Tag Archives: Global banking

Is MasterCard Really Changing The World?

Have you ever noticed that business and news organizations love to compile lists?

The U.S. News and World Report, for instance, draws the attention of the education industry each year with its Best Colleges lists. Forbes generates attention and envy with its World’s Billionaires list. And Dow Jones influences the global markets whenever it changes the composition of the thirty corporations in its Industrial Average list.

Fortune has repeatedly indulged in list compilation activities as well. Its annual Fortune 500 list of the top American companies, for example, has been garnering significant press coverage and scrutiny for decades. And last month, Fortune extended these activities by publishing its first Change The World list.

Change The World? What does that mean? In its Methodology and Credits statement, Fortune explains that the list consists of “companies that have made a sizable impact on major global social or environmental problems as part of their competitive strategy … (and that are) doing good as part of their profit-making strategy … (in order to) improve the human condition.”

That sounds quite noble, doesn’t it? The companies on Fortune’s list should be engaged in extremely impressive activities. And yet, considering its own methodology, at least one of Fortune’s choices may strike us as a bit odd.

Take Mastercard, for instance, which appears at #11 on the list. Along with Visa, American Express, Discover, and every bank that issues debit cards, Mastercard helps people avoid paper currency by paying with plastic instead.

Of course, people have been carrying plastic in their wallets since Diners Club issued the first charge card in 1950, and since Bank of America followed with the first general consumer credit card in 1958. The BankAmericard later went global during the 1970s and was spun off into the firm that became Visa.

But this decades-long progression of e-commerce didn’t deter Fortune from heaping praise on today’s MasterCard for services that simply “distribute social benefits on debit cards … (and thus help people) switch to electronic payments…” In addition, Fortune didn’t mention the ongoing controversies about excessive service fees that some financial institutions have placed on such cards.

To be fair, Fortune does note appropriately that the use of plastic cards in place of paper money can reduce cash theft and deter untaxed “off the books” transactions. But Fortune does not acknowledge that electronic payment systems are often plagued by hackers, thieves, and tax cheats as well.

On the one hand, it might indeed be true that the transition from paper to electronic payment transactions is helping to change the world. But isn’t it a little odd that Fortune has decided to focus its plaudits solely on MasterCard? After all, this is an evolution that has been progressing for well over half a century, and that has been jointly driven by numerous financial institutions.

Don’t they deserve some plaudits too?

Global Banking: It’s The Happy Meal!

Having lurched from one scandal to another during the past year, one would think that representatives of the global banking industry would be eager to improve their public image.

Wouldn’t one?

It thus may come as a surprise that global financial specialists have chosen to publicize a recent trading innovation that has been named after a product for children.

What is the product? It’s the Happy Meal! Named after the meal with a toy at McDonald’s, an investor’s Happy Meal is a bond that is convertible to stock, packaged along with a loan of some shares of the underlying stock.

Either way, an investor in a financial Happy Meal stands to earn a profit. If the issuing corporation performs well, the bond can be converted to equity. And if it doesn’t perform well, the stock loan can be utilized to sell the corporation short.

So which investment vehicle — the convertible bond or the stock loan — is analogous to the food in a Happy Meal? And which vehicle is analogous to the toy?

Regrettably, that distinction is not altogether clear. What is indeed clear, though, is that the naming of an investment innovation after a fast food product for children is not likely to enhance the badly tarnished reputation of the world’s global banks in the eyes of the general public.

Behavioral Finance and Government Regulation

Are you familiar with a field of study called behavioral finance? It focuses on psychological explanations for market behavior. Researchers who specialize in the field believe that personal (and often irrational) attitudes, beliefs, and emotions drive judgments and decisions, which in turn determine how individuals act when responding to events.

So if attitudes determine actions, then conversely, actions should reflect attitudes … shouldn’t they? In other words, if we observe consistent trends in the choices and actions of individuals, we should be able to intuit the underlying beliefs and emotions that have inspired them.

With this relationship in mind, let’s ponder the recent choices and actions of traders in global finance. Last summer, the manipulations of the Libor interest rate exploded across the news headlines; they continue to be the focus of numerous regulatory and criminal investigations.

And within the past two weeks, other long term trends have emerged as well. For instance, several firms are now under investigation for manipulating prices in the energy industry through the use of decades-old tactics that were originally pioneered by Enron Corporation.

Furthermore, the London Metal Exchange is now under fire for enabling Goldman Sachs to manipulate commodity metals prices by purchasing and storing massive amounts of industrial aluminum. The strategy is reminiscent of the schemes that were employed by the Hunt Brothers to “corner” the metals market for silver three decades ago, a plot that ended disastrously on Silver Thursday.

Some banking executives have vigorously defended their actions, asserting that they have broken no laws. Indeed, regulations from the Affordable Care Act to the Dodd Frank Act to the Transfer Pricing Laws of the Internal Revenue Service have long been criticized for their bloated lengths and incomprehensible language.

Nevertheless, the longstanding practices of Wall Street traders appear to reveal an underlying belief that any manipulative strategy is acceptable as long as it is legal. Under such circumstances, what method is available to protect the public interest, other than government laws and regulations?