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Q&A with 'Fine Print' author David Cay Johnston

The print may be tiny, but the personal and societal consequences aren't

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Fine print and faux disclosures cost Americans big bucks, according to David Cay Johnston, a Pulitzer Prize-winning investigative reporter whose bestselling books "Perfectly Legal" and "Free Lunch" unveil how corporations sidestep and rewrite the law to their own advantage .

David Cay Johnston, author,
'The Fine Print'
Q&A with personal finance author David Cay Johnston

The Fine Print

Pulitzer Prize-winning investigative reporter David Cay Johnston puts a magnifying glass to a host of anti-consumer practices in "The Fine Print: How Big Companies use 'Plain English' and Other Tricks to Rob You Blind." He chronicles ways in which regulation isn't a government-inspired throttle on businesses' freedom, but a tool of big business to lock out competitors and lock in profits.

In his latest expose, "The Fine Print: How Big Companies Use 'Plain English' and Other Tricks to Rob You Blind," the longtime New York Times reporter follows the money you pay on your monthly phone bill, utility statement and even your 401(k) summary for upgrades that never happen, services you don't use and taxes you don't actually owe. They're all right there in teensy tiny type, written in legalese that may as well be Sanskrit.

If you believe that credit card arbitration is a level playing field, that public utilities have your best interests at heart or that prosperity is poised to move from the top down if we can just get rid of those pesky government regulations, David Johnston is about to blow your mind.  

CreditCards.com: Americans seem strangely comfortable with fine print. In fact, we're sometimes suspicious of offers that don't come with disclaimers in tiny type. Why is that?

David Cay Johnston: That's because we don't really read it. It's amazing how "familiarity breeds attempt," which is what I always thought about teenagers dating as my eight children were growing up. The first credit card that was issued by Bank of America back in 1959 had a card agreement that was one-half page long. Today, I get minor changes to my card agreement that are sometimes six to eight pages of very tiny 6-point type, yet Americans have very much come to accept this. In fact, Judge Richard Posner of the Federal Court of Appeals in Chicago, who is perhaps the leading legal thinker of our age, said when he refinanced his home equity loan, "I didn't read; I just signed." And that's what most of us do -- we just sign.

CreditCards.com: Where's the harm in that?

The first credit card that was issued by Bank of America back in 1959 had a card agreement that was one-half page long. Today, I get minor changes to my card agreement that are sometimes six to eight pages of very tiny 6-point type, yet Americans have very much come to accept this.

Johnston: We don't realize that in signing, we're signing away legal rights that we have and granting enormous power to the bank or other lender whom we may one day have a dispute with. One of the stories I tell is about a bus driver in Washington, D.C., who needed a new car. She went to a car dealer who talked her into buying a car that was twice what she could afford and the car quickly turned out to be a lemon. The whole deal, which Wells Fargo financed, would have cost her almost $30,000 for a car worth $6,000. So she gave the car back to the car lender and what was Wells Fargo's response? "Well, we're sorry but you owe us all this money because the car isn't worth what you agreed to pay for it." When she said she would pay them $100 a month, they said, "No; instead, we'll take your house."

CreditCards.com: Could they do that?

Johnston: They tried. Generally, when you take out a loan, whether it's a credit card or a mortgage, you give up the right to sue and agree to go to arbitration if something goes wrong. Here's the problem with that: Not only do you have to pay for the arbitration, which can cost thousands of dollars in hourly fees and related costs, but you'll probably have no more than one arbitration in your lifetime, while the banks have arbitrations every single day. So what happens is, the arbiters that get picked and paid by both sides tend to see the issues through the eyes of the people who give them steady work, not from the random customer they'll run into once.

CreditCards.com: And if you don't sign the arbitration agreement, no loan for you.

Johnston: Arbitration really fixes the game against the customer. Fascinatingly, the 1925 Federal Arbitration Act only applied, and was only written to benefit, corporations when they had disputes that extended across state borders. Our U.S. Supreme Court has twisted this into a consumer law. If the Federal Arbitration Act as interpreted by the Supreme Court in recent years were put up to a vote today, not one single senator or congressman would vote for it because it is such an awful example of unfair law that is biased against the consumer and in favor of corporations, particularly banks.

CreditCards.com: One of the most insidious things about fine print is that it often seems totally benign until it manifests itself in real life.

Johnston: That's right. Here's an example: We have one industry in America, the pipeline industry, which is exempt from corporate income tax because they're organized as partnerships. But they got a regulatory rule from the Federal Energy Regulatory Commission that says that even though they don't pay the federal income tax, they can force their customers to pay it to them. And because they're a monopoly, as a customer, you're forced to pay it. As a result, they increase their profits by 75 percent because they get to keep this income tax. Now, nobody's going to go to war over a penny a day or 3 cents a day, but when you have one industry that gets a few cents here and another that gets a dollar and another that gets $10, pretty soon what you're doing is redistributing upward hundreds of billions of dollars a year, making a narrow group of people fabulously rich and draining the pockets of ordinary Americans.

CreditCards.com: All with fine print that's been as carefully laid as a pipeline.

Johnston: Yes, they're not dumb about it; they don't go into a legislature or regulatory agency in a state capital and seek a sweeping change. They get a little change put in the law here that nobody notices and a regulation the next year and another change a few years down the road and they build this mosaic that they see clearly but you don't. At the end of the day, they end up with profits they would never earn in the marketplace by blocking competition, which allows them to raise prices while providing you with lousy service.

[N]obody's going to go to war over a penny a day or 3 cents a day, but when you have one industry that gets a few cents here and another that gets a dollar and another that gets $10, pretty soon what you're doing is redistributing upward hundreds of billions of dollars a year, making a narrow group of people fabulously rich and draining the pockets of ordinary Americans.

CreditCards.com: At least our public utilities aren't gaming the system with fine print, right? They're still on our side?

Johnston: They certainly work very hard to make you feel that way. Here's the reality of that: The utility companies have been taken over by finance people as opposed to electricity people and they are literally being hollowed out. Pacific Gas & Electric in California got rate increases so it could replace its power poles on a 50-year cycle, which is perfectly reasonable. But after they got the money to do that, they cut replacement so that at the rate they've been doing it, power poles that are standing today will have to be standing in the year 2775, more than 700 years from now.

The same thing is going on with natural gas pipelines. Pipelines that were laid during the Truman administration are still being used. There have been some disastrous explosions such as the one that destroyed a city block in San Bruno, Calif., two years ago, and there will be more because it's cheaper for them to use these old pipelines and run the risk of an explosion than to shut them down and lay new pipe. And by the way, you pay for being put in danger. If the cost of insurance goes up for a pipeline or an electric utility because they're not replacing the equipment, they pay higher insurance premiums which these monopolies by law pass on to you. So you actually are subsidizing these companies to put your life in danger so they can extract short-term profits rather than keep the equipment in good shape for the long run.

CreditCards.com: Economic redistribution is a popular theme this campaign season. You describe its current status as a fire hose fully open, pouring money from the bottom to the top.

Johnston: The proof of this is, if you look at the income data in America, the bottom 90 percent of Americans made more money in 1973 than they make now, the median wage has been virtually unchanged since 1999, but at the top, people's incomes have exploded to levels that are fantastically unbelievable.  The tax cuts have all basically benefited people at the top. From 1961 to 2007, the top 100th of 1 percent, about 32,000 Americans, have seen their income go up by $37 for every $1 for the bottom 90 percent. This is without precedent in other industrial countries and it's because the system's rules are being rewritten to send money upward.

CreditCards.com: You single out the recent credit card reforms as one bright spot in this gloomy story.

Johnston: Yes, in the case of credit cards, we have put an end to things like dual-cycle billing, which means even if you paid off your card, you still could be charged interest for the next month. That's been stopped. These unilateral increases in credit rates have been stopped. But there are lots of other bad practices that are continuing.

CreditCards.com: Which do you find most egregious?

Johnston: The credit card industry is incredibly profitable, despite all the moaning and groaning they do to Congress, yet they've literally gotten the bankruptcy laws rewritten in their interest. It used to be that your home was protected in bankruptcy. The credit card industry got it rewritten and now, if you are rich enough to have a second home, your second home is protected in bankruptcy but your primary home is not. And your credit card debts, which are unsecured debts, are much more likely to have to be paid back after you file bankruptcy than in the past. That just encourages more reckless lending by the companies.

CreditCards.com: You make a strong case that the Great Recession could not have happened without the manipulation of fine print.

Johnston: Oh, absolutely. What has happened in banking that is still a problem is, laws have been changed to separate reward from responsibility. When President Obama was asked after the meltdown of the economy why there were no prosecutions going on -- after all, when the savings and loan crisis occurred, there were 3,000 felony convictions, 1,000 of those of high-level insiders at savings and loans -- Obama said, "Well, there are a lot of practices that we all think are terrible but they may not be illegal." And he hit upon a great truth: The finance community got laws changed that basically legalized things that you would have gone to jail for just 20 years earlier.

CreditCards.com: Such as bundling mortgage-backed securities.

[T]here is no such thing as deregulation or free markets. There is re-regulation, which is what we've gotten by business for business and against the public, and that's what Adam Smith warned us about in 'The Wealth of Nations.' There is regulation galore sought by business. Companies get regulations put in place to thwart competition, to block competitors, to make it easier to make profits.

Johnston: Exactly right. Both Republicans and Democrats were involved in this; this is not a one-party issue. There is only one party in Washington and that's the party of money. Separating reward from responsibility is, at core, the worst thing that we've done.

CreditCards.com: The Republican Party would have us believe that the biggest obstacle to recovery is overregulation; that we need to deregulate business so the free market can take wing to lift us all up. Are they wrong?

Johnston: First of all, there is no such thing as deregulation or free markets. There is re-regulation, which is what we've gotten by business for business and against the public, and that's what Adam Smith warned us about in "The Wealth of Nations." There is regulation galore sought by business. Companies get regulations put in place to thwart competition, to block competitors, to make it easier to make profits.

Take monopoly railroads. Where you have a single rail line, you can charge a monopoly price. Well, we have railroads all over the country where there are two rail lines that run side by side for 1,500 miles from the mouth of a coal mine to an electric power plant where they burn the coal. But if one mile of that trip, the last mile, has only one railroad -- and guess what, in almost all cases it does -- they get to charge a monopoly price not for the last mile but for the entire trip under regulations that the railroad industry got put in place.

CreditCards.com: Thanks to that innocuous fine print again.

Johnston: The reality is, that's what those lobbyists in Washington are doing. Thirty years ago, there were a few hundred lobbyists in Washington. There were 35,000 four years ago and then they changed the rules about who has to register, so now there are only 17,000. They're there to get the rules written to benefit business.

CreditCards.com: You've raised eight kids so presumably you're not easily ruffled. What keeps you up nights?

Johnston: This separation of reward from responsibility, which is moving all throughout our economy. I want businesses to be profitable. I want to have a competitive market. I want entrepreneurs and strivers to do well. But when we get these rules in place that say your reward is no longer dependent on hard work, fair play and responsible behavior, that your reward will be greater if you behave badly, if you damage the economy, if you prevent competition that is crucial to long-term growth -- if you separate those things, you put us into decline. The rest of the world is just running by America. In just a few years, we went from the largest creditor nation in the world to the largest debtor nation in the world while a narrow group of people at the top are making fortunes that were unimaginable 30 years ago. Those fortunes are not the result of economic growth and benefit; they are the result of mining the system.

CreditCards.com: Can either party lead us out of this dark wood?

Johnston: Not currently because they are just separate wings of the party of money. The underlying core problem is, whatever Mr. Smith ideas we might have to make Washington better, our staffs would tell us we have to meet with this special interest and that lobbyist and this lawyer from that corporation because those are the people that produce the money directly and through bundling that keeps us in office. If you're a Republican and you don't toe the line on certain issues, there's a group called the Club for Growth that will find another Republican and they will get rid of you, as they've done successfully a number of times. So the real underlying problem deals with the campaign finance system and the discovery by corporate America that you can make more money more easily by getting federal and state legislators and regulators to rig the rules in your favor than by competing in the marketplace.

See related: Credit card agreements still mostly unreadable

Published: October 22, 2012



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