{"id":1109,"date":"2013-08-04T07:00:05","date_gmt":"2013-08-04T11:00:05","guid":{"rendered":"http:\/\/www.dougsbriefcase.com\/blog\/?p=1109"},"modified":"2013-08-04T07:47:38","modified_gmt":"2013-08-04T11:47:38","slug":"fed-up-judge-strikes-down-federal-reserve-on-swipe-fees","status":"publish","type":"post","link":"https:\/\/www.dougsbriefcase.com\/blog\/fed-up-judge-strikes-down-federal-reserve-on-swipe-fees\/","title":{"rendered":"Fed Up: Judge Strikes Down Federal Reserve on Swipe Fees"},"content":{"rendered":"
\"The<\/a>

The Fed holds all the cards when it sets pol\u00adi\u00adcy. Nobody both\u00adered telling that to a fed\u00ader\u00adal judge, who last week struck down a Fed reg\u00adu\u00adla\u00adtion on deb\u00adit card swipe fees.<\/p><\/div>\n

When it comes to bailouts, mon\u00ade\u00adtary pol\u00adi\u00adcy, and bank\u00ading reg\u00adu\u00adla\u00adtion, the Fed\u00ader\u00adal Reserve has the last word. No one \u2013 not the Pres\u00adi\u00addent, not Con\u00adgress, not any\u00adone \u2013 stops the Fed from doing what it has deter\u00admined to do. Until last week.<\/p>\n

In the most sig\u00adnif\u00adi\u00adcant rul\u00ading you prob\u00ada\u00adbly nev\u00ader heard of (NACS<\/span> v. Fed\u00ader\u00adal Reserve<\/a>), Fed\u00ader\u00adal Dis\u00adtrict Court Judge Richard J. Leon last Wednes\u00adday inval\u00adi\u00addat\u00aded a reg\u00adu\u00adla\u00adtion writ\u00adten by the Fed\u00ader\u00adal Reserve on deb\u00adit card \u201cswipe fees.\u201d<\/p>\n

\u201c<\/span>The Court con\u00adcludes,\u201d Leon wrote, \u201cthat the [Fed\u00ader\u00adal Reserve] Board has clear\u00adly dis\u00adre\u00adgard\u00aded Con\u00adgress\u2019s statu\u00adto\u00adry intent by inap\u00adpro\u00adpri\u00adate\u00adly inflat\u00ading all deb\u00adit card trans\u00adac\u00adtion fees by bil\u00adlions of dol\u00adlars.\u201d [pages 1\u20132<\/a>]<\/p>\n

\u201c<\/span>Clear\u00adly disregard[ing]\u201d Con\u00adgress and any\u00adone else who might object to its poli\u00adcies is stan\u00addard oper\u00adat\u00ading pro\u00adce\u00addure at the Fed. What makes this case so spe\u00adcial \u2013 poten\u00adtial\u00adly even his\u00adtoric \u2013 is that the Fed has been held account\u00adable, con\u00adsid\u00adered sub\u00adject to the law and not beyond its reach. A fed\u00ader\u00adal judge has pro\u00adnounced its reg\u00adu\u00adla\u00adtion ille\u00adgal and said that it can no longer per\u00admit banks to \u201cinflat[e] all deb\u00adit card trans\u00adac\u00adtion fees by bil\u00adlions of dollars.\u201d<\/p>\n

Accus\u00adtomed as it is to mov\u00ading tril\u00adlions of dol\u00adlars around with impuni\u00adty, offi\u00adcials at the Fed must have been stunned to be told that the law for\u00adbids them to autho\u00adrize big banks, in direct con\u00adtra\u00adven\u00adtion of fed\u00ader\u00adal law, to shake down con\u00adsumers and mer\u00adchants for a few tri\u00adfling billion.<\/p>\n

Before going fur\u00adther: an expla\u00adna\u00adtion and a dis\u00adclo\u00adsure. First, the expla\u00adna\u00adtion. Swipe fees are hid\u00adden fees charged by your bank every time you swipe your deb\u00adit card. These fees are charged to the mer\u00adchant. If you pay a mer\u00adchant $100 in cash or write her a $100 check, her company\u2019s bank account is cred\u00adit\u00aded with $100. If you swipe your deb\u00adit card, she will be cred\u00adit\u00aded with some\u00adthing like $99. That may not sound like much, but it adds up. Cit\u00ading a brief by the Nation\u00adal Asso\u00adci\u00ada\u00adtion of Con\u00adve\u00adnience Stores, Judge Leon not\u00aded that, \u201cFor most retail\u00aders, deb\u00adit card fees rep\u00adre\u00adsent the sin\u00adgle largest oper\u00adat\u00ading expense behind pay\u00adroll.\u201d [p. 7<\/a>]<\/p>\n

Mer\u00adchants rec\u00adog\u00adnize the val\u00adue of accept\u00ading these cards as pay\u00adment and are will\u00ading to pay a fee. What caused them to seek leg\u00adisla\u00adtive relief was that the fees are not nego\u00adti\u00adat\u00aded, but dic\u00adtat\u00aded by the two largest card net\u00adworks, Visa and Mas\u00adter\u00adCard. They are in a posi\u00adtion to dic\u00adtate those fees because they dom\u00adi\u00adnate the mar\u00adket. Judge Leon\u2019s opin\u00adion observed that \u201cnet\u00adworks under Visa\u2019s and Mas\u00adter\u00adCard\u2019s own\u00ader\u00adship account for rough\u00adly 83 per\u00adcent of all deb\u00adit trans\u00adac\u00adtions and near\u00adly 100 per\u00adcent of sig\u00adna\u00adture trans\u00adac\u00adtions [trans\u00adac\u00adtions in which you swipe your deb\u00adit card but don\u2019t enter your PIN<\/span>].\u201d [p. 7<\/a>]<\/p>\n

Banks that issue cards with one of these brands are guar\u00adan\u00adteed to col\u00adlect swipe fees every time that card is used. They\u2019re also guar\u00adan\u00adteed that they don\u2019t have to com\u00adpete with oth\u00ader banks over the size of those fees. Visa and Mas\u00adter\u00adCard set the rates and they are the same for every bank in the net\u00adwork. \u201cWith\u00adin each net\u00adwork, issuers all receive the same inter\u00adchange fee,\u201d Judge Leon wrote, \u201cregard\u00adless of their effi\u00adcien\u00adcy in pro\u00adcess\u00ading trans\u00adac\u00adtions or their efforts to pre\u00advent fraud.\u201d [p. 8<\/a>]<\/p>\n

Banks that com\u00adpete over mort\u00adgage rates, auto loan rates, CD<\/span> rates and the like nev\u00ader com\u00adpete over swipe fees. They are cen\u00adtral\u00adly set by the big card net\u00adworks. There is no com\u00adpe\u00adti\u00adtion between<\/strong><\/em> banks.<\/p>\n

There is, how\u00adev\u00ader, a com\u00adpe\u00adti\u00adtion between Visa and Mas\u00adter\u00adCard for<\/strong><\/em> banks. To con\u00advince banks to issue their brand of card, each net\u00adwork has an incen\u00adtive to raise its swipe fees. The high\u00ader the fee, the more the bank will col\u00adlect with each swipe. So Visa and Mas\u00adter\u00adCard con\u00adtin\u00adu\u00adal\u00adly raise their rates to keep the banks they have with\u00adin their net\u00adwork and lure new ones in. Judge Leon described how these per\u00adverse incen\u00adtives work.<\/p>\n

\u201c<\/span>Visa, Mas\u00adter\u00adCard, and oth\u00ader deb\u00adit net\u00adworks vie for issuers [i.e., banks] to issue cards that run on their respec\u00adtive net\u00adworks. They can entice issuers by empha\u00adsiz\u00ading their rel\u00ada\u00adtive mar\u00adket pow\u00ader and abil\u00adi\u00adty to set inter\u00adchange and oth\u00ader fees. Net\u00adworks thus have an incen\u00adtive to con\u00adtin\u00adu\u00adous\u00adly raise mer\u00adchants\u2019 inter\u00adchange fees \u2014 which, again, flow from mer\u00adchants to issuers \u2014 as a way to attract issuers to the net\u00adwork.\u201d [pp. 7\u20138<\/a>]<\/p><\/blockquote>\n

Over the years, that \u201cflow from mer\u00adchants to issuers\u201d has become a tor\u00adrent. Judge Leon not\u00aded that, \u201cIn recent years, inter\u00adchange fees have climbed sharply.\u201d [p. 6<\/a>]  Over\u00adall, Judge Leon\u2019s opin\u00adion notes, \u201cfrom 1998 to 2006 mer\u00adchants faced a 234 per\u00adcent increase in inter\u00adchange fees for PIN<\/span> trans\u00adac\u00adtions (trans\u00adac\u00adtions when you enter your PIN<\/span>) and by 2009, inter\u00adchange fee rev\u00adenue for deb\u00adit cards totaled $16.2 bil\u00adlion.\u201d [pp. 6\u20137<\/a>]<\/p>\n

To address this issue, a coali\u00adtion of mer\u00adchants<\/a> asked Con\u00adgress to enact leg\u00adis\u00adla\u00adtion to curb deb\u00adit swipe fees charged by the largest banks. Which brings me to the dis\u00adclo\u00adsure: before retir\u00ading, I rep\u00adre\u00adsent\u00aded this coali\u00adtion in its suc\u00adcess\u00adful advo\u00adca\u00adcy of this legislation.<\/p>\n

Known as the \u201cDurbin amend\u00adment,\u201d after its lead Sen\u00adate spon\u00adsor, Dick Durbin (D\u2011IL<\/span>), the leg\u00adis\u00adla\u00adtion placed lim\u00adits on deb\u00adit card swipe fees col\u00adlect\u00aded by banks with more than $10 bil\u00adlion in assets. About 1.4 per\u00adcent of finan\u00adcial insti\u00adtu\u00adtions <\/a>meet this thresh\u00adold, mean\u00ading that 98.6 per\u00adcent of banks and cred\u00adit unions are exempt from Durbin amendment\u2019s lim\u00adits on their deb\u00adit fees.  Those that are not exempt can escape those lim\u00adits if they set their own swipe fee rates. If, for exam\u00adple, giants like Chase or Bank of Amer\u00adi\u00adca devel\u00adoped its own swipe fee sched\u00adule, rather than rely\u00ading on Visa\u2019s price-fix\u00ading, the Durbin amend\u00adment would not apply to them.<\/p>\n

The act direct\u00aded the Fed\u00ader\u00adal Reserve to write reg\u00adu\u00adla\u00adtions requir\u00ading that deb\u00adit swipe fees col\u00adlect\u00aded by cov\u00adered banks \u201cshall be rea\u00adson\u00adable and pro\u00adpor\u00adtion\u00adal to the cost incurred by the issuer with respect to the trans\u00adac\u00adtion.\u201d [Sec\u00adtion 1075 <\/a>of the Dodd-Frank Wall Street Reform and Con\u00adsumer Pro\u00adtec\u00adtion Act] The pro\u00advi\u00adsion drew a bright line between costs that were \u201cincurred \u2026 with respect to the trans\u00adac\u00adtion\u201d and those that were not. It required the Fed\u00ader\u00adal Reserve to take into account costs of autho\u00adriz\u00ading, clear\u00ading and set\u00adtling a par\u00adtic\u00adu\u00adlar trans\u00adac\u00adtion; it pro\u00adhib\u00adit\u00aded them from tak\u00ading \u201coth\u00ader costs\u201d that are \u201cnot spe\u00adcif\u00adic to a par\u00adtic\u00adu\u00adlar trans\u00adac\u00adtion into account.\u201d<\/p>\n

In its final rule, the Fed ignored this dis\u00adtinc\u00adtion, allow\u00ading banks to pad their fees by includ\u00ading all man\u00adner of costs not aris\u00ading from spe\u00adcif\u00adic swipe fee trans\u00adac\u00adtions. The prac\u00adti\u00adcal result of the Fed\u2019s will\u00adful mis\u00adin\u00adter\u00adpre\u00adta\u00adtion of the law was that it invit\u00aded Visa and Mas\u00adter\u00adCard to use their price-fix\u00ading pow\u00ader to levy a 21 cent fee on even the small\u00adest trans\u00adac\u00adtions, like a pack of gum or a cup of cof\u00adfee. They jumped at the chance. Their new, high\u00ader fees on small tick\u00adet items pro\u00adduced not only high\u00ader swipe fees on pur\u00adchas\u00ades under $12, they also raised con\u00adsumer prices for every\u00adthing from movie rentals (\u201cRed Box<\/a>\u201d) to park\u00ading meters (\u201cPark Mobile<\/a>\u201d).<\/p>\n

The banks and their sup\u00adport\u00aders were quick to blame the Durbin Amend\u00adment for these results. Now a fed\u00ader\u00adal judge has deter\u00admined that the prob\u00adlem wasn\u2019t with the law, but with the Fed\u00ader\u00adal Reserve\u2019s deci\u00adsion to ignore it.<\/p>\n

\u201c<\/span>The Board\u2019s inter\u00adpre\u00adta\u00adtion,\u201d in rais\u00ading allow\u00adable fees by includ\u00ading costs that the law for\u00adbade them to include, \u201cis utter\u00adly inde\u00adfen\u00adsi\u00adble,\u201d Judge Leon wrote. \u201cThe statute is not silent or ambigu\u00adous. Rather, the plain text \u2026 and the statu\u00adto\u00adry struc\u00adture and leg\u00adisla\u00adtive his\u00adto\u00adry of the Durbin Amend\u00adment clear\u00adly demon\u00adstrate that Con\u00adgress intend\u00aded for the Board to exclude all \u2018oth\u00ader costs\u2019 not spec\u00adi\u00adfied in the statute.\u201d (p. 40<\/a>)<\/p>\n

Judge Leon\u2019s crit\u00adi\u00adcisms were harsh. The Fed\u2019s argu\u00adment on includ\u00ading costs that the law for\u00adbids it to include \u201cmakes no sense\u201d (p. 33<\/a>) and \u201cdefies com\u00admon sense\u201d (p. 35<\/a>); the law told the Fed to look at only incre\u00admen\u00adtal costs and \u201cthat\u2019s it!\u201d (p. 37<\/a>); the Fed\u2019s posi\u00adtion is \u201cirrec\u00adon\u00adcil\u00adable with the statute\u201d (p. 37<\/a>) and \u201ccon\u00adtrary to the expressed will of Con\u00adgress\u201d (p. 38<\/a>); it \u201cruns com\u00adplete\u00adly afoul of the [law\u2019s] text, design and pur\u00adpose\u201d (p. 39<\/a>) and \u201ccon\u00adtra\u00addicts Congress\u2019s clear man\u00addate\u201d (p. 40<\/a>); the Fed can\u00adnot \u201cflout the statute\u201d (p. 42<\/a>); its inter\u00adpre\u00adta\u00adtion is \u201cimper\u00admis\u00adsi\u00adble\u201d (p. 42<\/a>); it is \u201cfun\u00adda\u00admen\u00adtal\u00adly defi\u00adcient\u201d (p. 55<\/a>); the Fed \u201cinter\u00adpret\u00aded the law in ways that were clear\u00adly fore\u00adclosed by Con\u00adgress\u201d (p. 55<\/a>); its rule is a \u201cbla\u00adtant act of pol\u00adi\u00adcy\u00admak\u00ading that runs counter to Con\u00adgress\u2019s will\u201d (p. 44<\/a>).<\/p>\n

In short, the judge con\u00adclud\u00aded that the Fed\u2019s reg\u00adu\u00adla\u00adtion is con\u00adtrary to law and irre\u00addeemably so.<\/p>\n

\u201c<\/span>Ulti\u00admate\u00adly, the Board asserts that it was giv\u00aden broad dis\u00adcre\u00adtion to \u2026 estab\u00adlish[] the inter\u00adchange trans\u00adac\u00adtion fee stan\u00addard. But even if this were true, which it is not, such dis\u00adcre\u00adtion does not give the Board the author\u00adi\u00adty to ignore the expressed will of Con\u00adgress. By includ\u00ading in the inter\u00adchange fee stan\u00addard costs that are express\u00adly pro\u00adhib\u00adit\u00aded by the statute, the final reg\u00adu\u00adla\u00adtion rep\u00adre\u00adsents a sig\u00adnif\u00adi\u00adcant price increase over pre-Durbin Amend\u00adment rates for small-tick\u00adet deb\u00adit trans\u00adac\u00adtions under the $12 thresh\u00adold. Con\u00adgress did not empow\u00ader the Board to make pol\u00adi\u00adcy judg\u00adments that would result in sig\u00adnif\u00adi\u00adcant\u00adly high\u00ader inter\u00adchange rates. Accord\u00ading\u00adly, the Board\u00ad\u2019s inter\u00adpre\u00adta\u00adtion of the inter\u00adchange fee stan\u00addard is fore\u00adclosed by the law and must be inval\u00adi\u00addat\u00aded.\u201d [pp. 45\u201346<\/a>]<\/p><\/blockquote>\n

Judge Leon said that the Fed must shred the reg\u00adu\u00adla\u00adtion and start over. He will hear fur\u00adther argu\u00adment from both sides as to tim\u00ading, but he made clear that he expects the Fed to write a new rule \u2013 this time one that fol\u00adlows the law \u2014 \u201cwith\u00adin months, not years\u201d (p. 57<\/a>). In the mean\u00adtime, the cur\u00adrent reg\u00adu\u00adla\u00adtion will tem\u00adporar\u00adi\u00adly stand.<\/p>\n

Judge Leon will not nec\u00ades\u00adsar\u00adi\u00adly have the last word. The Fed can appeal his rul\u00ading. If it does, the process could drag on for quite some time. But the les\u00adson from this case is nonethe\u00adless clear: the Fed\u2019s extra\u00ador\u00addi\u00adnary pow\u00aders do not free it from the law\u2019s con\u00adstraints. Courts have an oblig\u00ada\u00adtion to apply that law, even to an agency unac\u00adcus\u00adtomed to being contradicted.<\/p>\n

Like Judge Leon, Pres\u00adi\u00addent Oba\u00adma has an oppor\u00adtu\u00adni\u00adty to remind the Fed\u00ader\u00adal Reserve that it is not free to do as it pleas\u00ades. He recent\u00adly sig\u00adnaled in a \u201c60 Min\u00adutes<\/a>\u201d inter\u00adview that he would not reap\u00adpoint Ben Bernanke as Fed Chair\u00adman when his term expires next Jan\u00adu\u00adary<\/a>. That announce\u00adment has set off weeks of spec\u00adu\u00adla\u00adtion over who will be the next Fed Chair\u00adman.  Pub\u00adlished reports <\/a>sug\u00adgest that the Pres\u00adi\u00addent will choose between his erst\u00adwhile eco\u00adnom\u00adic advis\u00ader Lar\u00adry Sum\u00admers and the Fed\u2019s cur\u00adrent Vice Chair Janet Yellen.  Many Democ\u00adrats have weighed in on behalf of Yellen<\/a>,<\/span> who has served at the Fed through\u00adout the peri\u00adod dur\u00ading which Bernanke engi\u00adneered bailouts, estab\u00adlished a zero inter\u00adest rate pol\u00adi\u00adcy, and took tril\u00adlions of dol\u00adlars in gov\u00adern\u00adment and mort\u00adgage-backed debt onto its bal\u00adance sheet.<\/p>\n

The Pres\u00adi\u00addent should take this oppor\u00adtu\u00adni\u00adty to grill prospec\u00adtive nom\u00adi\u00adnees. What was the Fed\u00ader\u00adal Reserve\u2019s role in cre\u00adat\u00ading the hous\u00ading bub\u00adble? Why didn\u2019t it see the result\u00ading finan\u00adcial and eco\u00adnom\u00adic calami\u00adty com\u00ading? Should the Fed, as it did in the 2008 AIG<\/span> bailout, print mon\u00adey to pay for\u00adeign banks 100 per\u00adcent of what they were owed by a fail\u00ading US<\/span> com\u00adpa\u00adny? Will the prospec\u00adtive nom\u00adi\u00adnee sup\u00adport a full and inde\u00adpen\u00addent audit of the Fed and greater trans\u00adparen\u00adcy into its process\u00ades? What dam\u00adage has five years of the Fed\u2019s zero-inter\u00adest rate pol\u00adi\u00adcy done to savers and peo\u00adple liv\u00ading on fixed incomes? Should the Fed con\u00adtin\u00adue to pur\u00adsue poli\u00adcies that con\u00adtribute to inequal\u00adi\u00adty<\/a> by dri\u00adving up stock prices as wages dete\u00adri\u00ado\u00adrate and work\u00adforce par\u00adtic\u00adi\u00adpa\u00adtion rates decline?  When will the Fed begin to sell off the bonds it has bought? Can it do so with\u00adout crash\u00ading the stock mar\u00adket and roil\u00ading bond markets?<\/p>\n

The Pres\u00adi\u00addent should not nom\u00adi\u00adnate any\u00adone unwill\u00ading to answer these ques\u00adtions clear\u00adly and forth\u00adright\u00adly. Once con\u00adfirmed by the Sen\u00adate, the new Fed Chair\u00adman will hold enor\u00admous pow\u00ader for years after the Pres\u00adi\u00addent leaves office. Now is the President\u2019s last, best chance to hold him or her accountable.<\/p>\n

Judge Leon has shown that it can be done.<\/p>\n","protected":false},"excerpt":{"rendered":"

When it comes to bailouts, mon\u00ade\u00adtary pol\u00adi\u00adcy, and bank\u00ading reg\u00adu\u00adla\u00adtion, the Fed\u00ader\u00adal Reserve has the last word. No one \u2013 not the Pres\u00adi\u00addent, not Con\u00adgress, not any\u00adone \u2013 stops the Fed from doing what it has deter\u00admined to do. Until last week.<\/p>\n","protected":false},"author":3,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"nf_dc_page":"","wp_typography_post_enhancements_disabled":false,"_jetpack_newsletter_access":"","_jetpack_dont_email_post_to_subs":false,"_jetpack_newsletter_tier_id":0,"_jetpack_memberships_contains_paywalled_content":false,"_jetpack_feature_clip_id":0,"_jetpack_memberships_contains_paid_content":false,"nfd_image_url":"","nfd_onboarding_generated":"","footnotes":"","jetpack_publicize_message":"","jetpack_publicize_feature_enabled":true,"jetpack_social_post_already_shared":true,"jetpack_social_options":{"image_generator_settings":{"template":"highway","default_image_id":0,"font":"","enabled":false},"version":2},"jetpack_post_was_ever_published":false},"categories":[18,371,343,370,457],"tags":[281,445,1194,451,449,444,443,450,455,359,84,425,446,448,447,454,452,47,442,453,456],"class_list":["post-1109","post","type-post","status-publish","format-standard","hentry","category-economy","category-federal-reserve-economy","category-government-power","category-monetary-policy","category-swipe-fees-2","tag-bailouts","tag-bernanke","tag-congress","tag-convenience-stores","tag-court-rulings","tag-credit-cards","tag-debit-cards","tag-dick-durbin","tag-dodd-frank","tag-fed","tag-federal-reserve","tag-inequality","tag-janet-yellen","tag-judge-richard-leon","tag-larry-summers","tag-master-card","tag-merchants","tag-obama","tag-swipe-fees","tag-visa","tag-wall-street-reform-law"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t