A10 Economy & Business


EZ RE


KLMNO


TUESDAY, OCTOBER 5, 2010


U.S. hits AmEx with antitrust suit


Visa and MasterCard agree to settlement over ‘swipe fees’


BY YLAN Q. MUI The Justice Department an-


nounced Tuesday that it had filed an antitrust suit against Ameri- can Express for preventing re- tailers from offering customers discounts for using rival credit cards with lower processing fees. Federal officials added that


they had reached a proposed agreementwithVisa andMaster- Card over thematter. The issue of “swipe fees” has


BRENDAN MCDERMID/REUTERS Crunch the numbers and you’ll see that retail investors have been doing it wrong: buying stocks when they’re up, selling when they’re down. Hot tip: Look at retail fund investors, and do the opposite T


he way tomakemoney in the stockmarket is to buy cheap and sell dear.


Unfortunately, the average mutual fund investor does the opposite. He (or she) buys dear when stocks are hot and prices are high, and sells cheap when themarket’s cold, and prices are in the cellar. This isn’t an elitist putdown


of average investors. It’s what TrimTabs Investment Research found by analyzing retail investors’ purchases and sales of stockmutual funds. The conclusions are really


kind of depressing. TrimTabs, using data fromthe Investment Company Institute, themutual fund industry’s trade association, found that by buying high and selling low, stock fund investors over the past 10 years paid about 22 percentmore than themarket’s average price. During that period, stock


fund investors’ “flow-weighted purchase price” was the equivalent of 1434 on the Standard & Poor’s 500-stock index, says Vincent Deluard, TrimTabs’ executive vice president. During that period, which ended in July, the S&P


DEALS Allan Sloan


500 averaged only 1171. Do the arithmetic—divide


1434 by 1171—and you get a 22.5 percent difference. That’s how much above the average price of the S&P 500 (and presumably above the average prices of stock mutual funds) retail investors paid. “It’s badmarket timing,” Deluard says. “Retail fund investors buy when stocks are popular, and sell when they’re unpopular.” Don’t think for aminute that


the past decade was an aberration. Since 1984, Deluard says, retail stock fund investors have bought at an average price of 926 on the S&P 500, even though the index averaged only 773. That’s a 19.7 percent difference. (The analysis starts in 1984 because that’s as far back as Investment Company


Institute statistics go.) “It was a lot easier [for retail


investors] to buy stocks in the late ’90s, when stocks were going up and houses were going up, than it is for themto buy stocks now, when they’remuch cheaper,” Deluard says. Deluard says—rightly, I think


—that the average retail investor ismisled by history. In the late 1990s, stocks were sizzling, and the previous 10 years produced fabulous returns. But then they tanked. Now, stocks are unpopular because they’ve had a bad decade and a bad three years despite their 75 percent gain fromtheir low of 19months ago. Deluard estimates that half of


retail stock fund investors in the last 10 years have lost 25 percent ormore of their investment. By contrast, if you owned an S&P 500 index fund at the start of the period and just sat with it, you’re down only about 5 percent, because dividends have offset most of the decline in the index. For example, Vanguard’s small- investor S&P 500 index fund lost only 0.53 percent a year for the decade that ended in September. The point of all this is to show you that retail stock fund


investors, as a class, are almost always wrong. Currently, as you probably


know, investors are bailing out of stock funds at a time when U.S. stocks are relatively cheap (though not screaming bargains). They’re stampeding into supposedly safe bond funds, which have done very well the past three years because the Federal Reserve has forced down interest rates to ultra-low levels by doing extraordinary things that it can’t—and won’t—keep doing forever. Hmmmm. The retail crowd is


selling stock funds and buying bond funds. The crowd, historically, has been wrong. Draw your own conclusions about what’s likely to happen to bond fund investors over the next five or 10 years. To repeat what I wrote a week


ago: yes, “past performance is no guarantee of future performance” is a cliche, but it’s a cliche you should heed instead of projecting past returns into the future. It’s true of stocks, and it’s true of bonds. Nuff said. asloan@fortunemail.com


Allan Sloan is Fortunemagazine’s senior editor at large.


Bernanke warns of high budget deficits With his comments, Bernanke


Fed chairman says long-term finances are on ‘unsustainable path’


BY NEIL IRWIN The nation’s economic future


would be endangered if the gov- ernment does not rein in budget deficits in the years ahead, Feder- al Reserve Chairman Ben S. Ber- nanke saidMonday,andCongress should consider new budgeting rules to try to make that happen. “One way or the other, fiscal


adjustments sufficient to stabi- lize the federal budget will cer- tainly occur at some point,” Ber- nanke told an audience in Provi- dence, R.I. “The only real ques- tion is whether these adjustments will take place through a careful and delibera- tive process . . . or whether the needed fiscal adjustments will be a rapid and painful response to a looming or actual fiscal crisis.”


again waded into an area of eco- nomic policy over which he has no official responsibility but has become more vocal this year. He avoided endorsing specific tax or spending policies, and his speech did not explicitly address the major fiscal policy debate of the moment: whether to extend all or part of GeorgeW. Bush’s tax cuts, scheduled to expire at the end of the year. He did, however, say that “eco-


nomic conditions provide little scope for reducingdeficits signifi- cantly further over the next year or two”andthat“premature fiscal tightening could put the recovery at risk” which implies that the tax cuts should not be allowed to expire in 2010. Bernanke has aimed to use the


weight of his words to try to give more momentum to efforts to reduce the budget deficit in the medium to long term, and said it is “crucially important” that fiscal policy be put on a more sustain- able path.


long been a thorn in the side of the retailing industry, which complained that it has little power to inform customers of the differences in card costs. In its complaint, the JusticeDepart- ment estimated that the fees cost merchants $35 billion each year — resulting in higher prices for shoppers. The card networks “put cus-


tomers and consumers in a no- win situation,” Attorney General Eric H. Holder Jr. said in a news conference. “We are sending a very clear message: We will not tolerate anti-competitive poli- cies and practices.” American Express has some of


the highest fees andmost restric- tive practices in the industry, federal officials said. AmEx, based in New York, said it plans to fight the case, calling it “seri- ouslymisguided.” “Our merchant contracts are


pro-competitive and pro-con- sumer,” said Louise M. Parent, American Express executive vice president and general counsel. Retailers must pay a fee of


about 2 percent of the purchase price each time a customer swipes a card. That money is an important source of revenue for the banks that issue cards aswell as the networks, such as Visa and MasterCard, that process the transactions. Though card com- panies argue that consumers spend more when they use plas- tic — a boon to retailers — merchants say they have little control over the fees they must pay. “Merchants, small and large, welcome today’s news,” said John


Emling, senior vice president of government affairs for the Retail Industry Leaders Association, a trade group. “The fact is credit and debit networks operatewith- in a broken market where a few dominant firms set fees and dictate terms with impunity.” Congress took up the issue


over the summer as part of the financial regulatory overhaul legislation. It voted to allow retailers to give discounts to shoppers who pay with debit cards or cash, and directed the Federal Reserve to determine whether the swipe fees on debit cards are reasonable. The Justice Department set-


tlement also givesmerchants the ability to reduce prices for cer- tain credit cards.Merchants that accept only Visa and Master- Card,which the department esti- mated included 4 million store locations, can offer the discounts immediately. But those that also accept American Express, about 7 million locations, must wait for the outcome of the civil suit because their contracts for- bid discounting on any type of card. “There is no reason for these


prohibitions,” said Christine A. Varney, assistant U.S. attorney general for the antitrust division. “They stifle competition.” American Express said its


business model is different from Visa and MasterCard because it issues its own credit cards and negotiates directly with retailers to set the swipe fees. Those fees help pay for the services and rewards that allow the firm to cater to its higher-income cli- ents, which retailers are anxious to attract, American Express said. But David Balto, an antitrust


lawyer and former federal regu- lator, said Justice should have no trouble proving that American Express has been forcing mer- chants to pay excessive fees. And those costs, he said, are ultimate- ly passed to customers in higher prices. “The case is rock solid,” Balto


said. “AmEx made a serious mis- take by refusing to settle, and it’s going to end up costing them later on.”


muiy@washpost.com


Staff writer Jia Lynn Yang contributed to this report.


Paying for college slips a bit on the priority list


BY YLAN Q. MUI American families are scaling


back plans to pay for their chil- dren’s college education as the stunted economic recovery con- tinues to weigh on household budgets, according to a survey to be released Tuesday that was commissioned by college lender SallieMae. The study,whichwas conduct-


STEPHAN SAVOIA/ASSOCIATED PRESS


Fed Chairman Ben S. Bernanke waded further into an area of economic policy over which he has no official responsibility.


“An improving economy


should reduce near-term deficits, but our public finances are never- theless on an unsustainable path in the longer term,”Bernanke told the Rhode Island Public Expendi- ture Council in a speech. “We should not underestimate these fiscal challenges; failing to re- spond to them would endanger our economic future.” And indeed, taking action now


to reduce deficits a few years down the road could help the economy now, he argued, by in- creasing public confidence and helping keep interest rates low. Bernanke said Congress


should seriously consider “fiscal rules” that could make it easier to rein in the deficit over time, such as a stronger version of “paygo” pay-as-you-go rules now in place. He noted that nations ranging from Sweden to Canada to Chile have had success reining in defi- cits through rules that aim to


limit the options of future bud- get-writers. “Although not all countries


with fiscal rules have achieved lower deficits and debt, the weight of the evidence suggests that well-designed rules can help promote improved fiscal perfor- mance,” he said. EarlierMonday, Bernanke told


a group of college students in a town hallmeeting that additional purchases of bonds by the Fed, an action the central bank will con- sider at its next policy meeting, could benefit the economy. “I do think that additional pur-


chases — although we don’t have precise numbers for how big the effects are—I think they have the ability to ease financial condi- tions,” Bernanke said at the event. Several of Bernanke's Fed col- leagues have shown an inclina- tion toward such steps in recent days.


irwinn@washpost.com


ed by Gallup, found that the percentage of families who planned to make little or no contribution to tuition in- creased, while the percentage who expected to covermore than half of expenses decreased. The trends were particularly pro- nounced in Hispanic families, where the number who thought they could only pay a little jumped from 12 percent to 35 percent. In addition, the percentage of


familieswho said the reason they are not socking away money for college is that they cannot afford it rose from 62 percent last year to 68 percent this year. “They’re adjusting their expec-


tations to the economic condi- tions, both generally and what they may be experiencing on the individual level,” said Bill Dig- gins, Gallup’s lead researcher on the survey. Still, the study found that even


though families are financially stressed, saving for college re- mained a priority. About one- fifth of families reported it as a top financial goal — up from 14 percent last year and on par with those who rank saving for retire- ment as the priority. The rising cost of college edu-


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cation has become a flash point in Washington as the recession hampered families’ ability to foot the bill. According to a survey by the nonprofit College Board, which administers standardized tests, the cost of attending a private university has risen 2.6 percent a year over the past decade, while public college jumped nearly 5 percent annual- ly. President Obama is slated to hold a summit Tuesday on the


state of the nation’s community colleges, which have become an increasingly popular option for students seeking affordable al- ternatives to four-year institu- tions. On average, families have


saved about $28,000 to pay for college. About 12 percent of that money is in 529 plans, while 14 percent comes from general sav- ings accounts or certificates of deposit. Another 21 percent comes frominvestments, but the largest portion of that money — 23 percent — is in retirement savings. Sallie Mae Senior Vice Presi-


dent Sarah Ducich said the find- ing that families are relying heav- ily on retirement accounts “is a little bit disturbing.” Financial experts say that


raiding retirement accounts to pay for children’s college can be risky. There are tax penalties and other fees ifmoney is withdrawn from the accounts early, and loans against a retirement plan come with restrictions on how quickly theymust be paid off and the amount that can be bor- rowed. “The education and the retire-


ment are two different buckets. Wewould never put themtogeth- er,” said Marcia Tillotson, senior vice president of investments for Wells Fargo Advisors. “You can borrow for college. You cannot borrow for retirement.” The study also found that


although low-income families saved less money than wealthy households, they still put away an average of $1,788 annually toward college. For familiesmak- ing less than $35,000, that repre- sents about 8 percent of their budget — the largest percentage of any income level. Families making more than $100,000, for example, saved 2.6 percent of their income. Ducich said the finding under-


scores the value of college educa- tion to poor families, many of whom may not have had similar opportunities. “For these families, that’s the


ticket out,” she said. muiy@washpost.com


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