Wildhawk

Banks Don't Intentionally Overcharge Credit Card Customers… Or Do They?

Finally a breath of much-needed pragmatic realism in Seeking Alpha commentary! Mark, thank you for posting this entertaining commentary on your personal situation (your wife sounds like a pretty sharp lady, by the way).

What drives me nuts about so much of the commentary on both this site and the broader media is that government is automatically assumed to be incompetent and the free market (such as it is, which it ISN'T in American banking) is automatically assumed to be supremely omniscient in finding the perfect solution to everyone's problems.

What most commentators fail to realize, and which you've alluded to here, is that large banks in the US do not operate as part of a free market- they are oligopolies, which are antithetical to free market capitalism. They receive innumerable competitive advantages (e.g. the near-free borrowing from the Fed window; government guarantees of their debt, etc.) that bank alternatives like money market funds and peer-to-peer lending (e.g. Prosper) institutions do not have. In addition to the transparent advantages, they also clearly have the less transparent advantage of enormous influence in Washington, which has shown a propensity to do whatever big banks ask them to do, regardless of consequences. This, my friends, is not a free market, but crony capitalism where the oligopoly has all the advantage over the consumer. This is a classic situation where government MUST step in to break up the oligopoly and restore balance to the relationship between banks and consumers where none currently exists. It's precisely why anti-trust and consumer protection laws were enacted.

10 Highest Paid CEOs for 2008: Unbelievable

MMarrkk- your comment about the BOD being voted out in the next election doesn't hold water. Over 50% (and I believe the number is something like 70%) of shares are held either by institutions directly or indirectly on behalf of shareholders, rather than by individual shareholders themselves. Those institutions vote proxies in favor of management in virtually all cases, unless explicitly instructed otherwise by attentive individual shareholders.

So why are shareholders letting the institutions vote their proxies for them? Because most individual investors don't have the foggiest notion of how to read a 10-K or a 144A (proxy statement), and so couldn't even begin to tell you what the senior management teams of the companies they own make each year, much less what metrics those execs are paid on. Call it laziness, call it ignorance, call it what you will, but BODs don't get voted out because shareholders don't take the time to read disclosures or have the skill set to interpret those disclosures without it being spoonfed to them by the mainstream media. Even then, most have no idea that they even have an ability to vote on it, and when they do, virtually none of those votes are binding to the company (see all the drama and discussion around "say on pay" proposals, which also wouldn't be binding to companies).

Our current regulatory framework isn't in place to make this stuff easily accessible and understandable to the individual shareholder; it's set up to cater to ramming through whatever BODs want to do with a minimum of supervision and consequences from the true owners of the companies. Heads they win, tails we lose.

Not every company acts this way, but the ones that don't are the exception, not the rule.

I still think the solution to all of this is to institute fiduciary responsibility for everyone who handles the money or financial assets of others as an intermediary (it basically requires financial intermediaries of any kind to follow the "prudent person" rule, and to always act in the best interests of the end client). That would include C-level execs and BODs. I venture to say you wouldn't see this sort of negligence and recklessness from BODs and management teams if the consequences of their decisions could result in jail time. Incentives just would not be this out of whack if the decision makers might go to jail as a result.