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Friday, April 13, 2012

Credit-Card Companies in a Conflict of Interest

On April 12, 2012, Hawaii sued Bank of America, Chase, Citi, Barclays, Capital One, Discover, HSBC, and their subsidiaries, “claiming that the banks ‘slammed’ Hawaii credit card customers, charging them for products customers didn't need and that the companies never provided.” The Hawaiian government alleges that the banks used “‘predatory tactics to sign up customers for services they either don’t want or don't qualify for,’ and the companies charged their customers ‘without their knowledge or consent,’ according to a press release issued by the Hawaii attorney general's office.” According to the Attorney General, David Louie, “You don't know that you're enrolling, but they say, 'Oh you just enrolled,' okay, and now they've put a charge on your credit card.”  The banks’ telemarketing departments may have charged customers an average of $150 in the form of small charges.

It is a conflict of interest for credit-card companies to both administer the accounts and be the source of charges because if there is a dispute on a given charge the company can simply refuse to take off the charge. We accept the conflict of interest to the extent that a credit-card company charges customers to administer the accounts because that is a service provided. This rationale is missing where the companies use telemarketers to sell optional products, including additional services. Hawaii alleges that the companies put charges on their respective customers’ credit-cards without having secured permission. Should a customer find out and complain, the company would be resistant to removing the charge—presuming as per its financial interest that the customer had approved of the charge. In such a dispute, the company has an unfair advantage—essentially being a party to the dispute and the umpire. The company is acting as the card’s administrator and a vender who charges the card.

In his theory of justice for the city, Plato argues that each part ought to do only its own job. The ruler, rather than the businessman, provides the reasoned-based order on the city as a whole. Businesses are oriented to satisfying particular appetites. In the case of the credit-card companies, two distinct roles are being performed when only one fits with the desire being satisfied by providing the cards. Put another way, buying an ice-cream cone satisfied one desire, whereas being able to use a credit card (i.e., regardless of the particular substance of a given purchase) satisfies another. It is unjust in Platonic terms for a credit-card company to charge for particular products or services, rather than charging only for administering the cards. Besides more than one job being attempted—as if an arm trying to do its own work and that of a leg—the two jobs are incompatible in that the customer can be exploited.

Therefore, as a matter of public policy, American legislatures might consider giving credit-card customers the authority to unilaterally remove charges sourced in the credit-card company—excepting the charge for the administration of the card itself. The customers could then counter the temptation on the bank to be both party to a dispute and its initial decider. Given the costs involved when a customer sues a credit-card company, the role of first decider should not be trivialized. Should a customer remove a charge for an optional product, the company could remove or pick up the product. My point is that putting customers on a level playing field would stop the companies’ conflict of interest from potentially harming the customers. Simply put, it is not fair to be subject to one entity—business or person—being both defendant and judge.


Bonnie Kavoussi, “Hawaii Sues Bank of America, Chase, Citi, Others For Deceptive Credit Card Marketing,” The Huffington Post, April 13, 2012.


Banks Coopting the Consumer Protection Agency

According to the Credit Card Act, which took effect in February 2010, credit-card issuers cannot charge fees equal to more than 25% of the borrower’s credit limit in the first year after the account is opened. A question confronting the Consumer Financial Protection Bureau was whether up-front fees charged before the account is open count toward the limit. The new agency decided against subjecting such fees to the limit. The question is why.

Bankers at First Premier bank, which issues credit cards to people with low credit-ratings, claimed that the bank’s “very existence” would be threatened on account of “the loss of millions of dollars in profits.” That the threat was self-serving should at the very least make it questionable. However, if true, it could mean that the bank was depending on taking advantage of customers for its own survival—in which case it should not continue to exist. The bank was charging a $95 processing fee before an account is opened, plus a $75 annual fee. The annual fee itself is questionable, given the credit limit was $300. It is highly doubtful that the cost to the bank of processing a credit card application was $95. It can thus be argued that the bank was taking advantage of people who needed a credit card in order to rebuild their credit history. Depending on such a business model is not viable, at least ethically-speaking.

For an agency whose entire raison d’etre is to protect consumers to enable such charges by exempting them from the law’s limits for first year charges raises the question of whether “regulatory capture” had occurred.  Hardly unknown among regulatory agencies, the phenomenon occurs when the industry being regulated “captures” its regulators. Whether through the power of information that the agency needs or outright political pressure, industries can coopt or subvert their respective regulatory agencies from their formal missions. That the banks objected to Elizabeth Warren and she was replaced as the proposed director by Richard Cordray may suggest that his loyalties were not entirely behind the consumer. That is to say, the banks may have had too much influence on the selection of the director tasked with protecting consumers.


Tara Bernard, “Consumer Bureau Declines to Resist Upfront Credit Card Fees,” The New York Times, April 13, 2012.

Using Corporate Position to Torture Whistle-Blowers

Jack B. Palmer made a quiet complaint through internal channels at Infosys, an outsourcing company based in India. He suspected some managers were committing visa fraud. His complaint leaked. As a result, investigators from the U.S. Government looked into “whether the company used workers from India for certain kinds of jobs here that were not allowed under their temporary visas, known as B-1.”

For his role in triggering the investigation, Palmer “was punished for reporting corporate misdeeds, after executives pressured him to drop his complaints. One manager threatened to fire him, he said, and he received angry calls from co-workers. In November 2010, according to court documents, he found a death threat, neatly printed, on the chair in his office.” However, Palmer claimed the harsh treatment was actually even worse. “They did the worst thing they could do to someone who is used to working 80 hours a week. They sit me at home and cut me off from everything. My life is floating in Infosys purgatory. . . . The mental and physical challenge one takes on after blowing the whistle is excruciating.” Not to belittle the mental toll, but might he have been able to use his time at home learning more in his field? Perhaps Infosys was demanding that he do nothing else in exchange for continuing to be paid. If so, the tactic borders on torture.

According to the New York Times, “Palmer’s experience since he filed his first report in October 2010 alleging misuse of business visitor visas for Indian workers is a cautionary tale about the perils of confronting a big corporation.” A company spokesperson denied any retaliation had taken place, but the denial flew in the face of the physical evidence of the death-threats.

In my view, it is unrealistic to expect whistle-blowers to be able to continue to stay on after implicating superiors. Infosys demonstrates just how personal managers can take being reported by “one of their own.” In other words, the illusion of corporate controls pale in comparison to the all too human thirst for vengeance. The battle is hardly fair, for the reported have the strength of numbers and the organization itself, whereas the whistle-blower has only the fortitude of his or her own principles to weather the storm.

It may be that a kind of “witness protection program”—in the sense of removing the whistle-blower from his or her place of work and providing some support until an alternative job is secured—should be part of whistle-blowing legislation. In other words, if society values whistle-blowing, whistle-blowers must be given more support on account of how managers can use their organizational positions to satisfy personal agendas.


Julia Preston, “Whistle-Blower Claiming Visa Fraud Keeps His Job, but Not His Work,” The New York Times, April 13, 2012. http://www.nytimes.com/2012/04/13/us/whistle-blower-claiming-visa-fraud-keeps-his-job-but-not-his-work.html

Thursday, April 12, 2012

Christianity and “Social Capitalism”

The SEC charged Ephren Taylor with a fraudulent $11 million Ponzi scheme in April 2012. According to Reuters, “Taylor fraudulently sold $7 million of notes said to bear 12 percent to 20 percent annual interest rates, to fund small businesses such as laundries, juice bars and gas stations.” He “had conducted a multi-city ‘Building Wealth Tour’ in which he spoke to congregations” on the importance of “giving back.” He called himself a “social capitalist.” In actuality, he used the money on himself and his wife’s attempt to become a singer.

The congregants’ susceptibility to Taylor can be understand from grasping the larger historical trend within Christianity wherein the prosperity gospel—in which it is believed that God rewards “true believers” with material wealth—had replaced the anti-wealth view wherein being rich and saved is like a camel getting through the eye of a needle. In other words, the shift in historical Christian thought from a close coupling of wealth and greed to an outright rejection of such a linkage made it more likely that the lay Christians would view investing in “social capitalism” as sufficient to justify having wealth beyond subsistence living.

Secondly, Taylor’s assumed conflation or mixing of Christianity and social performance in business enabled the congregants to open their wallets presumably for religious purposes in line with a social conscience. It is worth pointing out that camel is not given a pass for using wealth in a socially responsible manner. In other words, if simply having wealth is indicative of underlying greed, how one uses the wealth is not sufficient to undo the linkage and justify having the wealth in the first place.

Moreover, fidelity to a social norm such as corporate social responsibility is not religious. Even though Unitarians maintain that certain social structures are the object of their faith, the religious domain contains a transcendent referent.  That is, faith in a religious sense is oriented to an object that lies beyond the limits of human cognition and perception.  Specific social structures do not qualify because they are in our human domain.

In fact, to advocate a particular social norm is not to justify ethically with ethical reasons.  That is to say, corporate social responsibility is not business ethics.  The difference can be explained by referring to David Hume’s naturalist fallacy, which holds that what “is” the case cannot justify what “should” be. In other words, you can’t get ought out of a melon. You need ethical reasons, such as “it is fair because x,” to justify what one should do. To advocate a social norm is not to provide an ethical reason; more would be needed to provide support for why a certain norm that can exist should exist.

Therefore, I question Taylor’s linking “social capitalism” to religion (and Christianity in particular). The application cannot even be justified under the rubric of religious ethics. In addition, the congregants were too gullible because they had applied or bent Christianity too far from its native turf.

See: Godliness and Greed. http://thewordenreport.blogspot.com/2012/01/preface-to-godliness-greed.html

Jonathan Stempel, “SEC Charges Ephren Taylor II For Allegedly Bilking Churchgoers In $11 Million Ponzi Scheme,” The Huffington Post, April 12, 2012.

Facebook Devours Instagram: Buying a Product

Reporters can easily get carried away in characterizing mergers and acquisitions in business.Regarding eBay buying PayPal in 2002 for $1.5 billion, Google purchasing YouTube in 2006 for $1.65 billion, and Facebook acquiring Instagram in 2012 for $1 billion, expanding in the technology sector can be viewed as buying technology as a product rather than acquiring another company. Accordingly, the fact that Instagram had not earned any revenue is irrelevant. 

The full essay is at "Taking the Face Off Facebook."

Wednesday, April 11, 2012

Justice as Fairness: Greece’s Bond-Holder Holdouts

In the wake of the agreement whereby private holders of Greek debt would swap the bonds and take a 75% loss, two or three percent of the private holders—namely, well-financed hedge funds including Aurelius Capital and Elliott Associates—were thought to be mulling over holding out for full pay-outs instead of agreeing to take the loss. Greece’s dilemma would have been to pay them in full in order to avoid a default and face the ire of the holders who took the losses, or risk default by invoking a collective bargaining law to force the holdouts to swap their bonds.

From an ethical standpoint, the principle of fairness would be violated were the holdouts paid out in full while the remaining 98% of the private holders lost 75% of their investment. In John Rawls’ theory of justice as fairness, a veil of ignorance keeps the designers of a social, political or economic system from knowing what status or position they would have. As a result, the design is not likely to be too harsh on the lowest positions. In the case of the swap, fairness would mandate that the decision on whether the holdouts should be paid out in full should be made by people who know that they could be among the bond holders who would take the 75% loss. Fairness would thus rest on the side of risking default, which could mean that Greece would be cut off from sources of capital in the international market. In other words, there is a cost to fairness.

Landon Thomas, “Next Hurdle for Greece? Bond-Swap Holdouts,” International Herald Tribune, April 4, 2012.

Tuesday, April 10, 2012

On the Arrogance of Assumed Superiority: Assad of Syria

One week after Assad’s Syrian government had agreed to a cease-fire with the state’s opposition, the government added further stipulations. First, it wanted “written guarantees” that rebels would  stop fighting and lay down their weapons before any government pull-back could occur. Second, the Syrian government wanted guarantees that Qatar, Saudi Arabia and Turkey would stop financing the armed groups within Syria. “The regime will not implement this plan,” Col. Riad As’aad, the leader of the opposition militia fatalistically said.

The strategy was essentially a device with which to sabotage the truce. Either Assad had never intended to honor it or he had second thoughts about it after having agreed. Either way, the other side was perfectly justified in ignoring the government’s additional demands because they were not among the terms of the truce. That it is obvious that additional conditions are invalid after an agreement is made points to the lack of character—and indeed the psychological condition—in whomever in the Syrian government had come up with the strategy. At best, the ploy is dishonest. At worst, the culprits were so presumptuous as to think that they could legitimately add additional obligations on the other side. The question is perhaps whether the pertinent government officials were in denial regarding both the arrogance and the invalid nature of the move.

The mentality can also be found among apartment rentals. In some cases when I have looked for apartments, I have thought an agreement had been reached only to find an “oh, by the way” email adding a further condition that must be satisfied. Typically, the convenient presumptuousness takes the you need to form. That such a further obligation is invalid after the handshake just highlights the arrogance in the you need to. The mentality would really be shown for what it is if the renter were to reply, “I would be happy to consider your suggestion.” Essentially, both moves are predicated on the desire to dominate. It is a control-battle, in other words. My main point is that such efforts to dominate presume entitlements far beyond what is actually deserved. That the person renting the apartment would find the renter’s reply offensive—even an insult—just shows how much presumption is in the mentality. The renter would no doubt react to the ensuing, more direct imperative with legitimate consternation and resentment. When holding a party to the terms of the agreement is viewed as a provocation by the party, which continues to assume that its over-reaching is valid, there is no hope of working things out without an authority that is over both sides.

Officials in Assad’s government surely realized the absence of an authority that could hold the government to its agreement without the added conditions. In such a case, obligation itself has no meaning. The agreement of a sovereign, in other words, is valid only in so far as it continues to be something the sovereign wants. There is no being held to anything. In the case of rental agencies, companies or owners, the presumption of an overweening entitlement is at odds with the nature of an economic transaction between two parties. It is not that one party is thereby the adult and the other is somehow in a child’s role. Nor is it an employer-employee role. Rather, money is exchanged for a good—the value of each being theoretically equal. A renter could object to the additional conditions and sue to have the lease enforced if the lessor should unilaterally stop performance on the basis of the additional conditions not being satisfied.

My main point is that the stubbornness of the presumptuousness that continues to insist that the additional conditions be met is without foundation and thus ought not to stand, yet it is amazing how resistant it is to being checked or corrected. The presumption of superiority lends an ignorance that can’t be wrong assumption to the presumption simply in adding the conditions. It is this phenomenon of arrogance on stilts (which shouldn’t even be standing on its own) that defies the laws of nature.

In other words, should Assad blame the rebels for his refusal to implement that which he agreed to because the two additional conditions had not been met, the blaming itself is at two degrees of separation from having any foundation. Even so, Assad could get away with not only his refusal, but also the further step of blaming the innocent party. Psychologically speaking, Assad should know that the blaming is illegitimate yet under this scenario he might not realize it.

Stubbornly holding to the lack of realization while imposing it on the other party is a phenomenon in need of an investigation. Specifically, how does it sustain itself and can it be knocked down. Simply insisting on the terms of the agreement typically does not work. Nor, for that matter, does making the invalid status of the additional conditions transparent. I suspect that the mentality, or brain sickness, is not unlike that of an alcoholic in denial.

Reuters, “Cease-Fire in Doubt as Syria Demands New Conditions,” The New York Times, April 9, 2012.