Audit Notes: Unreasonable Fees, Goldman Looks Away, iPad Mag Sales

Los Angeles Times columnist David Lazarus puts the Bank of America financial-reform charge in perspective. The too-big-to-fail bank took a $10 billion accounting charge because the law will hit the exorbitant rents (interchange fees) it and its peers charge merchants on each swipe of the card.

Lazarus notes that “the reform requires the Federal Reserve to set processing fees at a level that’s ‘reasonable and proportional to the cost incurred by the issuer with respect to the transaction.’”

Clearly, though, BofA anticipates a “reasonable” rate being set well below its current rate. BofA and other card issuers typically charge up to 5% of the cost of a purchase for credit- and debit-card transactions.

The only conclusion I can draw is that BofA knows the fees it’s been charging for debit cards have been entirely unreasonable, and that’s why it wrote off about $10 billion in shareholder value.

Put another way: The bank’s value has been elevated for years because of unreasonably high debit-card fees, and now BofA is acknowledging that if it had to charge a fair price for the service, the bank wouldn’t be worth as much to investors.


— Susanne Craig has an interesting story in The New York Times on Goldman Sachs getting itself in trouble by turning a blind eye to a client’s misdeeds. The client, the hedge fund Bayou Group, went on to collapse after fraud was exposed there. Investors won a $20 million award against Goldman in arbitration:

The award and the unsealed documents could complicate the industry’s position. They show Goldman’s clearing division had at times serious concerns about Bayou, yet failed to alert securities regulators, raising fresh questions about what the obligations of a clearing firm should be.

“Do we care if the Bayou ‘Bayou No Leverage Fund’ uses leverage?” asked a Goldman Sachs executive, Charles Sweeney, in a December 2003 e-mail to two colleagues. Mr. Sweeney, through the Goldman spokesman, declined to comment. A Goldman spokesman said that Bayou’s new account form allowed it to use margin….

Court exhibits and e-mails indicate the firm knew of Bayou’s claims of lofty returns. However, Goldman executives testified during arbitration that they were not aware of Bayou’s assertions of lofty returns.

Trading records show Bayou made many large wire transfers, often on the same day. For instance, on Dec. 21, 2004, $1.6 million was wired into Bayou’s no-leverage fund from an account at Wachovia. That same day, five wires went out of the fund for the same amount. The amount came in from one source, and went out to five different ones.

This practice is known as flipping and is suspicious because it could indicate a fund was laundering money.

Ad Age’s Nat Ives has a bunch of sales numbers for magazines on the iPad.

The numbers a mixed bag. Wired has to be pretty happy with its numbers. It’s averaging 32,000 sales a month (after its debut issue, which benefited from a bunch of press)—or more than a third of its average monthly newsstand sales, Ives points out. I’d like to know if Wired has seen any erosion of print sales or if these are mostly bonus sales.

On the other hand:

Glamour — one more major newsstand seller — sold 4,099 copies of its first issue on the iPad, the big September issue. That’s again equivalent to less than 1% of its newsstand sales.

These numbers are early since only about 5 million Americans own iPads. In five years that number will be much higher—most people will own an iPad or one of its competitors. So these magazine numbers will only go way up. The real question, as Ives points out, is what advertisers will pay to be in these e-editions.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.