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Christine Jenkins Tanzi NYU MA in Business and Economic Reporting

Crazy Things to Pay with a Credit Card: Sex Trade Edition

People love a good prostitute scandal. So why would high profile clients use one of their most easily traceable modes of payment to pay for escorts?

I started thinking about this while reading a Mark Jacobson New York Magazine story on the NY Confidential brothel that hired “a muscle-bound young banker… to manage credit-card accounts. This way, those wanting to disguise their use of NY Confidential services would appear to be spending their $1,200 or so at venues like the fictitious Gotham Steak.”

Right now Craig Thomson of the Australian House of Representatives is suing the Sydney Morning Herald for accusing him of paying for escorts and visiting brothels with his former union credit cards. The paper said it went through Thomson’s credit card statements and found for example:

“Two payments of $570 and $2475 in 2003 and 2005 to “Keywed Pty Ltd Restaurant” in Surry Hills, a company listed on the internet as the payee for clients of the Sydney Outcalls Network, an escort agency.”

In an interview with ABC News, Kristin Davis, the former madam that featured in Eliot Spitzer’s escort scandal, said of a list of 9800 clients that included employees at Goldman Sachs, Merryll Lynch, and JP Morgan:

“Some of these guys, I was invoicing on corporate credit cards,” she said. “I was writing up monthly bills for computer consulting, construction expenses, all of these things, I was invoicing them monthly so they could get it by their accountants,” Davis said…. One CEO ordered her to send him invoices for “roof repair on a warehouse” to disguise the payment for prostitutes from corporate funds.”

It’s all pretty brazen, but according to Davis the Manhattan District Attorney’s office showed no interest in prosecuting them.

In New Zealand, this week a former brothel manager revealed details about the two Chow Group brothels she worked at. They book girls through a website that charges “$220 an hour for customers who pay cash and $20 more for those who bill it to their credit cards,” and the former employee said that the girls like clients “who are really drunk because they loosen up the credit card.”

So revolving credit plays a prominent role in the sex trade, and I think somewhere, someone should be out there doing an investigative story on the use of the iPhone Credit Card scanner by street prostitutes.

August Capital’s David Hornik: Disruptions Lead to Opportunity

When TechCrunch had August Capital’s David Hornik on its “Ask a VC” series to answer reader-submitted questions, I sent in an email asking about the biggest threat to the credit card industry. Hornik has invested in Blippy, where users can socialize around their credit card purchases, and Bill.com, an online bill payment site for small businesses.

My question didn’t make into the video where Hornik says what he considers the dumbest recent Silicon Valley investment, but I sent an email to him anyway. The following is a short, edited Q & A from our emails, where Hornik talked about PayNearMe, a company he recently funded that provides a payment network for consumers without credit cards to make online purchases.  

Q: With the recession and new regulations, credit card issuers have certainly suffered. Can you point out any examples of companies that have been able to use that to their advantage?

A: Any time there are disruptions in traditional businesses there are opportunities. Then the only question is who takes advantage.  In this instance I think that the opportunity is that people are more careful about credit, are getting rid of credit cards, have no more credit, etc. and therefore are happy to pay with cash and will do so if they have a way to. That’s where PayNearMe comes in. Hopefully it will become a big platform.

The potential costumer base for a service like PayNearMe may actually be increasing, as 8 million credit cards users gave up their cards in the past year, according to TransUnion. To shop from Amazon or pay for Facebook Credits, consumers place their order, print a slip and then make the payment in cash at the register of any of the 6,000 7-Eleven locations. To use the service without a printer, they can chose to enter their cell phone number, text back the 9-digit number on the back of a PayNearMe card, and later pay with cash at the 7-Eleven store.

Q: What do you see as the biggest opportunity that the credit card business is leaving open?

A: I think that there are a bunch of opportunities.  Credit cards are just too expensive for small business, consumers, etc.  So there are all sorts of alternatives that are going to pop up… I think (PayNearMe) is going to be a big alternative to the credit card companies. I also think that these mobile payments companies have the possibility of getting really big.  And there are a bunch of innovations going on in the debit world.

Why Would Jamie Dimon Be Excited About Credit Cards?

 Judging from the first three quarters, 2010 doesn’t seem a great year for JP Morgan Chase’s card services. It’s still America’s biggest credit card company, but at $136 billion in October its end of period loans were down 10% from the end of the first quarter, and though its now on its second quarter of positive earnings, provisions for credit losses still took up 38% of its last quarterly revenue.

Yet C.E.O. Jamie Dimon says this week’s New York Times Magazine:

“One area Dimon is excited about is credit cards. J. P. Morgan is promoting a couple of Chase-branded cards, with the aim of cutting out partners like Starbucks.”

The profile doesn’t really get into how big this program could be, but it does look briefly into other changes the company has made as it faces the CARD Act regulation:

“To compensate for its inability to quickly raise rates, Chase has decided to lessen its exposure by no longer offering cards to a portion of its customers that it deems the riskiest. This isn’t necessarily bad; if the mortgage mess taught us anything, it is that banks should exercise discipline. Dimon is also protecting his firm by raising fees in areas that the law doesn’t reach. Free checking is on its way out. “Because you can’t charge for some things,” Dimon rattled on at the Sheraton, “you have to charge for others. When the government gets involved in pricing, I don’t think it’s the right way to look at a business.””

I think that almost any growth in revolving credit at this point would probably have to come from riskier customers, so I wish that reporter Roger Lowenstein included why the Chase cards would be successful in this environment.

While the profile on Dimon, whom the MIT economist Simon Johnson has called “the most dangerous American banker of this or any other recent generation,” isn’t necessarily glowing, some points should have been hit on harder. Lowenstein actually includes some of Johnson’s other criticism of Dimon (but not that “most dangerous” quote) on JP Morgan Chase’s growth. On his infrequently updated website, Johnson responded to the Dimon article:

“JP Morgan Chase is well on its way to becoming Too Big To Save.  Through expanding overseas, it effectively bypasses the weak controls we still have in place on bank size (no bank is supposed to have more than 10 percent of total retail deposits).”

As banks eye foreign markets as a potential source of growth, and I’m sure that laxer regulations are part of the draw, I do find myself thinking about if their expansion would prove sustainable or if we’re set for a repeat of losses and write-downs in the credit card business and in general. Johnson is worried about how the government would handle future bailouts of such large companies, and writes:

“Unfortunately, the resolution authority that ended up being created by the 2010 Dodd-Frank financial reform legislation does not cover JP Morgan Chase because Dimon’s bank operates so extensively outside the US (30% non-US in its current business, on its way to 50%, according to Lowenstein).  There is nothing in the current resolution mechanism or the broader powers of the Financial Stability Oversight Council that enables the relevant authorities to implement the orderly winding down of a cross-border bank, like JP Morgan is today or Lehman was in 2008.”

Shopping Bulls, Credit Bears

There’s something off about the reasons Black Friday shoppers gave to the New York Times for why they were sticking to cash this year.

“When you have the actual money, why not spend it, as opposed to going into debt and paying interest?” said a Nike store customer paying with a debit card. “Last year, it took me six months to pay it off.”

Some said they were spending more but stopped using credit cards two years ago: “We’ve been married 12 years, and it took 10 years to pay them off.”

But in both of these cases, there’s an unanswered “why now?”

They’re part of the 13.6 million Americans a recent Consumer Reports poll found are still dealing with debt from the 2009 holidays, but why didn’t they learn that lesson before, and what makes 2010 different? 

 “I’m probably spending the same as last year, but I’m not charging,” said another debit card shopper. “It seems like now with credit cards, even if you have good credit, it’s too much, the rates are too high.”

Actually, during the past quarter the average APR* was 14.22% according to the latest Fed consumer credit report, compared to 14.9% during 2009, so terms improved slightly. In any case, I doubt anyone has looked at their credit card statement in the past few years and thought, “Whoa, at this interest rate and with these fees, I should really get MORE in debt.”

Yet, “I never use a credit card anymore, because I remember always regretting having to pay everything back after the holidays,” said a Target shopper.

What makes this year different? If this is the “new normal” in credit cards, and from the last Fed release we know that revolving debt for the quarter is down almost 9% from 2009, and down 16% from 2008, then why? It doesn’t seem to be the interest rate, consumers are ready to spend  this holiday season, and defaults and bankruptcies are down, and yet more than eight million stopped using credit cards in the last year, according to TransUnion.

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Anti-trust in financial markets: Silver Futures

I’ve looked into the US Department of Justice’s civil anti-trust lawsuit against Visa, Amex, and Mastercard  for preventing merchants from offering incentives for using cards with lower interchange fees. For a class, I looked into another type of anti-trust suit presented in the financial industry which I think is relevant for its look into the inner workings of banks.

Between October 26 and November 10 this year, over 20 class action suits were filed against JP Morgan Chase and HSBC for their manipulation of the silver futures and options market.

The following anonymous comment appeared on a Naked Capitalism post that talked about the Commodity Futures Trading Commission’s (CFTC) investigation of speculation in the commodities market:

“The CFTC sees manipulation and speculation in the energy markets, yet in the silver market they see no sign of manipulation. Observers have reported that the bullish speculation in oil is only 1/3 the bearish speculation in silver. Yes, the big boys are allowed to keep the price of silver low by playing games in the paper silver markets…. Why is the CFTC so schizophrenic in their analysis? Why can they see manipulation in energy, where the supply demand problem is obvious as Matt Simmons and Boone Pickens have shown; yet the CFTC blindly ignores the obvious problem in the silver market?”

What really stands out is that the comment is dated May 30, 2008, or almost two years before London-based investor Andrew Maguire emailed the CFTC with a “real time” account of an attempt on February 5, 2010 to drive down the price of silver. 

In Macguire’s “whistle-blower” emails, published on the Gold Anti-Trust Action Committee’s (GATA) website, he pinpointed events when orchestrated selling occurred, such as the monthly expiration of options, contract rollovers, and the publishing the Bureau of Labor Statistics’ non-farm payrolls number, “no matter if the news is bullish or bearish.”

He told the CFTC: 

“I hope you took note of how and who added the short sales (I certainly have a copy) and I am certain you will find it is the same concentrated shorts who have been in full control since JPM took over the Bear Stearns position. It is common knowledge here in London among the metals traders that it is JPM’s intent to flush out and cover as many shorts as possible prior to any discussion in March about position limits.”

I think its just amazing that such “open secrets” still exist, and the response from CFTC’s Commissioner Bart Chilton, after a more than two-year investigation, is:

I have been urging the agency to say something on the matter for months.  The public deserves some answers to their concerns that silver markets are being, and have been, manipulated. The legal definition of manipulation under the law is a high bar to prove…. the government is required to demonstrate not only specific intent, we also need to prove that as a result of the intent and market control, that activity caused an artificial price—a point which can certainly be debated by economists… In saying this, I am fully aware of the prohibition from divulging trader names or information about their positions.

And on the only source of hope?

“The Wall Street Reform and Consumer Protection Act, which I strongly supported, contains new manipulation provisions as well as antidisruptive trading rules.  These new authorities, along with the implementation of thoughtful position limits in metals will go a long way toward ensuring more efficient and effective metals markets devoid of fraud, abuse, and manipulation.”

So this is another financial sector getting hit with anti-trust suits, and where shifting regulations are trying to correct the current state.

TJX Response to “The Great Cyberheist”

For the New York Times article “The Great Cyberheist,” James Verini got the behind the scenes version from hackers of what was actually happening as stores like OfficeMax, T. J. Maxx and Marshalls, Dave & Buster’s and Target began to uncover the 180 million payment-card accounts breached by a team affiliated with Albert Gonzalez. According to Attorney General Eric Holder, these cases ended up costing “victimized companies more than $400 million in reimbursements and forensic and legal fees.”

I thought it would be interesting to judge the response by one of the companies to see how quickly it acted, what it disclosed at the time and how it compared to what the hackers were now telling the New York Times.

Consumers should judge the steps that these companies took to protect their information, but they should also remember what two of the hackers told the reporter: “the majority of the stuff I hacked was never brought into public light,” said one, while according to another, there are “major chains and big hacks that would dwarf TJX. I’m just waiting for them to indict us for the rest of them.”

After a 22-year old Gonzalez was arrested at an ATM “cashing out” a stack debit card with stolen numbers on July 2003, he became cybercrime informant for the Secret Service. But by late 2004, he was searching for a way to profit from firms that  “had taken no precautions as they eagerly adopted WiFi in the early 2000s.” Gonzalez partnered with Christopher Scott and Jonathan James and started “war driving,” or hacking into large retail stores’ WiFi from their parking lots. By the summer of 2005:

“Scott cracked the Marshalls WiFi network, and he and James started navigating the system: they co-opted log-ins and passwords and got Gonzalez into the network; they made their way into the corporate servers at the Framingham, Mass., headquarters of Marshalls’ parent company, TJX; they located the servers that housed old card transactions from stores… By the end of 2006, Gonzalez, Scott and James had information linked to more than 40 million cards.”

Target, OfficeMax, and Barnes & Noble would follow, all while Gonzalez was still a paid Secret Service informant, speaking at seminars and conferences. He told Verini: “I shook the hand of the head of the Secret Service,” Gonzalez told me. “I gave a presentation to him.””

TJX’s account starts on December 18, 2006, almost a year and a half after their system was first compromised, according to the company’s SEC filing from January 2007. It contacted two computer security firms and decided three days later “that there was strong reason to believe that our computer systems had been intruded upon and that an Intruder remained on our computer systems.” Now four days after discovering the breach, they notified and met with government officials, where the Secret Service advised against disclosing the intrusion until law enforcement determined that disclosure would no longer compromise the investigation.”

It took TJX until December 26 and 27 to notify their contracting banks and credit and debit card processing companies.

Finally, on January 13 TJX acknowledged that additional customer information had been breached, and publicly announced the intrusion on January 17, 2007, almost one month after first learning about it.

There was still no lead in sight, and meanwhile Gonzalez had started to pursue Structured Query Language (SQL) injection, “the lingua franca of online commerce,” to first go through a website’s database of merchandise descriptions that “often exist in proximity to other all-too-accessible databases with more sensitive information — like your credit-card number.”

Even after TJX disclosed the first incident, Gonzalez again targeted TJX, “in part because it stored old transactions.” This time to get the accounts immediately after a customer swiped at the store, Gonzalez together with hacker Patrick Toey gained access to the servers that would process the information from the point-of-sale terminals.

Meanwhile, according to a SEC filing on September 21, 2007, TJX reached a class action settlement that included three years of credit monitoring and identity theft insurance for the 455,000 customers who returned merchandise without receipts, whose information was believed to have been stolen, including names, addresses, drivers’ license or identification numbers.  

By December 2007, TJX reached a settlement agreement with the banks that sued for expenses associated with the case, and Gonzalez’s involvement had been identified after the Secret Service uncovered his connection to Ukranian contact. On May 7, 2008, “agents rushed into his suite at the National Hotel in Miami Beach. With him were a Croatian woman, two laptops and $22,000.”  

Mark Jacobson on “The Return of Superfly”

Twenty-five years after the New Jersey home of Harlem Blue Magic heroin ringleader Frank Lucas was raided by the NYPD, Mark Jacobson did a New York Magazine profile on Lucas that would become the basis for American Gangster, a 2007 film starring Denzel Washington.

Lucas’ Cadaver Connection tale of smuggling heroin in the false bottoms of soldier’s coffins returning to the US from Vietnam “always seemed a tad apocryphal,” wrote Jacobson.

At that time, when “everybody had heard that story,” Jacobson was a cab driver in New York City and published his first story in New York Magazine about the 12th Ave clubs where he would take his passengers.  His latest novel, The Lampshade, was published on September 28 and follows the origin of a supposed Buchenwald lampshade found in Hurricane Katrina’s aftermath.

I interviewed Jacobson on the 2000 article, and he told me, “That’s one of my specialties, proving that urban legends are true.”

In “The Return of Superfly,” Jacobson determined that “braggart, trickster, and fibber along with everything else, Lucas was nonetheless a living, breathing historical figure, a highly specialized font of secret knowledge, more exotic, and certainly less picked over, than any Don Corleone… The idea that a backwoods boy could maneuver himself into position to tell at least a plausible lie about stashing 125 kilos of zum dope on Henry Kissinger’s plane — much less actually do it — mitigated a multitude of sins.”

The idea to interview Frank Lucas came when Jack Newfield, a friend from the Village Voice, told him that Nick Pileggi,  the Goodfellas co-screenwriter and New York Magazine writer, had run across somebody who knew Lucas, prompting Jacobson to ask, “how could he possibly still be alive?” But Jacobson shelved the idea until the 2000 profile when he found Lucas living in a New Jersey project, ready to tell the story he’d been crafting during his jail time.

Over twenty visits Frank would tell him about his “Robin Hood of Harlem” mentor Ellsworth “Bumpy” Johnson dying in his arms in a restaurant, and smuggling heroin on Henry Kissinger’s plane back from a Bangladeshian mercy mission.


Jacobson would sometimes meet with Lucas at Richie Roberts’s office, played by Russell Crowe in American Gangster as Lucas’s main foil, a detective at a new drug trafficking task force. By 2000, the former cop was Lucas’ defense attorney,  and although he was not mentioned in The Return of Superfly, Roberts would eventually accompany Jacobson, Lucas and Pileggi to LA to sell the movie rights to the story, according to a New York Magazine article in 2007.

Even if Frank’s account of the era was like a “historical novel fudged to make himself look better,” because of limited documentation on black organized crime, that period had been “previously inaccessible.”

 “You know he’s lying, he’s sitting there and you know he’s making some of this stuff up because it just can’t be true,” said Jacobson. But Lucas became a compelling figure for remembering “this time that was unremembered.”

 “To me he was his own truth.”

“I felt that my job as a journalist in that situation was to write down what he had to say.”

A lot of what Lucas said checked out, as Jacobson found contacting old lawyers as well as well as going through old newspaper clippings. With details that are impossible to verify details, “the fact that you can’t corroborate it doesn’t mean you can’t use it,” said Jacobson. “There is no way to verify most of this stuff because it was already thirty years ago and most of the people are dead.”

In a “typical” situation, Jacobson asked Lucas about the murder at of Harold Logan, a partner in Double L Records label that recorded soul singers like Wilson Pickett. Logan was shot between the eyes at the uptown club Lloyd Price’s Turntable. “I happened to know about it because I made it my business to find this stuff out,” said Jacobson, and he also knew that the club was actually owned by Lucas and gangster Zack Robinson. Lucas feedback was simply, “Well man, you can’t fuck with Zack Robinson.” When Jacobson pried again, he answered, “I just told you man, you don’t fuck with Zack Robinson.”

In this unsolved murder case, a traditional journalism lit search gets you nowhere. “Lucas was in the position to know the answer, or at least have an answer about certain things like that,” said Jacobson. The Logan story did not make it into the article.

A visit to former narcotics prosecutors Judge Sterling Johnson “added veracity to Lucas’s position” said Jacobson, since it  “was just the way Frank said it would be.”  Lucas had told Jacobson that “people like me. People like the fuck out of me,” and “Judge Johnson likes me a lot. You’ll see.” On a visit to the Judge’s office, he demandad “Get that old gangster on the phone,” and told Jacobson “look, don’t get me wrong: Frank was as bad as they come. You should never forget who these people really are. But what are you going to do? The guy was a pisser. A pisser and a killer. Easy to like.”

In 2007, Jacobson reunited rival Nicky Barnes, played by Cuba Gooding Jr. in American Gangster, and Lucas for their first conversation in 30 years. Barnes New York Times cover appearance “bragging that he was “Mr. Untouchable,” wrote Jacobson “soon got then-president Jimmy Carter on the telephone demanding that something be done about the Harlem dope trade.”

The two former gangsters agreed they wanted their epitaph to read, “Boy oh boy, he was old. God damn, he was old.”

Target’s Credit Card Profits Go Way Back

Target received pretty favorable coverage for its third quarter earnings report, but when Chief Executive Officer Gregg Steinhafel said during the investor conference call that the “credit card segment continues to deliver outstanding performance” in a “very tough environment,” I like to imagine there was a nostalgic twinge for what those profits looked like pre-crisis and pre-CARD act.

The increase in quarterly credit card profits  from $60 million in 2009 to $130 million wasn’t actually due to an increase in revenues, since both finances charges and late fees were down, but by getting their bad debt expense down to $110 million from $301 million compared to the previous year.

Target had to account for the last changes from what Chief Financial Officer Douglas A. Scovanner has referred to as the “regulatory crackdown” on credit cards that took effect in the beginning of the third quarter, with the new limits on late fees.

Although the company previously said it expected a 33% decrease in third-quarter late fees, there was actually a 59% fall to $38 million, down from $92 million.

Around two weeks before the October 30 end of the quarter, Target introduced the REDcard Rewards debit and credit cards that give customers an immediate 5% discount. Steinhafel defended the segment saying that “beyond profitability” it was now “integrated with our retail strategy.” If the company’s estimates are correct, the program would contribute around one percentage point of same store sales in the next quarter, and between 1 and 2 points next year.

It’s clear that despite Scovanner calling the performance “strong,” almost two years after the write-off lead $135 million loss in the last quarter of 2008, Target is still smarting over its loss of credit card profits. 

Why You Should Get a Check Splitting App

How should the check be split when you go out, share a pizza with Dave, a pitcher with John, and the three of you order some fries? Of the 14 people I presented with this problem, 30% ended up paying less than their share of the bill, and another 40% tipped less than 15% on their part and let their friends pick up the rest.


When friends are splitting a check, tipping is no longer straightforward and what could be a simple division problem can take three rounds as the bill goes around the table. I set up a scenario where the person had either a $50 or $100 and would pay the check, then settle with their friends and decide  the tip.

They were told that Dave gave $14 and John $7, but could ask their friends for more money for the tip, or give some back if it seemed like too much.

Dave’s share came out to $11.17, so he was generously tipping 25%, while John was rounding up from his $6.67 share, a stingy 5%. However, none of the participants opted to ask just John to add to the tip, and instead 30% asked both friends to add between $1 and $3 more each.

Most people said they wanted to leave a tip of 15% or more. A precise 15% between friends would have them returning $1.16 to Dave, asking John to add $0.67, and leaving $18.59 for their part, but it’s hard to anticipate that anyone would be this thorough.

Instead, 60% decided to leave a total tip of less than 15%, erring towards the cheap side. There was no significant difference between the participants that started with a $50 or $100 bill, or among the group who took part while under social conditions that involved drinking and the group with normal conditions.

My guess had been that they would correctly add up their share of the bill including tip, add it to Dave and John’s $21, and then check that the total tip was appropriate.

However, 60% of the participants ended up tipping less than 15% on their share. Even worse, 30% left less than they had even consumed, leaving Dave and John to subsidize their meal and tip.

The experiment required them to solve a business transaction while juggling their friendship, but one person said that although he recognized that John should contribute more to the tip, money couldn’t come between friends.

After years of splitting checks, he said it was possible that he owed some friends thousands of dollars, or it could be the other way around, but they could never know.

A Regatta Card? A Firecracker? Or a Card with More Friends than you?

Image from Pantone.

Visa recently introduced a Pantone Rewards Credit Card, in Regatta for consumers that identify with the “Trustworthy, Noble, Generous” blue, or maybe the “Insightful, Intuitive, Spiritual” Lavender. This partnership with Pantone, which makes the Pantone Guides and Matching System used as a standardized reference to “color match,” is promoted with a “low introductory APR,” which means a 0% APR that expires in 6 months, followed by an APR of 9.74% over the Prime Rate.

Of course, Visa is probably hoping that the card’s design credentials take precedence with  professionals that are part of the under 35 segment with a lower incidence of credit card debt. Only 48.5% of households where the head is under 35 carry a credit card balance, compared to around 52% to 54% of those between 35 and 54, according to data from 2007 Survey of Consumer Financials

Graphic designers might go for the iconic Pantone swatches that have also been used in postcards and notebooks, while young adults interested in fashion could be hooked in by the colors drawn from Pantone’s top 10 colors from women’s Fashion Color Report for Spring 2011. For example, Pantone matched Regatta to designers Catherine Malandrino and Lela Rose.

American Express is also among the issuers that have gone after a younger user base, with a Zync charge card that has it’s own Facebook page with over 120,000 friends, and a Zync Zone at Austin City Limits.  The card offers rewards that are billed as “customizable like your playlist,” but with a balance due in full every month and a $25 annual fee or more if you opt for one of the themed “Packs”. 

So how will the “cool factor” weigh when it comes to credit?

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