This Mother Of An Anti-Trust Lawsuit Could Slam Bank Of America, Major Banks, Credit Card Companies

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Why exactly we haven’t heard of this before, we’re not sure. Forbes conjectures that it could be because not a lot of banks have credit card company analysts.Regardless, Dan Freed reports that 5 million retailers are suing credit card companies,Visa and Mastercard, and major banks — JP Morgan, Bank of America, Sun Trust, Wells Fargo, PNC Bank, Citigroup, HSBC, Barclays, 5th Third Bancorp, and US Bancorp — for potentially billions.

Right now the parties are in settlement talks, and it seems like it isn’t going the defendants way. Mastercard said in its latest filing that the plaintiffs’ demands”remain unacceptable” given the size of the monetary demands and “unacceptable changes to MasterCard’s business practices.”

That unacceptable number could be about $40 billion a year from 2004 to now.

Here’s what the case is all about:

The retailers (Payless Shoestore, for one) “argue banks’ decision to spin off MasterCard and Visa through initial public offerings in 2006 and 2008 was a disingenuous effort to avoid the appearance of a monopoly. It seeks compensation for alleged overcharges “for the fullest time period permitted,” by statutes of limitations and the Wal-Mart settlement (thought to be 2004). The claim also requests defendants be found in violation of antitrust laws and barred from violating those laws in the future.”

Basically, the retailers say the banks and the credit card companies colluded to make prices higher than they should be and screw them. That’s the nutshell.

What isn’t so cut and dry is what everyone will have to pay. Estimate range from the single to double digit billions. One thing’s pretty clear though, banks could get slammed hard.

Think of it this way. The Durbin amendment (legislation curbing debit/credit card fees) cost BofA $1.9 billion. One Deutsche analyst estimates this could cost the bank $3.68 million. JP Morgan could get hit with a $5.38 billion settlement, and Durbin cost it $1 billion.

It all depends, however, on how much the total settlement is. Some banks have been preparing for it, as for others, we’re not so sure.

From Forbes:

Bank of America states in its 2010 10-K that it would have to pay 11.6% “of the monetary portion of any comprehensive Interchange settlement.

Citigroup also mentions the issue in its 10-K, noting that “as of December 31, 2010, Citigroup carried a reserve of $254 million related to certain of Visa USA’s and MasterCard’s litigation matters.

JPMorgan’s 10-K gives no specific numbers regarding its exposure, but notes that, “based on publicly available estimates, Visa and MasterCard branded payment cards generated approximately $40 billion of interchange fees industry-wide in 2009.

Purdue University economics professor John Connor that looked at 700 cartels going back to the 1600s found a median overcharge rate of 25.5%. But even if one assumes an overcharge of just 10% — the figure used by the Justice Department in its antitrust cases — that would suggest $32 billion of overcharges over eight years. That number, however, would be trebled, as is the rule in antitrust cases, meaning damages could conservatively be estimated at $96 billion. If Bank of America had to pay roughly 10% of that, as per its 10-K, the bank would have to cough up $9.6 billion.