Late in the Senate’s proceedings on the financial regulatory reform bill, the Senate adopted – with no hearings and minimal debate – a controversial provision proposed by Sen. Richard Durbin, Illinois Democrat, that imposes price controls on interchange fees for debit and prepaid cards. The amendment also allows merchants to override several rules of payment card networks that currently protect consumers from abusive practices by merchants. While big-box merchants and convenience stores are declaring this a victory against the financial services industry, if the amendment survives in conference committee, consumers and small banks will be the real losers.

Summary

Fresh off of the most substantial national liquidity crisis of the last generation and the enactment of sweeping credit card regulation in the form of the Credit CARD Act, Congress continues to deliberate, with a continuing drumbeat of support from lobbyists, a set of new regulations for credit card companies. These proposals, offered in the name of consumer protection, seek to constrain the setting of “interchange fees”— transaction charges integral to payment card systems—through a range of proposed political interventions. This article identifies both the theoretical and actual failings of such regulation. Payment cards are a secure, inexpensive, welfare-increasing payment mechanism largely unlike any other in history. Rather than increasing consumer welfare in any meaningful sense, interchange fee legislation represents an attempt by some merchants to shift costs away from their businesses and onto card issuing banks and cardholders. In particular, bank-issued credit cards offer a dramatic improvement in the efficiency and availability of consumer credit by shifting credit risk from merchants onto banks in exchange for the cost of the interchange fee—currently averaging less than 2% of purchase value. Merchants’ efforts to cabin these fees would harm not only consumers but also the merchants themselves as commerce would depend more heavily on less-efficient paperbased payment systems. The consequence of interchange fee legislation, as Australia’s experiment with such regulation demonstrates, would be reduced access to credit, higher interest rates for consumers, and the return of the much-loathed annual fee for credit cards. Interchange fee regulation threatens to constrain credit for consumers and small businesses as the American economy begins to convalesce from a serious “credit crunch,” and should be accordingly rejected.

One of my antitrust students recently pointed me to a television commercial that could inspire a great exam question. Unfortunately, I didn’t see the ad until I’d finished drafting this semester’s antitrust exam (which I’ve been grading…hence the absence from TOTM).

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I share Prof. Ribstein’s concerns about the federalization of corporate governance contained in the Dodd bill.  Though Senator Carper wasn’t able, in the end, to get the proxy access provisions out of the Dodd Bill, which I think were the most troubling, we did eliminate another of Senator Schumer’s ideas. (The corporate governance provisions of the Dodd bill were taken from Sen. Schumer’s “Shareholder Bill of Rights.”)  The initial draft of the Dodd Bill included a restriction prohibiting any publicly traded company from having a staggered board.  I suspect we have the good work of Senator Carper and Congressman Castle’s offices to thank for their continued work against that provision.  The option to have a staggered board is part of the Delaware brand’s advantage.  Nearly 80% of Boards and their shareholders used to embrace the staggered election approach, since then some (but not most) companies’ shareholders have pushed, and been successful, in changing to annual elections under existing rules, a development which Delaware’s freedom-of-contract philosophy embraces.  Now roughly 50% of publicly traded firms have staggered boards.  I should add…this, like most corporate governance changes, is not exclusively a Delaware issue…as Delaware is home to only 50% of publicly traded companies and 60% of the Fortune 500.

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I purchased my copy of Peter Klein’s latest —  The Capitalist & The Entrepreneur: Essays on Organizations and Markets — today.  It is available for purchase here and here.  And if you wont to sneak a peak, you can see the full version here.  The role of the entrepreneur is one of the more under-theorized subjects in economics and, in turn, law and economics.  Peter is an insightful and thoughtful economist with the right toolkit to bring to bear on this project.  He is one of my favorite thinkers about these subjects (he is also my second favorite Klein, no small compliment in these quarters).   I’m greatly looking forward to the book.

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I’ve recently finished reading Jonathan Baker’s Preserving a Political Bargain: The Political Economy of the Non-Interventionist Challenge to Monopolization Enforcement, forthcoming in the Antitrust Law Journal.

Baker’s central thesis in Preserving a Political Bargain builds on earlier work concerning competition policy as an implicit political bargain that was reached during the 1940s between the more extreme positions of laissez-faire on the one hand and regulation on the other.  The new piece tries to explain what Baker describes as the “non-interventionist” critique of monopolization enforcement within this framework.

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Chris Hoofnagle writing at the TAP blog about Facebook’s comprehensive privacy options (“To opt out of full disclosure of most information, it is necessary to click through more than 50 privacy buttons, which then require choosing among a total of more than 170 options.”) claims that…

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Much has been made of Judge Sullivan’s recent decision in City of New York v. Group Health Incorporated and its implications for the UPP test and market definition in merger cases under Section 7 of the Clayton Act.  Given the 2010 Proposed Horizontal Merger Guidelines’ (2010 HMGs) shift toward diversion ratios and margins and away from market shares, the blogosphere has sold Judge Sullivan’s decision as sign that the agencies might have a tough time selling the UPP to federal courts in the post-2010 HMG world.

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Abstract

This Paper presents evidence boards of directors “bargain” with executives about the profits they expect to make from trades in firm stock. The evidence suggests executives whose trading freedom is increased using Rule 10b5-1 trading plans experienced reductions in other forms of pay to offset the potential gains from trading. There are two benefits from trading—portfolio optimization and informed trading profits—and this Paper allows us to isolate them. The data show boards pay executives in a way that reflects the profits they are expected to earn from informed trades. The legal issues about paying using illegal profits are explored. As a matter of policy, the data seriously undercut criticisms of the laissez-faire view of insider trading most closely associated with Henry Manne. At least with respect to classic insider trading (that is, a manager of a firm trading on the basis of information about the firm where she works), if boards are taking potential trading profits into consideration when setting pay, it is difficult to locate potential victims of this trading. Current shareholders should be happy with a deal that pays managers in part out of the hide of future shareholders, and the firm should internalize any costs arising from this payment scheme, since future shareholders should take this into account when deciding whether and what price to buy shares. While there still may be good reasons to prohibit some individuals from trading on material, non-public information, the case for classic insider trading is made much weaker by this data.