Peter Schweizer - Throw Them All Out

In early 2008, Speaker of the House Nancy Pelosi and her husband, Paul, placed a very big bet. On March 18, the Pelosis made the first of three purchases of Visa stock, totaling between $1 million and $5 million. 1But this was no ordinary stock transaction. Somehow the Pelosis managed to get their hands on shares of what would become one of the most popular and lucrative initial public offerings of stock in American history. An IPO, as the name implies, is the first stock offering made by a company prior to its going public. Visa had been privately held by a group of banks up until that year.

Mere mortals would have to wait until March 19, when the stock would be publicly traded, to get their shares. According to the Pelosis' financial disclosures, two of their purchases were made after the nineteenth, but one was made before. They listed all three purchases together on their disclosure statement, making it impossible to know how many shares they purchased in the initial offering.

In any event, getting access to this IPO was virtually impossible for the average individual investor. MarketWatch and other news organizations reported that the IPO was "oversubscribed." In the words of IPO analyst Scott Sweet, it was drawing "extreme demand." Virtually all of the Visa IPO shares were going to institutional investors, or large mutual funds or pension funds. Renaissance Capital declared the offering to be the "IPO of the year." 2Who got these coveted shares? Only "special customers," hand-picked investors, received the IPO shares at the opening price of $44. Two days later, after public trading began, the stock price jumped to $65 a share. In short, the Pelosis made a 50% profit on their investment in a matter of two days. They liked the stock so much, they made another purchase, on March 25. On June 4, 2008, they made a third purchase—and Visa stock closed at $85 a share.

What makes this all the more remarkable is that this single investment represented at least 10% of the Pelosis' stock portfolio and potentially as much as half of their equity holdings (depending on where in the range of $1 million to $5 million it actually fell). They were staking a good part of their fortune on one company. How unusual was this for the Pelosis? Although rich in real estate, according to their financial disclosure form, they had only once before committed more than $1 million of their assets to a large, publicly traded corporation: Apple Computer.

It was an enormous risk. Or was it?

The Speaker of the House and her husband just happened to get those IPO shares barely two weeks after a threatening piece of legislation for Visa was introduced in the House of Representatives. John Conyers, chairman of the House Judiciary Committee and an old liberal warhorse, was joined by conservative Republicans Chris Cannon of Utah and Steve King of Iowa, among others, in introducing the Credit Card Fair Fee Act of 2008. The bill had forty-five sponsors in all. It would effectively allow retailers to negotiate lower fees with Visa and the other credit card companies. Retailers argued that these companies—American Express, Visa, MasterCard, and Discover—often set fees together, like a cartel.

By way of background, it's important to understand that Visa does not issue credit cards or make loans; banks do. Visa makes its money by licensing the Visa name and through something called an interchange fee. Every time you use a card at a store, the merchant pays Visa an interchange fee, somewhere between 1% and 3%. Merchants argued that Visa, MasterCard, American Express, and Discover should not be able to keep their fees so high. The Credit Card Fair Fee Act would have amended antitrust laws to require the card companies to enter negotiations with merchants over their interchange fees, and if they could not agree on fees, the Justice Department and the Federal Trade Commission would be empowered to arbitrate. These fees are a huge source of revenue for Visa and the other credit card companies, and a constant thorn in the side of merchants. In 2008, the four companies took in $48 billion in revenue, or about $427 per household, from interchange fees. 3

Needless to say, Visa and the others were adamantly opposed to the legislation. It was a very "bad bill," in the words of Visa's general counsel. 4

One would think that this piece of legislation would appeal to Pelosi. She had been outspoken about antitrust problems posed by insurance, oil, and pharmaceutical companies. And she was vocal about the need for controlling the interest rates individual banks charged to use their credit cards. This particular bill had grown out of a House Judiciary Committee Antitrust Task Force Subcommittee study. 5Big lobbying groups like the National Retail Federation and the National Grocers Association were strongly in favor of it. Indeed, the Maplight Foundation looked at the campaign contributors pushing for this bill on both sides of the aisle and found that Pelosi received twice as many contributions from supporters than from opponents. On top of that, the bill was popular with the public, too. One survey revealed that a whopping 77% of voters were in favor of its passage. 6

In fact, the bill did pass in the Judiciary Committee on a 19–16 vote, with yeas from 10 Democrats and 9 Republicans. Supporters of the bill were excited. "There is certainly time for the bill to reach a vote before the full House before the end of the year," said one. It was only mid-July. 7

The National Association of Convenience Stores lobbied for a vote. "It is imperative to tell your Representative to request a vote on the House Floor from Nancy Pelosi," the association wrote to its members. Supporters of the bill waited. And waited. And waited. Speaker Pelosi made sure it never got a hearing on the House floor.

Around the same time, Congressman Peter Welch of Vermont introduced a second bill on interchange fees. Called the Credit Card Interchange Fee Act of 2008, it did not go as far as the Credit Card Fair Fee Act. Welch's bill was merely a call for transparency: it would require the credit card firms to let consumers know how much they were paying in interchange fees. Again, Visa was adamantly opposed. This second bill suffered the same fate as the first, never making it to the House floor.

The following year, both bills were reintroduced. Conyers's bill, now called the Credit Card Fair Fee Act of 2009, had even more support this time, including among conservative Republicans like Joe Barton of Texas and liberals like Zoe Lofgren of California. Welch reintroduced his bill as well. Yet again, neither made it to the House floor.

To be sure, Speaker Pelosi did champion a credit card reform bill, one that did become law, but it focused on interest rates charged by the banks. The Credit Card Reform Act provided consumers more information about credit card fees and prevented the issuers of credit cards from jacking up rates. Pelosi declared, on November 4, 2009, that the Credit Card Reform Act was a great victory. "Today, the House voted overwhelmingly to send a strong and clear message to credit card companies; we will hold you accountable for your anti-consumer practices," she said. 8None of this affected Visa, however, only its client banks. Interchange fees were not touched, though the bill contained a vague clause stating that the issue should be "studied." Little surprise, then, that Visa stock went up when the bill passed. Having squelched legislative action on interchange fees for more than two years, Speaker Pelosi and her husband saw their Visa stock climb in value. The IPO shares they had purchased soared by 203% from where they began, while the stock market as a whole was down 15% during the same period. Isn't crony capitalism beautiful?

Congress did eventually act to deal with credit card swipe fees. But Speaker of the House Pelosi had little to do with it. The Frank-Dodd Wall Street Reform and Consumer Protection Act included a clause that required the Federal Reserve Bank to study and take action on the matter. Pelosi was pushed by her colleagues to support these efforts, but remained outside the fray. 9