This originally appeared here and I wish to thank John
for allowing me to publish his work. RK
Since Judge Richard Leon issued his shocking decision on
July 31 that called for even more draconian price controls under Dodd-Frank’s
Durbin Amendment, some legal commentators have given the judge the benefit of
the doubt. They concede the Durbin Amendment is bad law, but they say Judge
Leon was correct in his interpretation of the amendment, which basically
mandates the Federal Reseve not set price caps on what banks and credit unions
charge for interchange fees on debit cards at any rate higher than retailers
would like to pay them.
These commentators,
some
of whom I respect a great deal, simply overlook the incredible sloppiness
in Leon’s ruling in NACS.
v. Board of Governors of the Federal Reserve. Leon’s decision is filled
with unprofessional snark, misconstrues economic terms in the statute’s
language and limits its research of “legislative intent” to the “intent” of one
member of Congress who voted for the legislation: Sen. Richard Durbin, D-Ill.
Leon’s ruling forces the Fed to construe the law in a way that almost certainly
will foment a constitutional challenge – similar to the lawsuit TCF Bank filed
after the Fed’s more stringent “proposed rule” in late 2010 – involving the 5th
Amendment property right to seek a return on capital invested.
Because of these many flaws, the Fed would have a good
shot at getting the ruling overturned should it appeal. And Leon’s outrageous
suggestion last week that some of the biggest retail giants be paid by financial
institutions — including community banks and credit unions — for “losses”
caused by price controls supposedly set too high, something plaintiffs didn’t
even ask for, calls his impartiality further into doubt.
First, the snark. I’ve never
seen a ruling with so many sarcastic asides at a party in the suit. Several
two-sentence swipes at the Fed’s arguments litter this decision. Leon responds
to the Fed’s many arguments with snappy phrases like ”How convenient” (p. 29);
“red herring” (p. 31); “Not quite!” (p. 33), and a dismissive “That’s it!” (p.
37) – exclamation points in original. Now I’ve been know to use snark and
sarcasm against regulatory agencies in informal writing, but it is an entirely
different matter in a judicial decision that is supposed to weigh both sides’
arguments with the utmost of care.
Care is also lacking when Leon attempts to define words
in the statute. The crux of the issue is that in setting the price controls,
the Durbin Amendment allows the Fed to consider “the incremental cost incurred
by an issuer for the role of the issuer in the authorization, clearance or
settlement of a particular” debit transaction, but bars it from including
“other costs .. which are not specific to a particular” transaction. This may
sound somewhat clear at first read, but the term “incremental cost” is never
defined.
Citing just one federal court decision from 1992, Leon
concludes that “incremental costs” mean “variable, as opposed to fixed” costs,
and thus the Fed was allowing too many bank and credit union costs to be
considered in setting the price controls. Yet Leon ignores the body of economic
literature over the past few decades that defines “incremental costs” as
including at least some fixed costs.
“Incremental cost includes both product-specific variable
and fixed costs of production,” writes Ashish Lall, now professor of economics
at the National University of Singapore, in the authoritiative text Competition
Versus Predation In Aviation Markets. Lall cites award-winning American
economist William Baumol as providing this expansive definition of “incremental
costs.” Lall and Baumol are picking up on an insight of Nobel Laureate Ronald
Coase in his classic treatise The Firm,
The Market, and The Law, that average costs do not necessarily decline if
producing an additional unit requires higher fixed costs in things such as infrastructure
investment.
The Fed was in line with the mainstream of economists in
giving this term this reading. If Sen. Durbin wanted the price controls to
allow only for “variable costs,” then why didn’t he specifically say “variable
costs” rather than “incremental costs”?
Leon tries to paper over his slipshod interpretation of
the statute’s language with a strained reading of “legislative intent.” He
cites Durbin’s repeated statements that the Fed should set price controls as
stringently as possible but neglects other members who voted for the Durbin
Amendment and the Dodd-Frank legislation who then made the case to the Fed to
consider more costs.
For instance, Sens. Debbie Stabenow and Carl Levin, both
Democrats from Michigan, wrote
to the Fed in 2011 to “urge you to consider fraud-related costs and to make
every reasonable effort to mitigate any potential impact on access to banking
services for low- and middle-income families and businesses.”
Given Leon’s overreach, the Fed shouldn’t be afraid of
taking him on in an appeal. It also should be aware that if it doesn’t go that
route and price controls become more stringent, the litigation from all parties
likely will continue.
Richard Epstein, the property rights expert and New York
University law professor who represented TCF, agreed with Leon’s interpretation
of the statute. But Epstein reaffirmed his view that the statute itself is
unconstitutional, because it deprives banks and credit unions of the property
right to seek a return on capital invested guaranteed by the Due Process and
Takings clauses of the 5th Amendment
The lawsuits waiting in the wings may be the tipping
point in the Fed’s decision of whether to take on Leon.
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