Today, the House Financial Services Committee begins marking up (voting on) two key pieces of the financial reform puzzle -- derivatives legislation and the CFPA.

This New York Times editorial today That Promised Financial Reform supports our views on both derivatives and the CFPA, then urges legislators to reject industry demands:

Time and again over the last year we have heard lawmakers vow to protect the American public. We suspect most of them even meant it. But the lobbying power — and contributions — of the banks and the rest of the financial industry can be hard to resist. The House Financial Services Committee and all of Congress must resist and deliver robust reform.

We were among reform advocates who joined President Obama and several victims of financial chicanery at the White House Friday for an event urging swift passage of the Consumer Financial Protection Agency Act. President Obama singled out the U.S. Chamber of Commerce for special scorn in a strongly worded speech (video and full transcript and also, a new White House reform page). Excerpt:

"In a financial system that's never been more complicated, it has never been more important to have a watchdog function like the one we've proposed. And yet, predictably, a lot of the banks and big financial firms don't like the idea of a consumer agency very much. In fact, the U.S. Chamber of Commerce is spending millions on an ad campaign to kill it. You might have seen some of these ads -- the ones that claim that local butchers and other small businesses somehow will be harmed by this agency. This is, of course, completely false --..."

Great editorial How the banking lobby tries to undermine loan reform supporting the proposed Consumer Financial Protection Agency in Wednesday's USA Today. Excerpt: "One thing the industry doesn't have going for it are the facts." The proposed CFPA is a priority consumer reform for U.S. PIRG and other leading civil rights, labor, consumer and community organizations allied together as Americans for Financial Reform. A vote is expected next week in House Financial Services. Among the key issues: Whether we reinstate the states as laboratories of democracy and put state attorneys general back onto the corporate crime beat, or whether the banks and U.S. Chamber of Commerce succeed in gutting the bill's critical provision re-establishing federal laws as a floor not a ceiling of protection.

"Bank customer service" should become the new Webster's definition of oxymoron. The business model has morphed from "what can we do to help you?" to "How can we hurt you today?" Well, Ann Minch got tired of Bank of America's responses to her legitimate complaints about having her credit card rate jacked, so she's gone Hollywood. She stars in a new self-produced Youtube video that's generating a lot of buzz on the net -- 96,000 views as of Monday, says Arthur Delaney over at Huffington Post. The effort should help point out the need for a Consumer Financial Protection Agency. A CFPA would boldly go where no bank regulator has gone before -- to the aid of the consumer. That's why all the banks, and even the shrill U.S. Chamber, are mounting deceptive, misleading lobby campaigns to kill the proposal. Chairman Barney Frank (D-MA) of the House Financial Services Committee has announced additional hearings and a markup schedule for the CFPA and other reform bills. My previous CFPA blog.

Update: This should be posted at Financialstability.gov soon, but the Wall Street Journal has a link to the latest regulatory reform report. Also, the NY Times has a great editorial urging financial reform now.

Original post: Tuesday marks the day last year that Lehman Brothers failed and was not bailed out. Following its failure, Treasury Secretary Paulson, Fed chairman Bernanke and Tim Geithner, then New York Fed head, huddled with the remaining Wall Street titans over long September weekends to bail out the rest of Wall Street. What about the rest of us?

Well, since then, while the massive taxpayer and Fed infusions of cash have apparently staunched the economy's bleeding although not re-started it, not much has changed to prevent another financial crisis. Wall Street bankers living under the taxpayer TARP continue to pay themselves massive bonuses while Congress dithers under a withering assault from the bank lobby that claims it wasn't their fault -- it was some other guys who did it.

On Monday, President Obama speaks on the urgent need for financial reform at historic Federal Hall, which happens to be on Wall Street. We'll see if Congress listens. We're expecting critical votes on the Consumer Financial Protection Agency and other reforms soon. Opposing the CFPA has the shrill attention of the entire business community, simply because it will work to reduce risk and to hold them accountable. The system we've had in place did not work. It needs to change.

Gretchen Morgenson of the New York Times has a nice "Quis Custodiet Ipsos Custodes" piece on the need for reform: Her piece is called But Who Is Watching Regulators? and posits:

"Here’s a novel thought. Instead of creating more regulations to try to prevent this kind of mess from recurring, why not figure out how to hold regulators accountable when they perform as poorly as they did in recent years?"

Unlike the current regulatory system, which has failed because it was too close to the banks themselves, the CFPA will be accountable both to the Congress and the taxpayer. It is time for Congress to stop playing games with taxpayer and consumer wallets and enact real reforms. We look forward to the President's speech.

Law professor John Pottow, a Credit Slips blogger, has a nice Detroit Free Press op-ed explaining that the proposed Consumer Financial Protection Agency (CFPA) will help small banks. He issues a sharp criticism of the big-bank friendly American Bankers Association for its claims that the agency will hurt small banks:

Simple economics suggests the CFPA would actually help small banks, for at least two reasons. First, regulatory compliance costs are largely fixed. Big issuers do indeed have an advantage with fixed costs, as they can spread the costs over more borrowers. But the plain vanilla rule would lower fixed regulatory costs by providing one-time, simple-template approval for products underwritten by the CFPA. Smaller issuers should rejoice in this reduction of fixed costs as it chips away at the current advantages the regulatory structure accords large lenders. Second, and more important, plain vanilla products will achieve a transparency long overdue in the financial products market.

Following up on recent reports that bank fee income is being led by a whopping $38 billion in overdraft fees, in an editorial today called the Debit Card Trap the New York Times backs urgent calls for reform of bank practices associated with fee-laden debit cards.

According to a 2008 study by the F.D.I.C., overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent. The banks, which have grown addicted to overdraft fees, will almost certainly resist new regulation in this area. But there are several things that federal regulators must do to protect the public. First, banks must be barred from automatically enrolling customers in overdraft programs. This must be a service that customers opt in to — and only after they are provided full information about the fees and the penalties they will incur. These disclosure statements must meet the same rules laid out in truth-in-lending laws, since overdraft charges are essentially short-term loans.

Recognizing that large financial institutions are more complex and pose larger regulatory costs and larger risks to the financial system, the Obama Administration correctly plans to charge higher differential regulatory fees to big banks. Already, the tireless K Street apologists for the Wall Street companies that led the world economy into ruin are bleating: From the Washington Post:

"We think that it's outrageous to disproportionately and unevenly impose the cost of new regulation on the top banks," said Scott E. Talbott, the senior vice president of the Financial Services Roundtable, which represents the largest financial firms. The largest banks, he added, "should not be forced by the government to . . . pay the larger share of the funding costs of the [consumer financial protection agency] and regulatory oversight."

The PIRG-backed Media and Democracy Campaign has released A Public Interest Internet Agenda. Excerpt:

Connecting our entire nation via high-speed broadband will bring remarkable economic, social, cultural, personal, and other benefits. [...]But the quality of U.S. broadband access is lagging. According to the most recent statistics (December 2008) available from the Organisation for Economic Co-operation and Development (OECD), the United States ranks just 15th among developed nations in broadband penetration.

1. Broadband communications is a fundamental right. To ensure this fundamental right, there must be universal and open, non-discriminatory access to high-speed and high-quality broadband. Mobility, abundance, and privacy of broadband should be top priorities.

2. Good policy must be well informed. Federal policymakers must have access to reliable data on where broadband presently exists, at what speeds, of what quality, by what provider, how it is used by consumers, why certain consumers do not use it, and how other consumers integrate it into their lives. These data must be as granular as possible, and should be made available in raw form on the Internet for analysis by the public.

3. Policy should promote competition, innovation, localism, and opportunity. Locally-owned and-operated networks support these core goals of Federal broadband policy, and therefore should receive priority in terms of Federal support. Structural separation of ownership of broadband infrastructure from the delivery of service over that infrastructure will further promote these goals.

4. Government should use public resources and assets wisely. Policymakers should seek to leverage to the maximum extent possible the use of resources and assets such as publicly-owned spectrum, fiber and rights-of-way to achieve the goal of universal broadband access to the Internet.

5. Federal policy must stress digital inclusion and the service of historically disenfranchised communities. Stimulating broadband supply is necessary but not sufficient to achieve the goal of universal broadband. Policymakers must also promote digital inclusion initiatives to stimulate broadband demand and ensure that all U.S. residents have access to the digital skills and tools necessary to take advantage of the Internet’s enormous potential benefits in creativity, economic development and civic engagement. This benefits not just those who would otherwise be left behind on the wrong side of the Digital Divide; it benefits all broadband users.

Georgetown University Law Center Professor Adam Levitin has posted a research brief on the Consumer Financial Protection Agency proposal to his Credit Slips blog. He wrote it for the Pew Financial Reform Project. Adam writes in his blog:

"Many of the issues discussed in the research brief will be familiar to Credit Slips readers, but one thing that I believe is unique to the brief is a detailed examination of the supposed conflicts between safety-and-soundness and consumer protection. While this has been raised as a general specter [...] precious few examples of potential conflicts have been put forth."

First in a new blog series: Reasons we need a new consumer agency. This weekend, occasional New York Times columnist Randall Stross writes that Our Payments Were Automatic. Stopping Them Wasn’t. If you've ever attempted to get your bank or its regulator to take your side in any dispute involving the weak, consumer-unfriendly Electronic Fund Transfer Act, whether it's the Stross problem of a firm refusing to turn off automatic checking account debits or a a debit card fraud ("you must have given someone your PIN!" (Of course, debit cards don't need PINs)) or a debit card blocking problem or the illegal use of a demand draft to rip money from your checking account, then you can attest that we need a new Consumer Financial Protection Agency that will enforce and, where necessary, update this law. More on the weak EFTA law here.

Last week, Steve Bartlett of the Financial Services Roundtable told the New York Times that his goal was to "kill" the proposed Consumer Financial Protection Agency. Here's a letter of opposition from Bartlett's group and over a dozen other industry lobbies who were part of the financial meltdown but prefer business as usual. Meanwhile, the failed regulators who are also not happy about giving up power and turf testified before the House Financial Services Committee Friday. NY Times: Regulators Spar for Turf in Financial Overhaul. Washington Post: On the Hill, Finance Officials Draw Battle Lines on Reform: From the Post:

John C. Dugan, head of the Office of the Comptroller of the Currency, said he was worried that the new law would explicitly give states the right to regulate banks' interactions with consumers, making it harder for national banks to offer uniform products across state lines. "For the first time in the nearly 150 year history of the national banking system, federally chartered banks would be subject to this multiplicity of state operating standards,"

In testimony last week by Fed Governor Elizabeth Duke (a former American Bankers Association official) and yesterday by Fed Chairman Ben Bernanke, the Federal Reserve has argued that it deserves to keep authority over consumer protection. Neither admitted to nor apologized for any of the Fed's abject failures to protect consumers from unfair mortgages that led to the financial meltdown; instead, we heard that the Fed was "strongly committed" to consumer protection. From the New York Times: Bernanke Tells Senate New Agency Isn’t Needed. What a ridiculous conceit. I've taken our joint testimony from June before the House Financial Services Committee and extracted Ten reasons to establish a Consumer Financial Protection Agency instead of trusting that the Fed will change into a consumer agency. See it after the jump.

Ten reasons to establish a Consumer Financial Protection Agency instead of trusting that the Fed will change into a consumer agency.

1. It ignored the growing mortgage crisis for years after receiving Congressional authority to enact anti-predatory mortgage lending rules in 1994, only issuing final rules in 2008, after the crisis had peaked.

2. It took five years simply to consider credit card disclosure regulation, only adding provisions to ban unfair practices after Congress moved aggressively, and only finalizing rules in December 2008.

3. The Fed has allowed debit card cash advances (“overdraft loans”) without consent, contract, cost disclosure or fair repayment terms. Banks earn an estimated $38 billion in total overdraft fees each year.

4. The Fed is allowing a shadow banking system (prepaid cards), outside of consumer protection laws to develop and target the unbanked and immigrants.

5. Despite advances in technology, the Federal Reserve has refused to speed up availability of check deposits to consumers, even after it successfully campaigned to give banks faster access to our money.

6. The Federal Reserve has supported the position of payday lenders and telemarketing fraud artists by permitting remotely created checks (demand drafts) to subvert consumer rights under the Electronic Funds Transfer Act.

7. The Federal Reserve has taken no action to safeguard bank accounts from Internet payday lenders.

8. The Federal Reserve and other banking agencies have failed to stop banks from imposing unlawful freezes on accounts containing Social Security and other funds exempt from garnishment.

9. According to a 2008 GAO secret shopper study, the regulators have failed to enforce the Truth in Savings Act requirement that banks provide account disclosures to prospective customers. Worse, the Federal Reserve’s 1990s regulation implementing the act encouraged this practice.

9. The Federal Reserve actively and successfully campaigned to eliminate a Congressional requirement that it publish an annual survey of bank account fees.

10. Finally, the Federal Reserve missed or ignored the housing bubble, leading to a world-wide economic collapse, failing its primary duty as a systemic risk regulator. If it cannot do its primary job, why should it be expected to be able to accomplish the secondary job of consumer protection?

For more information, see pages 11-21 of the joint testimony of over a dozen consumer and community groups.

Just as the banks that helped destroy our financial system are fiercely opposing transformative financial reform, the health insurance lobby that has failed to develop a business model that will cover all Americans fiercely opposes the reasonable, but transformative, reform of offering a public plan option. Watch a video with U.S. PIRG's Larry McNeely at U.S. PIRG's Health Care pages. Read a column by Florida PIRG's Brad Ashwell Choice: Public Health-Care Option in the Lakeland, Florida Ledger newspaper. Excerpt after jump:

The reality is that the public option will be well positioned to implement the type of smart cost controls that the private insurers should have adopted long ago, but few of them did. It could create incentives for primary care, prevention and wellness; pay doctors for good health outcomes, not just the number of tests run and procedures performed; create incentives for utilizing patient centered research on which drugs and treatments work best; and ignore the hyperbolic sales pitches of drug company salesmen, instead opting for what is proven to work.

Professor Elizabeth Warren, who first proposed the idea of the Consumer Financial Protection Agency, has made a new Youtube video on the need for the agency. Over at Business Week, she also has an oped explaining why Consumers Need a Credit Watchdog. We were both interviewed for a CNN story yesterday -- I haven't found the video but the story is available: New consumer protection agency meets resistance. Excerpt:

However, the proposed agency is running into some resistance from the financial services industry. According to one of the industry's top lobbyists, stopping the agency is "our No. 1 priority."

Before we both testified the other day in the House Financial Services Committee, Professor Elizabeth Warren and I talked about the idea, right there in front of the door, with our videographer-intern, Ashi Soni. Click here or on the picture to go to Youtube. You can go to our action page to support the Consumer Financial Protection Agency. Tom Donohue, of the U.S. Chamber of Commerce, is pictured against. More on industry opposition to this sensible, necessary idea.

Keep checking our home page for more and more U.S. PIRG videos. Right now, Gary Kalman is also up there at uspirg.org -- talking health care reform.

We expect to see legislative language from the Treasury Department implementing President Obama's proposal for a Consumer Financial Protection Agency (CFPA) sent to the hill, probably Monday. Following Wednesday's House Financial Services hearing on the proposed CFPA (watch video, download testimony), the fight is just getting started. Industry groups have staked out their position: they strongly oppose an agency to protect consumers. They like the current system. But that system failed, the last I checked. But the bankers like it because they dominate its captured regulators. As the American Bankers Association's Ed Yingling testified as he sat right next to me: "We believe that a separate consumer regulator should not be enacted…." Further, the U.S. Chamber of Commerce will oppose a standalone agency "that cannibalizes regulatory expertise, adding yet another regulatory layer." (AP) The Chamber has also launched a $100 million campaign against “mounting government regulations:” (National Journal). Even the Wall Street lobby group (Securities Industry and Financial Markets Association-SIFMA) whose members’ excesses and greed exacerbated the collapse has a new campaign on ‘Populist Overreaction’ (Bloomberg).

The New York Times, in its editorial today On the Road to Regulation, points out that a key test of the new CFPA legislation will be whether it gives consumers the right to enforce the banking laws, too.

"Lawmakers will also have to ensure that the administration’s very good idea (link to previous editorial) for a consumer financial-products safety commission translates into a truly robust agency. One sign that is happening would be for the law to include a right for consumers to sue firms that violate certain doctrines established by the new agency."

After the jump, I have a lot more commentary plus links to news stories on what will be a critical reform battle between the banking lobby that failed our economy and the people and groups trying to ensure that it won't happen again.

That Times editorial On the Road to Regulation goes on to critique other parts of the Obama reform proposal, including its failure to democratize the Fed. Our coalition, Americans for Financial Reform, has made similar critiques. We look forward to working with the White House and the Congress to broaden and strengthen the proposals. We expect that the financial industry, whose excesses and greed led to the world's biggest economic collapse since 1929, will use its network of political connections and continued massive campaign contributions to oppose sensible improvements to and even attempt to weaken the Obama plan. As we told Business Week for their aptly titled story this weekend Financial Regulation: Industry Objections Increasing--Obama's plan for financial reform has sparked a growing chorus of protest from banks, hedge funds, and other interests, part of the industry's strategy is to "blame it on the other guy—they're hoping to water down reform, deflect criticism of their industry." Another way to look at what they are doing is this: invoking the Bart Simpson (video) defense: "I didn't do it, no one saw me do it, there's no way you can prove anything! Of course, the banks did do it, everyone saw them do it, and we can prove it." But, on Capitol Hill, "blame the other guy" works well to confuse and delay needed reforms.

There is plenty of coverage of the fight over the CFPA. Kevin Hall for the McClatchey papers Debate joined over new Consumer Financial Protection Agency:

In sometimes-testy exchanges, [Professor Elizabeth] Warren fought off suggestions by several Republican lawmakers that a new entity isn't needed, just new powers for existing regulators. "Congressman, that sounds like a good plan but that's what we have been doing for the last 70 years, and it hasn't worked very well," Warren responded.

Financial services companies are coming up with cash nobody knew they had to fight the proposal, which would put hidden credit card fees on a par with faulty bike helmets and flammable pajamas.

Denial, noun: An unconscious defense mechanism characterized by refusal to acknowledge painful realities, thoughts or feelings. The banking industry wasted no time declaring its opposition to President Barack Obama's recent proposal for a regulatory agency that would protect consumers from rapacious lending practices.

U.S. banks are fighting the Obama administration plan to create a consumer agency for financial services as they seek to protect fees, such as credit-card penalties that have almost doubled to $19 billion in five years.

Rep. Scott Garrett (R-N.J.) called the proposal an example of an "Orwellian, heavy-handed, government-knows-best mentality," and [Rep. Jeb] Hensarling [R-TX] said the new regulators would rule as "un-elected philosopher kings" over the financial services industry. Edward L. Yingling, president of the American Bankers Assn., also opposed the plan.

The chairman of the House Financial Services Committee, Barney Frank, scoffed yesterday at assertions that a new consumer protection agency would morph into “some out-of-control entity. There is no pattern of overregulation I can see in the consumer area, and I don’t see one here,’’

“Wall Street’s largest trade group has started a campaign to counter the “populist” backlash against bankers, enlisting two former aides to Treasury Secretary Henry Paulson to spearhead the effort.”

The best part of the plan is the creation of a Consumer Financial Protection Agency that would limit or forbid many of the worst bank practices still allowed under law. That includes excessive and surprise overdraft fees and outrageous credit card interest rates.

Over the past decade, federal bank regulators looked the other way as responsible loans were crowded out of the market by aggressively marketed financial products carrying hidden costs and fees. Tricky products, whose most “innovative” feature was their ability to obscure their true cost, led a race to the bottom that stifled innovation of any benefit to consumers. The aggressive marketing of these products caused an enormous loss of wealth across the middle class and sparked the current economic crisis.

Bank of America this year raised the maximum number of times customers can get hit with overdraft fees from five a day to 10. On top of that, it began charging a one-time fee of $35 if the account remains in the negative for more than five days. The bank also raised the monthly fee on My Access checking accounts to $8.95 from $5.95.

She added that in some cases, the bank changes have favored consumers. For instance, she said, the bank reduced the overdraft fee to $10 an item if overdrafts in a day total $5 or less.

Finally, this Huffington Post blog reports on an excellent exchange of views between Rep. Donald Manzullo (R-IL) and me, and fellow witnesses Elizabeth Warren and Ellen Seidman, during Wednesday's hearing. I think most Congressional witnesses would join me in saying that we enjoy engaging with the members. It's a lot more interesting than when a member uses most of his or her 5 minutes in a long statement with no real question involved.

The House Financial Services Committee has posted the testimony of nearly all the public witnesses for tomorrow's hearing on Regulatory Restructuring: Enhancing Consumer Financial Products Regulation. The joint testimony being delivered by me and Travis Plunkett of the Consumer Federation of America on behalf of over a dozen reform organizations is here. It's fully 56 pages long, so don't worry, we weren't going for a two-for-one discount!

Over at the White House blog, you can watch a video of President Obama talking about why he intends to fight for passage of the Consumer Financial Protection Agency. The video was filmed during his regular Saturday radio address. The President challenged the special interest opponents of reform to a fair debate (AP via Yahoo):

"I welcome a debate about how we can make sure our regulations work for businesses and consumers," Obama said. "But what I will not accept — what I will vigorously oppose — are those who do not argue in good faith." By that, Obama said, he meant those who defend the status quo at any cost. He didn't name any people or organizations, but said special interests are already mobilizing to fight change. He called that typical Washington. "These are the interests that have benefited from a system which allowed ordinary Americans to be exploited," Obama said. The president said he would stand up for his plans, saying: "While I'm not spoiling for a fight, I'm ready for one. The most important thing we can do to put this era of irresponsibility in the past is to take responsibility now."

"These interests argue against reform even as millions of people are facing the consequences of this crisis in their own lives. These interests defend business-as-usual even though we know that it was business-as-usual that allowed this crisis to take place."

One day after the President announced his support for a new Consumer Financial Protection Agency it is clear that the bankers are going to attack it on all fronts:

Banks “are really dumbfounded (NY Times) by the scope of this agency,” Edward L. Yingling, the president of the American Bankers Association, told The Times. “It’s not like the current regulators don’t have all the authority they need. You don’t have to blow up the system.”

"We intend to take our case to Congress to explain why we believe adding new layers (Jim Puzzanghera and Walter Hamilton in the Baltimore Sun) to a broken regulatory system is not the answer," said David Hirschmann, president of the Center for Capital Markets at the U.S. Chamber of Commerce.

Robert Litan, a senior fellow with the Brookings Institution, calls expanding state authority " a recipe for disaster. That could lead to 51 different laws" (Kathleen Pender in the SF Chronicle) and the need for banks to create 51 different products and disclosure statements, he says.

More stories discussing the Consumer Financial Product Agency: John Waggoner on Page One of USA Today, Jane Kim in the Wall Street Journal, Katherine Rampell in the New York Times blogs, Kimberly Palmer's U.S. News Alpha Consumer, Julie Satow in HuffPost, Connie Prater in Creditcards.com.

Update2: Here is our Americans for Financial Reform release responding to the announcement.

Update-- The White House has put up a whole new page on the regulatory reform proposal. Not all the links appear to be live yet, but should be live after the President speaks.

Here is the final 85 page outline of the President's proposal for financial reform that he will announce midday today. Again, this link may not work until after the speech.

Here is a working link to the scanned leaked version of that document.

John D. (Jay) Rockefeller IV, Chairman of the U.S. Senate Committee on Commerce, Science, and Transportation today announced a Senate Commerce Committee investigation into certain e-commerce marketing practices that generate thousands of mysterious monthly charges to consumer credit cards.

On many well-known websites, including Fandango.com and Orbitz.com, after consumers make a purchase, a hyperlink or “pop up” window appears and offers consumers a cash back reward if they sign up for a company’s online membership service.

The practices? Pre-acquired account telemarketing and "free-to-pay" scams. Without your informed consent, if any consent at all -- a company you "trust" (some of the companies you used to trust were called "banks") shares your confidential credit card, debit card or even checking account information with a "marketing partner" that it "trusts" to provide it with massive commissions after it signs you up for products you didn't order and clubs you didn't join.

In the free-to-pay variant, you might get a few weeks free. But unlike the Mickey Mouse Club, you don't even get a cool hat. You just get monthly bills and find it a royal pain in the neck to get your money back.

Yes, Virginia, it is "very true" that websites are sharing your credit card number with third parties that bill you for products you didn't order and club memberships for clubs you didn't join. But, you say, "I just clicked on a "special offer" popup and immediately closed the horrific page of junky offers. I had no idea they could, or would, enroll me for looking at a page for two seconds. They can do that?"

Yes, websites could and yes, they would. And they have for years (my previous blog). But maybe, as part of this investigation and the renewed Congressional oversight of the financial system, the old problem of "pre-acquired account telemarketing" will finally be solved.

The 1999 Gramm-Leach-Bliley Financial Services Modernization Act was supposed to fix a lot of things. It was supposed to remove barriers that prevented financial firms from becoming giant one-stop financial supermarkets that would create synergies, boost competition, offer consumers choices, lower prices and make America strong. How's that going for you?

In response to a rotten privacy scandal involving Memberworks and U.S. Bank, first uncovered by the Minnesota Attorney General, GLBA was also supposed to stop banks and other firms from sharing your credit card, debit card and even checking account numbers with "trusted" marketing partners without your consent. Who needs identity theft? An identity thief didn't steal your information and sell it. Your bank had it already and sold it.

Just as its consolidation of the banking industry didn't work out, GLBA didn't completely solve this problem, either, so after pressure from the state attorneys general, the FTC made changes to the Telemarketing Sales Rule to further limit the seamy practice of "pre-acquired account telemarketing" as explained in these supplemental comments of the Minnesota and Illinois Attorneys General. As the Minnesota comments make clear, it isn't just hard to avoid being signed up without consent, it's hard to cancel.

Some financial institutions have a “hotline” system so that consumer calls can be transferred directly from the customer service center at the financial institution to the retention department of the preacquired account seller. As one bank told its customer service representatives: We prefer that cardmembers contact the Business Partner directly when
attempting to cancel. However, when a call comes into [Bank], we will attempt to re-route the call to the Business Partner via an abbreviated warm transfer, i.e., we introduce the caller and then the Business Partner handles the call.

Unfortunately, GLBA and the TSR include only limited protections against pre-acquired account telemarketing and related "free-to-pay" scams. Let's hope Senator Rockefeller's investigation leads to more financial privacy reforms, including on the Internet.

Believe it or not, Vertrue even has a page warning about pre-acquired account telemarketing, even though that's its game.

More links:

My testimony from a 2002 Senate hearing on privacy and Gramm-Leach Bliley. Other pro-privacy witnesses at the hearing included the Minnesota and Vermont Attorneys General and Phyllis Schlafly, head of the conservative Eagle Forum. Among the industry witnesses was John Dugan, now head of the obscure, but powerful, federal OCC (previous blog).

An article from the Multinational Monitor about Memberworks and U.S. Bank.

New credit law will regulate Freecreditreport.com, a classic free-to-pay scam.

Well. as you can see, I am so excited about this investigation, this blog could go on and on...

With the backing of President Obama, the Credit Cardholders Bill of Rights (Maloney-D-NY) moves to the full House floor for a vote Thursday. It passed last year 312-112. But the banks are pulling out all the stops to kill or weaken or delay final reform. Here's what Time Magazine has to say in How the Banks Plan to Limit Credit-Card Protections.

Live blogging the Joint Economic Committee hearing on the financial system's Too Big Too Fail problem-- update 5 -recommend watching or reading this hearing's transcript, especially the Q&A with all the witnesses.

update 4 to a question, Joe Stiglitz says- "it is nonsense" that we couldn't compete globally if (we took strong actions to re-regulate and even reduce the size of these "too big to manage" banks that aren't doing as good a job as small banks and venture capital funds at building the economy.)

update 3 --Professor Simon Johnson is now ripping Washington's "solicitousness" toward the banks or what he calls "American oligarchs"; building on Joe Stiglitz's call for strict regulation and limits on the size of big banks, he is also calling for stricter enforcement of the antitrust laws to "break the oligarchy."

update 2 -- well, professor Stiglitz has just skewered the conventional wisdom and said that the TBTF banks should be subject to a public utility model and provide greater services to the unbanked - among other things- in return for their special treatment.

update 1 -- waiting for the hearing to start, I note that Nobel economist Joe Stiglitz - in his written statement - has pointed out that because the PIRG-backed Financial Product Safety Commission will make loans and credit cards and mortgages safer, that will lessen the TBTF problem "by taking risk out of the system." That means the big banks will "not be able to buy up big packages of financial products that have a high risk of non-payment." As always, Professor Stiglitz has made an important point in a way that everyone can understand. He is speaking now and pointing out that even though our financial system is over-sized, it has failed to serve everyone--the poor still go to checkcashing stores.

Along with over 130 consumer, labor, civil rights, community and responsible investing organizations, U.S. PIRG and the state PIRGs have urged the Obama administration and all members of Congress to base financial reform legislation on the recommendations of the Special Report on Regulatory Reform issued by the Congressional Oversight Panel. We are following up the Call with meetings on the hill and administration from representatives of the broad civil society signers of the "Call to Action." Excerpt:

In the face of a full-blown global economic crisis, bold action is needed now by leaders in Congress, the Administration and the federal government to repair our nation’s broken financial system, establish integrity in the financial markets, and facilitate productive economic activity that benefits all segments of our communities. It is only in doing these things that we can meaningfully address the public’s shattered confidence in the fairness of the financial marketplace and establish a healthy, robust and productive economy.

The good news is that a framework for the needed financial services regulatory reform already is in front of us: the “Special Report on Regulatory Reform,” released on January 29, 2009, by the Congressional Oversight Panel identifies the key principles essential for meaningful financial reform. Chaired by Professor Elizabeth Warren, the Panel was established by Congress to monitor the bailout and to help ensure that aid to the financial sector is accompanied by meaningful market reforms. The January report concluded that “the present regulatory system has failed to effectively manage risk, require sufficient transparency and ensure fair dealings.”

It proposes principles calling for reforms to:

more closely regulate financial institutions that pose systemic risk;

limit excessive leverage in key financial institutions;

increase supervision of the shadow financial system;

create a new system for federal and state regulation of mortgages and other consumer credit products;

put in place executive pay structures that discourage excessive risk taking;

reform the credit rating system;

establish a global financial regulatory floor; and

start planning now for dealing with the next crisis.

While I often blog on unfair consumer practices or products that threaten consumer health and safety, U.S. PIRG also seeks to protect taxpayer wallets by ensuring that government budget and spending policies make sense. In this National Journal experts' blog on transportation issues, one of U.S. PIRG's tax and budget experts, Phineas Baxandall, gets the last word (scroll down) in a debate on road privatization:

The notion that the next transportation bill will bring more private financing has taken on an air of inevitability. Elected officials have little incentive to question the truism. It gives people something to say about where additional money might come from without taking political heat for mentioning new taxes or fees. But upfront money for privatized roads is not akin to money falling from trees.[...]Congress will need to scratch beneath the surface of benign-sounding terms such as “innovative finance” and “public-private partnerships” (PPPs). We should remember that sub-prime mortgages and derivatives are also innovative finance. The troubled Freddie Mac and Frannie Mae are also PPPs. It should give us pause when Jim Chanos, an early critic of Enron, warns in Fortune magazine that Macquarie, the world’s largest private road operator’s financial practices bear “the hallmarks of a Ponzi scheme.”

After the jump, a few more odd Bank of America stories.

The lawsuit, filed in Federal District Court in Brooklyn late Thursday, contends that Bank of America “established, equipped and staffed” a branch office in the headquarters of Mr. Cosmo’s firm, Agape Merchant Advance. As a result, the lawsuit contends that the bank knowingly “assisted, facilitated and furthered” Mr. Cosmo’s fraudulent scheme.

Bank of America rebuffed earlier news reports that its chairman and chief executive, Ken Lewis, intended to suggest to President Barack Obama to separate commercial and investment banking. The Charlotte bank said in a statement, "Mr. Lewis was referring to people's understanding of banks and how they should view the difference between commercial and investment banks in terms of forming perceptions of their various activities."

It turns out he was just trying to tell the public where to direct its ire against "banking" in general: Hate those Wall Street bankers, but not the poor tellers in your local branch.

If the local police stumble onto a bank robbery, they will say "stop robbing now" and arrest the perpetrators. But after the Fed stumbled upon the blatantly obvious idea that credit card banks were robbing their customers, the Fed said, "Keep robbing now, then stop robbing in July 2010." So, according to widespread reports, banks continue to tighten down the thumbscrews on their customers, by imposing higher fees and new fees (how about that Chase $10/month fee?) and jacking most consumers, even good risks, to higher interest rates.

Now, there is hope. As noted today by Reuters, the Senate Banking Committee and a House Financial Services subcommittee are scheduled to mark up (vote on) two PIRG-backed credit card reforms next week. On Tuesday, 31 March, the Senate committee will consider Chairman Chris Dodd's (D-CT) Credit CARD Act, S. 414. Our previous letter of support is attached. On Wednesday, the subcommittee on Financial Institutions and Consumer Credit will consider Rep. Carolyn Maloney's (D-NY) Credit Cardholders' Bill of Rights, HR 627, which passed the House overwhelmingly last year on a 312-112 vote.

In the Senate, we expect that the banks will simply oppose the Dodd bill because it is more comprehensive than the Maloney bill, which largely tracks important but narrower Federal Reserve rules declaring routine bank practices as illegal unfair and deceptive acts. The Fed rule was approved in December but is not slated to take full effect until July 2010. In the Senate, the banks will say, "the economy is bad, don't hit us when we're down," and in the House they will say "Wait for the Fed, or at least delay Maloney until the same timeframe as the Fed." Consumers need protection now, not in 2010. Call your committee members, now. House Financial Services (full committee) members. Senate Banking Committee members. All can be reached through the Congressional switchboard at 202-224-3121.

Treasury Secretary Tim Geithner has announced his broad financial re-regulation plan as comprising four parts, and provided generally encouraging details on the first part, systemic risk regulation. His testimony and draft legislation proposed to the House Financial Services Committee today.
The four parts:

1. Addressing Systemic Risk
2. Protecting Consumers and Investors
3. Eliminating Gaps in Our Regulatory Structure
4. Fostering International Coordination

We also look forward, in coming weeks, to whether Geithner formally endorses a Financial Product Safety Commission, which we support and the President has generally supported in recent speeches. A plan without an FPSC would be a mistake. Geithner's testimony implies a single "strong" consumer regulator (good) but refers to "uniform" consumer protection (very bad). A plan where an FPSC preempts stronger state actions or limits state attorney general or other regulatory authority would be a mistake. A plan that allows weak, permissive, industry-friendly international treaties, often negotiated in secret, to trump stronger state and federal consumer protections would also be a mistake. As introduced in the House and Senate, the FPSC establishes a federal floor of consumer protection but allows states to go further. Laws that allow states to do better are the only consumer protection laws that make sense.

We testify this morning before the Subcommittee on Courts and Competition Policy of the House Judiciary Committee at a hearing on Competition in the Ticketing and Promotion Industry (you should be able to watch the hearing and download all testimony after 10am).

The hearing is really about the question: What were the behemoth monopolists Ticketmaster and Live Nation thinking when they proposed to merge instead of compete in the marketplace? Our testimony says: This merger is bad for consumers, bad for artists and bad for independent promoters. We also discuss the importance of NYPIRG's longstanding efforts to protect New York consumers against ticket scalping, question the long-term contracts between ticket and concert promoters and taxpayer-built venues and, finally, we condemn Ticketmaster's wretched, over-priced customer "service." Would you like convenience fees with that ticket? How about paying lots more than mail postage would cost for mere Internet "delivery?"

We also endorse the testimony of antitrust expert David Balto of the Center for American Progress Action Fund from Tuesday's Senate Judiciary hearing on the merger. We also approve this Huffington Post blog Stopping the Ticketmaster/Live Nation Merger by our colleague Jamie Love of Knowledge Ecology International. Our previous blog comparing the merger to the completion of Darth Vader's Death Star.

Rep. Peter DeFazio (D-OR) and seven colleagues have filed legislation, HR 1068, the Let Wall Street Pay for Wall Street's Bailout Act of 2009, that could become an important part of the long-term solution to the financial meltdown and help rebuild the economy. The bill is based on a proposal first made by Nobel Laureate James Tobin of Yale (Wikipedia on Tobin tax). HR 1068 would impose a small tax (0.25%) on securities transactions. The tax would have two effects: first, it would help pay for the bailout as noted in the bill's findings. Second, and more importantly, its imposition might act as a brake on the size of Wall Street and the number of securities transactions made by helping to deter speculation and "right-sizing" the economic sector, which, according to many economists, has spun out of control considering its mere intermediary role in the economy. As economist Dean Baker of the Center for Economic Policy Research has noted:

Such a tax could easily raise a $150 billion a year, enough to pay for a national health care program or a major clean energy initiative. A tax of this magnitude will have almost no impact on someone who intends to buy and hold a financial asset.

From Dean Baker:

No airline is going to be discouraged from hedging on jet fuel futures because of a 0.02 percent tax, nor will any farmer be dissuaded from hedging on her corn crop. Similarly, most long-term investors will not even notice the 0.25 percent tax when they buy or sell their stock. The reduction in transactions costs due to the development of computer technology over the last quarter century far exceeds the size of this tax. Most traders will be paying far less for their trades in 2009 with the tax, than they did in 1980 without the tax. The only people who will really be hit by the tax are speculators; people who buy futures at 2:00, with the intentions of selling at 3:00. Even a modest tax can put a serious dent in the profits of those whose business is short-term speculation. We will therefore see less of this speculation, but it is hard to see why we should care.

As members of the The Coalition for an Accountable Recovery, we're today co-releasing (PIRG news release) a memo compiled for the coalition by Celinda Lake's firm concerning voter attitudes toward transparency and recover spending. From the Lake Research/Topos memo "New Poll Shows Broad Support for Economic Recovery Package and Tough Government Accountability Measures":

Despite voters’ goodwill toward Obama and sense of optimism about the future, there is still widespread concern about the undue influence of special interests in Washington. Voters remain concerned about the lack of openness, oversight, and accountability in government.

Some of the strongest numbers in the entire survey revolve around voters’ support for pre-conditions for private companies receiving financial assistance from the government, which include “limiting executive pay, bonuses, and dividends to shareholders.” Eighty-four percent (84%) of Americans support these conditions, with 70% supporting these conditions strongly. In addition, more than eight in ten voters from every major demographic, political, and regional subgroup agree.

“We need disclosure and accountability for the states receiving stimulus funds just as we need it for the financial institutions receiving bailout money. Otherwise tax dollars may be spent on Bridges to Nowhere, stratospheric bonuses, and other boondoggles."

In two stories today, the New York Times quotes investment bankers defending their pay and bonuses, just one day after President Obama called that pay "shameful." But I think the more interesting comments occur in a NYT story from a week ago by Floyd Norris. But first, from today: In Getting Theirs Cuts Both Ways on Wall Street by Eric Dash and Louise Story, a young banker whines:

“I feel like I got a doorman’s tip, compared to what I got in previous years,” said a 30-something investment banking associate at Citigroup’s offices in Lower Manhattan.

Back to Floyd Norris, he interviewed economic historians for the story Wall Street Paychecks May Wither. After an analysis of a study that proves Wall Street workers are currently overpaid, by a lot, and their regulators outnumbered and outgunned, he quotes Professor Thomas Philippon, a study co-author:

“Some of the financial innovations we have seen are obviously inefficient,” he said. “A good chunk of innovation has to do with tax and regulation arbitrage. That is really a waste for the society.”

The GAO has released a withering report describing how America's most powerful corporations, including many federal contractors and numerous banks on the TARP taxpayer dole, hide income in tax haven countries. While this appears to most disinterested observers to be a stellar way to avoid paying their fair share of taxes, the report International Taxation: Large U.S. Corporations and Federal Contractors with Subsidiaries in Jurisdictions Listed as Tax Havens or Financial Privacy Jurisdictions lists a variety of reasons for the practice and does not draw conclusions. Nevertheless, one of its Congressional requesters, Senator Byron Dorgan (D-ND), stated in the Washington Post:

"This is kind of like economic patriotism," Dorgan said. "Americans were told you have to pony up some money to help these companies. And it's rather infuriating for them to find out now that those companies, when they were profitable, didn't want to pay taxes and found clever ways to hide their money overseas."

It is all legal, but it could come to an end, given the dire condition of the U.S. economy and President-elect Barack Obama's campaign pledge to close this popular business tax loophole. The Treasury estimates that it loses $100 billion a year in tax revenue as a result of companies shipping their income off shore, and congressional leaders are vowing to introduce legislation forcing big companies to pay full freight.

“This report shows that some of our country’s largest companies and federal contractors, many of which are household names, continue to use offshore tax havens to avoid paying their fair share of taxes to the U.S. And, some of those companies have even received emergency economic funds from the government,” said Senator Dorgan. “I think we should take action to shut down these tax dodgers and we will be introducing legislation to do just that.”

Today, along with my colleague Nicole Allen, who coordinates our maketextbooksaffordable.org campaign, I am speaking today at a TransAtlantic Consumer Dialogue (TACD.org) conference called Patents, Copyrights and Knowledge Governance: The Next Four Years. It's on ways to spur innovation while making the copyright and patent system fairer. As Nobel Laureate Joe Stiglitz told conferees yesterday, there are a variety of alternatives to the current system, which not only enriches monopolists, but creates both static and dynamic inefficiencies in the market that delay or halt the spread of new ideas and products. My workshop is on the use of prizes (you may have heard of the X-Prize) to encourage innovation. Last year, Senator Bernie Sanders (I-VT) introduced legislation to establish a medical innovation prize. We also believe prizes could spur the development of open source educational resources. More on prizes from KEI. My previous blog.

In today's editorial A Voice for the Consumer, the New York Times backs the recent call by U.S. PIRG, the Consumers Union, the Consumer Federation of America and other leading groups to restore the long dormant White House Office of Consumer Affairs. From the NYT:

The time has come to give the American consumer a much stronger voice in Washington. President-elect Barack Obama has already named what amounts to an energy and environmental czar in the White House, and America’s beleaguered consumers deserve no less.[...] Presidents Johnson and Carter both recognized the need for a strong person to do that job. Both chose Esther Peterson, who during about eight years in office pushed for then-radical ideas like nutritional labeling on food and truth in advertising. As the Reagan anti-government era began, the consumer protection job steadily lost clout until it was shuttered in the late 1990s.

Read the details here:
1. Restore the United States Office of Consumer Affairs; Put a Consumer “Czar” In The White House.
2. Rein in Wall Street Excesses, Protect Consumers from Abusive and Predatory Lending.
3. Protect Consumers from Price-Gouging in Oil, Gas and Electricity Markets, and Take Steps To Provide Households With Access to Alternative Energy and Efficiency.
4. Improve Consumer Access to Justice By Reinstating Legal Rights.
5. Guarantee Safe, High Quality, Affordable Healthcare for Everyone.
6. Ensure our Food and Products are Safe.

UPDATE: Larry Lessig's Newsweek piece is a pre-dot-bomb retread by Mike Weisman at Reclaim the Media.

Internet guru Larry Lessig has an interesting op-ed in Newsweek: Reboot the FCC:

We'll stifle the Skypes and YouTubes of the future if we don't demolish the regulators that oversee our digital pipelines.[...] President Obama should get Congress to shut down the FCC and similar vestigial regulators, which put stability and special interests above the public good. In their place, Congress should create something we could call the Innovation Environment Protection Agency (iEPA), charged with a simple founding mission: "minimal intervention to maximize innovation." The iEPA's core purpose would be to protect innovation from its two historical enemies—excessive government favors, and excessive private monopoly power.

Former New York Attorney General Eliot Spitzer, who took on unsavory Wall Street practices while federal regulators weren't watching out for small investors, has a Washington Post op-ed How to Ground The Street with some interesting ideas. Meanwhile, over at the New York Times, Eric Lipton and Steve LaBaton report on former Senator Phil Gramm: Deregulator Looks Back, Unswayed.

In two recent interviews, Mr. Gramm described the current turmoil as “an incredible trauma,” but said he was proud of his record. He blamed others for the crisis [...]

Update: Gift card holders may be out of luck in retail bankruptcies in the LA Times explains that when companies file bankruptcy consumers lose the value of unused prepaid gift cards.

Original post: Over the last several years plastic payments, especially debit, have eclipsed cash and check transactions. Also, the Internet has provided a new portal for shopping and bill payments and has stimulated development of still more payment systems (Paypal, cell-phone payments, etc.). But the laws have not kept pace. So, the only way I will pay on the Internet is with a credit card. It's the safest way. You risk all the money in your bank account and more when you use check transfers or debit cards.

In addition, as banks added and increased fees without mercy or regulatory oversight, more and more consumers found themselves un-banked. Others found themselves on debt and fee treadmills. Meanwhile, check-cashers, payday lenders, rent-to-own stores and other high-cost lenders boomed as they were able to march through state legislatures enacting safe harbor laws that exempted their products from usury (interest rate ceilings) and other protections. Federal regulators and Congress ignored or even encouraged the trend.

The laws have not kept pace. The New York Times has some stories today on payment systems. First, the brief Social Currency by Rob Walker discusses prepaid debit cards. These cards (marketed by hip-hop stars and others) have fees, but do not always link to bank accounts. Debit cards in general are not as well protected as credit cards; debit cards not associated with bank accounts are less well-protected than bank account debit cards, and of course, do not come with the possible savings benefits of bank accounts (if you can afford the fees, you can save). Along with the Consumers Union, the Consumer Federation of America, the Center for Responsible Lending and others, we have long called for comprehensive reform of the payments system. It should be high on the agenda of the new Congress. Here are some resources.

That ought to be enough to get Congressional oversight committees off to a start on reform.

The NYT Magazine also has a much longer feature Check Cashers, Redeemed by Douglas McGray of the New America Foundation that points out some of the problems with the unregulated new businesses but also points out that the banks are partly to blame:

“If they’re properly regulated and scrutinized, there’s nothing wrong with check cashing as a concept and there’s nothing wrong with payday loans as a concept,” Robert L. Gnaizda, general counsel for the Greenlining Institute, a California nonprofit focused on financial services and civil rights, told me. “And there’s nothing automatically good about free checking accounts if you have multiple fees whenever you make the most minor mistake.”