Explaining the Housing Bubble

Some self-promotion:  I've posted a new paper to SSRN, coauthored with Susan Wachter (Wharton).  It's entitled "Explaining the Housing Bubble."  Here's the abstract:

    There is little consensus as to the cause of the housing bubble that precipitated the financial crisis of 2008. Numerous explanations exist: misguided monetary policy; government policies encouraging affordable homeownership; irrational consumer expectations of rising housing prices; inelastic housing supply. None of these explanations, however, is capable of fully explaining the housing bubble, much less the parallel commercial real estate bubble.

    This Article posits a new explanation for the housing bubble. It demonstrates that the bubble was a supply-side phenomenon, attributable to an excess of mispriced mortgage finance: mortgage finance spreads declined and volume increased, even as risk increased, a confluence attributable only to an oversupply of mortgage finance.

    The mortgage finance supply glut occurred because markets failed to price risk correctly due to the complexity and heterogeneity of the private-label mortgage-backed securities (MBS) that began to dominate the market in 2004. The rise of private-label MBS exacerbated informational asymmetries between the financial institutions that intermediate mortgage finance and MBS investors. The result was overinvestment in MBS that boosted the financial intermediaries’ profits and enabled borrowers to bid up housing prices.

    Despite mortgage securitization’s inherent informational asymmetries, it is critical for the continued availability of the long-term fixed-rate mortgage, which has been the bedrock of American homeownership since the Depression. The benefits of securitization, therefore, must be reconciled with the need for economic stability. The Article proposes the standardization of MBS to reduce complexity and heterogeneity in order to rebuild a sustainable, stable housing finance market based around the long-term fixed-rate mortgage.

Direct-to-author (not posted) comments are most welcome.  

Why Is the Government Paying High Interchange Fees?

The American Banker (subscription required) reports that Senator Dick Durbin has "added an amendment to an appropriations bill that would require credit card payments accepted at government agencies to be given the lowest available market interchange rates, which typically can only be negotiated by large supermarket chains."

The amount of money at stake is relatively small--perhaps $28 million/year. But it is rather astonishing that the US government doesn't already get rock-bottom interchange rates. If interchange is supposed to reflect the merchant's risk (an argument sometimes made), the US government should be getting the risk-free rate. It hasn't been. Frankly, I'm not sure why the government should settle for getting the best rates available to large supermarket chains-that's not a risk-free rate. If interchange is about risk-based pricing, surely supermarkets should pay a premium over the government?

Where's the Beef? Elizabeth Warren Edition

Here's what's striking about all the criticism of Elizabeth Warren: there's no smoking gun. No one has been able to point to anything radical in Elizabeth Warren's extensive body of writing. Where's the beef?

Rating Agencies on Strike

I thought that this story about the rating agencies' response to the financial reform bill received far too little attention. The rating agencies are refusing to rate until and unless they are relieved of their newly acquired liability for their ratings. In the meantime, the ABS markets can't function, which hurts not only the rating agencies, but also ABS issuers. Clearly the rating agencies are counting on the issues to plead their case before Congress. Smart strategy.  

We're going to see a lot of examples in the next couple years of industries in turmoil because of Dodd-Frank. I don't think Congress really worked through all of the rating agency issues thoroughly enough; it's clear that there's a problem, but finding the right solution is much more difficult. 

HAMP Update: Still Ineffective

Another HAMP data report is out.  Same old story--HAMP isn't doing very much for very many people. We're up to 398,021 permanent modifications. That's out of around 1.7 million HAMP eligible mortgages and 5.7 million mortgages that are 60+ days delinquent (the June report doesn't contain the updated eligibility waterfall, unfortunately). Drop in the bucket. The trial modification numbers are a bit better, at 1.28 million, but the number of new trials each month seems to be flattening out--just 15,153 new trials started in June.  That means new permanent modifications will also start to taper off in a few months. And there are an awful lot of failed trial modifications, as Felix Salmon (commenting on the May numbers) has noted. 

I've long been skeptical about HAMP as doing too little at too high a cost, and I think the numbers bear out that skepticism. How much evidence has to amass about the failure of HAMP to provide effective foreclosure relief before the program is canned and the policy debate is refocused on providing meaningful foreclosure relief? 

Elizabeth Warren and the CFPB

Some of our readers might have noticed that we at Credit Slips have remained remarkably silent about the question of who should head the CFPB. Other bloggers on consumer finance issues have not. Shahien Nasiripour and other HuffPo bloggers (here, e.g.) and Simon Johnson (and here) have declared the nomination of Elizabeth Warren to be a progressive litmus test for the administration. Andrew Leonard and Felix Salmon, among others, have particularly interesting discussions about Professor Warren and some of the other potential nominees. The silence has not been for lack of strongly held opinion, but out of a sense that our opinions would be completely discounted because of our various relationships with Professor Warren and inconsistent with the nature of the blog.

On the Rangers' Bankruptcy

The New York Times has an interesting piece on the Texas Rangers' bankruptcy. It seems that Major League Baseball is supporting one bidder group (including Nolan Ryan), but that group hasn't made the top dollar offer. So do the Rangers have to be sold to the top bidder or do MLB's preferences (and threat to terminate the Rangers' franchise if it doesn't get its way) have to be taken into account? 

The story doesn't explain why MLB prefers the lower bid. Maybe there's a good reason. On the other hand, "we just like them better," or "we think it'd be cool for Nolan Ryan to own the Rangers," (i.e., "in the best interests of baseball") can't be sufficient grounds for going with the lower bid. 

What about the threat of that if their preferred bidder wins, MLB will pack up its toys and leave the sandbox? I would anticipate that a sale order would include some sort of injunction against this (e.g., no termination of franchise except for reasonable cause). To be sure, for some creditors, the loss of the Rangers' franchise would be far worse than a lower sale price, but I don't think a spite termination can be included in a valuation maximization comparison. (Fwiw, I don't think MLB's unique antitrust exemption has any bearing on whether a bankruptcy court order can enjoin it from terminating a franchise.)

On a side note, yes, I'm aggrieved that MLB loaned the Rangers $40M, which was used to land Cliff Lee. Go go White Sox!

[Bob: note the spacing!]

Goldman Abacus Settlement: $550M in Hush Money

The SEC settled with Goldman Sachs for $550M over Goldman's lack of disclosure in the Abacus 2007-AC1 CDO.  While this is a record settlement for the SEC, I think the settlement is a real disservice to the public because it means that we will never have the opportunity to really learn just what was going on in the bowels of Wall Street in the run up to the financial crisis.  The real value of the Abacus litigation was it was a chance to shine some sunlight on the inner workings of Wall Street.  The complaint and hearings gave us a taste, but if this litigation went further, we would likely have learned much, much more.  Instead, Goldman paid the SEC $550 in hush money and will succeed in keeping further details of its operations under wraps.  

Foreclosure Update: the Good and the Bad

Here's the good news: foreclosure starts in Q1 2010 fell a bit, to 691,017, their lowest number since 2008, according to HOPE Now. It's encouraging to see the numbers fall, rather than rise, but they are still at extremely high levels.  

Here's the bad news: completed foreclosure sales in Q1 2010 rose significantly to 291,381, their highest number in US history. Some of this might be a matter of reporting over quarters--the Q4 2009 numbers were down, perhaps because of Yuletide forbearance. But the clear message from these numbers is that we are nowhere close to being out of the woods on foreclosures.

Real Housewives of New Jersey Bankruptcy

OK, I'm way, way late on this story, but I thought it was worth a few lines.  Teresa Guidice, one of the Real Housewives of New Jersey has filed a Chapter 7.  Here's the petition for all you financial voyuers.  It's a nice window on the noveau lifestyle, and reasonably comparable to the other Real Housewives' petition (the White House crashing Salahis').  

Getting Rid of Nonrecourse Mortgages?

It's interesting to look at some of the reader comments to the NY Times article about the rich being more likely to default on their mortgages.  A lot of them are aghast that a mortgage might not be full recourse--that one can walk away and have no personal liability.  What happened to one's word being their bond, honor, etc?  

Since the onset of the mortgage crisis, some commentators (starting with Martin Feldstein in 2008) have been discovering to their horror that a lot of mortgage lending is nonrecourse.  They think this situation is an invitation to moral hazard and argue that we should do away with nonrecourse mortgages and otherwise punish strategic defaulters (without ever saying how we identify a strategic default--not everyone who walks away from an underwater property is a strategic defaulter...)  Putting aside the issue that a lot of mortgages are recourse, I don't think these commentators have fully thought through the implications of doing so.  

Are the Rich More Likely to Default on Their Mortgages?

The NY Times has an article about mortgage default rates being higher on larger (>$1M) mortgages than on small mortgages.  The argument suggested by the article is that the rich are more likely to see their homes simply as investments.  Put a different way, the consumption utility component of the home is relatively less important to the rich.  A house has two value components--it's an investment, and it is also a consumable (but durable) product.   The consumption value of a home is basically the same for everyone--I might derive more or less utility from any particular house, but it is all within a relatively constrained range, and my range is probably around the same as everyone else's.  That means that the consumption value component of a house is largely fixed, regardless of the house's price.  The more expensive the house, the smaller the ratio of the consumption value to the investment value.  Therefore, it would follow that people with more expensive houses place more value on the investment component and treat the house more like an investment.  

I think that's correct, but I also think there's more going on and wish that the analysis in the article had dug deeper because it has unfortunately fed into a narrative of the mortgage crisis being one of strategic default by ruthless investors, with the corollary being that they do not merit any government assistance and even deserve opprobrium or punishment (although they are only playing by the rules of the game, which should have been priced in by lenders).  Here's what I wish the story had pointed out:

Welcome Art Wilmarth!

Credit Slips is pleased to welcome its newest guest blogger, Professor Arthur E. Wilmarth, Jr. of the George Washington University Law School. Art is a leading authority on financial institution regulation. His past work has covered important topics such as National Bank Act preemption, financial services consolidation (here and here), and Glass-Steagal. We're thrilled that Art will be sharing his thoughts with us here at the Slips, particularly on the eve of financial regulatory reform. (Or at least one hopes.) Welcome Art!

Call for Papers: AALS Financial Institutions and Consumer Financial Services

Here is a Call for Papers for the Financial Institutions and Consumer Financial Services section of AALS.  Deadline is August 1st.  

Guns and Bankruptcy

Mike Konczal at Rortybomb has an interesting post about the Protecting Gun Owners in Bankruptcy Act of 2010 (the Pro-GOB Act).  This legislation would make firearms exempt from creditors' claims in bankruptcy.  I'm still not sure if it is a joke or real legislation; I haven't been able to find the text of a proposed bill.  Even if one thinks this legislation is a good idea (which it isn't), it is all sizzle, no steak.  It would be inapplicable to almost all bankruptcy cases.  It would only affect Chapter 7 debtors who own firearms and live in 16 states.  

The CFPB Auto Dealer Exemption--A Reminder of the Why We Should be Worried

It looks like auto dealers are going to get their carve out from the CFPB.  I can't think of a policy argument for exempting auto dealers; maybe someone will provide one in the comments.  The used car dealer has long been the poster child for sharp dealing.  But it's worth reviewing the consumer protection problems with auto dealers, so that we realize what practices are being exempted from potential future regulatory oversight.  

Interchange Theory: Simultaneous Rent-Extraction from Both Merchants and Consumers

Todd Zywicki and I have been having a back and forth on interchange in several forums.  Todd and Joshua Wright had an op-ed in the Washington Times, I responded with a letter to the editor, and then Todd came back with a blog post. I posted a detailed response to Todd in the comments to his post, but I will repost the core of the response here.  

In his blog post, Todd says that he can't understand my argument that in the credit card world there are economic rents (supracompetitive prices) being extracted from both merchants and consumers.  Todd thinks the only possible economic rents story is one of merchants being charged too much and consumers too little.  (Todd does not endorse this story, but he at least gives it theoretical credence.)  Therefore, Todd believes that any reduction in interchange income must be offset by an increase in consumer charges.

What follows is a brief outline of my argument that the current credit (and debit) card system simultaneously extracts economic rents from both merchants and consumers.  The corollary to my argument is that interchange regulation actually produces reductions in the economic rents paid by both merchants and consumers; it does not result in costs being shifted form merchant to consumer, but instead results in reduce profits for card issuers and card networks.  To this end, I present a rough sketch of the net impact of interchange reform in Australia; as surprising as it is, I do not believe this has been done before.  

The CFPA Auto-Dealer Exemption

The CFPA/B proposal that the House conferees have presented to the conference committee for the financial reform bill includes an exemption for auto-dealers (see the bottom of p. 13).  It's frankly an exemption that is impossible to justify except as special interest pleading.  They House proposal would exempt used-car salesmen for goodness sakes!  (There's also a less troubling pawn-shop carve-out).  

Today the Federal Reserve's Consumer Advisory Council (CAC) has submitted a letter of opposition to the auto-dealer carve-out to Chairmen Frank and Dodd.  This letter is an unprecedented move for the CAC, which is a non-partisan, expert body that does not usually weigh in on legislation.  I think it shows that there is absolutely no policy justification for the auto dealer carve-out.  

The Disingenuous Mr. Russell Simmons

Russell Simmons (yes, the hip-hop entrepreneur and vegan advocate) is blogging away at Huffington Post against the Durbin interchange amendment.  Simmons claims that his card takes "the poor, the voiceless and the under-served" out "from the claws of payday lenders and check cashers, from humiliating lines waiting to cash their paychecks and then more lines to pay their bills." 

Gosh, you'd think that Russell Simmons was operating a charity. Somehow Simmons neglects to mention how much money he is pocketing from debit card swipe fees in addition to the $1/transaction "convenience fee" the RushCard charges its low-to-moderate income users.  (See here for more details on the RushCard.)  The RushCard is an alternative to check-cashing outlets, but that's all that it is--another high-cost financial service for the poor.  I'd be curious to know how much revenue the RushCard makes on interchange; I suspect it would still be quite profitable without it.  Maybe Russell will show us the books.

Russell Simmons is claiming to be the voice of minority communities and the poor on interchange.  He's not, and his personal financial interest in maintaining high interchange rates compromises him as an advocate on interchange, just as the fees on the RushCard compromise him as an advocate for the poor. 

It's worthwhile looking at what The Hispanic Institute, which has no financial stake in the matter, found in an empirical study it sponsored on interchange fees.  The study finds that there is a regressive cross-subsidy that has a disproportionate negative impact on low income minority communities.  

Simmons also misunderstands (perhaps deliberately) the Durbin amendment in his post; he complains that it regulates debit interchange while leaving credit interchange untouched, and that this dings the poor, while leaving the rich unscathed.  That's just wrong.   While part of the amendment deals only with debit cards, part covers all payment instruments, including permitting merchants to offer a discount for debit (how does that hurt the poor?).  The impact of reduced debit card interchange will inevitably be reduced credit card interchange rates for smaller ticket transactions where credit competes with debit. 

The logic of the Durbin amendment is straightforward:  debit transactions are just like checks, but with even lower fraud risk because of real-time authorization.  Checks clear at par throughout the entire banking system.  Therefore, debit should clear at par too (or close to it--the amendment is generous in this regard).  If debit clears at near par, credit interchange rates will drop, and because merchants are, in general, more price competitive than card issuers, the savings will be largely passed through to consumers.  The card industry will have to learn to live with reduced (but still substantial profits), which should incentivize the card industry to innovate to develop new, efficiencies or higher margin products.  Net result:  consumers win.

Debt Settlement Firms--Fraudulent Transfers

There's a nice piece about debt settlement companies in the NYTimes.  

The story left me wondering whether Ms. Robertson, who paid $4,000 to the debt settlement firm without getting any debt relief might have a fraudulent transfer claim against them.  I recognize that it is far from clear whether such a suit would succeed; there is a REV question and an insolvency question at the very least, and the trustee might not want to litigate over what is at most a few thousand dollars in most cases.  Yet especially for no-asset cases, the avoidance action might be the only real value available for creditors.  

Does anyone know of fraudulent transfer suits being filed against debt settlement firms?  Are trustees or creditors starting to inquire at 341 meetings whether the debtor has been making debt settlement payments?  I'm curious to here whether practitioners have started to account for pre-bankruptcy debt settlement attempts.  

Interchange Irony: George Mason University Edition

George Mason University law professors Todd Zywicki and Joshua Wright have been the leading (and almost sole) academic defenders of the current interchange fee system.

So how's this for irony:  Zywicki and Wright's own employer announced that it will no longer accept Visa for tuition payments because interchange fees are too high.  (You'll have to watch a 15-second BP propaganda bit before the video on GMU).  The school doesn't want other students or taxpayers footing the bill for rewards programs.  Antiregulatory ideology runs deep at GMU, but clearly it won't get in the way of a real world business decision.  

Note, btw, that GMU was able to opt-out of taking a particular card network (somehow the other networks are permitting a convenience fee to be tacked onto the tuition bill to cover interchange).  Universities are in a rather unique position of being able to refuse to take cards altogether.  For most merchants, taking payment cards is just part of operating in the modern commercial economy.  

The End of Free Checking?

The Wall Street Journal has a story that Bank of America is contemplating the end of free checking in response to the paring back of fee income due to regulatory reform.  Banks are undoubtedly already adapting to the past year's regulatory changes, and that means attempting to figure out where they can charge new fees or increase existing ones, without losing too many customers so that the net result of the fee structure shift would be a loss.  

Yet, I'm dubious that free checking will go the way of the dodo. Here's why:

Russell Simmons, Interchange Crusader

It's amazing who the interchange debate will bring out of the woodwork.  Hip-hop entrepreneur Russell Simmons has been making the rounds on Capitol Hill (and on Huffington Post) urging Congress not to act on interchange reform.  Why is Simmons so engaged with this issue?  

The answer is because he makes a lot of money off of interchange from a very questionable product.  Simmons markets the "RushCard" a Visa-branded prepaid debit product marketed primarily to the black community.  The card provides a payment device for an ersatz deposit account, which allows cardholders to make transactions when cash is not accepted.  Remember that there is no extension of credit to the consumer on the RushCard.  Instead, like any prepaid debit product, the RushCard consumer is actually lending money to Bancorp Bank, the card issuer.  And, as we'll see, the consumer is actually paying money to make an interest-free loan to the Bancorp Bank.  

Simmon's claim is that the RushCard provides important access to financial services for the unbanked:  it's helps consumers avoid check cashing and bank account fees, has greater security than cash, is convenient, and it's "the prepaid card that provides respect." 

What's respect worth?  Well, take a look at the fee schedule below and decide for yourself.  

Banking the Unbanked--Government-Sponsored Prepaid Cards?

Blogging about the RushCard has me thinking.  Prepaid debit is filling a market need for financial services (payments and safe-keeping) for the unbanked.  But prepaid debit products are often as predatory in their pricing as check-cashing outlets.  So two questions.  

First, why isn't this market working better?  That is, why isn't competition pushing out the bad products and lowering prices?  This can't be a credit-rationing or red-lining story, as there's no credit (and almost no risk) involved with a prepaid product.  

And second, is this market isn't working, what role for government?  There are lots of ways to respond to market failures, and a lot depends on identifying the nature of the market failure.  But one option, when the private market isn't working, is to spur it along with public competition.  To this end, it's worth considering the possibility of government-sponsored prepaid debit cards as a means of providing low-cost basic financial services access (payments and safe-keeping) to the unbanked (who are generally low-to-moderate income (LTMI) consumers.  

Payment systems are the infrastructure backbone of commerce; we should want to ensure that all Americans have basic commercial access; it's no stranger to think of the government subsidizing payments than for the government to subsidize rural housing or rural broadband.  I think there's a case that since the private market is not providing low-cost access to basic financial services for LTMI consumers that government competition in that market is a reasonable policy response.  A low-intensity form of postal banking through prepaid cards could be a way to bank the unbanked.   

The government already transfers a variety of welfare benefits to consumers using prepaid debit--SNAP benefits (foodstamps), Social Security, state benefit programs, etc. But these programs are just using prepaid cards as a means of transferring funds to consumers.  They could be leveraged to achieve a broader goal of providing LTMI consumers with no-or-low-cost access to basic financial services like payments and safe-keeping of funds.  For this to work, entitlement programs would have to be combined with a reloadable, prepaid government-sponsored debit card.  

There would be a thicket of operational issues to work through for such a program, including the expense (I suspect that float income alone might be sufficient to fund a large-scale program with economies of scale) and then there is a conceptual question of whether we want a "public option" of this sort?  Do we think there is value in public-private competition? 

The Interchange Cross-Subsidy: False Analogies

Zywicki's interchange paper repeats a claim made by other opponents of interchange regulation that cross-subsidies, even regressive ones, exist throughout the economy, so there's no reason to get worked up over the interchange cross-subsidy imposed by credit card network rules. 

Zywicki provides several examples of cross-subsidies in the consumer economy:  Starbucks charges the same price regardless of whether a consumer takes sugar and cream, so those who take their coffee black subsidize the sugar and cream of the others.  Supermarkets offer free parking, so the walkers subsidize the drivers. 

Zywicki's examples, however, are false analogies to the credit card interchange cross-subsidy from users of low cost payment methods (cash, debit, nonrewards credit) to users of high cost payment methods (rewards credit).  The Starbucks' cross-subsidy is Starbucks' business decision.   The free parking cross-subsidy is the grocery store's business decision.  But the interchange cross-subsidy is not the merchant's business decision.  It is the card network's business decision.  Card networks force merchants to impose a cross-subsidy.  It's an affront to the nose-picking rule of commerce:  you can pick your friends, you can pick your prices, but you can't pick your friends' prices....

With this in mind, it's worth examining another cross-subsidy caused by interchange.  Interchange fees are paid from acquirers to issuers.  The fees are the same for all banks.  Therefore, the safer banks are subsidizing the riskier banks in a card network.  But there's a catch.  The safer bigger banks often get rebates from the card network in addition to interchange fees. 

Two interesting points about this.  First, it shows that the card networks won't tolerate cross-subsidies for themselves. Second, it casts some doubt on the efficiency rationale for interchange fees--that one-size-fits-all fees are sensible as a way to avoid the transaction costs of individually negotiating every issuer-acquirer contract.  Truth is that 20 or so banks make up 95% of the credit card market.  The transaction costs for these banks to negotiate with each other is fairly low.  This points to the question of whether small banks should be in the card business at all.  Cards are very much an economy of scale business; smaller issuers tend to see cards as loyalty devices, not profit centers.  Would a 20-bank card market be a more efficient arrangement than the current networks with thousands of institutions? I'm not sure, but I think the efficiency of the interchange system is far from proven.

Zywicki on Interchange

Todd Zywicki has a new paper out on interchange regulation, just in time to support the banks' push against the Durbin interchange amendment in conference committee. The paper doesn't present any new arguments or evidence.  Instead, it presents a highly polemical form of antiregulatory claims. 

There's an awful lot to criticize about this paper, starting with its complete unwillingness to engage with pro-regulatory arguments and evidence on anything beyond a strawman basis.  The omission of the findings of the Reserve Bank of Australia (and reliance on a MasterCard funded study instead) on the impact of Australian regulation is remarkable.  

But don't take my word for it.  Zywicki gets spanked around pretty soundly by the Australian economist Joshua Gans, who objects to the way his work is used by Zywicki in a "very selective and misconstrued way" in a paper whose "broad conclusions" are "flawed." 

Let me add my own broad objection (I'll probably blog on more of the details later).  Zywicki's general assumption about bank regulation is that if fee type A is regulated, then fee types B and C will increase to offset the regulation.  That might be the result; indeed, it is a variation on the whak-a-mole bank fee thesis (also here), that if fee A is banned, new fees B and C will sprout up. 

But there is another possible regulatory outcome that Zywicki never considers:  banks might simply have to endure lower profit margins.  If the consumer side of credit card pricing markets is competitive as Zywicki believes (I've got my doubts, which is the point of the whak-a-mole thesis), then the result should be smaller profit margins, instead of shifted fees.  Zywicki seems to take it as a given that banks must maintain profitability levels.  But they don't.  That's the nature of capitalism:  bank have a right to make a profit, but only through fair and legal competition. If a bank can't operate profitably under those conditions, should it really be in business? 

More Naked Credit Default Swaps--the Role of Dealers

These post titles should definitely increase the hits on our blog...

I want to add another point to the debate:  CDS are often done through dealers, and a naked position for a dealer is different from a naked position for an end-user.  A CDS dealer's swaps desk is unlikely to have any long-term stake in the underlying asset.  Generally, a swap desk tries to execute perfectly matched swaps so that it will never have any exposure itself to the underlying assets, only counterparty risk.  (And dicey counterparties have to post collateral).  It isn't always possible to match swaps instantaneously, however, so the dealer will often enter into one swap hoping to find a match soon.  Until the dealer finds a match, the dealer has exposure.  Moreover, a dealer might be able to get a better price (and hence a bigger cut for itself) if it doles pieces of the swap into the market, rather than trying to move the whole swap position at once.  There might not be a lot of market appetite for a $25B swap position except at a steep discount(this goes for CDS as well as other types of swaps), but smaller pieces might be digestible.  Dealers tend to try and have everything cleaned up by the end of the quarter, but in between, the short-term exposure could be sizable.   If naked CDS were banned without a dealer exception, covered (i.e., not naked) CDS would become quite difficult to arrange and execute. 

Complicating this picture is that sometimes a swap dealer decides that the swap is an inherently good position given the price and holds the action itself.  This is all by way of saying that CDS go through a dealer market, not a broker market.  There might be a case for moving CDS to a broker market, but unless there's sufficient liquidity for the product, that'd be difficult. 

To illustrate the role of dealers, consider the Abacus deal.  It is usually presented as Goldman Sachs simply arranging a swap between Paulson and the CDO.  That's the economic essence of the deal, but not how it worked technically. 

Interpreting Australian Interchange Regulation's Consumer Impact

A lot of the interchange debate in the United States now is about interpreting the results of the longest-standing interchange regulation experience, that of Australia.  There's a lot of ridiculous claims made about Australia.  So let's clear the deck.  There isn't any conclusive empirical evidence about the effects of interchange regulation on consumers.  I don't know of any study that even purports to study the effect of interchange regulation on consumer prices.  There's a MasterCard-funded study which found (surprise, surprise) that interchange regulation hurt consumers.  But the study reaches this conclusion by looking at annual fees and levels of rewards, which are just two pieces of a much larger picture.  Selective metrics can't tell us about overall consumer welfare (or the distribution thereof).  To do so would require a detailed analysis of, at the very least, Australian consumer prices (including rate of inflation) and Australian credit card products (including interest rates and other fees, not just annual fees and rewards).  The data for such a study doesn't exist. No one can take an empirically-founded stance one way or another.  What this means is that statements from MC/Visa and their defenders that consumers in Australia haven't benefited from interchange regulation are simply nonsense. 

This doesn't mean that we can't make any assumptions about Australia.  Below the break, I explain why contending there isn't a pass-thru to consumers requires arguing against basic principles of economics.  Economics 101 tells us that we can expect a pass-thru, the percentage of which will vary by the competitiveness of the merchant's industry. 

Interchange Amendment Passes Senate 64-33

Interchange legislation is on the move.  An  amendment the Restoring American Financial Stability Act of 2010, sponsored by Senator Durbin passed the Senate on a roll-call vote of 64-33.  The amendment instructs the Federal Reserve to regulate debit interchange fees and requires that the fees be reasonable and proportional to the costs of the issuer or the payment network.  The amendment also restricts certain merchant restraint rules for credit and debit payments.  It prohibits restrictions on minimum and maximum transaction amounts for credit and debit, and it prohibits restrictions on merchants offering discounts to steer transactions among networks or to other forms of payment (the existing Cash Discount Act does not clearly protect debit discounting, for example, and the card networks' rules largely frustrate discounting as it is). 

The amendment doesn't address all of the problems with interchange, and I would have preferred to see surcharging, rather than discounting, but it's a very good start (and I think arguably the Fed could permit surcharging as part of regulations implementing the amendment).  Of particular importance is that (if the amendment becomes law) a federal regulatory agency is now clearly vested with authority to regulate interchange, and that reasonable and proportional is set as the standard for the level of the fees.  That's a major change from the current situation in which interchange is beyond the regulatory sphere.  To be sure, there's no analogous provision in the House bill, which raises an issue for conference, if the Senate bill passes, but this is a major step forward on fixing the interchange market. 

Bankruptcy Fees

Bankruptcy fees in megacases are getting some media attention.  I can't say whether Weil's fees have been too high or not, I think a little context would help.  Stating the billing dollars alone makes things look shocking, but how many attorney hours were involved?  I'm guessing that cost/attorney hour is actually relatively low compared with other high-end transactional or litigation work.  There might be a reasonable complaint about the cost of top-end legal services, but it makes little sense to single out bankruptcy attorneys.  You've gotta pay the gravedigger if you don't want the corpse putrefying in the street. 

Bankruptcy is the only area of law, other than class actions, where attorneys' fees are subject to court approval.  And because of this, in part, bankruptcy professionals' fees have long been subject to an unspoken spirit of economy.  Top bankruptcy attorneys are reluctant to break the $1000/hr billing mark, which their corporate and litigation counterparts have long ago crossed.  While there are sometimes unseemly items on bankruptcy fees applications, such as first-class seats, what the article missed is that there are a lot of costs for which debtor's counsel does not bill.  There are plenty of costs that get written off by debtor's counsel, if only to avoid the pain in the ass of haggling about them in court. 

There's also tremendous wasted transaction costs involved with court review of billing.  I once witnessed the sorry sight of a bankruptcy judge raising sua sponte the question of whether debtor's counsel was paying too much for airline tickets based on his own on-line research into ticket prices.  Somehow the judge didn't get that by extending the hearing for half an hour, he caused several additional hours of billing for the debtor's counsel, the committee's counsel, and various creditors' counsels.  The debtor's counsel agreed to eat a couple thousand dollars, but the hearing probably cost the estate far more than that. 

I know that the appearances of high professionals' fees in bankruptcy cases are unsightly, but when viewed in the context of biglaw practice, I don't think it is anything so remarkable.  I'm hoping that we'll get some thoughts from Stephen, our resident fee expert.

Resolution Authority: What's Wrong With the Dodd Bill

The Dodd bill gets things right on first principles:  there needs to be some type of resolution authority, and it needs to provide the ability to impose haircuts on creditors.  The bill accomplishes that much.  But it goes way off the rails on a critical issue that has received virtually no discussion:  how the resolution authorization process is supposed to work.  

There's been a good deal of ink spilled recently over how to regulate systemic risk, but little consideration of the institutional design of resolution authority.  Who gets to decide to pull the plug on a troubled firm?   And who gets to decide to provide support for other firms or sectors of the economy?  

I would suggest that however we do this, the paramount value should be maximizing political accountability.  Resolution is a distributional matter, which makes it inherently political.  Indeed, systemic risk is really a political issue, not an economic issue--there's no accepted economic metric for systemic risk.  Instead, it is about social anxieties over loss distribution.  Determining the most politically accountable part of government is something that administrative law scholars endlessly debate, but there are some parts that are less accountable politically than others:  the courts and independent agencies (as opposed to cabinet agencies).  Thus, if we are concerned about political accountability, the Fed is the wrong place to vest decision-making authority.  Same for the courts. 

But this is exactly what the Dodd bill does.  First it, like the Frank bill in the House, create a systemic risk oversight council.  Sounds nice, sort of like the Justice League of financial regulation, but in practice it is likely to merely dilute accountability among regulators.  Second, a troubled firm can only be placed into resolution if (1) the Treasury Secretary, generally acting on the recommendation of a supermajority of the Fed Board and the FDIC, successfully petitions (2) a special panel of bankruptcy judges for the resolution.  Again, this mechanism invokes the participation of a number of regulators (including two of the least politically accountable), and then a rather odd subgroup of judges (3 Delaware bankruptcy judges), another politically unaccountable constituency. 

The goal of the Dodd bill seems to be to make resolution a scientific matter.  But it isn't, and we might do better by going for one that abandons the semblances of legalism and goes with accountability.  (Again, for those who want the fuller version of the argument, you can read it here.)

Resolution Authority: What's Wrong With the Republicans' Argument

The Senate Republicans are arguing that resolution authority, including a $50B resolution fund, would institutionalize bailouts.  Implicit in this argument is the belief that without such resolution authority or fund there would not be bailouts.  This is a demonstrably false position. 

There is no way to credibly commit to not having bailouts.  Our current system is to have bankruptcy/FDIC as a default resolution system and bailouts as need be.  Creating resolution authority is hardly going to mean that there will be bailouts where there were none.  We already have bailouts.  Exhibit 1:  the TARP, which was passed with the votes of 33 Senate Republicans (including Mitch McConnell, who has taken the lead in making this silly argument against resolution authority). 

To be sure, Congress could pass a “no bailouts” law. But see how much good that did the EU:  its no bailouts law hasn't prevented the EU from bailing out Greece (contingently).  If Congress gets scared enough it will bail.  Better, then to have a clear and responsive mechanism for doing the bailout.  No matter how well we do risk regulation, bailouts will be inevitable from time-to-time.  Given that reality, we might as well do them well, and an institutional structure is critical for this.  (If you want to read the long version of this argument, you can read my paper, In Defense of Bailouts here.)

Let me be clear, though, while the Republican argument against resolution authority is silly, there is a lot to criticize about the proposed resolution authority, in both the House and especially the Senate bills.  I'll take this up in a subsequent post. 

Resolution Authority: Is It Constitutional

The Dodd financial services reform bill, S. 3217 would give "original and exclusive jurisdiction" over liquidation petitions for failed systemically important financial firms to a panel of three Delaware bankruptcy judges appointed by a the Chief Bankruptcy Judge for the District of Delaware.  This panel is supposed to adjudicate whether a "a covered financial company is in default or in danger of default."  If so, then the FDIC takes over. 

This arrangement strikes me as having (at least) two potential Constitutional problems.  First, it vests original jurisdiction in the bankruptcy court (or really a special subset of the bankruptcy court), a non-Article III tribunal, which is adjudicating eligibility for a federal liquidation.  Recall that in Northern Pipeline v. Marathon Pipe Line,  Justice Brennan's plurality decision prohibited non-Article III tribunals from adjudicating non-federal rights.  While the technical adjudication by the special panel is of a threshold question for an FDIC takeover, it is ultimately determining what will be the system that handles private state law contractual rights.  Original jurisdiction over that question might bring this into the ambit of Marathon's prohibition. 

Second, there is only limited appellate review (by the Circuit Court or the Supreme Court).  Review is limited to whether the determination of the Secretary that a covered financial company is in default or in danger of default is supported by substantial evidence.  At least one reading of the proposed language is that there is not even a right of appeal to challenge the jurisdiction of the court (such as whether a firm is a covered financial company).  I think this creates a Constitutional problem itself; a non-Article III tribunal cannot have the final word on questions of federal jurisdiction (although we'll see how that plays out in the arbitration context in the Rent-a-Center case). 

There might also be a synergy between these problems that makes two separately acceptable flaws combine into a Constitutional problem. 

SEC v. Goldman Sachs: What's the End Game?

So far no one seems to be talking about the end-game of the SEC suit against Goldman Sachs over the Abacus CDO.  What is the SEC really looking to do here?  Regardless of whether this case goes to trial or settles (and I'd bet on the latter), what does the SEC want from Goldman? 

Explaining the Abacus CDO

I'm taking particular glee in the SEC's suit against Goldman Sachs for alleged market manipulation with the Abacus CDO.  This isn't Schadenfreude.  Instead, it's that I just taught synthetic CDOs to my structured finance class last week.  The timing couldn't have been better.  When was the last time a synthetic CDO made the front page of the Times?

The news accounts of the suit don't really do justice to the transaction at issue.  Hopefully this description helps a bit. 

In a nutshell, a synthetic CDO is a securitization of a portfolio of credit default swap positions. 

Credit Bidding

The Third Circuit has ruled in Philadelphia Newspapers that a cramdown plan that includes an asset sale not subject to credit bidding is confirmable.  The ruling overs only sales under a plan (1123(a)(5)(D) sales), not pre-plan sales (363 sales).  It is the latest example (with Chrysler and GM's plans being the next most recent) of the tension between sections 363 and 1123/1129.  In Chrysler and GM, a 363 sale was used to effectuate a plan, whereas in Philadelphia Newspapers, an 1123/1129 sale is being used to effectuate a 363 sale without credit bidding.  It's becoming increasingly clear that integrating 363 and 1129 protections for creditors is going to be at the heart of the next round of corporate bankruptcy reform.   

Some thoughts below.  I suspect that Stephen Lubben will chime in as well...

Thank You Anna Gelpern

We've enjoyed having Anna Gelpern as a guest blogger for the past couple weeks.  (Is there anyone who can write, much less say, "fortnight" any more?).  Anna's saucy and erudite posts have provided a real education in some very timely sovereign debt issues.  Thank you Anna!

Foreclosures: What About the States?

Here's something that's puzzled me:  no state has yet to enact any serious foreclosure moratorium.  In the 1930s, these moratoria sprouted up all around the country, and foreclosure rates (but not default rates), were much lower than today.   California imposed a 90 day moratorium, but that's not going to do much.  Why haven't Nevada or Arizona enacted a more serious foreclosure moratorium?  What's the political economy story in those states?  Any thoughts?

Half a (Rotten) Loaf is Worse Than None at All: The Fate of the CFPA

As political wrangling over financial services reform continues, the creation of an independent CFPA remains a major bone of contention.  A number of compromise proposals have been bruited:  creating an independent bureau in Treasury, vesting the power in the Fed, vesting the power in the FDIC, or vesting the power in the FTC.  Some proponents for stronger consumer protection in financial view a compromise as acceptable on the theory that half a loaf is a better than none at all. 

It's not.  Better not to have a consumer protection agency at all than to have one placed in a prudential regulator.

Welcome Back Anna Gelpern

The Slips is pleased to welcome back Professor Anna Gelpern of American University's Washington College of Law for another guest bloggership.  Anna's written extensively on sovereign debt crises (see here, here, here, here, here, here, and here, among other papers), and we are thrilled to provide a platform for her to share her thoughts on Greece, Dubai, Ecuador, and any other sovereign (including California and Illinois).  (She's also written a great paper on mortgage-backed securities workouts, which have some of the same collective action problems as sovereign debt workouts....) 

The usual repast at the Slips is consumer and business credit in the United States, but we're always interested in credit more broadly, including comparative credit systems and sovereign debt.  Unfortunately, given US government budget deficits, we may all want to become a little better versed in sovereign debt issues. 

A very brief primer for our readers who are not familiar with sovereign debt issues.  Sovereign debt presents four critical differences from consumer or corporate debt.  First, it is very hard to collect if the sovereign doesn't pay; Argentina's creditors have been trying for years to lay their hands on Argentine state assets, but there are few outside of the Argentina.  Second, there is no bankruptcy option for a sovereign; there is no legal mechanism for discharging debt at less than 100 cents on the dollar.  Third, sovereign debt is intimately tied up in both domestic politics and the politics of international relations.   And fourth, sovereign debt is highly intertwined with currency markets.  These four factors are central in shaping sovereign debt crises.  Again, welcome back Professor Anna Gelpern. 

Reflections on Credit CARD Act Day

Today most of the provisions of the Credit CARD Act went into effect.  It's been widely noted in various media outlets.  The CCARD Act will surely cause some changes in the credit card industry's business model.  I think there's scant evidence that its going to cause the total cost of credit to go up, however.  The card industry has long been so clever in its product design that it wouldn't leave any available consumer surplus on the table.  Instead, I think we're going to see reconfigured pricing structures and smaller profit margins for card issuers (meaning greater consumer surplus).  

The CCARD Act's fully effective date is time for some reflection on how financial services reform has progressed.  Two thoughts: 

First, we should recognize that the Credit CARD Act is the only regulation of the financial services industry to occur since the financial crisis.  That's troubling.  There were and continue to be lots of problem practices in the card industry, but the crisis wasn't about credit cards.  Federal regulatory agencies have passed some important regs, but they're playing catch-up for a decade of neglect. 

Second, card issuers are going to engineer around the CCARD Act as much as they possibly can.  How fast will we see those changes?  (Some changes are already emerging, as a CRL study notes).  And how will regulators react?  Will the Fed (and OTS and NCUA) be more aggressive in using their UDAP powers?  Or will they only use them when Congressional action is threatened (as occurred with the CCARD Act)?  In other words, has a new regulatory culture emerged or are the existing consumer protection agencies unable/unwilling to respond to new billing tricks and traps as they appear?  How the agencies respond going forward is another test of whether we can rely on the existing regulatory structure or whether the only way we will get real consumer protection is a stand-alone Consumer Financial Protection Agency. 

Monetary Policy and the Housing Bubble

A popular explanation of the financial crisis lays the blame at the feet of the Federal Reserve for lax monetary policy.  In this story, the Fed dropped interest rates starting in 2001 and kept rates too low for too long.  Low rates induced an orgy of mortgage borrowing for leveraged home speculation. 

It's a nice story.  Only problem is it doesn't really hold up under inspection.  Low rates in 2001-2003 did fuel an amazing mortgage refinancing boom, but not a purchase boom, and the boom was mainly in conventional fixed-rate mortgages, not the exotic products later years.  Moreover, despite the refinancing boom, no housing bubble was emerging in this period. 

The Fed started to raise rates in mid 2004 and continued to do so until mid-2006.  It was during this period that the bubble emerged, when rates were going up.  (To be fair, some might argue for an earlier date to the bubble, even as far back as the late 1990s.)  If we date the bubble from 2004, it's not consistent with a rate-driven bubble story, although rates were still extremely low in absolute terms during this period. 

The monetary policy story, however, really falls apart when one compares the US and Canada, as the graph below does.  Canadian interest rates, and perhaps more importantly, Canadian mortgage rates, track US rates pretty closely.  Yet the US had a housing bubble, and Canada did not.   This means we have to look somewhere other than monetary policy to explain the housing bubble.  The answer, I believe, lies in method and regulation of housing finance. 

Overdraft Fee Regulation and the End of Free Checking?

Ron Lieber has a thoughtful column about the future of free checking.  Consumers have become quite used to free checking over the last 15 years or so.  The impetus for the column is whether the Fed's new overdraft regulations, scheduled to go into effect in July (new accounts) and August (existing) accounts this year will change the financial equation such that free checking is no longer viable.

I'm skeptical.  The potential impact of the Fed's overdraft regulation impact is greatly over-hyped. 

Usury and Securitization

Most institutional lenders in the United States are not subject to usury laws.  National banks can evade they by basing themselves in states without usury laws and exporting the laxer regulation to other jurisdictions.  State institutions often find themselves exempt because of state banking parity laws.  And usury laws are preempted for many mortgages by federal law (although originally the FHA eligibility rate cap--removed in 1983--served as a de facto federal usury law for many mortgages). 

There's plenty to say (at another date) about whether usury laws are good policy.  I want to raise a related legal question for discussion on the Slips:  are debts held in securitized pools subject to usury laws? 

Visa Does Not Issue Cards or Extend Credit.

The Union Station Metro station in DC is plastered with Visa ads.  Currency of Progress, Visa is a Payment Technology Company, etc.  But among the ones that was featured was this beauty:

One rarely sees such a defensive ad.  When was the last time you saw a company advertising what it does not do?  That bespeaks a major branding problem.  It might as well have said "I am not a crook" or "We do not harm small furry animals."  The ad is true, but not what one would expect.  (Technically, I don't think the ad is quite true.  Visa doesn't extend consumer credit, but likely extends some sort of daylight overdraft credit to its members due to payments imbalances.) 

Clearly Visa wants to disassociate itself politically with its member banks.  I emphasize politically because the Union Station Metro stop is one of the ones used by Capitol Hill staffers.  I haven't seen this particular barrage elsewhere in the DC Metro, which makes me wonder if it is a targeted campaign aimed at Hill staffers (in DC one also hears card industry radio ads about interchange that aren't aired elsewhere--this is the Beltway bubble). 

What is Visa so concerned about, though?  Financial regulatory reform has largely ignored entities like Visa.  I've got to think that this is about interchange legislation, and this looks like the ad of a company that is running scared. 

Pro-Consumer Innovations in Payments

Todd Zywicki wrote in a Wall Street Journal op-ed yesterday that "The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards." 

Todd is right that consumers are happy to see annual fees go away, but the disappearance of annual fees wasn't a freebie for consumers.  It came about as part of a shift in the credit card business model whereby upfront fees were replaced with backend fees that have lesser salience to consumers when the consumers decide which cards to carry and use.  This was a move that was made to increase revenue for card issuers (or put another way, to siphon off more consumer surplus); it was not a charitable act.  The disappearance of annual fees is an important innovation, but I think it is a stretch to call it a pro-consumer innovation, when it is viewed contextually.  

The disappearance of annual fees was a step in the democratization of credit (or put another way, the decline in underwriting standards).  Whether this was a good thing is unclear.  It certainly increased consumer's borrowing ability and choices, and might have led to a substitution from secured installment credit to unsecured revolving credit.  But greater ability to borrow and more borrowing choices are not necessarily good.  They are only good to the extent that a consumer is capable of repaying the increased credit line and making informed choices among credit options.  Both of those are questionable for many consumers.  

In Todd's defense, though, I am hard pressed to think of another widespread innovation that would qualify unabashedly as pro-consumer, so maybe the disappearance of annual fees wins by default.  I would have placed the card associations' waiver of all consumer liability for unauthorized transactions (going beyond TILA) as the clear winner, but I don't know how far back this policy goes.  (Please pipe in if you do.)  

The difficulty in naming pro-consumer innovations is a sorry indictment of the payments industry, and one that says something about the nature of innovation and competition in payments.  Maybe others have thoughts about pro-consumer innovations.  Comments are open.  

New Credit Card Tricks, Traps, and 79.9% APRs

The card industry is at it again, devising new tricks and traps to disguise the cost of its products and avoid price competition.  Unfortunately, this was exactly what I predicted in the wake of the Credit CARD Act.  I was a vocal supporter of the Credit CARD Act, but I also viewed it as a missed opportunity.  Congress focused on prohibiting particular abusive credit card practices, but left the door wide open for the card industry to put all of its ingenuity to work devising new substitute practices.  Far better if Congress had taken up a regulatory model that permitted card issuers to charge only certain specified types of fees (at whatever level). 

Now, even before most of the Credit CARD Act's provisions have gone effective, a new report from the Center for Responsible Lending finds that the card industry has already invented a new bunch of tricks and traps.  (I'm still waiting to see an issuer implement my personal candidate--the "high risk transaction security fee"--which could be applied to pretty much any transaction the issuer wants to deem high risk.) 

One thing the Credit CARD Act did quite effectively, however, was clamp down on so-called "Fee Harvester" cards-ultra subprime cards that charged extremely high upfront fees, but offered minimal lines of credit.  The Credit CARD Act limits upfront fees to 25% of the line of credit, effective in February 2010.

It's interesting to see how fee harvester card issuers are responding.  Many assumed that they would simply be out of business.  I'm not so sure that's the case.  A recent news story about South Dakota-based First Premier Bank, NA, perhaps the king of fee harvester companies, shows how the card industry is adapting.  Currently, a First Premier card bears a 9.9% purchase APR, a $250 line of credit and at least $256 in fees in the first year, $179 of which are immediately applied.  The $256 is divided among four different fees. 

First Premier is apparently now using direct mailing offers to test a new product that conforms with the Credit CARD Act.  This new card has $75 in fees and a $300 credit line, but a 79.9% purchase APR.  Yes, you read that correctly.  79.9%.  Now 79.9% APR looks pretty shocking, but it turns out that the new card is actually be cheaper than the old First Premier card. 

A Wager of Law!

Apparently I've been challenged to a duel wager.  I say apparently, because this challenge was never delivered to me.  Instead, it was posted to a website almost a month ago, which is a little odd for a serious bet.  

So what is this about?  Slips readers will be familiar with (or exhausted by) my back-and-forth with David Evans and Joshua Wright on the Consumer Financial Protection Agency (CFPA).  Briefly, Evans and Wright wrote a paper, funded by the American Bankers Association, that argued that the CFPA would be a disaster.  I wrote a critique that took issue with some statistics they cooked up about the impact of the CFPA (the rest of the paper was familiar anti-regulatory boilerplate).  I said that the methodology by which they produced their numbers were bs, they defended some of their numbers, and I disagreed, but noted that they weren't able to respond to the most damning part of my critique--that some of their numbers were simply plucked out of the air.   

Wright responded with a challenge of a wager.  Wright's George Mason colleague Todd Zywicki provided color commentary at Volokh Conspiracy.

The challenge to a wager is very nice and gentlemanly, but it is a distraction from the real issue:  the severely flawed methodology Wright and his co-author David Evans use to manufacture evidence for their arguments against a CFPA. 

White House Dinner Crashers' Bankruptcy

Some of the news reports on the White House dinner crashers (Tariq and Michaela Salahi) have noted that they own a winery that filed for Chapter 11 (reorganization) bankruptcy and then converted to Chapter 7 (liquidation) bankruptcy. My prurient interest was engaged, so I tracked down the petitions and relevant filings (linked below).  What follows is my attempt to sort out the Salahi family's business doings, as well as some musings about where we should really look for bankruptcy abuse--small business filings where the business is the alter ego of the owner, but where corporate law might not allow veil piercing.  In these cases the sophisticated creditors get personal guarantees, but the tax authorities, tort creditors, and unsophisticated creditors get screwed by the corporate form.

As far as I can tell, however, from the PACER filings, this part of the story has been misreported.  There are two separate, but apparently affiliated entities that filed for bankruptcy separately.  First, Oasis Vineyards, Inc., filed for Chapter 11 in December of 2008.  Oasis Vineyards has three shareholders:  Mr. Salahi (5%), his mother (40%, also president of Oasis Vineyards), and his father (55%).  The petition schedules assets of $333K and liabilities of $1.9M.  Tariq Salahi, a Salahi Family limited partnership, Oasis Enterprises, Inc., and Salahi's parents are listed as codebtors (cosignors or guarantors) of various obligations.

In April 2009, the US Trustee filed a motion to convert the case to Chapter 7 liquidation or have it dismissed because the debtor failed to file its monthly operating reports and had not filed a plan of reorganization.  (This is pretty standard; it appears that several monthly operating reports were subsequently filed simultaneously.)  The court has postponed ruling on the motion to convert or dismiss because of the death of the debtor's counsel.

Second, Oasis Enterprises, Inc., a/k/a Oasis Winery, of which Tariq Salahi is the president and sole shareholder, filed for Chapter 7 bankruptcy in February 2009.  That case is still pending.  The scheduled assets are $339K and liabilities oare $982K. The petition states that Oasis Enterprise's income fell from $1.7M in 2007 to a mere $35,000 in 2008.  Ouch.  In 2008, a bank repossessed a $150K Aston-Martin car (resulting in a $85K deficiency) and a $90K Carver 350 Mariner Boat from Oasis Enterprises (resulting in a $56K deficiency judgment).

The Australian Interchange Experience

The New York Times ran a story on the impact of interchange regulation in Australia.  Calling it interchange regulation is somewhat of a misnomer.  The Reserve Bank of Australia in fact acted to bust up anticompetitive private regulation of interchange.  Payments are an area with intense regulation, but that regulation is often private self-regulation.  Thus, what occurred is better thought of as interchange deregulation. 

Guess what?  Interchange regulation is working exactly as one would have predicted.  Consumers who want rewards have to pay for them directly now.  They can't free-ride off of other consumers (using cash, debit, or non-rewards credit cards) to finance their frequent flier miles, etc.  Not surprisingly, annual fees have gone up for rewards cards.  This has also pushed consumers toward greater debit card usage, which is often a healthy thing.  (To be fair, there is a similar move to debit in the US without interchange deregulation, so the causation in Australia is questionable.)

A predictable problem has arisen in Australia, however.  Some merchants are now imposing credit card surcharges that are greater than the cost of accepting credit card transactions.  This isn't good for consumers.  But it isn't a problem with interchange regulation.  This is just a symptom of less than perfectly competitive markets in other areas of the economy.  Excessive surcharging is most likely to appear in the least competitive areas of the economy.