Consumers Union, publisher of Consumer Reports, has written FDA Commissioner Andrew C. von Eschenbach to demand action on potentially harmful and deceptively marketed nanoparticles in sunscreen:

New findings published in Consumer Reports today confirm that use of certain nanoparticles is widespread in mineral-based sunscreens, and that company representatives are making erroneous assertions about these particles in their products.[...] Thus, our two test projects suggest that use of nanoparticles of titanium dioxide and/or zinc oxide in mineral-based sunscreens is widespread and that consumers will generally not be able to avoid exposure by buying mineral-based products that manufacturers say do not contain nanoparticles.

Full statement of the Chairman regarding the ways banks are abusing the first installments of their unprecedented $750 billion taxpayer bailout:

Washington, DC - House Financial Service Committee Chairman Barney Frank (D-MA) today released the following statement regarding provisions in TARP:

“I am deeply disappointed that a number of financial institutions are distorting the legislation that Congress passed at the President’s request to respond to the credit crisis by making funds available for increased lending. Any use of the these funds for any purpose other than lending— for bonuses, for severance pay, for dividends, for acquisitions of other institutions, etc.-- is a violation of the terms of the Act.

“I appreciate the fact that the Secretary of the Treasury has reemphasized that increased lending activity is the only legitimate purpose for taxpayer funding of these institutions. He must make it absolutely clear to any participating entity that the federal government will insist on compliance.

“On November 12th and November 18th the House Financial Services Committee will hold oversight hearings on legislation Congress has passed to cope with the financial crisis. It is very important if Congressional and public support for this program is to continue that we receive assurances at those hearings that the money being advanced will be used only for relending and for no other purpose.”

Our counsel for media and telecommunications reform, Amina Fazlullah, has sent letters to Attorney General Mukasey and to Department of Justice antitrust chief Thomas Barnette expressing our opposition to the proposed Google/Yahoo online advertising agreement on both antitrust and privacy grounds:

The combined market share of Google and Yahoo would probably exceed 90 percent. Such concentration raises concerns about a lack of competition in the paid search advertising market, which could have negative repercussions for content providers, advertisers and consumers. [...] In our opinion the proposed agreement induces the remaining paid search advertising outlets to resort to privacy invasive techniques which harms consumer privacy online and thus threatens online discourse in general.

Our allies at the Center for Justice & Democracy released a new report today THE BITTEREST PILL – How Drug Companies Fail To Protect Women And How Lawsuits Save Their Lives.

The report shows how critically important lawsuits have been in protecting women from unsafe or defective drugs and devices, and how women, in particular, would suffer should the U.S. Supreme Court give the drug industry complete immunity from lawsuits in the Wyeth case (to be argued Monday).

Diana Levine is a musician who lost her arm to gangrene following an adverse reaction, due to a poorly-administered and overdosed injection of a Wyeth antihistamine to treat nausea and migraines. The drug firm Wyeth's defense? That her state law claim for compensation is preempted because the injected drug had an FDA-approved warning label that her doctors should have read (previous blog). More from Diana Levine's counsel Public Citizen Litigation Group's Wyeth v. Levine case page.

Bush administration agencies have engaged in a massive campaign to eliminate longstanding state common law rights to sue companies when harmed by dangerous products. Not only does this system enable consumers to obtain compensation when harmed (the federal government does not provide compensation to victims), it also deters manufacture of dangerous products in the first place, perhaps even more than minimal federal standards do. Yet Bush agencies are asserting that compliance with federal law trumps not only state statutory law but also those state common law rights (previous blog). Also today, House Oversight and Government Reform Chairman Henry Waxman released a report Internal FDA Documents Show Career Staff Objected to Agency’s New Stance on Preemption.

We recently joined NACA and NCLC in an amicus (or friend of the court) brief in an important 11th Circuit case concerning the rights of consumers to enforce the federal Fair Credit Reporting Act (FCRA). In general, but in particular with the FCRA, when strong consumer remedies are eliminated by bad court decisions, then all consumers run the risk that credit bureaus and creditors will ignore the law even more than they already do. That will leave us all paying more for credit due to mistakes or even perhaps-intentional mis-interpretations that please creditor-customers at the expense of consumers. As an example of the importance of consumer enforcement of the FCRA, just a few months ago, a court stopped credit bureaus from mis-reporting debts discharged in bankruptcy. That class action is ongoing, but the injunctive relief is an important victory concerning the (information on White vs. Experian). Due to the injunctive relief granted, millions of consumers will benefit as credit bureaus are now forced to verify the accuracy of certain information received from creditors.

Without consumer enforcement, where would we be? The FTC occasionally, but not often enough, at least slaps a small fine at its regulated credit bureaus. But, when was the last time you recall one of the bank regulators penalizing a bank for violating the FCRA?

A peer-reviewed subcommittee report prepared for tomorrow's FDA Science Board meeting rips the agency's recent draft assessment (7mB pdf) finding that the toxic chemical Bisphenol-A (BPA) was generally safe. From the subcommittee report:

Coupling together the available qualitative and quantitative information (including application of uncertainty factors) provides a sufficient scientific basis to conclude that the Margins of Safety defined by FDA as “adequate” are, in fact, inadequate.

lacks an adequate characterization of uncertainties

does not articulate reasonable and appropriate scientific support

has important limitations.

Although the Food and Drug Administration will not reveal who prepared its draft, the agency's own documents show that the work was done primarily by those with the most to gain by downplaying concerns about the safety of the chemical. That includes Stephen Hentges, executive director of the American Chemistry Council's group on bisphenol A, who commissioned a review of all studies of the neurotoxicity of bisphenol A and submitted it to the FDA. The FDA then used that report as the foundation for its evaluation of the chemical on neural and behavioral development. The American Chemistry Council is a trade group representing chemical manufacturers.

If you read the subcommittee report, you can detect a high level of scientific outrage that the FDA in effect stacked the deck by excluding numerous peer-reviewed studies without cause, even though the assessment committee deemed them adequate.

Consistent and credible criteria for study inclusion, recommended by the Subcommittee, would be to use those studies that are judged as “adequate” by CERHR in the FDA hazard, dose-response and safety assessment of BPA. In addition, several studies of effects of BPA on adult humans and animal species that were published after the draft assessment was finished should be considered for inclusion in the final assessment.

More in BPA Ruling Flawed, Panel Says by Annys Shin in the Washington Post).

Chairman Henry Waxman (D-CA) of the House Committee on Oversight and Government Reform has sent letters to CEOs of major banks and Wall Street firms inquiring about their plans to continue to dish out massive bonuses and incentives in light of their receipt of billions of dollars of taxpayer aid. He says:

While I understand the need to pay the salaries of employees, I question the appropriateness of depleting the capital that taxpayers just injected into the banks through the payment of billions of dollars in bonuses, especially after one of the financial industry's worst years on record.

Following a recent major story in London's Guardian newspaper that estimated nearly 10% ($70 billion) of the $750 billion in taxpayer transfers to banks was already allocated to bonuses, Waxman's Senate investigative counterpart, Carl Levin (D-MI), Chairman of the Permanent Subcommittee on Investigations, had written (letter w/ Guardian story) Treasury Secretary Henry Paulson (himself of course a former Wall Street CEO from Goldman Sachs) asking how he was enforcing the new bailout law's limits on excessive compensation. Levin says:

It is unacceptable for financial institutions that have generated billions of dollars in losses, damaged the U.S. economy, and accepted a bailout, to maintain past levels of compensation.

I am getting calls from the press about credit card company use of behavioral credit scores to lower credit limits. According to press reports, American Express, at least, (MSNBC story) has admitted lowering the limits of otherwise good customers because they might shop at stores that customers who've defaulted on their cards also shopped at. I am sure other majors are also using behavioral scores. A credit score is derived from a regulated credit report. A behavioral score could be derived from a variety of unregulated information sources, including, in this case, where you use your card. "Experience and transaction" information is something that the bank obtains from your own account data. The bank can enhance it with commercially available outside data sources to develop a virtually unregulated dossier on you. Consumer groups including U.S. PIRG have long argued that "experience and transaction" information -- one of the richest sources of detailed information about you -- should be subject to greater privacy rights. It is not. I also said above that all the big banks are probably using behavioral scoring. So are the subprime lenders.

This summer, I had an entry about parallel FDIC/FTC legal actions against a subprime predatory "fee-harvester" credit card company known as CompuCredit. That firm is known for issuing low-limit cards of $250 or so with the catch of over $150 in upfront fees or more, leaving consumers with a now easy-to-exceed less than $100 limit right out of the box. In addition to calling the marketing of cards with such ephemeral limits deceptive, the agencies called a wide variety of the firm's other practices deceptive. Among these was its undisclosed use of behavioral scoring to reduce credit limits. For example, according to the FTC's complaint at page 34 :

75. CompuCredit has based these credit line reductions on an undisclosed “behavioral” scoring model that penalized consumers for using their cards for certain types of transactions, including transactions touted in their solicitation materials such as cash advances and transactions with the following types of merchants: • Direct marketing merchants • Marriage counselors • Personal counselors • Automobile tire retreading and repair shops • Bars and night clubs • Pool and billiard establishments • Pawn shops • Massage parlors. 76. In some instances, CompuCredit reduced subscribers’ credit limits to levels below their existing balances and then charged over-limit fees.

Steve Kroft of 60 Minutes did a nice piece last night The Bet That Blew Up Wall Street explaining how Congress got us deeper into the unregulated credit default swaps/derivatives mess with the Commodity Futures Modernization Act of 2000 (my previous blog). The story features Professor Harvey Goldschmid, a former SEC Commissioner, although his page is still archived at the SEC.

"Is it your impression that people at the big Wall Street investment houses knew what was going on and knew the kind of risks that they were exposed to?" Kroft asks. "No. My impression is to the contrary, that even at senior levels they only vaguely understood the risks. They only vaguely followed what was going on," Goldschmid says.

The vehicle for doing this was an obscure but critical piece of federal legislation called the Commodity Futures Modernization Act of 2000. And the bill was a big favorite of the financial industry it would eventually help destroy.

It not only removed derivatives and credit default swaps from the purview of federal oversight, on page 262 of the legislation, Congress pre-empted the states from enforcing existing gambling and bucket shop laws against Wall Street.

"It makes it sound like they knew it was illegal," Kroft remarks.

"I would agree," [New York Insurance Commissioner] Dinallo says. "They did know it was illegal. Or at least prosecutable."

In retrospect, giving Wall Street immunity from state gambling laws and legalizing activity that had been banned for most of the 20th century should have given lawmakers pause, but on the last day and the last vote of the lame duck 106th Congress, Wall Street got what it wanted when the Senate passed the bill unanimously.

In today's New York Times, Brad Stone's story Banks Mine Data and Pitch to Troubled Borrowers explains how the Big Three credit bureaus continue to develop new data sources and methods that allow them to sell even more sophisticated consumer profiles and dossiers to lenders. The firms are exploiting the light hand of the FTC to expand their use of the credit and insurance "pre-screening" exceptions to the Fair Credit Reporting Act's otherwise strict limits on the use of credit reports for marketing.

Back in December, USA Today also had a nice story that explained how certain credit bureau products such as "trigger lists" or "lead generators," coupled with the aggressive online direct-to-consumer advertising of some of their subsidiaries, such as lowermybills.com, were contributing to the mortgage bubble. As I blogged at the time:

In the view of many, the lists do not meet the criteria to qualify for the special [pre-screening] exception. But the FTC claims that they do, in some very thin letters and fact sheets lacking any buttressing legal authorities. Incredibly, the FTC, the credit bureaus, and the subprime mortgage crisis are also linked to the Internet advertising bubble. Lowermybills.com was and may still be one of the biggest web advertisers. You do have a right to opt-out of pre-screened lists. You can call 1-888-5-OPTOUT or find out more about doing so by mail or on the web from the FTC.

Arthur Levitt, SEC Chairman under President Clinton, has an op-ed How to Restore Confidence in Our Markets in today's Wall Street Journal (pd. subs. req'd) calling for consolidation of the SEC and the Commodity Futures Trading Commission (CFTC), which nominally, at least, governs the derivatives and futures markets (previous blog). It's a timely piece, since the massive "Paulson blueprint" issued last spring instead calls for consolidation of most authority under the Fed. From Levitt:

This approach differs dramatically from the one proposed by Treasury Secretary Henry Paulson last year. He advocates gutting the SEC and the CFTC of their mandates, and placing the Federal Reserve and (mostly) Treasury at the helm of our markets. The Federal Reserve's responsibility is monetary policy and the stability of depository institutions, a mission often at odds with investor protection, and it should remain separate. Treasury is a political entity controlled by the president -- just imagine what our financial markets would look like if controlled by the White House.

The CPSC has issued an urgent safety warning to all parents with cribs to check for shoddy hardware or design that could lead to hazards for their infants. The agency especially singles out "drop-side" cribs. The agency's announcement was prompted by two deaths in Delta Enterprise cribs. The CPSC announced that Delta Enterprise has agreed to recall 985,000 cribs for replacement of a missing safety peg and an additional 600,000 cribs for other drop-side hazards.

In Melanie Trottman's story in the Wall Street Journal (pd. subs. req'd):

Some consumer advocates say the CPSC's action is long overdue, and say at least some of the cribs involved in the latest string of recalls were certified by the Juvenile Products Manufacturers Association, a U.S. trade group whose stamp of approval can lead consumers to believe a product is safe. "Clearly something in the voluntary standards is not catching these serious flaws," said Nancy Cowles, executive director of Kids in Danger, a Chicago child-safety advocacy group.

The recalls follow highly-publicized massive recent recalls of Simplicity cribs following at least two other deaths. That process was slowed and complicated by the bankruptcy of Simplicity; the private equity firm that had purchased its assets claimed no responsibility for its liabilities.

Provisions in the new Consumer Product Safety Improvement Act will subject durable nursery products, including cribs, to mandatory standards and stricter enforcement, following years of consumer groups at loggerheads with the crib manufacturers, their lobbyists, their lawyers, their associations and even the independent standards development firms such as ASTM that develop the voluntary standards now in use, as Annys Shin points out in her Washington Post story:

Consumer advocates have tried unsuccessfully for much of the past decade to get ASTM to develop a more comprehensive durability standard, said Donald Mays, senior director of product safety for Consumers Union.

The Nobel Prize-winning economist Joe Stiglitz made a number of important points in his testimony today before a hearing of the House Financial Services Committee. It is truly a must-read, and it is in English, unlike the gibberish spoken by many of his colleagues. Among numerous other important points, he opposes the notion being pressed hard by the banks to eliminate "mark-to-market" accounting. He also suggests that the recent death-bed conversion of the two remaining at-risk Wall Street investment banks into bank holding companies poses risks to the deposit system and requires better "ring-fencing" to protect the taxpayer-backed insurance funds:

The fact that two investment banks have converted themselves into bank holding companies should be a source of worry. They argued that this would provide them a more stable source of finance. But they should not be able to use insured deposits to finance their risky activities.

We have yet another Strategic Plan to combat identity theft. Government likes issuing strategy papers. Unfortunately the tactics proposed are inadequate to protect ordinary Americans from hassles created by the sloppy data practices of the public and private sector. Identity theft is booming partly because it is a simple skill that can be taught to thieves still in short pants who are not destined to become rocket scientists. Until we improve consumer rights to compensation from the companies that lose our data to their simple schemes, the firms will continue to be negligent about protecting it better.

And while the government may be trumpeting the increased penalties recently enacted for committing "aggravated identity theft," I would note that recent news stories suggest that these penalties are being used more to threaten individual undocumented low-wage immigrants than to hold identity theft kingpins to account.

As I repeatedly told government officials in meetings and conference calls over the last 18 months of the development of the report, its failure to recommend adequate restrictions on private sector uses of Social Security Numbers means it won't work well. Further, despite the stunning record of over 40 state governments in enactment of security freeze and data breach identity theft protections since passage of the federal Fair and Accurate Transactions Act (FACTA) of 2003 (which allowed stronger state identity theft laws), the report refers to the usual pejorative "patchwork" of state laws and calls for uniform national standards to preempt stronger, or newer state security breach notification efforts. Even worse, nearly every such federal proposal I have seen would not only establish uniform national breach law standards, it would also broadly preempt other state privacy efforts. Proposing yet again to preeempt the states, and taking 50 important tools out of the democracy toolbox, shows that the conservative principle of federalism doesn't matter to this President.

For more on the government's position against stronger state law health and safety protections, see this brief commentary Safety Last by law professor David Vladeck in The Nation.

Professor and Internet guru Larry Lessig (and author of the new book Remix (previous Remix blog)) has a New York Times op-ed today: Copyright and Politics Don’t Mix. The editorial discusses the threats to long-standing consumer fair use rights to use limited excerpts of copyrighted material. The problem is caused by TV networks and record companies demanding under the obtrusive Digital Millennium Copyright Act that YouTube remove homemade videos and political ads that use snippets of their audio and video (clearly fair uses) in them. Excerpt:

THROUGHOUT this election season, Americans have used the extraordinary capacity of digital technologies to capture and respond to arguments with which they disagree. YouTube has become the channel of choice for following who is saying what, from the presidential campaign to races for city council. But this explosion in citizen-generated political speech has been met with a troubling response: the increasing use of copyright laws as tools for censorship. [...] It would be far better if copyright law were narrowed to those contexts in which it serves its essential creative function — encouraging innovation and ensuring that artists get paid for their work — and left alone the battles of what criticisms candidates for office, and their supporters, are allowed to make.

Lost in the "that's so last week" horse race analysis of the mortgage bubble and daily mood swings on the exchanges is the critical battle over regulation of credit-default swaps, the complex financial derivatives that essentially brought down AIG. The market for the products swelled to $55 trillion (much larger than the actual value of any of the securities actually insured) after an amendment exempting them from regulation (pushed by Sen. Phil Gramm R-TX) became law in 2000 as the Orwellian-named Commodity Futures Modernization Act. That law gave us the "Enron loophole" that exempted energy futures trading but it also deregulated credit default swaps. These products are used as a form of insurance, or an offsetting bet against the possible failure of your risky securities portfolio. The Washington Post story 3 Agencies Vie for Oversight of Swaps Market by David Cho and Zachary A. Goldfarb explains that the SEC, the CFTC and the New York Fed (which seeks to "watch" a private self-regulatory system run by the banks) each have a dog in the fight.

"Some regulators say the market can operate largely on its own but simply needs more transparency. Others say that the credit crisis has exposed wide gaps in oversight that require a much more direct role by the government."

These unregulated swaps have been at "the heart of the subprime meltdown," says Greenberger. "I happen to think Gramm did not know what he was doing. I don't think a member in Congress had read the 262-page bill or had thought of the cataclysm it would cause." In 1998, Greenberger's division at the cftc proposed applying regulations to the burgeoning derivatives market. But, he says, "all hell broke loose. The lobbyists for major commercial banks and investment banks and hedge funds went wild. They all wanted to be trading without the government looking over their shoulder."

From the Guardian (UK) Wall Street banks in $70bn staff payout: Pay and bonus deals equivalent to 10% of US government bail-out package:

Staff at six banks including Goldman Sachs and Citigroup are in line to pick up the payouts despite being the beneficiaries of a $700bn bail-out from the US government that has already prompted criticism. The government's cash has been poured in on the condition that excessive executive pay would be curbed. Pay plans for bankers have been disclosed in recent corporate statements. [...] None of the banks the Guardian contacted wished to comment on the record about their pay plans.

Bob Herbert's column today Climbing Down the Ladder talks about the impact of the mortgage crisis on older homeowners: "Losing a home to foreclosure is a disaster for anyone. It’s a catastrophe for older people." Also, Gene Sperling and Michael Barr of the Center for American Progress have a well-reasoned column Poor Homeowners, Good Loans that obliterates the mean-spirited, fact-less campaign to blame it all on the Community Reinvestment Act.

It is not tenable to suggest that the Community Reinvestment Act, which was enacted more than 30 years ago, suddenly caused an explosion in bad subprime loans from 2002 to 2007. During the 1990s, enforcement under the reinvestment act was strong, prime lending to low-income communities increased and it was done safely. In 2000, a Federal Reserve report found that lending under the act was generally profitable and not overly risky.

UPDATE: In Sunday's New York Times: F.B.I. Struggles to Handle Wave of Financial Fraud Cases

ORIGINAL: If, as some free market and other commentators persistently claim, the worldwide financial crisis was caused by reckless home buyers knowingly abusing cheap mortgages they couldn't pay, why does the Washington Post report today that

Lehman Brothers, the giant investment bank that last month filed the largest bankruptcy in history, is the subject of at least three federal criminal investigations that have subpoenaed a dozen top executives, according to a person familiar with the matter. [...] and [...] Lehman is one of at least 26 firms being examined by federal authorities investigating potential fraud and wrongdoing in connection with the worst financial crisis since the 1929 stock market crash.

In today's New York Times, an editorial The College Credit Card Trap features our U.S. PIRG Education Fund's truthaboutcredit.org project:

With financing from the Ford Foundation, Uspirg has begun a national campaign urging schools to adopt some common-sense principles that would help shield students from credit card marketers and financial ruin.

The group calls on universities to stop selling the names and contact information of currently enrolled students to credit card marketers. It also says that schools should ban marketers from using gifts to entice students to sign up for credit cards, and it urges schools to do more to educate students on managing debt responsibly.

Most importantly, the group calls on schools that still decide to cut deals to only do business with credit card companies that steer clear of commonly used but unscrupulous credit card terms that take advantage of students. That means an end to hidden fees or unreasonable penalties, including universal default, under which interest rates go up when the customer fails to pay a bill not related to the credit card account.

In addition to the Presidential and Congressional elections, there are numerous important questions on the ballot (see Ballot Initiative Strategy Center list) around the nation. Two of the most important are in Arizona and Ohio, where predatory payday lenders are spending millions to confuse citizens into supporting their campaigns to continue making triple-digit APR small loans. Yesterday, Arizona PIRG and Arizonans for Responsible Lending issued a release with the lede:

Early findings of a University of Arizona study find that 5 percent of University of Arizona freshmen took out a payday loan last year, as reported by two professors at the University of Arizona’s Norton School of Family and Consumer Science.

In Ohio, the lenders have apparently finally qualified (after a messy signature campaign) their measure that seeks to overturn a recent law criminalizing payday lending. We urge a YES vote on issue 5 in Ohio to sustain the new law capping payday's typical interest rates of 391% APR or more at a reasonable 28%. This new report from Policy Matters Ohio finds that credit counselors oppose payday lending.

Oh, and don't forget, in Arizona, the Consumer Rights League is actually the bad guys. In Ohio, watch out for Ohioans for Financial Freedom. Both groups are among the astroturf fronts created by the industry's national lobby with the nice "hey, neighbor" sounding name, the Community Financial Services Association. They're on the run around the country, but they've still got millions in profits extracted from the pockets of hard-working Americans that they're driving into Ohio and Arizona by the truckload. Ohio and Arizona are critical battlegrounds in the campaign to end predatory lending.

I haven't read it yet, but Professor and Internet idea-sharing and free culture guru Larry Lessig's latest book Remix is out in hardcover...and, of course a freely downloadable version with a Creative Commons license (no full copyright) will be out soon. Excerpt from one review on its website:

Lessig sketches a program of legal reform and culture practice that is a cogent first step in this process. He closes with the exhortation that "there is no justification for the copyright war that we now wage against our kids. Demand that the war stop now."
Wesley Yang, AmLawDaily.

I believe we are moving into a new kind of cultural if not economic reality. We are moving away from a world organized around centralized control, strict intellectual property rights and hierarchies of credentialed experts, to a radically different order. The new order is predicated upon open access, decentralized participation, and cheap and easy sharing.

More and more, it is clear that while the collapse of the U.S. mortgage bubble was the harbinger of the world economic collapse, it wasn't risky borrowers (previous blog) that caused the debacle, it was lax oversight and lack of oversight. Yesterday, the House Agriculture Committee, which has jurisdiction over the Commodity Futures Trading Commission, held a hearing on credit derivatives and over-the-counter (OTC) credit default swaps. From acting CFTC Chairman Walter Lukken's testimony: "Yet, these OTC swap transactions are largely unregulated." Yesterday, the Washington Post's detailed analysis What Went Wrong explained that misguided deregulation and failure to regulate in the 1990s led to the Enron fiasco and also contributed to the increased risk-taking by financial institutions in this market. The story detailed how laudatory 1990s efforts by then-CFTC chair Brooksley Born were derailed by other regulators, including Alan Greenspan (Fed), Robert Rubin (Treasury) and Arthur Levitt (SEC). Then, after she left, Senator Phil Gramm (R-TX) stepped in with legislation to deregulate the agency even further. Then, as the story continues, things only got worse when the SEC was forced to accept voluntary self-regulation of financial industry risk management systems-- the system excoriated in the recent SEC Inspector General's scathing report on the Bear, Stearns collapse.

Read What Went Wrong. It's a good summary of how politics gets in the way of policy. Also see this Texas Observer story explaining how former CFTC chair Wendy Gramm created a special-for-Enron energy futures loophole in 1993, then became a member of its board.

Risky mortgage products, not risky borrowers, are the root cause of the mortgage default crisis, according to findings from a new study of default rates among low-income and minority home buyers conducted by the University of North Carolina at Chapel Hill's Center for Community Capital.

The researchers, looking at affordable mortgage programs for low- and moderate-income consumers, found that home-loan borrowers with similar risk characteristics defaulted at much higher rates when they used subprime mortgages not made for Community Reinvestment Act (CRA) purposes.

Federal investigators have organized a task force to examine any wrongdoing at Washington Mutual, the troubled savings bank that regulators seized and sold to JPMorgan Chase late last month.

Over at Credit Slips blog, Professor Adam Levitin has several posts (this one and this one, too, e.g.) analyzing the way that the partial taxpayer nationalization of banks really works:

The important thing to notice about the Treasury's "equity" injection into major financial institutions is that it is equity in name only. The preferred stock the Treasury is taking is at a prescribed dividend (5% for 5 years, 9% thereafter) and has no voting rights. Economically, it is a subordinated loan without a term.

How come the "what, me worry?!" attitude was so pervasive? As we know by now, no market participant -- mortgage brokers, banks, securitizers, hedge funds, and so on down the line -- had an incentive to consider the risk on their books. They could always pass it on to somebody else. In economics, this is known as the "theory of the greater fool", to whom the risk can be passed on. This is the problem that needs to be rectified through proper regulation.

The American Association for Justice has an important new report Get Out of Jail Free documenting the unprecedented partnership between the Bush administration and corporate lobbyists to use agency rulemakings as a vehicle to diminish consumer legal rights. The strategy has been used by FDA (drugs and medical devices), NHTSA (roof crush) and CPSC (mattress fire safety). Each agency (absent Congressional authority to do so) has issued at least one (FDA many more) rule that claims that as long as a product meets the rule's requirements, consumers have no right to go to court if harmed. The new report is based on Freedom of Information Act (FOIA) requests.

The FOIA documents detail a Bush regulatory strategy called preemption. In short, the Bush administration has decided that federal rules should usurp – or preempt – the rights of states to protect their citizens with stricter safety standards. In turn, consumers can no longer use the state protections when harmed by negligence or misconduct, giving total immunity to corporations instead. AAJ has tracked how the administration’s first attempts to preempt states rights utilized friend-of-the-court briefs on behalf of corporations in civil justice cases. After only mixed success, the administration then shifted strategies, targeting instead regulatory agencies in charge of product safety oversight.

The Wall Street Journal has a story today by Alicia Mundy Bush Rule Changes Could Block Product-Safety Suits (pd. subs. req'd) on the preemption issue and on the U.S. Chamber of Commerce's efforts to limit consumer legal rights. From the WSJ:

The use of rulemaking to protect corporations from product liability was discussed from early in the Bush administration, said former Bush domestic-policy adviser Jay Lefkowitz, who was instrumental in the process.

Our previous blog on the "merry band" of industry lawyers moving between federal and lobbying posts to coordinate these tawdry efforts to limit access to the courts. There are two major reasons consumers need to be able to sue companies that make dangerous products. First, no rubber-stamp federal law is ever adequate to protect the public and no federal law is ever nimble enough to respond quickly to marketplace changes that increase safety risks. Only the threat of paying damages causes companies to make their products safer.

Second, no federal law provides compensation to victims who've been harmed by dangerous products. Without access to the courts, consumers have no access to justice and no compensation for their injuries.

Over the last several weeks, opponents of fair lending and naive others looking to blame something other than deregulation, lax regulation and excessive risk-taking by Wall Street for the worldwide financial crisis have ginned up a sometimes mean and manifestly undocumented and false campaign that seeks to place the blame for the entire global economic collapse on one small, but important, obligation of banks. A law known as the Community Reinvestment Act of 1977, or CRA, imposes reasonable obligations on banks to make loans in the communities where they take deposits. It does not require that those loans be subprime nor does it allow community groups to hold banks hostage, let alone control the world economy. The Center for Responsible Lending has more; so does an editorial Misplaced Blame in today's New York Times.

When the emergency bailout was proposed, consumer groups demanded that taxpayers gain an ownership stake not only in toxic assets, but banks (and their potential profits) participating in the bailout program themselves. While early drafts of the new law were unclear on this point, a floor discussion (colloquy) by Financial Services Chairman Barney Frank (D-MA) insisted that this authority was part of the bill. Now (Treasury Secretary Paulson statement; New York Times story) the free market Bush administration that slept while the crisis worsened is already broadly interpreting the two week old bill and announced today it is partly nationalizing some of the nation's banks as a condition of government aid. The firms will also face limits on dividends and executive compensation. The other question on everyone's mind is: will government-owned banks conduct their practices with less usury and fewer fee tricks that punish depositors and borrowers? At a news conference today, Senate Banking Chairman Chris Dodd (D-CT) made a welcome and "about-time" call for enactment of major consumer protections, to be considered in a possible Congressional lame-duck session after the election, including limits on predatory lending and unfair credit card practices and implementation of bankruptcy reform. From Dodd's release:

Homeownership Preservation: 9,800 families enter foreclosure each day. We should declare a temporary moratorium on foreclosures so that lenders, servicers and homeowners can come together to try to restructure their loans on terms agreeable to all.

Stop Predatory Lending: The Federal Reserve’s rules barring unfair and deceptive mortgage lending practices are a step in the right direction. We need additional legislation to stop these practices, which have triggered the greatest financial crisis in at least eight decades.

Credit Card Reform: The credit card industry is characterized by behavior toward consumers by many issuers that is considered abusive and predatory. These practices in the area of mortgage lending have had devastating effects on consumers and the country – to avoid future economic crises, we must reform credit card marketing and billing practices.

Bankruptcy Reform: It is irrational and unjust that a family that owns one home receives less protection under our laws than a family that owns two or more homes. The average American homeowner should be able to seek the protection of bankruptcy court to save his or her home.

UPDATE 14 Oct 08: I've been in meetings in Brussels over the weekend with European consumer advocates as part of the Transatlantic Consumer Dialogue (TACD); we met with representatives of the European Commission and US State Department. Turns out that our European colleagues are extremely disappointed in Commissioner Kuneva's proposal -- below -- which would downgrade protections in many of the 27 EU member countries. The New York Times story, they tell me, reads like a press release from the Commissioner. We expect better from her. More news as we get it.

Original post: Today, the New York Times reports in the story by Stephen Castle Europe Prepares Consumer Rights Plan that European Commissioner for Consumer Affairs Meglena Kuneva (check that link later for a copy) will announce a directive that protects consumers in cross-border shopping. The PIRG-backed TransAtlantic Consumers Dialogue issued a paper in 2002 explaining some of the important fraud and consumer protection (products don't arrive, products don't work) issues. I am sure our European colleagues will have feedback on the proposal soon. I'd watch BEUC.org, the website of the European consumer federation. From the Times:

Under the commission proposal, which is subject to approval by the individual countries and the European Parliament, a common cooling-off period of 14 days would be established. In addition, prices and terms and conditions of sale would have to be explained on the sellers’ Web sites, and retailers would be prohibited from putting prechecked boxes for added-cost options on their sites. Consumers would have the right to be reimbursed for money paid for preselected options.

From the Wall Street Journal (pd. subs. req'd.):

In 2002, Angela Crespo, then Neurontin's senior marketing manager, emailed an outside firm that was contracted to write up the study's results: "We are not interested at all in having this paper published because it is negative!!" Pfizer declined to make the three employees in the emails available for interviews.

From the New York Times story Experts Conclude Pfizer Manipulated Studies by Stephanie Saul:

The drug maker Pfizer earlier this decade manipulated the publication of scientific studies to bolster the use of its epilepsy drug Neurontin for other disorders, while suppressing research that did not support those uses, according to experts who reviewed thousands of company documents for plaintiffs in a lawsuit against the company.

Merck had hired ghostwriters to produce scientific articles about Vioxx, then recruited prestigious doctors to serve as their official authors. [...] Last winter, Merck and Schering-Plough were criticized for delaying the release of a study on their best-selling cholesterol medication Vytorin...

Despite the products’ extraordinary popularity, every study performed in recent years shows that they have no therapeutic effect beyond sedation, and a growing number of reports have concluded that they can be dangerous.

At his House Oversight and Government Reform Committee hearing today on the collapse of insurance mega-giant AIG, Chairman Henry Waxman disclosed that AIG executives decided to splurge nearly half a million bucks on golf one week after accepting an unprecedented $85 Billion federal bailout. The firm's top executives loaded up their golf clubs and tennis rackets and sojourned out to the luxurious St. Regis Monarch Beach resort in California. From Chairman Waxman's opening statement:

The federal bailout occurred on September 16. Less than one week later, AIG held a week-long retreat for company executives at the exclusive St. Regis Resort in Monarch Beach, California. A photograph of the resort is on display. Rooms at this resort can cost over $1,000 per night. Invoices provided to the Committee show that AIG paid the resort over $440,000, including nearly $200,000 for rooms, over $150,000 for meals, and $23,000 in spa charges.

According to the resort's website:

Situated high on a bluff overlooking the majestic Pacific Ocean, stands a landmark resort of legendary proportions. Located midway between Los Angeles and San Diego, the Tuscan-inspired St. Regis Resort, Monarch Beach is devoted to the pursuit of service and elegance with a seamless blend of comfort and technology.

Chairman Henry Waxman (D-CA) of the House Oversight and Government Reform Committee is drilling down into the financial and economic crisis. You can see yesterday's Lehman hearing materials here and watch a hearing video, including the written testimony of Lehman CEO Richard Fuld. Today, he goes after AIG in a hearing that features its founder Maurice Greenberg, as well as the "what went wrong?" critique testimony by Mr. Lynn Turner, former chief accountant at the SEC under the Clinton Administration. From Turner:

American International Group (“AIG”) serves as a reminder and an unfortunate but excellent example of what is wrong with our financial system today. While there are many capital market participants that operate within ethical and legal boundaries, there have been far too many that have not. We began the decade with names such as Enron and Worldcom, followed by the revelations regarding Wall Street analysts misleading investors, then on to the mutual fund late trading and market timing scandal, then the stock option back dating at companies such as United Health, and now we find ourselves in the midst of the biggest and most destructive crisis of all—the subprime fiasco. This is a crisis that could have, and should have, been averted before it cost American taxpayers what appears may be in excess of a trillion dollars before all is said and done.

Last week we sent letters to the Senate and the House urging members to oppose the Wall Street bailout unless it included the key mortgage modification provision sought by all leading consumer, civil rights, community and labor groups (it didn't). As an attachment to that letter, we included U.S. PIRG’s Main Street Financial Reform Platform. In addition to listing the emergency reforms that needed to be included in the bailout (they weren't, at least not in adequate form), we laid out a five-part platform for development over the next 100 days so it could be considered in the first 100 days of the new Congress in 2009. In addition to proposing prudential regulatory reforms to prevent future fiascoes, the platform urges passage of the Consumer and Shareholders Protection Act, as proposed in 2002 as S. 3143 (his last proposal) by the late consumer champion Senator Paul Wellstone (D-MN). The proposal would establish a government-chartered, consumer-controlled organization to amplify consumer participation in government and counter the influence of the powerful special interests whose self-interested lobbying over the years contributed to the catastrophic failure of the legislative and regulatory systems to prevent this crisis. Its concept is based on that of the successful Illinois Citizen Utility Board (Illinois CUB). We'll have more on this and on the full platform in coming weeks.

Updated and name corrected In recalled-crib-company collapse news, Michael Greenwald Rosenwald (oops, also Annys Shin contributed) of the Washington Post has a story on Blackstreet, the private equity firm and parent of SFCA, which says it bought Simplicity's assets, but not its liabilities. The cribs had been recalled (previous blog) due to the deaths of several infants. From the Post story A Test of Blackstreet's Strategy: [Blackstreet founder Murry]

Gunty declined to speak in detail about the bassinet issue, saying only: "With respect to Simplicity, I'm the father of three young kids, and I cannot imagine the loss these families have suffered. It's very tough, and we want to do the right thing here." Blackstreet's lawyers have argued that it bought only Simplicity's assets, not its liabilities, even though government officials are seeking "all legal remedies" against the company. Asked several times what the "right thing" was, Gunty would say only, "It's a very tough situation, and we want to do the right thing."

Here's the final paragraph of the story, with some incredible quotes from Mr. Ray Rice, an investor in the Blackstreet firm:

Rice, for one, is not overly concerned about Blackstreet's potential liability. While he said it is a "terrible, terrible, terrible tragedy when somebody loses a baby" -- he has grandchildren -- Rice also stressed that he didn't think Blackstreet had any liability. "I don't think I'm exposed to a darn thing," Rice said. "I don't think the fund is exposed." But even if the Simplicity deal does turn bad -- if people stop buying the products altogether -- Rice said, "If Simplicity gets wiped out and the equity gets wiped out, it's just a loss."

Last week Citibank made a federally-assisted $2 billion offer for Wachovia's banking assets only, then on Friday Wells Fargo countered with $15 billion of its own money for all of Wachovia. The battle is playing out in state and now federal court filings (Associated Press and Washington Post). Seems as if mighty Citibank made kind of a low-ball offer and the government jumped too soon...now the government may try to cut the cake, giving each a piece to speed the deal and get all the lawyers out of court where they appear to be depleting Wachovia's value further in legal fees.

Well, if all those Countrywide subprime option ARM loans were entered into by knowing consumers who understood the "fair" terms of their contracts, why has the new Countrywide owner, Bank of America, agreed to an $8 billion (record by far) settlement over predatory practices with those pesky state Attorneys General? From the Wall Street Journal (pd. subs. req'd):

With this settlement, we have the first-of-its-kind mandatory loan modification program," said Illinois Attorney General Lisa Madigan, who had filed a civil lawsuit alleging that Countrywide engaged in unfair and deceptive practices. "This program is going to help homeowners stay in their homes, which ultimately helps investors," she added. "It will shore up communities and therefore it will help with the economy.

“Unlike last week’s congressional bailout, this loan-modification program provides real relief for borrowers at risk of losing their homes. Tragically, California and the other states have had to step in because federal authorities shamelessly failed to even minimally regulate mortgage lending.”

Countrywide deceived borrowers by misrepresenting loan terms, loan payment increases, and borrowers’ ability to afford loans.

For Immediate Release: Friday, October 3, 2008
Contact: Ed Mierzwinski, 202-546-9707x314

Statement of U.S. PIRG Consumer Program Director Ed Mierzwinski on Final Passage of Wall Street Bailout Legislation Today

“U.S. PIRG is deeply disappointed that Congress punted on enacting critical protections for taxpayers and homeowners in the Wall Street bailout legislation passed today.

There is no question that regulator inaction and ineptitude made things much, much worse.

Should the markets stabilize following this vote, Congress must realize that this is only a stopgap measure with nothing – not a single line in more than 400 pages – that guards against another collapse of the financial markets.

Further, all of the homeowner and many of the taxpayer protections touted by bill supporters are voluntary. We can only hope that Secretary Paulson will use the unprecedented and extraordinary power he has been given to stabilize the uncertain financial landscape for homeowners, consumers and communities. Protecting homeowners protects taxpayers.

We call on Congress to take up broad financial reform in the first 100 days of the new Congress. Next year’s reforms must include tougher, more prudent safety and soundness regulation, greater oversight of the regulators themselves, and elimination of predatory credit card and mortgage practices. It must also give consumers, depositors, small investors and taxpayers a bigger voice in financial regulation.”

-30-
PIRG's Wall Street Campaign pages

The House is expected to vote today on the new, 451 page Wall Street bailout (Rules Committee documents) with 350 added pages of tax extenders and sweeteners. Over at the Credit Slips blog, several professors with expertise in consumer bankrupcy have recent posts explaining why bankruptcy modification, the current system has no safety valve for homeowners, and that the bill doesn't add any. Professor Sovern, over at Consumer Law and Policy blog, posts links to bankruptcy scholarship also. Meanwhile activists (Washington Post story) have denounced the attempts by some opponents to blame the world financial meltdown on the important consumer law known as the Community Reinvestment Act or CRA. Chairman Barney Frank and other members of the Financial Services Committee have sent out a letter with similar criticism of the attacks, which I will post later.

Lost in the shuffle of the bailout news, on Friday, Senator Dick Durbin (D-IL) filed legislation, S. 3629, to "establish a new Consumer Credit Safety Commission, to provide individual consumers of credit with better information and stronger protections, and to provide sellers of consumer credit with more regulatory certainty." More information is not yet available at Thomas.loc.gov but should be in a few days. Over at Consumer Law and Policy blog, Professor Jeff Sovern explains the concept. Here's a working link (Jeff's in his post doesn't work) to one of several available articles where Professor Elizabeth Warren, one of the nation's leading consumer credit and bankruptcy experts, explains her idea. It's a good one. If the CPSC can ban dangerous toys, shouldn't there be a companion CCSC with the power to ban dangerous financial products? From Professor Elizabeth Warren:

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even if you meet all the credit terms. Why are consumers safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards?