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OpenMarket: Banking and Finance

  • The Economist: Interchange Fee Caps Benefit Large Retailers at Consumer Expense

    October 9, 2014 11:52 AM

    Surprise! Price controls lead to unintended consequences—including transfers of wealth to parties who lobbied for those controls.

    That’s the actual – and unsurprising – result of the an amendment to the 2010 Dodd-Frank financial reform bill, sponsored by Sen. Richard Durbin (D-Ill.) that caps fees charged by banks for payment cards, mainly debit and credit cards. As The Economist reports:

    [T]he limits on “interchange fees”, as the financial jargon has it, have not worked out as planned. They have resulted, by one calculation, in the transfer of between $1 billion and $3 billion annually from poor households to big retailers and their shareholders. These were not the beneficiaries Mr Durbin had in mind when the amendment came into effect three years ago this week.

    Or are they? This result is exactly what I said would happen. And as I noted at the time, Sen. Durbin was quite open about whose interests he had in mind.

  • See Me at San Francisco Crowdfund Banking and Lending Summit

    October 8, 2014 2:05 PM

    My colleague Wayne Crews’ Forbes column Monday explained “How Entrepreneurs Can Speak Out About the Cost of Regulation,” but noted sadly that “businesses that never form in the first place because of regulation never get a chance to talk.”

    But there may be at least one exception. Next week in San Francisco, a conference will bring together entrepreneurs and investors to discuss, in part, businesses that can’t form because of the thicket of red tape.

    Coastal Shows, producer of the annual Crowdfund Global Expo (CFGE), will host the CFGE Crowdfund Banking and Lending Summit at San Francisco’s Grand Hyatt on October 16 and 17. A bevy of prominent speakers, including yours truly, will talk about crowdfunding as a new frontier that could open up opportunities in investing and lending, if only some of the antiquated securities regulations could be trimmed.

    When most folks hear the word “crowdfunding,” they think of sites like Kickstarter and IndieGogo in which fans can fund a new project and get souvenirs such as T-shirts. These innovations should be applauded, but they only scratch the surface of what crowdfunding could do. Viewed broadly, crowdfunding could bring together investor and entrepreneurs, allowing them to bypass “middle men” such as Wall Street banks.

    But as I wrote recently in Forbes, if one of these crowdfunding projects currently were to offer funders a piece of the potential profits—instead of  T-Shirts and other trinkets—it would run “into a brick wall from 1930s-era Securities and Exchange Commission (SEC) rules that treat a promise of a share of a business’s earnings a ‘securities offering.’”

    As I explained, “this would subject entrepreneurs making a simple pitch for funding movies or music to the panoply of federal securities laws—including the behemoth Sarbanes-Oxley and Dodd-Frank laws—that publicly traded corporations must contend with every day at a cost of millions of dollars per year.”

  • Lesson from Ex-Im Fight: More Agencies Should Have Sunsets

    September 17, 2014 8:17 AM

    Congress hasn’t voted just yet on the Continuing Resolution that includes the Export-Import Bank’s reauthorization. But we already know that it will pass this week, and Ex-Im will get a new lease on life, probably through June. We’ll have this fight all over again next spring and summer. But the fight has already taught an important lesson: more agencies should have automatically expiring charters. Ending or reforming Ex-Im would never have been a possibility if its charter didn’t have an expiration date. I make that point in a piece in Investor’s Business Daily:

    Institutions matter. The rules of the game have a lot to do with how people play it — imagine what basketball strategy would look like if the three-point shot was changed to five points, or how baseball strategy would change if hitters could strike out on a foul ball.

    The rules an agency issues aren't the only ones that matter. Rules governing the agencies themselves are just as important. If more agencies had a built-in check such as an automatic sunset that forced a periodic congressional reauthorization vote, they would have an incentive to behave better and pursue their missions in a less burdensome way.

    The fight over Ex-Im isn't over. Even with Ex-Im's temporary new lease on life, reformers will still have won an important victory in tamping down its excesses.

  • Dueling Ex-Im Commentary

    September 11, 2014 12:21 PM

    A vote on the Continuing Resolution, which includes the controversial Export-Import Bank reauthorization was originally scheduled for today, but has been pushed back to next week. So the combat continues over how long the Ex-Im reauthorization will last, and what other conditions might included as part of the deal. In today’s Washington Times, National Association of Manufacturers President Jay Timmons and I have dueling op-eds, with Timmons favoring reauthorizing Ex-Im, and me wanting to end it. The Wall Street Journal also weighed in with an editorial this morning, sharing my skepticism of Ex-Im.

    Timmons makes three points in his piece that deserve a response. First, he argues that Ex-Im fills in gaps in private financing:

    Ex-Im Bank provides financing that is critical to fill gaps when private-sector financing for small and large manufacturers is not available.

    If Ex-Im makes a profit, as Timmons argues it does, then surely private banks would welcome an opportunity to make money for themselves by lending to more exporting businesses and their customers. If Ex-Im loses money, as the Congressional Budget Office convincingly argues, then there is no financing gap to be filled, and Ex-Im is financing too many insolvent projects.

    Second, Timmons commits the “but other governments do it, too” fallacy:

  • Don’t Tie Ex-Im Renewal to Government Shutdown

    September 9, 2014 12:29 PM

    It appears Congress will decide the Export-Import Bank’s short-term fate this week. There are several bills with different reauthorization terms, and Rep. Justin Amash and Sen. Mike Lee even have a bill that would shutter the bank altogether. None of the bills have made it out of the House Financial Services Committee, which is chaired by Rep. Jeb Hensarling, who opposes the bank. What will likely happen instead is that Ex-Im reauthorization will be included in a Continuing Resolution (CR), which Congress must pass by September 30 to avoid a government shutdown.

    The current battle isn’t whether Ex-Im will be reauthorized, it is how long the reauthorization will last.  There are two likely options. Ex-Im opponents would prefer a reauthorization through early 2015. Ex-Im opposition is bipartisan, but the GOP has been more vocal about it, and most political observers are expecting Republicans to gain seats this November. Depending on how the numbers play out, when the new Congress convenes in January, it might be possible for Congressional Republicans to either let Ex-Im’s charter expire, or pass a bill similar to Amash and Lee’s to actively kill the bank, even if they can’t get much Democratic support.

    Ex-Im’s defenders would rather keep the shutdown card in their hand; Ex-Im opponents will not risk a shutdown over a program equivalent to less than one percent of the federal budget. That’s why they want Ex-Im’s reauthorization to be the same length of any Continuing Resolution that gets passed, however long that might be. Even though that would be a shorter-term reauthorization, they can continue to renew Ex-Im with each CR that must pass going forward, knowing that it will succeed.

  • Nationalizing Bitcoin?

    September 9, 2014 10:13 AM

    The phrase “if you can’t beat them, join them” seems so applicable in light of the Commonwealth of Dominica announcing plans to distribute bitcoins to all of its citizens. This is a wonderful attempt to integrate people into a burgeoning market. The timing could not have been better, as Ecuador also announced it will introduce its own cryptocurrency. The key difference between Ecuador and Dominica’s plan is that Ecuador plans to implement its currency through its central bank, whereas Dominica plans to disperse bitcoins directly to its citizens. Perhaps fearing competition, Ecuador is also banning Bitcoin, so the central bank’s cryptocurrency will be the only game in town. It’s a fascinating natural experiment in the making.

    Forbidding competition is a mistake on Ecuador’s part because competition is what truly allows the best goods and services to develop, so it looks like Dominica’s experiment will be more successful for it citizens.

    Moreover, Bitcoin was created to resist centralized institutions, according to the original white paper by Satoshi Nakamoto, the currency’s creator. These cryptocurrencies represent the potential for non-fiat currency to be used on a global scale. This potential should be nurtured, not squandered by governments.

  • You’re a SIFI, Charlie Brown

    September 5, 2014 7:37 AM

    “Good grief!”

    That’s what the Charlie Brown, star of comic strip Peanuts and cartoon spokesman for the MetLife insurance firm, might say about the government’s actions against MetLife yesterday.

    The Financial Stability Oversight Council (FSOC), an unaccountable, secretive task force of financial bureaucrats created by the Dodd-Frank “financial reform” bill that was rammed through a Democrat-controlled Congress in 2010. Yesterday, FSOC designated MetLife as a “systemically important financial institution” or SIFI. This means that the federal government officially considers MetLife to be “too big to fail” and subject to the same Dodd-Frank bailout regime set up for banks.

    Many firms would see being tagged as a too-big-to-fail SIFI as a blessing. As CEI argues in our constitutional challenge to the FSOC, part of our comprehensive lawsuit against Dodd-Frank, the SIFI designation confers on a firm a strong competitive advantage, as investors know the government won’t let it fail. That’s why big banks and MetLife competitor AIG, who have already received billions in taxpayer bailouts, have eagerly embraced their SIFI status.

    But MetLife, to its great credit, has public stated it’s not too big to fail and does not want the special privileges that come with the SIFI status. MetLife’s Chairman and CEO Steven A. Kandarian declared publicly last year, “I do not believe that MetLife is a systemically important financial institution.”

    Unlike AIG and the big banks, MetLife has never taken a dime in taxpayer bailouts. And all it is asking for now is not a handout, but for the federal government to keep its hands off of the successful business model MetLife has utilized for decades to provide insurance to many satisfied customers.

  • Ex-Im Update

    September 3, 2014 5:23 PM

    Congress comes back from its annual August recess next week. One of the top items on its agenda is deciding the Export-Import Bank’s fate. Ex-Im subsidizes financing for U.S. exporters and their foreign customers. As I outlined here, Ex-Im subsidizes certain businesses at others’ expense. It is a pro-business policy, when what the economy needs are pro-market policies. Ex-Im will also be forced to shut its doors unless Congress reauthorizes its charter by the end of September, making for a golden reform opportunity for corporate welfare opponents.

    The merits of the issue are clear enough, but politics is getting in the way. A bill to reauthorizes Ex-Im’s charter would likely pass the Senate, but would have trouble getting through the House. This would ordinarily mean that Ex-Im opponents would succeed in shuttering the agency, since Ex-Im’s expiration is automatic without reauthorization. That means Ex-Im supporters will probably pursue other means, such as tucking Ex-Im’s reauthorization into a must-pass appropriations bill. Ex-Im opponents would have no choice but to swallow that poison pill, or risk another politically costly government shutdown.

  • Eric Holder Avenges Investor Fraud by Taking from Defrauded Investors

    August 22, 2014 1:54 PM

    “Bank of America failed to make accurate and complete disclosure to investors and its illegal conduct kept investors in the dark,” declared a government official in a Department of Justice press release announcing yesterday’s record settlement in which Bank of America agreed to fork over $16.65 billion to settle charges it and companies it had purchased had deceived investors.

    Back in Washington from Ferguson, Mo., Attorney General Eric Holder announced at a press conference: “As part of this settlement, Bank of America has acknowledged that, in the years leading up to the financial crisis that devastated our economy in 2008, it, Merrill Lynch, and Countrywide sold billions of dollars of RMBS [residential mortgage-backed securities] backed by toxic loans whose quality, and level of risk, they knowingly misrepresented to investors.”

    Yet how much from this settlement goes to the investor victims? Nada! In fact, the settlement takes billions from the very investors who were defrauded.

    More than $9 billion from this settlement goes to the federal and various state government coffers. And, as Holder proclaimed at the press conference: “Under the terms of this settlement, the bank has agreed to pay $7 billion in relief to struggling homeowners, borrowers, and communities affected by the bank’s conduct. This is appropriate given the size and scope of the wrongdoing at issue.”

    But whatever Bank of America’s misdeeds – and there were many by the company and those it purchased (Countrywide and Merrill Lynch) – it is certainly not “appropriate” to take from the investors the government itself says were victims to give to homeowners that the government never alleges were defrauded.

  • The Impending BitLicense and Premature Regulations

    August 19, 2014 3:19 PM

    Last month, the New York State Department of Financial Services (NYDFS) announced its proposed regulations for businesses engaged in “Virtual Currency Business Activity.”The Department defines these businesses as being involved in the following types of activities, according to provision 200.2n:

    “(1) receiving Virtual Currency for transmission or transmitting the same;

    (2) securing, storing, holding, or maintaining custody or control of Virtual Currency on behalf of others;

    (3) buying and selling Virtual Currency as a customer business;

    (4) performing retail conversion services, including the conversion or exchange of Fiat Currency or other value into Virtual Currency, the conversion or exchange of Virtual Currency into Fiat Currency or other value, or the conversion or exchange of one form of Virtual Currency into another form of Virtual Currency; or

    (5) controlling, administering, or issuing a Virtual Currency.”

    It is worth noting at the start that provision 200.3c2 would exempt “merchants and consumers that utilize Virtual Currency solely for the purchase or sale of goods or services,” from needing to obtain a license and thus being subject to these regulations. This is helpful, as otherwise these regulations would probably have prevented any widespread adoption of virtual currency by merchants. However, there are certain other non-consumer functions of virtual currencies that are not covered by this provision, such as charitable donation. It should therefore be broadened.

    The proposals were received with much skepticism and dismay among the virtual currency community, particularly after NYDFS head Benjamin Lawsky had said in January, “Our objective is to provide appropriate guardrails to protect consumers and root out money laundering -- without stifling beneficial innovation.” Unfortunately, the proposed regulations have provisions that will almost certainly stifle beneficial innovation while not doing much to protect consumers. Four provisions in particular stand out as problematic.

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