Beleaguered and desperate student loan borrowers need immediate help.
There is a way out for them. That same way out could also rein in college costs.
But it’s blocked by law. Obviously, the law has to be changed.
It can be done in just one step.
And today, I’ll tell you how we can get there…
The wrongheaded law, which the financial industry pushed hard for, of course, is the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA).
BAPCPA basically says the courts cannot wipe out any student loan debt – federal or private – in bankruptcy unless the borrower can prove repaying the loan would cause “undue hardship.”
And you can pretty much forget demonstrating undue hardship unless you suffer from a severe disability.
BAPCPA lumps student loan debt in with child support and criminal fines as types of debt that can’t be discharged in bankruptcy.
While the “Bankruptcy Abuse Prevention” part of the law is obvious, one wonders where the “Consumer Protection” part of BAPCPA resides.
It’s in there, but to find it, you have to understand how bull(you know what) is spun into colorful yarn and woven into legislation.
Financial industry lobbyists pushed BAPCPA by promising cheaper student loans and more of them.
“Cheaper” didn’t happen, but “more” certainly did.
In 2010, student loan debt in the United States surpassed credit card debt for the first time. And thanks to BAPCPA – let’s call it the “Protection Racket Act” – lenders are sticking it to students for life.
Student loan debt now exceeds $1.3 trillion, according to the U.S. Federal Reserve.
Private lenders, however, say they’re only a small part of that big number and are wrongly being pummeled. That’s not exactly true.
It is true that only about 10% of the $1.3 trillion of student loan debt is strictly private. But according to the U.S. Department of Education, about 33%, or $403 billion, of the total is private debt backed by government guarantees.
It doesn’t matter what form student loan debt takes – BAPCPA says it cannot be wiped out during bankruptcy.
Obviously, the law is a bad one, foisted on us by bad actors – the usual suspects.
BAPCPA has to be changed or struck down.
Declaring personal bankruptcy is not an easy or desirable path for beleaguered borrowers. But it is a way out of indentured servitude to lenders who have no legal obligation to work with borrowers.
If lenders had to write off bad loans discharged in bankruptcy, no doubt they’d be less inclined to shovel out money to borrowers without doing better repayment calculations.
That would reduce the amount of easy money flowing into the student loan borrowing arena. And that would be a good thing.
Not everyone who borrows a fortune to get a degree ever gets a degree. And those who do get degrees lately, for almost the past decade, can’t find work.
As long as there’s money to spread about because BAPCPA requires lenders get paid back, college costs will keep rising.
Have you priced an education lately?
It sure looks like colleges, universities and, especially, for-profit schools of almost every stripe are in cahoots with lenders. It’s become a nationalized, legitimized duplicitous and ruinous Ponzi scheme.
It’s got to stop. Making student loans dischargeable is the first step.
They’re telling us that markets are nervous, very nervous. The constant jumping out with both feet and jumping back in with both feet is indicative of nervousness. Investors are jumping out because they don’t want to get caught in a correction, and they’re jumping back in because they don’t want to miss the next leg up.
However, things aren’t exactly what they seem to be. The jumping in and out isn’t being done by individual investors – it just looks that way. And that itself is even more telling, but of something completely different.
Here’s the truth about the new volatility. First of all, it’s part of the system now. Second, volatility will always increase when markets head south or when nervousness pervades.
Volatility has many meanings, and how you slice it and dice it or measure it is another conversation, and a long and complicated one. But there’s a simple understanding of volatility that you absolutely must grasp and not let go of. All other means of describing volatility are part and parcel to the essence of the new volatility.
The “new volatility,” which I’m coining here and now, refers to the big moves (with “big” always being relative) that stocks make. Stocks come first. There is no “market” without individual stocks.
Stocks all have a bid and ask. In normal times, there are investors and traders bidding for (wanting to own) shares at prices they want to buy them at. And there are offers, prices that investors and traders want to sell shares or short-sell shares at. The difference between a bid and an offer, meaning the two prices, is called the spread.
Whenever there is nervousness, especially when a stock, stocks, or the market is going down, spreads “widen.”
The reason spreads widen is straightforward.
Say you’re an investor, or a trader, or a market-maker (I’ll get to market makers) and you are bidding for stock and prices are falling. You’re not going to be so anxious to put up a price at which you are willing to buy shares if you think you can pull your bid and buy shares lower as the price falls.
Because sellers still want to sell and buyers are getting out of the way, when a bid shows up at a lower price, sellers will quickly “hit that bid” (meaning sell to that bid) to unload their stock, or short the stock if they think prices are going lower.
Market makers (and I made markets on the floor of the Chicago Board Options Exchange and as an “upstairs” trader in stocks and other instruments) are designated (subject to regulators) traders in certain stocks. A market maker’s job is to always post a bid and offer in the stocks he or she makes a market in.
Specialists on the New York Stock Exchange are market makers, too. If you get that, you know that market makers have to be willing and able to both buy and sell the same stock at the prices they’ve posted. They have to.
Now, if you’re a market maker and the stock you make a market in is falling, are you going to keep bidding for stock and keep buying stock as the price falls? Of course not.
So what do you do? You widen your spread, making it as wide as you can within the rules that govern those parameters (wink, wink).
Welcome to the New Normal
The new volatility comes from wide spreads that are inherent in the new normal market. The new normal market has wider spreads than anyone really sees – until panic occurs, and then everyone sees how wide they get.
That’s because there just aren’t a lot of bidders and sellers lining up anymore. When I say they are not lining up, that doesn’t mean they’re not there – it means they aren’t putting down their orders anywhere.
We now have 14 exchanges here in the United States, where we once had one, the NYSE, then two with the American Stock Exchange (AMEX), then some other little ones, and finally three big ones when the NasdaqStock Market computerized exchange came online. On all these exchanges, investors and traders can send their orders – mostly to places that will pay them to execute in their houses.
And because stocks now trade in increments or a single penny, investors and traders don’t put down orders and just leave them out there.
The advent of decimalization on top of an increasing number of trading venues and what the confluence of those two had on volatility is a remarkable story, one for another time. But suffice it to say, they resulted in more inherent volatility.
Even when the spread in a stock looks tiny, and you think that means there’s a lot of liquidity there, you’re being fooled. What’s more important than the actual spread is the “depth of the market” or how many shares are being bid for at that bid price and how many shares are being offered at that offer price. That’s what’s important.
That seemingly “tight” spread can widen in a nanosecond if there aren’t any bidders lining up to buy stock.
That’s where volatility comes from. The big moves aren’t necessarily the result of a lot of volume of shares being traded (though that certainly adds to volatility at times).
The new volatility inherent in the system results from the fact that spreads widen really quickly. Both on down days when investors are anxious to get out at any price and on big up days when investors will pay up to get into a stock.
Volatility moves stocks quickly in either direction. The new volatility means that, even on the quietest days, volatility can spring to life in a nanosecond.
What the recent volatility, meaning the triple-digit moves in the Dow, means is that investors and traders are nervous and don’t know what the market’s next direction will be.
Because the market system has embedded new-volatility characteristics that will cause prices to gap up and gap down, we should all take the increasing volatility as an early warning sign.
Whenever markets are this nervous, it’s time to be cautious and make sure you have an exit plan, or at least a strategy to hedge any positions you have.
If you can’t beat ‘em (or manipulate ‘em), then don’t join ‘em.
That’s the new Wall Street mantra, as evidenced by happenings in the “fixing” world.
Talk about irony. “Fixing” or “fix” are Wall Street terms used to describe how benchmarks are priced on hundreds of instruments, from the Libor and other foreign currency exchange rates to gold, silver and swaps.
In all fairness, “fix” didn’t start out as a Wall Street term.
It’s been around, but Wall Street eagerly joined ‘em.
Now, join me as I tell you all about this fix we’re in…
Price Fixing’s Downfall
Most stocks trade on exchanges, and their prices are determined by those trades, and so the closing price of a stock is generally the last price at which it traded. On the other hand, benchmarks (not including stock-market benchmarks) are “fixed.”
Take the Libor, for example – it’s fixed. The London Interbank Offered Rate is actually a series of interest-rate benchmarks in different currencies for different durations.
The Libor is the most widely used interest-rate benchmark in the world. Interest rates on all kinds of loans are based on Libor plus some additional “spread” above the base Libor rate.
But Libor itself isn’t determined on any exchange, or where loans are traded over the counter, or necessarily by any actual transactions. Libor is fixed by a fixing panel.
That means the select, small panel of bankers who trade Libor (interest-rate traders) get together, through computers (for some instruments, sometimes by phone), and fix, which means determine or price, benchmarks. Those benchmarks are then used for valuation purposes, including pricing trade blotters and balance sheet assets; for loan pricing purposes; and to trade against.
While the methodologies used to determine fixes are different, in all cases where benchmarks are fixed by panels, the input of the bankers is what results in the output.
When panels are convened to determine the fixed price of an instrument, and the panelists also make markets, hold as assets, and/or trade those instruments, panel participants may have an agenda in determining price outcomes.
Say, for example, you’re on a panel that determines the price of silver. Maybe your boss comes to you and says, “We have stockpiled silver, and the quarter is coming to an end. We need the price of silver to be as high as you can make it because the value of silver will impact our quarterly earnings.”
Or, say you’re a trader who has a big short position in silver, it’s almost the end of your fiscal year and your bonus will be determined as of the last trading day this week. Because you’re short silver, if you manipulate the price of silver down (by influencing the panel’s outcome), you’ll get a bigger bonus.
The problem with these panels is that they can and have manipulated benchmarks they are charged with determining, presumably in a fair and honest manner.
Big banks responsible for fixing Libor were regularly manipulating rates. So far, a group of them have paid more than $6 billion in fines for their dirty work.
Member banks of panels that determine fixings on foreign currency exchange rates have manipulated them and will end up paying billions of dollars in fines to settle those charges. And there are other ongoing investigations where regulators are looking at other instruments whose prices are determined by panels.
Well, now that the big banks are subject to huge fines for their manipulations, they are packing up their panel positions and closing shop.
That’s right. Banks that got away with manipulation for years and probably decades – and got caught – are getting out of the business of being on panels.
Several big banks, including Deutsche Bank AG (NYSE: DB), JPMorgan Chase & Co. (NYSE: JPM), UBS AG (NYSE: UBS) and Citigroup Inc. (NYSE: C), have looked at the cost of those fines and dropped out of panels.
I guess the old saying works in reverse: “If you can’t beat and cheat ‘em, leave ‘em.”
How’s that for a slap in the face?
These banks obviously feel that they can’t be honest, or that they can’t control the greed of their traders or higher-ups, who all like their big-fat bonuses, to any degree that they can stop the manipulation that’s become part of the fabric of the soiled cloth they’ve woven. Because they can’t make money cheating, they’re packing up their knitting needles.
First Comes Silver
I say good riddance to you lying, cheating manipulating bonus junkies.
It’s high time we replace panels of poseurs with transparent, real-world, market-based inputs. We’ve had the technology for years now. The old system is antiquated, and the only reason it’s still so predominant is that it’s so easily manipulated.
Silver was the first to get a makeover. Gone is the 117-year-old London Silver Fixing Market and its panel pricing methodology.
It was killed off in the middle of August this year when a new system for determining the silver fix was implemented. The new fix, the London Bullion Market Association Silver Price, is determined by actual transactions. And where there aren’t enough transactions, meaning 300,000 ounces of silver trading hands, an algorithm takes over that looks at price and volume transactions and comes up with a dirty-hands-off, free-market fix.
In case you’re wondering why silver went that route, it was because Deutsche Bank, one of the three panel members who “fixed” silver (I used quotes there, because, well, you figure it out) very publicly pulled out of the panel.
Why did they pull out? Who knows?
Maybe they were just tired of getting caught up, or caught, in the fixing game.
It’s like trying to watch grass grow, but it’s growing.
How do you feel about that?
And we’re being told that unemployment has been falling, steadily, like sap from a maple tree in winter. That is, unless you consider how many people aren’t included in the headline number because they’re not looking for work anymore, or that the newly employed are mostly part-timers because they’re cheaper to hire, easier to fire, and don’t have to be covered by healthcare plans.
Still, unemployment is down. How do you feel about that?
Before you give me your answers, keep reading, because I’ve got many more questions…
It’s All on Tape
Interest rates are down. They were cut to the quick and quickly, there’s no disputing that. So, how do you feel now that you’re older and have shifted your savings out of equities and into fixed income, so your retirement future would be less subject to the market’s volatility and comfortably accumulating all that safe interest?
How do you feel about the stock market rising to the moon because low interest rates allowed speculators to leverage up their risk exposure and allowed companies to borrow cheaply to buy back their shares to lift their stock prices? After all, you’re mostly out of the market because you were shaken out or wiped out back in 2008.
How do you feel about getting back into the market? You did get back in, didn’t you?
You were supposed to. The Federal Reserve told all of us to do so. It openly articulated a zero-interest rate policy, commonly known as ZIRP.
Da ZIRP was designed, so they say, to drive investors out of saving and into the malls and into equities to lift the stock market.
Why drive investors into the stock market, you ask?
You knucklehead. It was obviously to make everybody rich by means of the extraordinarily brilliant policy prescription known as the “wealth effect.”
So, are you feeling wealthy yet? Are you any wealthier? Or is this all a dream?
Here’s where I give you all good news I’m famous for delivering.
You’re screwed. We’re all screwed.
That’s because the folks at the Fed, the kingmakers and economy breakers who run the country, who are the emperors of our time, have no clothes.
These naked fools have exposed us to a leveraged-up stock market, lifted on the backs of broke savers whose forsaken paydays were shifted over to hedge funds, big banks once again, and corporate CEOs and CFOs who ZIRPed markets higher in spite of economic realities.
And now we’re about to see how naked they really are and how exposed we are.
The Fed is the primary regulator of the players in the wealth feeling stealing game. And, not that we didn’t already know it, but once again, they are demonstrating that it’s not us they’re here to protect.
Two not-so-little items will prove my point about how screwed we are.
First, there’s “The Goldman (Sachs) Tapes,” which were first broadcast on NPR’sThis American Life last week. Carmen Segarra, a former Fed examiner in the bowels of Goldman Sachs, secretly recorded some of the goings-on there.
Here’s what USA Today said about the tapes:
What these tapes depicted were bank regulators who were timid and equivocating, deferential in the extreme to the bank they were supposed to keep in line, especially after Wall Street’s flagrant disregard for law and ethics led to the financial crisis that crippled the world economy.
The New York Fed is the lead regulator for the main Wall Street banks and even has supervisors embedded in the offices of Goldman Sachs and others.
What emerges in the tapes is that the team embedded in Goldman is the very definition of regulatory capture – when regulators become more oriented to the institution they are supervising than to representing the public interest.
These sessions were taped by a member of that Fed team, Carmen Segarra, who was fired after seven months on the job and is suing the Fed, claiming it was her refusal to go along with this timorous form of bank supervision that led to her dismissal.
In one session on tape, as the examining team was discussing tactics for probing a Goldman deal one of them characterized as “legal but shady,” this timidity was on full display.
“I think we don’t want to discourage Goldman from disclosing these types of things in the future,” said one male participant who remained unidentified in the transcript, “and therefore maybe you know some comment that says don’t mistake our inquisitiveness, and our desire to understand more about the marketplace in general, as a criticism of you as a firm necessarily. Like I don’t want to, I don’t want to hit them on the bat with the head [sic], and they say screw it, we’re not gonna disclose it again, we don’t need to.
How’s that for comfort?
Fed examiners are coddling the biggest, baddest Wall Street titan of all time. The richest, most powerful investment bank the world has ever known – whose awesome moneymaking prowess is only outdone by the audaciousness of its global scheming to make mountains of money – in a very real sense, owns the Fed.
And Goldman Sachs isn’t the only owner. All the big banks are part owners of the Federal Reserve System, literally.
The Leverage Bubble
Secondly, there’s the whole leveraged loan thing.
Last year the Fed demanded big banks, including Goldman Sachs, to tighten up on the “leveraged loans” they were making, issuing and selling to investors.
Leveraged loans are loans made to companies that already have relatively high debt loads. In other words the borrowing companies are already leveraged. These are relatively high-interest rate loans (relative is a relative term), which means investors want to buy them, because they can get better yields on the pass-through of those interest payments, many of which are floating-rate loans.
Floaters have the interest rates that float higher as an underlying benchmark rises. (Can you say Libor? As in the famously manipulated London Interbank Offered Rate.)
Leveraged loans, because they are in such demand by yield-hungry investors, are increasingly “covenant lite” loans. Borrowers tell investors: If you want the interest my loan affords you, come and get it, but I’m not going to give you any of the standard protections usually embedded in loan agreements. You’ll be at higher risk, but, hey, you want the yield, don’t you?
The Fed gave the banks it sent letters to 30 days to comply with its supervisory requests that the banks not make loans to companies where subsequent leverage would exceed six times earnings before interest, taxes, depreciation and amortization (EBITDA).
The banks in turn gave the Fed the finger.
Not only are 70% of leveraged loans made this year covenant-lite loans, according to Barclays – incidentally, one of the banks that got the Fed’s letter. Debt-to-EBITDA levels on leveraged loans have risen steadily. In the first half of 2014 the average debt-to-EBITDA multiple was 5.89x. In the third quarter it rose to 6.26x. Standard & Poor’s notes that compares to the 6.23x on leveraged loans in 2007.
Those are averages. One deal TravelClick leveraged itself on over a $560 million loan came out to 9.7x. Another deal Acosta Sales & Marketing did on a $2.7 billion term loan came out at more than 8x.
What was the money being raised for?
For private equity companies Thoma Bravo and Carlyle Group, respectively, to buy out the companies.
That’s right. The companies leveraged themselves up with loans to give the money to private equity buyers to buy them. Who bought the leveraged loans? Why investors in mutual funds and exchange-traded funds (ETFs) and institutional investors, of course.
Here’s a small extraction from an American Banker article: “‘Terms and structures of new deals have continued to deteriorate in 2014,’ Todd Vermilyea, senior associate director at the Fed Board’s Division of Banking Supervision and Regulation, said in a May 13 speech in Charlotte, North Carolina. ‘Many banks have not fully implemented standards set forth in the inter-agency guidance.’”
Of course they haven’t. They know the Fed is naked, so they just kick it where they want.
The Fed is afraid to regulate their masters, who have been leveraging up markets with the ZIRP money the Fed has fed them for six years now.
And we’re supposed to be comfortable with the high stock market and the wealth effect we’re supposedly feeling?
Get ready for the Greatest Show on Earth. I’m not kidding!
The circus opens today in Washington at the big-top U.S. Court of Federal Claims.
That’s where insurer Starr International is suing the United States for essentially ripping off American International Group Inc. (NYSE: AIG) and its shareholders. Starr is an insurance company controlled by Maurice “Hank” Greenberg, the former CEO of AIG, not long ago the largest insurance company in the world.
Starr International Co. Inc. v. United States will feature clowns, both the frightening variety and the funny kind… lions and tigers and bears, oh my… death-defying high-wire acts… human cannonballs… and bare-naked ladies.
Here’s what it comes down to. Did the Federal Reserve and the U.S. Department of the Treasury have the right to confiscate 80% of AIG’s common stock during the 2008 bailout, in the process costing AIG shareholders $40 billion?
You heard me right.
Starr is suing for $40 billion. No wonder the circus is coming to town…
Grab Some Popcorn
Everyone knows AIG got an almost $180 billion bailout. But what very few people know is what the Fed and the Treasury actually did to AIG to cause it to need $180 billion.
No doubt the New York-headquartered but London-based AIG Financial Products Group was stupid to sell insurance in the form of credit default swaps to a whole bunch of giant banks, guaranteeing them payment in full if the mortgage-backed securities they were stockpiling ever defaulted.
While they were stupid, they were most likely also duped. But that’s another story.
When the mortgage crisis hit, the credit default swaps AIG wrote came back to haunt them.
Here is not the place to get into the particulars, though I know them intimately. Why not here? Because if we’re lucky – and we may get lucky this time – the truth about the particulars will come out at the trial.
If you know some of what really happened, you’ll be following the trial to find out why Goldman Sachs Group Inc. (NYSE: GS) did what it did to AIG in the first place and why AIG had to pay Goldman $14 billion when at the time it owed it $8 billion, at most.
Why did other banks, including several giant foreign banks, get paid 100 cents on the dollar on claims they made against AIG when they were only entitled to market-value amounts of what was owed to them? And that’s assuming they even had a right to collect in the first place, which was in dispute at the time.
Why did the Fed charge AIG 14% on the money it lent it and 8.5% on the money it was going to lend to it but it didn’t need, when it was charging big banks between 2.5% and 5%?
Why did the government take almost 80% of AIG’s equity and controlling voting shares when it didn’t take any voting shares from any other bailout customers it coddled?
There are a lot more questions to be answered.
Some of the clowns who were deposed privately (on videotape) will also testify in open court. They include then-Federal Reserve Bank of New York President Timothy Geithner; then-Treasury Secretary Henry Paulson (another Hank), formerly the head of Goldman Sachs; then-Fed Chairman Ben (aka “Benny” the jet helicopter pilot) Bernanke; and lot of other movers and shakers who bobbed and weaved behind the scenes to extract money from AIG to send to faltering favored sons to save them.
This really is going to be the Greatest Show on Earth because it’s going to expose the criminality of the system that bailed out some of the biggest crooks in the world, who then leveraged taxpayers and economies to make ungodly sums of money with the de facto understanding that the Fed and the Treasury had their backs.
Hurry, hurry, hurry – step right up!
I’ll be here twice a week to let you know how it’s all unfolding. I’m going to slice and dice this theatrical spectacular for you, one julienne fry at a time.
Defense stocks have had a good run so far this year. Shah appeared on Fox Business yesterday afternoon advocating taking profits on three of the biggest firms that have reached all-time highs recently.
With the rise of lower cost energy alternatives like natural gas, major coal producers – including Alpha Natural Resources and Peabody Energy – have seen a massive decline over the past 5 years. Is it time to sell or buy more at these extremely low levels? Shah tells us what to do.
He also gives his best natural gas pick that’s poised to be a $140 billion enterprise company. “And the prospect for dividends is tremendous,” says Shah. The dividend yield will more than likely start around 5% but he expects it to go a lot higher.
And Shah calls Alibaba “a go-to stock for the next decade or two.” Find out what his buy-in price is by watching the video below.
You as an individual are at risk. Your bank account is at risk. Your credit is at risk. You’re at risk in ways you never thought about.
Merchants are at risk, maybe to the tune of tens of billions of dollars.
Banks are at risk. In fact, the whole financial system could be at risk.
And we hate to think about it, but the entire country is at risk.
And then there’s the security implications of breaches of critical U.S. infrastructure imply. And the global geopolitical implications of cyberwar.
We know that’s all out there, but today I’m going to put a single data breach under a microscope.
So, put on your lab coats and let’s get started…
The E-Castle Walls Are Coming Down
Today, I’m focusing on basic credit and debit transactions.
They’re not basic anymore.
The electronic world we’ve constructed isn’t impenetrable. In fact, it’s pretty porous.
Almost every day businesses are attacked by hackers, by malware, by criminals intent on stealing proprietary information, trade secrets and customer information. They’re going after our payment card numbers, passwords, addresses – anything they need in order to steal or make money.
Corporate and government data breaches are so common now that there’s a website dedicated to what’s happening: www.DataBreachToday.com.
The data breaches that have garnered the most media attention recently are the Target Corp. (NYSE: TGT) and the Home Depot Inc. (NYSE: HD) thefts.
The more recent Home Depot breach dwarfs the one last year at Target. So let’s zero in on what happened at the hardware giant and what’s going to happen in the future.
Home Depot’s more than 2,000 North American stores were all affected. Some 56 million Home Depot customers’ payment cards were exposed – about 40 million Target customers’ cards were breached.
Needless to say, the lawsuits are starting to fly.
One lawsuit, which is seeking class-action status, was filed on behalf of Home Depot customers even before the retailer admitted its systems had been breached. That suit anticipated the eventual admission and points to the fact that Home Depot knew about the breaches and didn’t come clean, which would have helped customers who were subsequently affected protect themselves in some way.
Now banks are getting on the sue-Home Depot bandwagon. Two credit unions are suing and seeking class-action status, claiming unspecified losses related to refunding fraudulent charges, reissuing cards, opening and closing accounts, stopping or blocking payments, notifying customers, increasing fraud monitoring and lost revenues from a drop-off in accounts.
Whether banks can sue merchants for losses related to data breaches is about to be ruled on by a judge in a Target lawsuit. In that suit, Target is trying to derail a consolidated class action by a group of banks claiming the retailer is responsible for their losses. One estimate of Target’s liability to the banks suing it is a cool $18 billion.
If the banks prevail, merchants’ liability in the future will be staggering.
Between banks and customers suing, merchants are going to face charges of breach of confidence, privacy, fiduciary duty, negligent misrepresentation and outright negligence. In short, the plaintiffs are accusing the merchants of failing to meet their legal obligation to protect customers and customers’ banks.
Sometimes, as may be the case with Home Depot, there may be obvious (at least in my mind) culpability. And it may be clear that obligations were not met where they could be reasonably expected.
Apparently, Home Depot knew about the breaches at least five months before going public about it. An outside data security firm warned the retailer about “using out-of-date malware detection” systems. And a former Home Depot information securities manager has said he warned the company about its out-of-date antivirus software on its point-of-sales systems.
It was the point-of-sales systems that were compromised at both Target and Home Depot.
In fact, the U.S. Department of Homeland Security, based on U.S. Secret Service findings, warned Home Depot about Mozart (the name of the malware that infected the retailer’s systems) infiltrating its checkouts.
Data security experts think Mozart to be a customized malware designed to attack Home Depot’s point-of-sale systems. In other words, whoever designed Mozart understood, or knew how to get around, Home Depot’s safety systems. Mozart was “customized” to the retailer’s technology. And it was running for at least five months before anyone detected it.
In a nutshell, the malware used a “RAM scraper” to capture a customer’s card and related information between the time – just milliseconds – it was swiped and the time it took Home Depot’s systems to encrypt the customer’s information.
Home Depot encrypted its customers’ information – but Mozart stole the data before encryption occurred.
What will the eventual costs to Home Depot be? What will merchants be responsible for in the future? What was the Secret Service doing looking into Home Depot’s systems? What’s out there in cyberland that we have yet to face, defend ourselves against and combat?
All I know is that technology is a double-edged sword.