Priceless: The Case That Brought Down the Visa/MasterCard Bank Cartel (32 page)

When John Stockton, the great Utah Jazz point guard, retired in 2003, he was asked whether he regretted never having won an NBA championship. He said he had no regrets and recounted some moments from his long and heroic career. These weren’t memories of the playoff finals or even games where he set any of his many personal or league records. They we obscure moments of team solidarity and quiet moments of nonquantifiable personal accomplishment. They occurred in the third quarter of some long-forgotten game in a city that lost its NBA franchise long ago. Stockton said that the part of basketball that he would remember, treasure, and build upon in his future was “the journey.”

I will remember the Movie Nights at C&P and the trips to Bentonville, Pleasanton, Columbus, Richmond, and Hoffman Estates. I will remember my ritual drinks in the Redwood Room of the Clift Hotel in San Francisco, followed by all-nighters. I will remember my tough band of clients incarcerated in a Brooklyn courthouse. I will remember lying in a king sized bed with Bob Begleiter, Mitch Shapiro, and George Sampson in the Brooklyn Marriott at 4:45 AM on April 28, 2003, after MasterCard capitulated and the moment sixty hours later when Visa did the same. I will remember the countless preparation sessions for court appearances and for the trial that never occurred. Many late nights after a long rehearsal, a good one, we would go back to the bottom of the hill and do it all over again, just like Lance. I will remember the journey.

L.C.

December 2008

N
INE YEARS AFTER the settlement and almost four since the completion of
Priceless
, this Skyhorse Publishing edition provides an opportunity to review how the
Merchants’
case has influenced the law, banking, and payments systems. It also is occasion to reflect on how the case changed the author, beyond the significant effects previously chronicled.

In the personal transformation category, there is scant to report, at least of any great interest or value to the reader. The financial security provided by the attorneys’ fee award spurred me to leave the practice of law for what I expected would be the rest of my active working life. After chairing our former law partner Eliot Spitzer’s gubernatorial transition, I joined his executive staff as Senior Policy Advisor, with the expectation that the gig would last for eight or more triumphant years in Albany, to be followed by eight more in Washington, D.C. How that plan quickly and tragically came apart is the subject of another of my books,
Journal of the Plague Year
, also since republished by Skyhorse.

The other personal development of note, and possible use to others, is how the case greatly improved me as an athlete, making my
sixties happier and more productive than my teens and early twenties, when sports is what I cared about most. We are told that athletics, and team sports especially, will help us in our work and careers, and that’s probably true. However, with me, the seven years of active battle, with all its physical and emotional challenges, produced an athlete with far more focus and endurance than the child who was father to this old man.

In 2009, as I returned to Constantine Cannon with the title of “Counsel” in a senior and nonmanagerial role, I found the firm deeply immersed in many of the legal and business developments that the
Merchants’
case and its outcome had spawned. Some of these were introduced in the concluding chapter to the 2009 edition of this book. However, beyond those, other very important additional developments were set in motion by the case. These continue to evolve as we go to press.

The most important is the wholly positive explosion in the use of safer/faster/cheaper electronic debit transactions to replace cash and checks. As I recounted in Part I, in the run up to filing the case in 1996, I encountered many merchants who simply didn’t know that they were accepting, or more accurately being forced to accept, Visa and MasterCard signature debit card transactions at their stores. Among them were Allen Questrom, at various times the CEO of Macy’s, JC Penney, and Federated Department Stores, and another executive who was in charge of payments for our clients, The Limited, Victoria’s Secret, Abercrombie &Fitch, and all of Leslie Wexner’s retailing empire. That lack of visibility and the actual suppression of debit by Visa and MasterCard were deliberate and effective. It was a necessary byproduct of their campaign to hide the fact that under their “Honor All Cards” tying arrangements, stores were forced to accept debit transactions and pay the same or higher prices for them as credit card transactions, where banks were loaning money and exposed to much greater risk.

With the elimination of those rules in the settlement and its requirement that every one of the more than one billion debit cards since issued be conspicuously labeled with the word “debit,” the volume of debit transactions exploded and now has far surpassed credit. Those forces and trends were augmented by the deep recession of 2008 and 2009, as people surrendered or laid aside their credit cards to spend money they actually have.

Another development of great import is the so-called Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act, in which Congress essentially directed the Federal Reserve Board to do what I told them they could and should have done under existing law. When I addressed the Fed’s International Payments Policy Conference as its keynote speaker on May 5, 2005, I told the Fed that market forces in the debit sector had been perverted by decades of Visa and MasterCard conspiracy. I explained that the Federal Reserve Act, enacted in 1913, and the Electronic Funds Transfer Act gave them the power to eliminate interchange fees for debit transactions in the same manner that the Fed had barred interchange fees in checking transactions as its first order of business in 1914.

The Durbin Amendment to Dodd-Frank, authored by Illinois Senator Dick Durbin, the current Majority Whip and most knowledgeable member of Congress about these issues, amended the Funds Transfer Act and told the Fed to drastically reduce interchange fees. It did not mandate their elimination, as I had called for. Durbin prescribed that banks could simply recover the basic incremental costs incurred by them in debit card transactions. My position on elimination of all fees was and is based upon the simple fact that
banks avoid the high costs of processing and handling checks and cash and therefore are making money each time a debit transaction occurs. In the 1980s, Visa measured this cost avoidance as 55 cents to $1.60 for each displaced check. The savings is much more today. Given the fact that the Fed outlawed interchange fees on checks, allowing them for safer and more efficient debit transactions makes no sense.

Armed with its new and probably superfluous authority, the Obama Fed did pretty much what this administration has done in every major area where “Change You Can Believe In” was promised by the candidate. In fairness, the Fed is officially independent of any President’s administration. The Fed settled for half-a-loaf when it could have gotten the whole thing or at least a good deal more. In proposed regulations published for comment in December 2010, the Fed proposed to cap debit fees at roughly 12 cents per transaction. That would have been a reduction from the 42 cents average rate that obtained, then and after, the drop from 63 cents before the settlement and the price reductions it caused. The Fed also exempted so-called “small banks” from these price restrictions, defining them as institutions with less than $10 billion in assets. That approach, while not optimal and certainly not an exercise of the full authority the Fed had been granted, would have been three-quarters of the loaf. However, the Fed that sees its role first and foremost as a protector of banks, caved in to their heavy lobbying and, in July 2011, doubled the permissible limit to 24 cents while also weakening the requirements that prohibit Visa and MasterCard from forcing the trademarks and functionality of competing debit networks, such as Star and NYCE, off debit cards, in order to restrain competition. Those practices had also been the subject of the
Merchants’
case and of some of the relief in the settlement.

As the Fed’s proposed debit fee limitation rules were issued in both their initial tougher and later weakened forms, the banks prepared to gouge back the money lost from reduced debit interchange fees, amounting to tens of billions each year. Prior to the
Merchants’
case, the banks’ activities would have easily been coordinated under the old Visa/MasterCard cartel. But by 2011, when the final Fed rules went into effect, Visa and MasterCard had separated, abandoned their status
as membership corporations wholly owned by the same banks, and separately gone public. The banks now merely hold varying and minority stakes in the two publicly traded companies.

Nevertheless, beginning with Bank of America and J.P. Morgan Chase, most of the nation’s largest banks and every one of the top ten, announced that they would immediately charge depositors new fees for using their debit cards to access their own money. Chase CEO Jamie Dimon, poster boy at the time for the skillful and prudent bankers that had avoided the banking practices that caused the near financial collapse in 2008, was most vocal about why Chase had to get fees from consumers. He said, “If you’re a restaurant and you can’t charge for the soda, you’re going to charge for the burger.” I woke up to Dimon’s statement and Bank of America’s equivalent announcement on September 30, 2011, as I came out of anesthesia at the Hospital for Special Surgery. (All that increased athleticism and spare time has its price.) I immediately penned an oped for the
New York Times
titled “Charging for Debit Cards Is Robbery” that appeared on October 7, 2011, and is reprinted as an addendum to this edition.

The
Times
piece went viral, made its way around the world, and contributed to the revolt over the banks’ newly announced debit fees. Even President Obama weighed in against them in an interview with ABC’s George Stephanopoulos on October 3, 2011. Within two weeks, every one of the top ten U.S. banks had rescinded their recently announced debit fees.

However, as pointed out by many observers then, the banks continue to look for ways to regain their lost debit fee income and otherwise play the game of “heads I win, tails you lose.” After their bailout in 2008 and 2009, as they gambled away their own and investors’ money, banks have gotten the clear signal that we will always rescue them, lest their failure cause the entire economy to collapse. So banks justify new fees and fee structures as necessary to maintain their “safety and soundness”
while at the same time resisting the Obama administration’s efforts to prohibit the type of risky investment strategies that brought down Bear Stearns, Lehman Brothers, and many others in the sector. In 2011 our metaphorical soda jerk, Jamie Dimon, led the fight to avoid what he deemed overly restrictive rules to prohibit certain “hedging” strategies. That was until one of those strategies led to a $3 (and rising) billion loss at Chase in 2012.

So the cat-and-mouse fight pitting merchants and consumers against the banks goes on, but on a landscape vastly changed by the
Merchants’
case and its aftermath. The fees and bank games are much more visible to consumers and merchants, while the banks have lost the cartel mechanism, under which they formerly coordinated their conduct.

Finally, the stores who came together in the
Merchants
’ case have not disbanded. They have begun to form their own payment network, called MCX for Merchants Consumer Exchange. It will be faster, safer, less expensive, and far more efficient than anything available in this country to date. MCX recognizes that the interests of consumers and stores are aligned and that payment is simply a process facilitating the main event, being the exchange of goods and services among buyers and sellers, that is the foundation of our and any economy. MCX will not be limited to plastic cards or any current form of payment. It will be free to participate and innovate in newer payment forms such as mobile wallets, using cell phones and PDAs.

The
Merchants’
case formally ended on October 24, 2011, precisely fifteen years after it was filed on October 25, 1996. It ended with Judge John Gleeson awarding the $1.75 million left in the settlement fund to three worthy institutions. This occurred after the claiming merchants had been paid all, and indeed more than, their share of the billions in settlement funds. These “Cyprés” award recipients, recommended by Constantine Cannon to the judge, were the American Antitrust Institute, the U.S. Public Interest Research Group (PIRG), and Consumers
Union of the United States. The three organizations had, in various ways, supported the litigation, mostly by heightening awareness of the beneficial effects of vigorous antitrust enforcement.

Though the case technically ended on that date, Judge Gleeson and our firm will not become strangers. The injunction that he issued at the close of active hostilities in 2003 is permanent, and we will likely soon approach the Court to enforce that permanent injunction against new assaults on merchants mounted by Visa. Judge Gleeson is also supervising the settlement talks involving the more than 100 new class actions filed against Visa and MasterCard in January 2004. Those cases, now more than 8 years in litigation, are likely to settle for yet an additional $6 to 10 billion out of Visa and MasterCard’s coffers, stocked amply with the proceeds of their record IPOs. The banks demanded that the card associations conduct those public offerings to avoid additional multi-billion dollar settlements, like those in the
Merchants’
case, the
Discover
case, and the
Amex
case, where banks were on the hook.