Last week, Representative Barney Frank, Chairman of the House Financial Services Committee, made a push to scale back the proposal for the Consumer Financial Protection Agency (CFPA), part of a financial regulatory reform bill, which is expected to be voted on by the end of the year.  Some of the paring down of the CPFA includes the elimination of the requirement for financial firms to offer plain “vanilla” products and services, such as mortgages with simple terms and credit cards with easy to understand contracts.  Additionally, in the memo that was circulated by Rep. Frank, outlining the modifications he envisions with respect to the CFPA, it was noted that, “ the CFPA will not have authority to approve or change business plans” for financial institutions.  As one would imagine, plans for the CFPA have been amended in order to assuage industry concerns about its restrictiveness and to appease legislators whose support is needed if the full bill is to pass through Congress. 

This is par for the course in Washington, and we’ve all seen how much the healthcare bill has shifted over the past few months.  However, the CFPA has been doomed from the start because it is disjointed at its core, and no amount of amendments or adjustments will fix the problems that are inherent to this new regulatory agency.  The CFPA won’t work because its basis is the idea that consumer protection can be separated from the oversight of the soundness of the financial institutions themselves.  Thus, while Congress and the Obama administration have been spot on in their diagnosis of the problems that plague America’s financial regulatory system, embracing the CFPA as a solution will not help the industry nor will it protect consumers.

Recent waves of bank failures, and the expected continuance of those failures, has put the FDIC in an uncomfortable position.  Covering the accounts held by the failing banks is depleting the FDIC’s coffers, leaving them with only two options on how to get that money back.  Unfortunately, neither option is particularly attractive. 

On one hand, the FDIC could borrow the money from the Treasury, but the size of the FDIC and its position as a bedrock American financial institution loads its actions with enormous relevance for the rest of the economy.  If the FDIC has to borrow money from the Treasury for the first time in twenty years, it creates serious doubts concerning the strength of our economy and our recovery.  If there is another large collapse, moreover, having already borrowed money from the Treasury, the FDIC will be in a more precarious position to guarantee the safety of America’s bank accounts.  On the other hand, if the FDIC decides to turn to the industry to build up its funds by charging banks more insurance fees, it will end up putting more ‘at risk’ banks into further danger of collapse, which would, in turn, force the FDIC to cover those accounts.

If you are like most Americans, you often use credit cards for your purchases.  Behind the scenes, when you swipe your credit or debit card through the machine, the merchant pays a small fee to their bank (i.e. interchange fee) for the ability to accept credit card transactions.  Let us be blunt about this: if the business wants your money, then they would be smart to pay these fees because cash transactions are becoming rarer with each passing day.  ‘Cash only’ businesses are becoming a thing of the past. 

The merchants themselves are becoming increasingly irate that they have to pay these fees to allow their customers to use credit cards and are now turning to the nation’s lawmakers for help.  Bills are already headed for Congress which would allow merchants to enter into collective bargaining with the banks and would make it easier for merchants to steer customers to other forms of payments and let them set minimum and maximum amounts for credit card purchases.

All along it has been our contention at Wallet Blog, that the board of director’s system for American public companies is in need of significant repair.  Specifically, its problem is that shareholders lack the ability to control who serves on the board of directors of their own companies at any point in time.

Lately, we have seen more and more stories in the financial news telling us that the various boards of directors of American public companies have acted in ways that are either suspicious, irresponsible, or just plain illegal.  With each such story, we see the SEC attempting to curb the corporate excesses one problem at a time.  In a recent story, the SEC has begun investigating the role of consulting firms in setting salaries for CEOs.  Specifically, the question is whether recommendations about CEO pay packages are compromised when the same consulting firm hired by the board also provides other services to the company? In other words, are these consulting companies providing generous recommendations to the board about the CEOs pay packages in order to keep the CEO happy and minimize the chances that the CEO replaces them with another consulting firm for all the other services that they provide?

Each member of Congress, with an ear for his or her community will hear thousands of ideas about what they should or should not be doing, and where they should or should not lend their support.  With 535 members of Congress, it is only natural that the network of ideas, beliefs, stances, and opinions are fairly complicated.  We can expect that the majority rule will allow some of these ideas to make into law.  We cannot expect, however, that a change in the manner by which Congress conducts business will ever gather the steam necessary to become law. 

Congress is designed to make moves in the nation’s political game; it is not designed to change the rules of that game.  When the public votes for a Senator or Representative, they vote for an individual and not a vision of how Congress should conduct its business.

On the anniversary of the collapse of Lehman Brothers, President Obama warned the financial community that there wouldn’t be any more bailouts and that the age of Wall Street greed and reckless mismanagement would have to come to an end.  We completely agree with this position, but we also think that it is hypocritical that some modified version of this sentiment wasn’t delivered to Congress as well.  

Whatever is said about Credit Default Swaps and the other exotic financial products that caused the near total collapse of the global financial system, they were (and still are) legal.  Moreover, they were made legal after 91 years of being illegal by the  Commodity Futures Modernization Act of 2000 which was piggybacked onto a much larger bill, presented at the last minute before Christmas recess, allowed to bypass committees and was passed by Republicans and Democrats alike.  It was this law that created an unregulated $63 Trillion market  and set on its course to blow up in the face of the American taxpayer.   

Recently, a judge denied Bank of America’s attempt to settle with the SEC for $33 million dollars under accusations that the Bank presented false information to its shareholders about Merrill Lynch employee compensation packages.  The judge reasoned that the $33 million would end up being paid by shareholders, effectively forcing them to pay a bill twice which they should have never had to pay at all.  While we agree with the decision we clearly can not continue operating in a manner where shareholders are helpless in running their own companies.

Does it not seem odd that the owners of the company are not responsible for hiring corrupt or incompetent management or for allowing that corruption to continue?  Unfortunately, the reality with the current Board of Directors system is that shareholders cannot be responsible because they have very little power to decide who will sit on that board or to quickly remove board members when their attitudes or behaviors work against the shareholder interests.  If shareholders could have ousted Ken Lewis at any point in time, then they should have been responsible for any wrongdoings under his leadership. 

J.D. Power and Associates recently released the results of a customer satisfaction survey of credit card issuers in conjunction with their 2009 consumer satisfaction awards.   According to J.D. Power and Associates:  “The study measures customer satisfaction with credit cards by examining six key factors: interaction; fees and rates; billing and payment process; rewards; benefits and services; and problem resolution.”

In these categories, they found that Discover Card and American Express Credit Cards topped the list in nearly every category along with National City (except in the category of Problem Resolution where the sample size was too small).  American Express ultimately received the J.D. Power and Associates Award for Credit Card Satisfaction.  In some categories, these big three were rivaled by Wells Fargo.  U.S.  Bank also, notably, scored above average in Fees and scored an outstanding in Problem Resolution.  Target Visa, WaMu, GE Money, Credit One Bank, and First Premier Bank scored below average (2 out of 5) across nearly all categories.  Interestingly enough, Bank of America scored only average in all but two categories (Rewards and Problem Resolution) where it scored below average.

A few weeks ago, in the middle of the evening rush hour and during one of Washington, D.C.’s infamous summer rainstorms, I was side swiped.  The fault was completely on the part of the driver that hit me.  After this lovely woman insisted, while screaming at the top of her lungs, that the accident was my fault, we exchanged the necessary information.  I looked down to the portion of the torn piece of paper where she had written her insurance information, and saw that she had listed a company called MAIF as her automobile insurer.  I thought innocently, “huh, never heard of these guys before.”

When I got home I Googled “MAIF,” and was shocked at what came up.  Turns out MAIF stands for the Maryland Auto Insurance Fund, which was, according to the Web site, “created by the Maryland State Legislature in 1972 for the purpose of providing automobile liability insurance for those residents of the State of Maryland who are unable to obtain it elsewhere in the private insurance market.”  What does this mean?  It means the state of Maryland has a government run and subsidized car insurance program for residents who have been priced out of the commercial auto insurance market.  This usually happens due to drivers being involved in multiple car accidents, which causes insurance premiums to increase until they eventually become unaffordable.  I’m not a resident of Maryland, and I’m a liberal who believes in big government, but I’d be pretty teed off if I knew that even one penny of my tax dollars was going directly or indirectly towards a program that seems to have been designed to help insure reckless drivers.  I’m all for universal coverage when it comes to health insurance, but for car insurance - nope not on my dime. 

As Chair of the Congressional Oversight Panel, which has been charged with reviewing the current state of financial markets and the regulatory system, Harvard professor Elizabeth Warren has been quite vocal in her support of the administration’s proposal for a Consumer Financial Protection Agency (CFPA).  The CFPA would be the regulatory body that ensures that financial institutions provide clear and simple disclosures, which would ostensibly deter consumers from opting for risky and “exotic” financial products, and would be the eighth agency involved in consumer credit regulation.  While I agree that there has been little effectiveness in the regulatory system as far as consumer financial protection is concerned, this is no reason to create yet another agency.  The CFPA, which was actually conceived by professor Warren several years ago, would separate the regulation that provides consumer financial protection from the regulation that ensures the banks that serve these consumers are solvent, and do not introduce toxic products to the market.  If our hope is for a solid financial system, then it must be understood that these two areas of regulation go hand-in-hand.  Warren is right, “the credit market is broken,” but she herself proves that the CFPA won’t fix it. 

Warren lays out her arguments for the CFPA in two articles that appeared recently in Business Week and in The Baseline Scenario.  While she is spot on in her analysis of the nature of the problems that plague our financial system, her solutions do not address the problems that she identifies.  It’s true, traditional financial products cannot compete with “exotic” products whose terms seem attractive up front, but hide surprises and changes that are revealed only after the consumer has committed.  Further, the more complex these “exotic” financial products become, the less able consumers are to make comparisons.  Right now our financial system lacks a level-playing field, transparent in its operation, which encourages competition, and also engenders product innovation. 

What is the greatest issue facing America right now?  Is it the crisis of non-renewable energy sources, financial regulation reform, health care reform, or the recession and the stimulus package?  I think we’d all agree that all of these are major issues regardless of our viewpoints about the right solution.  The attention given by President Obama to these issues suggests that he, too, sees these problems as requiring immediate attention.  As such, his administration has set about dealing with all of them at once.

The result is that no particular issue gains the necessary momentum to answer opposition in Congress, and nothing can be done without Congress’s approval.  So, President Obama’s plans are taking far too long and are being swept under by waves of resistance despite the fact that the country needs solutions.  By attempting to solve all these problems in parallel, he is failing to decisively solve any of them.

According to Associated Press Economics Writer Christopher S. Rugaber, the recession is showing signs of recovery because 10,000 fewer people filed for unemployment benefits than the figure projected by economic analysts.  Another sign of recovery, according to Rugaber, is that the number of people receiving unemployment benefits fell 159,000 to 6.1 million.  Of course, that’s a tricky number as it’s clear by the rise in the overall unemployment rate that the drop in unemployment benefits wasn’t due to people finding jobs, but to people losing their benefits. In other words, they’re now out of work and out of income.  What I’d like to know is: how does Rugaber read these figures and determine that these are positive signs of recovery?

Let me first address the figure upon which Rugaber seems to base the lion’s share of his opinion:  analysts predicted that American companies would lay off 560,000 workers last month and as it turned out, they only laid off 550,000.  Let us be reasonable about this: both numbers are staggering.  Either number indicates half a million people.

For a very limited time, Restaurant.com is offering gift certificates worth $25 for the price of $1. Just enter the Discount Code NINETY at checkout and hit “apply.” Oh, and be sure to say “no thanks” when they ask if you want to complete the survey, because if you click “yes” you’ll get charged an additional twenty bucks.

This offer is good for 99 hours starting 9/9/09, so act quickly!

The bulls are pointing to the end of a recession and a robust recovery ahead for the American economy.  Their optimism is based on a definition of the recession, in economic terms.  For economists, a recession ends when the economy ends its negative growth.   These terms, however, are theoretical.  In practice, a robust recovery must parallel a robust recovery at the American household level, which is unlikely to happen for a number of reasons: 

• The Unemployment rate:  We hear a good deal of optimism coming from economists concerning the fact that the unemployment rate is slowing, but we ought to remember that it isn’t actually going down, but continues to rise.  According to the Associated Press, we are at the worst unemployment crisis since 1983 and economists are predicting the unemployment rate to peak above 10% by the middle of next year. 
• State Deficits:  We are suffering huge deficits at the state level which the Federal Stimulus package can not correct.  This means additional job losses for state employees.
• Unemployment Insurance:  Not only is America facing a dangerously high unemployment rate, but the unemployment level in this country has been high for so long that benefits are now running out.  We are in a situation far worse than simply having people who are out of work; they are out of work, have few prospects for new jobs, and are receiving no income.
• Continuing Bank Failures:  Despite the federal government’s intervention, we continue to see banks fail.  The number of banks on the FDIC’s “Problem List” (banks in danger of failing) has gone from 305 to 416 at the end of June ‘09.  Some analysts are afraid that the FDIC will go into the red by the end of this year.
• Continuing Credit Crunch:  In these uncertain times, credit markets continue to be very tight.  Because of the continuing failure of the nation’s banks, regulators and bank executive remain cautious, which means less credit availability.  Companies who need to deal with debts that are coming to maturity are likely to find less opportunity to refinance.  As a result, we can expect more corporate bankruptcies and more job losses.   
   

Many economists are calling for more stimulus money by the federal government, but it is clear that what the country really needs is smarter spending.  We desperately need to make investments with government funds that will deliver strong returns on the nation’s money, and thus, we believe that the federal government ought to invest in new technologies that will turn America’s trade deficits into strong surpluses. It is precisely for that reason that this is the right time for a ‘Manhattan Project’ on energy independence.

Yeah, between summer vacations and back-to-school, my wallet’s pretty tapped out. Yours too? How about a nice change of pace: free stuff!

1. Free TV and Movies: Seems like there’s nothing good on TV these days; good thing we’ve got Hulu.com as our go-to source for TV-over-the-Internet. Not only do they have hundreds of shows cataloged on their site, they’ll also tell you where to find other favorites. An umbrella site, ovguide.com, also serves as a massive pointer toward other TV and movie favorites.
2. Free Debt Help: feeling overextended? Evolution Finance (EF) just completed a new credit card debt help area. It’s chock-full of tips, definitions, and referrals for people who are feeling a little overwhelmed (or a lot overwhelmed) and want to get their debt load under control. EF is also the parent company of Wallet Blog, so I’m happy to assure you that it’s worth a look.
3. Free Music Education: Always wanted to learn to play the ukulele? Ukulele Underground offers free online video ukulele lessons, tabs, chords, and more. Go Piano offers free piano lessons from basic to advanced. And eHow offers a series of 15 videos that will get you started on the road to violin virtuosity. There are similar lessons on the Internet for every instrument — just type “free online <instrument> lessons” into your search engine and watch it go!
4. Free Food for Kids: About.com’s travel with kids host has cataloged many sites that offer coupons or information about where kids can eat for free (usually while dining with an adult who pays full price).
5. Free Time-Sucker: Facebook. ‘Nuff said.
6. Free Money for College: Besides the myriad grants and fellowships out there, you can start saving for your kids’ college now by registering for Upromise. By shopping online through upromise.com, eating at participating restaurants, or shopping at participating stores, you can be credited with bonus money in a Upromise account that can then be rolled over into a 529 account. Makes sense!
7. Free Mind Expansion: Find Hub is a compilation of all major search engines in one place. From comparison shopping to videos, from travel to maps and a dictionary to help you define it all, it’s a one-stop site and super convenient (and yeah, it’s under the Evolution Finance umbrella too, but it’s really helpful and you’ll like it).
8. Free Stationery: Once you register for Vistaprint, you’ll receive about four emails a week and they’ll all offer you free printed items. It costs a little more to upload your own designs (rather than using their templates), but it’s worth it! I’ve ordered from them for years and have never been disappointed — just make sure that you double-check that they don’t put their logo on the back side of anything you’re ordering.
9. Free Comparison Shopping: How did we ever save money before the Internet? Whether you’re looking for travel deals on Kayak.com, item deals on Shopping.com, credit card/gift card/prepaid card deals on Card Hub, or mortgage deals on Lending Tree, the Web is chock-full of sites that help you become a savvier consumer. Thanks, Tim Berners-Lee!
10. Free Credit Report: You are allowed one free credit report per credit-reporting agency each year. Get in on the fun at annualcreditreport.com. Watch out for other outfits that promise a “free” credit report — they usually sucker people into paying a subscription fee.
11. Free Software: Paying for software is so 1999. Nowadays you can use Google Apps for your personal and business use. Microsoft Office replacements are available online at OpenOffice, and you can keep  your PC safe via AVG’s free anti-virus protection.

Disclosure: Some links point to CardHub.com or FindHub.com, which are both owned by the same parent company as this blog.