Major Credit Card Reform Law Takes Effect Today

Nine months after President Barack Obama signed into law the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009, some major reforms are finally going into effect.

"For too long, credit card companies have had free rein to employ deceptive, unfair tactics that hit responsible consumers with unreasonable costs. But today, we are shifting the balance of power back to the consumer and we are holding the credit card companies accountable," said the President on Monday.

Due largely to a nationwide meltdown of the credit system over the past few years, the CARD Act was put in place to do things like prevent creditors from charging customers over-the-limit fees, not giving customers enough time to read and review their bills and levying on them simultaneous arbitrary interest rate increases and interest charges on debt paid on time.

Calling them “common-sense rules,” Treasury official Michael Barr trumpeted the law’s consumer protections during a conference call with reporters on Monday.

“[It’s] a way of ensuring fair rules of the road going forward, it is a way of letting competition occur based on quality and price, and not on shark practices.”

More importantly, the law puts an end to the days of credit card companies using fine print to mislead customers on key information about their cards. Barr said he believes the law will level the playing field.

“What we’ve put in place is a set of rules that permit good, strong competition, but based on fair terms...and not based on ‘hide the ball’ [tactics].”

However, as noble as the reforms seem, the White House nevertheless faces criticism from those who say the delay in implementing the law gave creditors too much time to game the system. Specifically, folks are pointing to the fact that many companies raised interest rates, created new card fees and closed accounts during the past nine months.

White House Senior Economic Adviser Austan Goolsbee, who participated in the call, shrugged off those concerns, arguing that companies would’ve taken those steps regardless of an impending law.

“We have just gone through the biggest credit crunch since 1929, so the fact that credit was difficult to get I don’t think was a secret, and I think that that’s pretty speculative to attribute it to the putting in of completely common-sense rules of the road.”

Goolsbee later suggested that the administration would continue to push for the creation of a consumer protection agency that would, among other things, help enforce the CARD Act.

In a statement released late Monday afternoon, House Financial Services Chairman Barney Frank (D-Mass.) blamed Republican lawmakers for providing cover to credit card companies.

“Republican objections in the Senate blocked the bill. Had the [Consumer Financial Protection Agency] CFPA been in existence we could have moved right away to block the banks’ egregious actions.”

Senators Seek Stricter Regulations For Ratings Agencies

By Laura Woodhead - Talk Radio News Service

Regulations governing rating agencies must be tightened to prevent future economic distress a handful of Senators argued Wednesday during a hearing with the Senate Banking, Housing and Urban Affairs Committee. Chairman Chris Dodd (D-Conn.) said that rating agency regulation reform was essential due to the pivotal role poor financial regulation played in the collapse of the U.S. financial market.

“There are two areas alone that deserve special recognition for the [financial] problems. One was, of course, failure the to regulate the brokers who were out marketing products they knew had problems… and the second is the ratings agencies.” said Dodd. The modernization of financial regulations “may be the most important piece of legislation that this committee will deal with or has dealt with in decades,” he said.

The committee discussed the effects of the Rating Accountability and Transparency Enhancement Act of 2009 once passed, as well as adopting the administration’s proposed overhaul on the regulations for ratings agencies. Both proposals advocate an increase in transparency, a system to expose conflicts of interest, and greater SEC supervision.

Testifying before the committee, Assistant Treasury Secretary for Financial Institutions Michael Barr said it was important to show the market that the government was serious about regulatory reform.

“[We need to have regulations that] permit transparency in the system, restore honesty and integrity to the process that was so sorely lacking in the last bit of time,” he said.

In response to an assertion made by Sen. Johanns (R-Neb) that more regulation could cause higher costs to be passed on the American public, Barr said that every consumer were already negatively affected by unsatisfactory rating regulations.

“I think, unfortunately, the whole country is paying the price. Every consumer is paying the price today of a significant failure of our financial regulatory system,” Barr said.

“I think we need to have a system in the future in which the level playing field and high standards are established in a way so that it makes it much less likely that we are going blow up our financial system and cause this amount of harm to the average American home owner, consumer small business person,” Barr continued.

Rapid Ratings International, Inc. Chairman and CEO James H. Gellert said that the administration’s proposal was a mix of “positive steps and disturbing developments” that would stifle potential innovation and competition, and ultimately cause smaller ratings agencies to go out of business.

“The Treasury proposal…threatens to erect more hurdles to competition in this industry,” Gellert said.

Fed called to answer for bailout of Bear Stearns

Why did you bail out Bear Stearns? It was the resounding question heard over and over in the Senate Banking, Housing, and Urban Affairs Committee hearing on "Turmoil in U.S. Credit Markets: Examining the Recent Actions of Federal Financial Regulators." Federal Reserve Chairman Ben Bernanke, SEC Chairman Christopher Cox, United States Treasury Under Secretary Robert Steel, and President of the Federal Reserve Bank of New York Timothy F. Geithner, all attempted to answer that question to Congress.

In his opening statement, Senator Chris Dodd (D-CT), said the stunning fall of Bear Stearns was matched only by the sweeping response to its collapse put together by the New York Fed and the Federal Reserve Board of Governors, which, with the support of Treasury, "exercised powers in some instances that had not been used since the Great Depression." However, he said, people on 'Main Street' are struggling to pay their mortgages, and so was the rescue of Bear Stearns justified to prevent a systemic collapse of financial markets, or was it a $30 billion taxpayer bailout for a firm on Wall Street?

Yes, but how big do you have to be, to be too big to fail? Senator Jim Bunning (R-KY) posed that question in his opening statement. Why, exactly, was it necessary to stop the invisible hand of the market? That is Socialism, he said, adding that he was very troubled by the failure of Bear Stearns. A big question, he said, was who let our financial system become so fragile?

Chairman Bernanke said the that pressures in the short-term bank funding markets have increased, and many lenders have been reluctant to provide credit to counterparties, especially leveraged investors, and they have increased the amount of collateral they required to back short-term security financing agreements. Credit availability is restricted, and some key securitization markets (including those for nonconforming mortgages) continue to function poorly if at all.

Bernanke, nearly at the end of his prepared statement, arrived to the explanation as to why they had assisted Bear Stearns. The news that Bear Stearns would have to file for bankruptcy, he said, raised difficult questions of public policy. "Normally, the market sorts out which companies survive and which fail, and that is as it should be. However, the issues raised here extended well beyond the fate of one company." He said that our financial system is extremely complex and interconnected, and Bear Stearns participated extensively in a range of "critical markets." The damage caused by a default by Bear Stearns "could have been severe and difficult to contain."

The chaotic unwinding of Bear Stearns could have cast doubt of the financial positions of some of Bear Stearns' thousands of counterparties, Chairman Cox said. But a question remained on whether or not investors were at risk. Despite the run on the bank to which Bear Stearns was subjected, Cox said, its customers were fully protected. At no time during the week of March 10-17th were any of the customers of the Bear Stearns's broker-dealers at risk of losing their cash or their securities.

Under Secretary Steel gave an explanation as to why Bear Stearns was assisted, saying a strong financial system is vitally important for all Americans. When our markets work, he said, people throughout our economy benefit, and when our financial system is under stress all Americans bear the consequences. The focus was more on the strategic concern of the implication of a bankruptcy. The failure of a firm that was connected to so many corners of the market would have caused financial disruptions beyond Wall Street.

The risk has its protections, Geithner said. There is a substantial pool of professionally-managed collateral that was valued at $30 billion, the agreement on the part of JPMorgan Chase to absorb the first $1 billion of any loss that ultimately occurs in connection with this arrangement, and a long-term horizon during which the collateral will be safe-kept.

In the written statement of James Dimon, Chairman and Chief Executive Officer of JPMorgan Chase, he said they got involved in the matter because the collapse had the potential to cause serious damage to the financial system. They could not, and would not have assumed the risks of acquiring Bear Stearns without the $30 billion facility provided by the Fed, and that the transaction is not without risk for JPMorgan. However, they informed the New York Fed and Treasury that the risks were too great for JPMorgan to buy the entire company on their own. The statement also explains the reason for bailing out Bear Stearns: a Bear Stearns bankruptcy could have touched off a chain reaction of defaults at other major financial institutions, and the consequences could have been disastrous.

The repeated phrase by each and every witness was that the failure of Bear Stearns was a result of a lack of confidence. According to the written statement of Alan Schwartz, President and CEO of the Bear Stearns Companies, even though the firm was adequately capitalized and had a substantial liquidity cushion, "Unfounded rumors and attendant speculation began circulating in the market" that Bear Stearns was in the midst of a liquidity crisis. The unfounded rumors grew into fear and there was a run on the bank.