, that is a security interest, and therefore must comply with the provisions of Article 9 -- the problematic point being if there is another creditor in the picture. The state may very well have a security interest, but may lose out in the priority scheme if other creditors have a claim.

If the state's position is that it has a state possessory lien on the tenant's possessions for failure to pay rentals (which does not appear to be the state's theory), the case may be more clear cut -- particularly given the preference for liens under Article 9-333.

Whichever it is, we will keep an eye on this case to see what the bankruptcy court does with the various roller coasters. If the Court needs (after a safety evaluation) a thrill description of the roller coasters in Kentucky Kingdom park, I would be happy to offer my services; though I suspect I would need to include at least four other theme parks in my assessment in order for my report to be complete.

Image is of the Chang Roller Coaster, Courtesy of Coaster Gallery. Chang's statistics are:

Built: 1997

Composition: Steel

Height: 154 Feet

Drop: 144 Feet

Top Speed: 63 mph

Ride Time: 2 Minutes, 30 seconds

MLR (Marc )

Odel Initiative on Consumer Protection Legislation

Professor David Oedel over at Mercer University Law School is heading up a legislative proposal that some of you might be interested in signing onto:

Dear Senators and Congresspersons,

As law professors concerned about encouraging the most thoughtful, effective and flexible forms of financial reregulation, we urge that federal law should permit states also to protect financial consumers. In other words, any new financial regulation emerging from Congress this year should include a provision that would allow states the freedom to protect financial consumers with state rules that are stricter than (but consistent with) the minimum consumer protection standards established by federal law. This basic model of state regulatory freedom to protect state interests in ways that do not conflict with federal law has worked well in a number of other arenas, such as in some areas of environmental protection and insurance. Our sense is that many recent financial troubles could have been averted had the states been freer to regulate on behalf of their consumers on the main streets of their states.

We do not propose to alter the current law of federal preemption as it relates to national systemic safety and soundness. Our proposal is only to free up state innovation on matters of consumer financial protection.

Thank you for your consideration.

If you are interested in being a part of this initiative, contact Dave at oedel_dg@law.mercer.edu with e-mail, including your name, title, and institution.

- JSM

The CISG and the Vis International Moot: Twin Ideas for Effective Lawyering in a Globalized World

This year marks the 17th anniversary of the Willem C. Vis International Commercial Arbitration Moot (The Moot.) The Moot takes place annually in the Spring in Vienna, Austria with participants from over 100 law schools hailing from civil and common law countries. The journey is not only a milestone for the student participants, but a bridge to international understanding through the rule of law. The Moot engages students in the art of effective advocacy, and conveys the important message that the adversarial process is not necessarily an arena for gladiators.

The stated goal of the Moot is "to foster the study of international commercial law and arbitration for the resolution of international business disputes through its application to a concrete problem of a client and to train law leaders of tomorrow in methods of alternative dispute resolution." (www.cisg.law.pace.edu/vis.html).

I was privileged to participate in the Ninth Moot in 2001-2002, while a student at the University of Pittsburgh School of Law. One year later, I served as coach to a group of students at the Meiji Gakuin University in Tokyo, Japan. Both events galvanized the premise that law schools in the United States need to engage students in this level of competition to enhance legal education. Specifically, participation in the Moot will bolster legal writing and advocacy skills. The message is being heard as each year, more law schools are discovering the Moot. Some law schools in the United States and Europe have incorporated the Moot into the curriculum. For example, Touro Law School and the University of Pittsburgh have collaborated with schools in Central and Eastern Europe to offer a summer program structured around the Moot. (www.law.pitt.edu/academics/cile/jdprogram/studyabroad).

In the area of advocacy, preparation for the Moot will be extremely beneficial, even to first year law students. In this critical area, the Moot provides students with skills in the art of persuasion. Not only do particpants learn to write persuasive arguments, but they develop, and hone the nuances of rhetoric on the international stage. The Moot is organized around a contractual problem, which asks students to analyze the articles of the United Nations Convention on the International Sale of Goods (CISG) (www.uncitral.org). As such, students are exposed to the work of the United Nations Commission on International Trade Law, and acquire the added bonus of exposure to comparative legal systems. Specifically, for U.S. law students comparing the rules of Article 2 of the UCC with the CISG is both challenging and exciting. As a result, participants in the Moot develop critical skills in international commercial law that even seasoned lawyers lack.

Moreover, the CISG is at the heart of the Moot. This treaty espouses the theory that economic rights are human rights. The treaty provides uniform rules governing certain aspects of the making and performance of everyday commercial contracts for the sale of goods. Article 7 of the CISG provides that "the adoption of uniform rules, which govern contracts for the international sale of goods should take into account the different social, economic and legal systems." The CISG was created to foster the development of international trade on the basis of equality and mutual benefit as an important element in promoting friendly relations among states. The CISG aims to promote international trade by removing legal barriers in international trade, and to unify the sales law of international trade.

Although the focus of the moot is commercial arbitration, the format of the Moot serves several pedagogical needs. Foremost among them is a focus on the representation of clients from diverse backgrounds and diverse legal systems. In this age of globalization and multiculturalism, the Moot provides ample opportunity for students' exposure to crucial interpersonal lawyering skills. Participation in the Moot exposes students to principles of fairness in international contracts, which will instill an awareness of multiculturalism and widen the lenses of their worldview. In addition, the Moot provides students with the opportunity for research and writing, oral adovacy and treaty interpretation.

Each year, the Moot problem focuses on issues of contract drafting, which helps students understand choice of law issues. In the practical context, students learn the importance of effective drafting. These issues allow students to grapple with civil and common law systems of procedure. Although the advocacy space is based primarily on arbitration principles, this forum provides participants with the rhetorical skills needed for effective advocacy, albeit in a non-confrontational and less adversarial manner. In addition, preparation for the Moot can bolster student confidence, and help prepare them for oral advocacy.

Finally, the tenets of multicultural lawyering form the bedrock of the CISG. As outlined in its preamble, the overarching goal of the CISG is to erase disparities in international trade. The CISG espouses the principles of effective lawyering through its emphasis on the use of simpler, clearer language in international contracts. According to Professor Harry Flechtner, the CISG seeks the "ommission of awesome relics through its push for a unified language in the drafting of international contracts." See John Honnold, Uniform Law for International Sales Under the 1980 United Nations Convention 30 (Harry Flechtner ed., 4th ed. 2009). This transformative capacity of the Vis Moot and the CISG to improve communication across cultures and transfer the rule of law around the globe will enhance the law school experience, and add value to the lawyering process for law students and practitioners.

Citibank's Promise of Free Checking

What does it mean to be free? When many of us open up a new checking account, it is with the intention of doing business with that bank for a period of time. After all, I've not got my online banking set up to send up bill payments. I've ordered printed checks for when I need them. I've got my debit card. It is a hassle to switch banks and have to redo all this. So, it is important that banks disclose account fees at the outset.

So might have believed customers over at Citibank who opened checking accounts advertised as free. Despite the free-hook, Citibank announced that it would begin imposing account fees on these same customers. Apparently about 1 million free accounts were included. The Truth In Savings Act requires banks to disclose account fees. So, free means free. Moreover, one might expect the free status to last for some time. Not surprisingly then, New York Attorney General Andrew Cuomo's office complained about the Citibank fee increase. Today, Citibank announced that free will remain free, putting aside overdraft and other fees, for the time being. (See Citibank to Keep Free Checking).

- JSM

Interchange Fees: the Silent Visa Tax

As we've seen the federal government tackle credit, debit and gift cards, new attention is gearing up toward card network interchange fees. Interchange fees are the cost of using debit and credit cards charged to merchants for use of the network (Visa, Mastercard, etc.). The fees are about $.75 for every $100 spent and more than if the consumer uses the a debit card and enters their pin number. The GAO's November 2009 report on Rising Interchange Fees found the fees are posing a problem for merchants as they comprise a larger amount of the revenue earned with some merchants complaining that the benefit of cards such as lower labor costs and increased sales are outstripped by the cost of the interchange fees. The fees are enough that some discount retailers, like Costco, don't accept credit cards, but will allow the debit card usage. Of course, retailers cannot possibly refuse to accept VISA cards, for instance, so the fees are here to stay. While the fees may be here to stay, I suspect that the size of the fees will cause them to come under regulatory supervision at some point in the not so distant future. That seems to be the common result when greed and overreaching get to a point that complaint is loud enough. With small business owners trying to keep their businesses afloat during a recession, it is easy to see why there is more compaint about the size of interchange fees.

The New York Times just did a nice video (and article) giving a pretty good overview of the tension between the networks, merchants and ultimately consumer interests.

Visit msnbc.com for breaking news, world news, and news about the economy

- JSM

The Politics of Bernanke's Reappointment

The Senate today confirmed Chairmen Bernanke's reappointment to a second term at the Federal Reserve by a vote of 70 to 30 (See Bernanke Confirmed). As concerns abounded about the extent of the Federal Reserve's independence, Senator Schummer commented: “If you don’t like monetary policy when the Fed does it just wait until the politicians get their hands on it.” Well said. Bloomberg did a nice (and short) piece about the politics of the reappointment and the need for the Federal Reserve Chariman to go visiting with the politicians to keep his job.

- JSM

Are Mobile Payments the Next Big Thing?

Forget all this business about credit cards (What You Need to Know About the CARD Act), debit cards (What the Fed's New Overdraft Rules Don't Do) and gift cards (Fed Targets Gift Cards). Here comes mobile payments! Mobile what? At least that is what I said to myself when Jim Chen sent me a link to a CBS article The Mobile Triple Threat (Jan. 22, 2010). Perhaps I've just been in denial that this was coming down the pipeline for real (or too busy complaining about the drawbacks of debit cards). Without knowning more, I found myself reacting "don't even think about doing this . . ." Well, perhaps that is a tad harsh. Merchants are serious about opening this door as handheld phones and readers have increasing amounts of applications for them. And, tighter credit and debit card rules couldn't hurt their motivation either, right?



The whole idea here is that the consumer could be in a store looking at merchandise and not only do research on the product using their mobile device, but also check inventory and make payment for the product (by a charge to their cell phone bill). Other possibilities include small credit card terminals that small merchants could plug into their own mobile device in order to run a customer's credit card (See, Twitter Co-Founder Tackles Mobile Payments). Pretty cool and technically beyond my expertise (See, Discover: Contactless Payment Sticker Users Inadvertently Crippling Performance). But . . . payments wise, this presents the same (and more) problems than consumers just paying at the register with their credit or debit cards. Surely, there are issues about how well the application transfers money and what to do about errors. One would hate to be walking through Best Buy with your phone in your pocket and accidentally purchase several televisions. Moreover, the risk of credit card data being misused or misappropriated is already a problem without the involvement of mobile devices. Poor reliability and speed follow along as potential pitfalls.

Apparently, Paypal, Google and Amazon already have mobile payments capability, so mobile payments appear to be upon us. Mobile payments companies are beginning to receive funding for their ventures, so this will be an area to watch develop (Mobile Payments Startup Boku Lands $25 million). Always a big question regarding payment methods is the cost associated with its use and disclosure to consumers. For me, it will be a while before I pay using my phone.

- JSM

The Big One!

Bless them boys, Who Dat! and Geaux Saints! As someone that spent most of my life in Louisiana, the Saint's getting to the Superbowl feels like an impossible dream that just came true. As someone who lived in New Orleans most of my adult life, who watched from afar after moving away from Louisiana the city that was the state's most visible symbol destroyed by the "big one," that no one thought would come seeing the Saints eligible to play in the "Big Game," that again, no one thought would come, seems surreal. In New Orleans before Katrina, the newscasts would advertise for hurricane preparedness, asking proverbally "what if the big one hit New Orleans." Well it did, and the city has never been the same. For many, the New Orleans Saints represented a break from the reality of mold covered homes and lost possessions -- a way to forget that the city they loved was now forever marked by the eye of a perfect storm, that destroyed lives, houses, and hopes. No symbol was more emblematic than the Superdome -- a building whose exterior mirrored the cities pain for so long.

Tonight's game was bigger than football. It seemed to confirm that the past is over. And maybe that's ok. In New Orleans, the past, before Katrina seemed ideal. It was the after-Katrina world that was so scary. But tonight's win in the same dome where people's lives in the city were forever changed, maybe offers a glimmer of hope. Perhaps the future can be better than the past was. The past was filled with inequality and political cronyism. Maybe that has not changed, but with every new day lies new hope. The Saint's showed that the future does not have to be worst than the past.

In reality, the last few minutes of the game seemed to encapsulate the Saint's and New Orleans' history. The Saint's offense seemed more like the aints' after the first half; the defense gave up first downs and big plays; and the season seemed like so many others of late -- lots of promise, but just short of the big one. And then, as if by divine intervention, the Big Ones came -- the biggest interception; the biggest forty-yard kick-off return; the biggest fourth and inches conversion, and the biggest forty-yard field goal; and, perhaps, the biggest win that the team and the city of New Orleans needed. The future is bright. The only thing I think I can say to match my thoughts -- Bless them Boys! And Geaux Saints.

And now, pulling a trick from Dean Chen's book, I can think of no better song to offer you than U2 and Greenday's The Saints are Coming

Marc (MLR)

Bankers Without a Clue?

Paul Krugman wrote a nice op ed piece in today's New York Times titled Bankers Without a Clue. Krugman observes disappointingly that the bankers just don't get it. In truth, comments like the financial crisis was just a perfect storm (Goldman Sachs’s Lloyd Blankfein) and that no one could have predicted its coming (Jamie Dimon of JPMorgan Chase & Co.) are pretty unbelievable. I hope that the executives of these large financial insitutions aren't and weren't really that clueless. That said, I agree with Krugman that I don't expect the banks to give much concrete advice on financial reform. The distrust the banks have of regulators (and desire to protect their own pocketbooks) has resulted in many of the banks repaying the TARP funds as soon as possible.

Bill Thomas who is Vice Chairman of the Financial Crisis Inquiry Commission has assured us that at least the questions will be asked. Question is, whether any meaningful financial overhaul will come from this?

-jsm

What You Need to Know About the Card Act

For consumers looking for basic information about the CARD Act, the Federal Reserve just published What You Need to Know: New Credit Card Rules. What credit card companies must tell you:

• when they plan to increase your rate and fees
• how long it will take you to pay off your balance.

The circular also covers all the new rules on fees, rates and limits:

• no rate increases for new cards in the first year
• rate increases only apply to new charges
• restrictions on over-the-limit transactions
• caps on high fee cards
• protections for underage consumers (under 21)

Finally, the circular contains some new rules on billing and payments:

• standardized payment dates and times (i.e. payments due on the same day each month)
• payments applied to highest risk first
• no two-cycle billing.

All and all, the circular is easy to read and even contains handy definitions and links to other information. Hopefully, consumers will be able to find this easily on the Internet (and will read it). Three cheers to the Fed for trying to get the word out.

- JSM

Spot Light Shines on Debit Card Interchange (Finally)

For several years now the hot payment card story has been the rising interchange fees effectively paid by merchants to card-issuing banks on credit card transactions. A major class action attacking those fees is well underway, and the Department of Justice, Antitrust Division, has an open investigation.

Commentators have disagreed about whether market competition between Visa, MasterCard, American Express and Discover could yield an appropriate interchange fee or whether more aggressive industry regulation is required. Some say that the only competition is to increase fees to encourage banks to issue a particular network's cards. But some historical evidence suggests that competition among networks does create pressure to lower interchange fees to increase merchant acceptance. There has also been considerable debate about whether interchange fees constitute an unfair tax on those who do not use credit cards.

Surprisingly, however, debit card interchange fees have coasted under the radar since the 2003 settlement in which Visa and MasterCard agreed to pay merchants $3 billion and permit the acceptance of credit cards but not off-line signiture debit cards. At that time, Visa also significantly lowered the interchange fee on its signiture debit cards.

Today's New York Times has a front page story Visa's Strategy in Debit Cards: Push Up Costs by Andrew Martin taking Visa to task for its more recent debit card pricing practices. This attention is long overdue. In contrast to credit cards, the case against Visa and MasterCard's interchange fee pricing practices and the need for regulation are much stronger in the debit arena. Under the right conditions, American Express and Discover could possibly serve as a competitive check on credit card fees, but neither has a significant enough presence in the debit market to challenge the banks issuing Visa and MasterCard. And while the spending flexibility created by credit cards creates significant benefits for consumers and potentially increased sales for merchants -- benefits that may outweigh the cost of credit cards -- debit card benefits are considerably more limited for both consumers and merchants, and their costs are thus significantly less likely to be justified.

The development of debit cards is quite interesting. They began as extensions of ATM cards issued by regional networks of banks with the goal of saving costs by encouraging consumers to switch away from paper checks. Interchange fees were virtually non-existant and, in some cases, banks even paid merchants and consumers to stimulate use of the cards. But banks faced two problems. Like ATM cards, these early debit cards required the entry of a PIN, and most merchants did not have card acceptance systems that could handle PIN entry. Second, because the cards did not generate significant revenue for the banks, they could not justify investing in the advertising necessary to educate consumers about the cards.

Visa responded in the mid-1980s by creating a signiture-based debit card that could run over the Visa credit card network. It permitted any merchant accepting credit cards to also accept debit. And because the card was priced at near credit card levels, the banks were willing to support heavy advertising to stimulate debit card use. The scheme worked. Debit card use exploded.

An initial period of competition arose between Visa and the regional networks (as well as MasterCard) which argued that on-line PIN-based debit was a safer, lower cost option compared to Visa's signiture debit. During this era, Citibank's representative on the Visa board reportedly called the regional network operators "through-put jockeys" because they cared only about increasing volume on the network without paying sufficient attention to bank profits. The campaign thus began to encourage consumers to use signiture debit -- despite the greater potential for fraud and higher processing costs -- through rewards programs and other methods.

These practices led to a mid-1990s major class action led by Walmart and Sears, arguing that Visa and MasterCard illegal tied acceptance of signiture debit cards to credit cards. Six years later, Visa and MasterCard agree to settle the case by permitting merchants accepting credit cards to reject signiture debit and to reduce signiture debit interchange fees.

Although PIN acceptance is now widespread, expensive signiture debit remains a significant market force shifting billions of dollars annually from the retail industry to the banking industry. Why? After the settlement, very few merchants refused to accept signiture debit, fearing that they could lose customers. Today, Costco limits acceptance to PIN debit, and a few other major retailers try to steer customers to PIN, but most do not. In addition, even before the settlement, Visa began a strategy of increasing the interchange fees on its own PIN debit cards, including a major jump in 2007 that left its PIN system's interchange only slightly below its signiture debit interchange. The strategy has had the dual benefit of (1) forcing MasterCard and the regional networks to increase their PIN debit interchange to avoid losing bank support to Visa, and (2) discouraging merchants from disfavoring signiture debit by reducing the pricing spread. A former regional debit network CEO, Ronald Congemi, bemoaned Visa's strategy in the Times article: “What we witnessed was truly a perverse form of competition. They competed on the basis of raising prices. What other industry do you know that gets away with that?”

Critically, debit card issuance is much less costly for card issuers than credit card issuance. Debit cards are issued virtually costlessly to checking account holders as part of the ATM card package. Moreover, they carry virtually no credit risk for the issuer, as the money for the charge is removed from the checking account promptly for signiture debit and immediately for on-line PIN debit. On-line PIN debit also dramatically reduces fraud risk.

Perhaps because credit interchange fees have increased so much, debit cards may appear to be a good deal for merchants. But given the cost differences for card issuers, debit card fees may be much less justifiable and thus a more appropriate target for regulatory attention.

Commercial Law Course Survey Update

I have received 70 responses so far. Once again, I am only reporting the raw numbers to this point, so the percentages reflect the number of times the course option was selected as against the other options (including write in variations). I also include a list of institutions in which someone has posted a response, so if your institution is not represented, please take two minutes to complete the survey by clicking here.

Thanks

Marc (MLR)