TIME

The Real Truth About the Wall Street Bailouts

It happens to be the one we already know

It was probably inevitable, which doesn’t make it any less absurd. And it is certainly a reflection of their remarkable success, which doesn’t make it any less unfair. But six years after the spectacularly unpopular Wall Street bailouts, the government rescuers are under fire again—this time, not for their alleged generosity to financial firms, but for their alleged stinginess.

On Monday, a trial began in a lawsuit filed by AIG shareholders who claim the government somehow violated their rights when it rescued the busted insurer and salvaged their worthless investments. But even commentators who have admitted the lawsuit is “asinine” (in the New York Times) and “mostly insane” (in The New Republic) have suggested it’s nonetheless performing a public service, because it’s going to reveal the truth about the Wall Street bailouts. And on Tuesday, the Times ran a blockbuster story quoting unnamed sources who claim the government also could have bailed out Lehman Brothers, the venerable investment bank whose implosion nearly cratered the global economy. Again, the implication is that the official story is askew.

In fact, the lawsuit over the $182 billion AIG bailout is precisely as asinine and insane as it sounds. The government officials who stabilized the world’s most dangerous financial firm were the ones who performed a public service. And they absolutely would have rescued Lehman as well if they could have. Unfortunately, Lehman was hopelessly insolvent, and the government had no legal or practical way to save it without a private buyer willing to take on at least some of its risks. As for the truth about the Wall Street bailouts, well, the truth is already out there.

I have a bias here; I helped former Treasury Secretary Tim Geithner, who helped rescue AIG and tried to rescue Lehman when he was president of the New York Fed, with his memoir, Stress Test. I was even peripherally involved in the AIG case, when Greenberg’s lawyers sought access to transcripts of my conversations with Geithner.

But I wrote a pretty high-octane defense of the AIG bailout back in January 2010, before I ever met Geithner. And it stands up pretty well, except for the part where I said taxpayers would take a hit; in fact, taxpayers ended up earning a $22.7 billion profit on their investment in AIG.

Overall, taxpayers have made more than $100 billion on the bailouts. More importantly, the aggressive U.S. financial response—along with similarly aggressive monetary and (initially) fiscal policies—helped rescue a free-falling economy that was crashing at an 8 percent annual rate. We’ve recovered better than the rest of the developed world—Europe still has 11 percent unemployment—and much better than nations that endured much less damaging financial crises in the past. It’s kind of amazing that we’re still arguing about an emergency response that turned out so much better than anyone, even the emergency responders, expected at the time.

But here we are. Critics still doubt the official story that Lehman could not be saved. They also insist the Fed could have forced AIG’s senior creditors to accept less than 100 cents on the dollar; they’re excited about the lawsuit because they expect it to expose shocking evidence about why the government didn’t insist on haircuts. In fact, these questions have been asked and answered. Geithner tells the story of Lehman and AIG at length in Stress Test. You can find a quick explanation of why Lehman couldn’t be rescued in on pages 206-208 and a quick summary of why AIG’s counterparties didn’t absorb haircuts on pages 246-248. Again, I’m biased, but if you’re interested in this stuff, you should read the whole thing.

Here’s a shorter version. The old conventional wisdom that Geithner and his colleagues were desperate to prevent big Wall Street firms from collapsing during the crisis was basically correct, although I’d say they were right to be desperate. The firms were all dangerously interconnected with the rest of the global financial system at a time when markets had lost confidence in their housing-related assets, and it was clear that any one of them defaulting on its obligations could further depress confidence and spark runs on the others. That’s why when Bear Stearns was failing in March 2008, the Fed helped engineer a deal for JP Morgan Chase to acquire it and stand behind its obligations, providing an emergency loan backed by some of Bear’s sketchiest mortgage securities. And when Lehman was failing that September, Geithner and his colleagues worked feverishly to recruit a buyer for a similar deal, holding a series of emergency meetings documented in crisis books like Too Big to Fail and In Fed We Trust.

So what happened? The only bank willing to buy Lehman and its toxic assets that chaotic weekend was the British firm Barclays—and British regulators balked before a deal could be finalized. That left the Fed without options. It’s only allowed to lend against plausibly solid collateral, and Lehman looked hopelessly insolvent. At the time, then-Fed chair Ben Bernanke and then-Treasury Secretary Hank Paulson suggested publicly that they had chosen to let Lehman fail, because they didn’t want to accelerate the panic by making the government appear powerless. But really, they had been powerless. They knew the consequences of failure would be disastrous. They would have been thrilled to find a way to save Lehman.

In its carefully hedged, anonymously sourced story, the Times is now suggesting some New York Fed officials were “leaning toward the opposite conclusion—that Lehman was narrowly solvent and therefore might qualify for a bailout.” Put it this way: Their bosses did not agree, and neither did the market; as the Times noted, Bank of America had estimated Lehman’s net worth at about negative $66 billion that weekend. In fact, a subsequent study by economists William R. Cline and Joseph E. Gagnon—a study not mentioned by the Times—found that Lehman was at least $100 billion and perhaps $200 billion in the hole at the time.

“Our overall judgment on Lehman is that it was deeply insolvent,” Cline and Gagnon concluded.

One more point about Lehman: Even if the Fed had broken the law to lend into a run on an insolvent firm, and had somehow managed to stabilize Lehman rather than kiss its cash goodbye, it wouldn’t have defused the larger crisis. The government still lacked the authority to inject massive amounts of capital into the financial system—and a Congress that initially refused to grant that authority through the notorious TARP even after Lehman’s failure certainly wouldn’t have granted it before a failure of similar magnitude. Whatever. I guess some people find it comforting to believe the government could have snapped its fingers and ended the crisis early. It’s not a reality-based belief.

The perennial question is how, if the Fed lacked authority to rescue Lehman, it somehow found the authority to rescue AIG the next day. The short answer is that AIG, despite the awful misjudgments of a subsidiary that insured trillions of dollars worth of mortgage securities, had valuable revenue-generating businesses and a plausible claim to solvency. While Lehman was really nothing more than the sum of its toxic assets and shattered reputation as a venerable brokerage, AIG had solid collateral that the Fed could lend against with a decent expectation of repayment.

Ultimately, AIG would receive an astonishing $182 billion in government financing, and it would pay back every dime with interest. Its shareholders, who would have received nothing if the government had let the firm collapse, are now complaining in court that they should have gotten more. In his Times op-ed, Noam Scheiber aptly compared them to “a formerly starving man insisting he deserved filet mignon rather than a rib-eye.” Yet Scheiber argued that their filet mignon demand “may end up serving a constructive purpose.” He thinks the trial underway in Washington will reveal the real reason AIG’s creditors didn’t face haircuts; he doesn’t think the official explanation—that voluntary haircuts were impossible, and involuntary haircuts would have accelerated the panic—makes any sense. Times columnist Gretchen Morgenson not only called the lawsuit a “public service,” she actually portrayed AIG as an innocent victim in the financial crisis, “the patsy at the poker table.”

Uh…no. AIG was as rapacious and reckless as any bank. The government did push for modest haircuts for its creditors that might have saved taxpayers as much as $1 billion, but seven of the eight top creditors flatly refused. Unfortunately, the Fed could not force them to change their minds; several of them weren’t even U.S. firms. And the Fed could not impose the haircuts without forcing AIG into default; the creditors logically concluded a government that was spending $182 billion to avoid a default wasn’t going to create a default on purpose to save $1 billion.

This is the key: In a financial crisis, default is the enemy. The fear that secured debts won’t be repaid in full is the fear that drives panics. The Federal Deposit Insurance Corporation learned this the hard way a week later when it foolishly haircut Washington Mutual’s creditors, instantly triggering a run on the next-weakest bank, Wachovia; its ten-year bonds lost two thirds of their value the day after the haircuts. The whole point of the bailouts was to avoid defaults. This is not “counterintuitive” (Scheiber’s word) to anyone who has endured a financial crisis.

But the critics—who were wrong when they predicted the bailouts would cost trillions, and when they warned that the banking system could not be saved without mass nationalization, and in so many other ways—think the frivolous AIG lawsuit will reveal some dirty backroom deal where Geithner and Lord Voldemort conspired to rip off widows and orphans on behalf of Goldman Sachs. “Traumatic historical episodes often require a high-profile public reckoning before the country can move on,” Scheiber wrote. OK, he then admitted, the financial crisis inspired a litany of those, “but none fully exposed the weakness of Mr. Geithner’s logic.”

Hmm. Maybe it’s someone else’s logic that’s weak. And maybe it’s already time for the country to move on.

TIME technology

Holder Says Apple’s iPhone Encryption Will Thwart Child Abuse Investigations

"It is fully possible to permit law enforcement to do its job while still adequately protecting personal privacy"

Attorney General Eric Holder ripped technology companies Tuesday that he said are “thwarting” the federal government’s ability to stop child abuse, just days after Apple and Google announced new security measures that would prevent the companies from giving authorities data on users.

“We would hope that technology companies would be willing to work with us to ensure that law enforcement retains the ability, with court-authorization, to lawfully obtain information in the course of an investigation, such as catching kidnappers and sexual predators,” Holder said at a Washington conference of the Global Alliance Conference Against Child Abuse Online. “It is fully possible to permit law enforcement to do its job while still adequately protecting personal privacy. When a child is in danger, law enforcement needs to be able to take every legally available step to quickly find and protect the child and to stop those that abuse children. It is worrisome to see companies thwarting our ability to do so.”

Apple has recently drawn the ire of some law enforcement figures, including FBI Director James Comey, for making it harder for the federal government to access users’ personal information—including emails, photos and contacts—on its new iOS 8 mobile operating system. Apple says it’s “not technically feasible” for the company to respond to government warrants, as it now can’t bypass users’ passcode to access data (though experts say the NSA can still get around this). Earlier this month, Google announced that its next generation Android operating system will have encryption on by default for the first time.

Read Holder’s remarks here.

TIME 2016 Election

Bobby Jindal to Appear With Hobby Lobby Family

Bobby Jindal, governor of Louisiana, waves after speaking during the Conservative Political Action Conference in National Harbor, Maryland, U.S., on Thursday, March 6, 2014. Andrew Harrer—Bloomberg/Getty Images

Louisiana governor will stand alongside the Green family at an event, as he prepares the way for likely presidential bid

Lousiana Gov. Bobby Jindal will appear with the billionaire family behind the Hobby Lobby arts and crafts chain Wednesday, as the Republican lawmaker continues to lay the groundwork for a likely presidential bid in 2016.

According to an aide, Jindal will appear at an event at the Hobby Lobby campus in Oklahoma City Wednesday evening with the Green family in support of the Museum of the Bible, a museum backed by the family planned for Washington, D.C.

The Greens’ retail chain became a nationwide household name earlier this year when the Supreme Court ruled that it could not be required to pay for contraceptive coverage as part of employees’ health insurance plans because it would violate their Christian beliefs.

Jindal was among the most vocal Republicans in support of Hobby Lobby before the Supreme Court and one of the loudest celebrants after the decision was handed down. In a commencement address at Liberty University in May, Jindal highlighted the Green family’s fight against the Obama administration, calling the company “nothing less than an all-American success story.”

The event will provide Jindal an opportunity to highlight one of his signature issues, religious freedom, while placing him next to a potential deep-pocketed donor for his likely presidential campaign. In a February address at the Reagan Library in California, Jindal held up the Hobby Lobby as an example of what he terms the Obama administration’s “silent war against religious liberty.”

The conservative GOP lawmaker also supports the efforts by some in the Republican Party to advocate for greater availability of birth control over the counter at pharmacies, instead of the requirement for a doctor’s prescription.

TIME 2014 Election

Meet the Woman Who Could Keep Control of the Senate Up for Grabs

Amanda Swafford Libertarian Georgia Senate
Courtesy Swafford for US Senate

Libertarian Amanda Swafford considers forcing a Jan. 6 run-off in the Peach State’s Senate race a victory for third party candidates everywhere

There is a nightmare scenario that keeps most politicos working on both sides of the aisle up at night: after the midterm elections, and even through the anticipated Dec. 6 run off in Louisiana, control of the Senate likely won’t be decided until Jan. 6, the date a run-off in Georgia will take place, if any one candidate fails to muster 50% of the vote. It is this scenario that Libertarian candidate Amanda Swafford, who regularly pulls 5% in most polls, relishes.

“In that situation, if we did force a runoff,” Swafford tells TIME, “I’d say that’s a clear mandate from people of Georgia for a small government and less involvement in people’s lives.”

Small government has hardly been a theme in the race between Republican businessman David Perdue and Democrat Michelle Nunn, who are competing to fill retiring Republican Saxby Chambliss’s seat. The two have spent millions firing at one another: Perdue accused Nunn of funding terrorists through her work with the Bush Family Foundation and Nunn said Perdue lost jobs and discriminated against female workers as CEO of Dollar General.

“If that nastiness continues in a run-off, the folks responsible for the run-off will probably just stay home,” Swafford says of her supporters. “And they will have to find new voters in order to win and they will be exceptionally hard.”

Perdue now leads Nunn by 3.4 points, according to an average of Georgia polls by Real Clear Politics. But Perdue has only broken the 50% threshold in one out five of the most recent polls, and he’ll need at least 50% of the vote to avoid a run-off. Swafford’s “mere presence on the ballot creates the potential for a run-off,” says Jennifer Duffy, who follows Senate races at the non-partisan Cook Political Report. “Overall, Libertarians tend to draw more from Republicans, so she is a bigger problem for Perdue than Nunn.”

But Swafford says that may not be the case with her voters, who she maintains are open to whomever makes the best case. Swafford isn’t even sure she’d caucus with the Republicans if, by some miracle, she were to be elected.

And so an unlikely figure could impact national politics. As of the end of June, Swafford had raised $7,683 for her senatorial bid. The single 37-year-old has kept her day job as a paralegal as she has mounted her campaign. “It makes for a lot of late nights and early mornings,” she says, “but I believe electing someone to the Senate like me, who knows what it’s like to work a job, have a boss, and make ends meet on a regular budget, would bring a valuable perspective to the Senate.”

Swafford is pro-choice and for the legalization of marijuana. And, like most Libertarians, she’s deeply suspicious of President Obama’s engagement abroad, particularly in Syria and Iraq. “Last year, the President wanted to bomb Syria for their chemical weapons, now he’s asking for their help to defeat another enemy,” she says. (Obama hasn’t actually asked Syrian strongman Bashar Assad for help in defeating ISIS.)

Swafford benefits from Georgia’s strong Libertarian history. It is home to 2008 Libertarian Presidential candidate Bob Barr, a former Republican congressman. And that same year, John Monds made history by becoming the first Libertarian candidate to draw more than a million votes—statewide or nationally—though he still lost his attempt to become Georgia Public Service Commissioner. Four years later, Libertarian David Staples made another bid for the same office and again broke the one million-vote threshold, though again fell short. But, unlike Swafford, both of those men faced only one rival from a major party, not two.

Swafford says she had no choice but to run statewide: Georgia’s ballot access laws for third party candidates for state races are some of the most restrictive in the country. “So, it’s either run for city council, or statewide,” says Swafford, who was elected to her hometown city council in Fiery Branch in 2010. If they lose this Senate seat, Georgia Republicans who control the state legislature might consider rethinking those restrictive third party laws. Because if politicians like Swafford can’t clinch state office, spoiling a statewide race is the second best—and clearly effective—option to get their ideas out. It turns out, some politics might be better off local.

TIME White House

White House Touts Growth of Initiative to Aid Young Minorities

The new call to action brings local leaders into the Obama Administration's effort to reach young men and boys of color

More than 100 cities have accepted the White House’s latest call to action for the My Brother’s Keeper initiative and have pledged to adopt strategies to ensure minority boys and young men have access to greater economic opportunity, officials said Tuesday.

The call, known as the “Community Challenge” was first announced by President Barack Obama on Saturday during a speech before the Congressional Black Caucus, where he said communities and outside groups are continuing their efforts to “bring folks together to examine how can we ensure that our young men have the tools they need to achieve their full potential.”

Since the initiative’s launch last February, the Obama Administration has announced several efforts to close achievement and opportunity gaps between young men of color and their white peers. Most recently, the Justice Department launched a partnership with local law enforcement agencies to improve relationships between officers and members of the community. The announcement came just weeks after protests broke out in Ferguson, Mo., in response to the police’s handling of the shooting death of an unarmed black teen by an white police officer.

As a part of the community challenge—which Ferguson has accepted—communities will work to keep young people safe from crime, get all children reading at grade level by third grade and improve opportunities for employment and education after high school.

“We’re taking MBK local,” Secretary of Housing and Urban Development Julián Castro said Tuesday on a call with reporters. “We’re putting important local leaders right at the helm of this effort.”

TIME U.K.

U.K. Edges Toward Departure from European Union

Prime Minister David Cameron walks with Mayor of London and Parliamentary candidate Boris Johnson at the Conservative party conference on Sept. 29, 2014 in Birmingham, England.
Prime Minister David Cameron walks with Mayor of London and Parliamentary candidate Boris Johnson at the Conservative party conference on Sept. 29, 2014 in Birmingham, England. Peter Macdiarmid—Getty Images

As Britain's Conservative Party holds its last party conference ahead of May's general elections, the Euroskeptic message looks like a winning one

It’s hard to imagine anything more insular than a British party political conference—except, perhaps, for an island.

The ruling Conservative Party is currently meeting in the U.K.’s second largest city, Birmingham, but delegates tightly ringed by security and focused on the narrow issue of how to win the next election may as well be on a coral atoll for all the connection they have with the wider world.

Events in Hong Kong go unremarked. U.K. participation in the military campaign against ISIS barely merits a mention. A lone protestor standing beyond the crowd barriers bellowed rage against Britain’s fresh involvement in Iraq for hours Monday, but his words whispered in the convention center like distant waves. Even so, events on this artificial island may yet carry global significance. Britain is getting ever closer to the brink of leaving the European Union.

That is the probable outcome if the Conservatives win the U.K. general election next May, as they have pledged to allow Britain’s increasingly Euroskeptic population a referendum on whether to stay or go. Polls suggest a sizeable majority would vote to leave the E.U. under the current terms of membership.

Admittedly a Conservative victory is far from a sure thing in 2015. The Labour Party enjoys a lead of several points in most opinion polls and the Conservatives, in coalition with the Liberal Democrats since 2010, should expect to be punished by voters for implementing painful austerity policies that have reduced the budget deficit (but not by as much as they promised). But even though Labour may look like the likelier winner, it doesn’t act like it. Neither party members nor the wider public have faith in the current Labour leader Ed Miliband, who capped a lackluster conference last week by forgetting key chunks of the speech that should have energized his troops and instead demoralized them.

In truth all three mainstream parties are suffering from a loss of connection with the public — voters feel they’re untrustworthy, and incapable of championing Britain, whatever form that might take. This disenchantment is fostering the rise across Britain of populist parties that promise a new, more honest mode of politics and more localism. In Scotland this means the Scottish National Party strengthening largely at the expense of Labour, which will struggle to retain its 41 Westminster seats there at the coming election.

But in England, it is the anti-immigration, Euroskeptic United Kingdom Independence Party (UKIP) that has been attracting support on the back of its strident views, which it calls “unashamedly patriotic”. The party’s manifesto not only calls for departure from the European Union, but also restrictions on the numbers of immigrants entering the country, less foreign aid, and priority in the allocation of social housing given to “people whose parents and grandparents were born locally”.

It’s a message that appeals to many who might otherwise be inclined to vote for the Conservative party. The eastwards expansion of the E.U. was enthusiastically supported by past Conservative governments, because they thought a larger union might be less inclined to move towards federalism and consequent impingements on British sovereignty. But enlargement has increased the pool of E.U. citizens entitled to work in the U.K, and fostered resentment among conservative voters, as the British economy struggles to recover from the economic slump. UKIP has capitalized on that resentment; two Conservative MPs have recently defected to UKIP and more are rumored to be considering jumping ship.

“The biggest issue on the doorstep is immigration,” says Phillip Lee, the Conservative MP for Bracknell, west of London, “but this is also related to Europe.” His constituents would like to see an Australian-style points system applied to jobseekers from abroad, he says. That’s a policy UKIP already proposes for all immigrants, whether they come from the E.U. or further afield.

Even so, the Conservatives are better positioned than Labour—which opposes giving Britons a vote on E.U. membership—to fight UKIP on its own turf. Prime Minister David Cameron’s post-Scottish referendum promise of “English Votes for English Laws” plays to demands for more local control, while his party is ramming the message home at every opportunity during its conference that only a Conservative government will deliver an in-out referendum on the E.U. It will doubtless be a pivotal passage in Cameron’s keynote address to delegates tomorrow.

Cameron first made the offer partly in an effort to hold together a fractious party that has a long history of falling out over Europe. But his official position—that he wants Britain to remain in the E.U., but on renegotiated better terms—also happens to be his real preference, not least because many British businesses worry that an E.U. exit will load costs and obstacles on to their European operations. His ideal is to retain the advantages of E.U. membership while shielding Britain against moves to closer E.U. integration precipitated by the euro zone crisis. But in a BBC interview this morning, Cameron made clear that he wouldn’t be too upset if Britain left the E.U. entirely. The sales pitch being rolled out in Birmingham is clear: vote UKIP, get Labour, lose the chance of a referendum.

Despite what the polls say, many Conservatives believe this is a winning formula, and they could well be right. But the same urges the Conservatives would be tapping to win election victory would inevitably still be in play if and when Britons voted on their relationship with Europe. An exit would mean a period of extended turbulence for Britain and for the E.U., used to British intransigence but also used to Britain as a counterbalance to German muscle and French protectionism. The rest of the E.U. hopes Britain stays put, and so does Washington, which still often looks to the U.K. as a bridge to Europe.

British politicians hear these voices but their message, like the shouts of the man outside the Conservative Party conference, are muffled. This island nation with its parochial politics could well be headed for greater insularity.

TIME 2014 Election

The Top 3 Campaign Fundraising Fibs

Check out some of the worst offenders

Tuesday marks the end of the final full quarter of political fundraising before November’s midterm elections, and both campaigns and outside groups aren’t just cramming inboxes with solicitations: They’re resorting to bold-faced lies.

On both sides of the fight, political groups are fast at work driving fear into the hearts of their supporters with terrifying ALL-CAPS subject lines and pleas of poverty. But aside from those messaging gimmicks, they are resorting to even less savory tactics to drive up their end-of-quarter fundraising totals, including invented “memberships” and matched donations.

Political email lists are generally self-selecting groups of supporters inclined to make donations and unfazed by the constant pleas for cash, and these tactics have proven remarkably effective. But the latest fundraising innovations may be furthering the erosion of what little trust remains in the political system, and potentially in the very same groups looking to fundraise.

“Over the long term it’s important for candidates and parties to have the trust and goodwill of their supporters, which these kinds of tactics can chip away at,” one Democratic digital consultant warned. “Over the short term, obviously, they can drive a lot of donations. So that’s a balance each campaign and committee has to figure out how to strike. But you don’t want to wind up in a position where, when you have an actual crisis to communicate around or a message that legitimately needs to be delivered, no one is paying any attention. Nor, on a human level, do you really want to irritate everyone.”

Here are some of the worst offenders:

The “Triple-Match”

A favorite of both the Democratic Congressional Campaign Committee and the National Republican Congressional Committee, among others, the gimmick suggests that donations will be triple-matched by another donor. This is a practice that’s common in non-profit fundraising, but is fraught with issues in political fundraising. A donation of $2,000 to a committee, for instance, legally cannot be triple-matched by a donor without running afoul of Federal Election Commission contribution limits. Experts say it’s an outright lie—a practice that would draw increased scrutiny in the private sector, but not in politics. Neither the DCCC nor the NRCC would comment on the practice.

Screen Shot 2014-09-30 at 11.16.19 AM

Screen Shot 2014-09-30 at 11.16.33 AM“Membership”

While top-tier donors are often afforded special privileges, many political groups advertise “membership” for average online donors—a meaningless designation. House Majority PAC and the National Republican Senatorial Committee are recent offenders on this front.

Screen Shot 2014-09-30 at 11.25.13 AM Screen Shot 2014-09-30 at 11.20.47 AM

Fake subject lines

It’s not uncommon for political groups to fake subject lines, but they are increasingly designed to appear as though sent by friends or acquaintances. House Majority PAC has taken to suggesting that emails are being sent from staffers’ “(personal)” accounts or even their iPads. That’s not the case.
Screen Shot 2014-09-30 at 11.21.24 AM

TIME White House

Secret Service Chief Pledges ‘Complete’ Probe After White House Fence Jumper

"What happened is unacceptable and it will never happen again"

The head of the Secret Service promised lawmakers a “complete and thorough” investigation and policy review Tuesday, on the heels of a new report that revealed the man who jumped the White House fence on Sept. 19 got further into the President’s home than previously thought.

“I take full responsibility; what happened is unacceptable and it will never happen again,” Secret Service Director Julia Pierson said in prepared remarks to a House oversight panel. “It is clear that our security plan was not executed properly.”

The Washington Post reported Monday that Omar Gonzalez made it further into the White House than previously disclosed, getting all the way to the East Room before being subdued.

“There is no such thing as ‘business as usual’ in our line of work; we have to be successful 100 percent of the time, and we are constantly making changes and doing everything possible to ensure that we are,” Pierson said, noting that the Secret Service has apprehended 16 White House fence jumpers over the past five years, including six in 2014.

“I intend over the coming months to redouble my efforts, not only in response to this incident, but in general to bring the Secret Service to a level of performance that lives up to the vital mission we perform, the important individuals we protect, and the American people we serve.”

House Oversight Committee Chairman Darrell Issa (R-Calif.), who called Tuesday’s hearing while Congress is in recess, said the most recent security lapse called for greater scrutiny on the agency. Calling an internal Secret Service investigation “not sufficient,” Issa requested that Homeland Security Secretary Jeh Johnson conduct a “far greater and more independent” probe of the agency.

“Whether deficient procedures, insufficient training, personnel shortages, or low morale contributed to the incident, this can never happen again,” he said in his opening statement. “We simply cannot allow it.”

Issa said Pierson, who was appointed in 2013, had some “tough questions to answer” following the Gonzalez incident, including why the front door was left unlocked and why neither security dogs nor guards could stop the man from hurling himself over the fence, running 70 yards and into the White House.

The White House invasion is the latest in a string of high-profile embarrassments for the agency —including the 2009 state dinner crashers, the 2011 White House shooting and the 2012 Cartagena prostitution incident—but the first to occur on Pierson’s watch.

“The appointment of Director Pierson brought the hope that the agency would reclaim its noble image—but recent events show the troubles facing the agency are far from over,” Issa said. “The United States Secret Service was an elite law enforcement agency.”

Rep. Elijah Cummings (D-Md.), the ranking Democrat on the committee, said the incident “unfortunately causes many people to ask whether there is a much broader problem with the Secret Service.”

“I think my major concern goes to the culture,” Cummings said. “It is very disturbing to know that Secret Service agents in the most elite protective agency in the world feel more comfortable apparently—from what I’m hearing—coming to members of this committee and telling things than coming to you and members in the agency. That I’m telling you, when I boil all of this down, that to me is dangerous.”

Cummings added that the “jury is still out” on whether or not Pierson can “correct this situation.”

TIME Morning Must Reads

Morning Must Reads: September 30

Capitol
The early morning sun rises behind the US Capitol Building in Washington, DC. Mark Wilson—Getty Images

Protesters Set Deadline

Hong Kong’s pro-democracy group Occupy Central called on Chief Executive Leung Chun-ying to grant citizens the right to nominate and directly vote for candidates for the city’s highest office. Leung replied that Beijing would not be moved and refused to resign

Women’s Colleges Turn to Men

Women’s colleges are going co-ed in an effort to combat years of decline in revenue. Enrollment at women-only colleges fell 29% since 2000

Secret Service Under Fire

A report released ahead of a congressional hearing on presidential security reveals the White House fence-jumper got further inside than thought

See Newlywed Photos of George Clooney, Amal Alamuddin

The intimate wedding that took place in Venice on Sept. 27 is featured in this week’s issue of PEOPLE, in conjunction with Hello! magazine internationally, and includes 25 exclusive photos of the ceremony, celebrity-packed parties and other candid moments

Afghanistan, U.S. Sign Long-Awaited Security Pact

The deal, which will allow U.S. forces to remain in the country past the end of the year, was signed in Kabul on Tuesday. President Ashraf Ghani Ahmadzai, sworn into office a day earlier, said it signaled a fundamental shift in Afghanistan’s relations with the world

Va. Kidnapping Suspect May Be Linked to 2009 Murder

Authorities say Jesse L. Matthew Jr., the main suspect in the disappearance of University of Virginia student Hannah Graham, may be connected to the abduction and murder of another young woman in the area five years ago

Louisiana Restaurant Gives a 10% Discount for Packing Heat

Kevin Cox, owner of Bergeron’s Restaurant in Port Allen, is bucking a corporate trend by encouraging, rather than banning, firearms in his Cajun food establishment. “I just need to see a weapon. I need you to be carrying a gun,” he said

Marijuana Legalization Spreads Across 2014 Ballots

Referendums on legalizing marijuana across the country this year, from Florida to Alaska, have the power to shape the ongoing fight ahead of an even bigger battle in 2016. Here are the pot votes that will matter most in 2014

Netflix Plans to Release First Original Movie

Netflix has announced plans to release its first original movie — a sequel to Ang Lee’s martial-arts epic Crouching Tiger, Hidden Dragon — to all subscribers in August 2015, charting new territory for the streaming service

Wildlife Populations Have Dropped by More Than Half

A new WWF report that measured more than 10,000 representative populations of mammals, birds, reptiles, amphibians and fish found a 52% decline between 1970 and 2010, with even grimmer statistics for some species like freshwater dwellers

No, Snapchat Hasn’t Been Hacked

Snapchat denied being hacked after some users reported receiving spam messages from their friends advertising a weight-loss site. User login data may have been taken from other sites and used to access Snapchat for the spam

Iceland Plans for Men-Only Conference on Gender Equality

Iceland has plans to organize a gender-equality conference that won’t have any female attendees. The conference will be conducted in January and will be co-hosted by the South American nation of Suriname, according to the Icelandic government

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TIME justice

Meet the Prison Bankers Who Profit From the Inmates

Pat Taylor
Pat Taylor holding a picture of her son, Eddie, who is serving 20-year prison sentence at Bland Correctional Center in Virginia. Eleanor Bell—Center for Public Integrity

With the ultimate captive markets, prison bankers and state jailers make money off high fees for financial services.

This story was published by The Center for Public Integrity, a nonprofit, nonpartisan investigative news organization in Washington, D.C.

Pat Taylor doesn’t believe in going into debt. She keeps her bills in a freezer bag under her bed, next to old photo albums, and believes in paying them on time religiously. For Taylor, living within your means is part of being a good Christian.

Lately, Taylor, 64, has felt torn between that commitment and her desire to be a loving, supportive mother for her son Eddie.

Eddie, 38, is serving 20-year prison sentence at Bland Correctional Center for armed robbery. He’s doing his time at a medium-security Virginia state prison located 137 miles northwest of Johnson City, across the dips and valleys of the Blue Ridge Mountains here in the heart of Appalachia. The cost of supporting and visiting Eddie keeps going up, so Pat makes trade-offs.

“I would send him money even if it broke me, because I do go without paying some bills sometimes to go see him,” Pat says.

Between gas to make the trip and overpriced sandwiches from the prison vending machine, visiting Bland costs about $50, a strain on her housekeeper’s wages. So she alternates, visiting Eddie one week and sending him money the next.

To get cash to her son, Pat used to purchase a money order at the post office for $1.25 and mail it to the prison, for a total cost of less than $2. But in March of last year, the Virginia Department of Corrections informed her that JPay Inc., a private company in Florida, would begin handling all deposits into inmates’ accounts.

Sending a money order through JPay takes too long, so Taylor started using her debit card to get him funds instead. To send Eddie $50, Taylor must pay $6.95 to JPay. Depending on how much she can afford to send, the fee can be as high as 35 percent. In other states, JPay’s fees approach 45 percent.

After the fee, the state takes out another 15 percent of her money for court fees and a mandatory savings account, which Eddie will receive upon his release in 2021, minus the interest, which goes to the Department of Corrections.

Eddie needs money to pay for basic needs like toothpaste, visits to the doctor and winter clothes. In some states families of inmates pay for toilet paper, electricity, even room and board, as governments increasingly shift the costs of imprisonment from taxpayers to the families of inmates.

“To give him $50, I have to send $70 off my card,” says Taylor, who moved to a smaller apartment on the outskirts of Johnson City in part because of the rising cost of supporting Eddie.

“They’re punishing the families, not the inmates.”

Price of prison

JPay and other prison bankers collect tens of millions of dollars every year from inmates’ families in fees for basic financial services. To make payments, some forego medical care, skip utility bills and limit contact with their imprisoned relatives, the Center for Public Integrity found in a six-month investigation.

Inmates earn as little as 12 cents per hour in many places, wages that have not increased for decades. The prices they pay for goods to meet their basic needs continue to increase.

By erecting a virtual tollbooth at the prison gate, JPay has become a critical financial conduit for an opaque constellation of vendors that profit from millions of poor families with incarcerated loved ones.

JPay streamlines the flow of cash into prisons, making it easier for corrections agencies to take a cut. Prisons do so directly, by deducting fees and charges before the money hits an inmate’s account. They also allow phone and commissary vendors to charge marked-up prices, then collect a share of the profits generated by these contractors.

Taken together, the costs imposed by JPay, phone companies, prison store operators and corrections agencies make it far more difficult for poor families to escape poverty so long as they have a loved one in the system.

Shifting costs to families

“It’s not just the money transfer that’s the problem, it’s the system it enables to shift costs onto families,” says Lee Petro, an attorney who helped litigate for a national cap on some prison phone rates. Without companies like JPay, he says, “it would be much harder to take money from families and make families of inmates pay their own keep.”

In 12 years, JPay says it has grown to provide money transfers to more than 1.7 million offenders in 32 states, or nearly 70 percent of the inmates in U.S. prisons.

For the families of nearly 40 percent of those prisoners, JPay is the only way to send money to a loved one. Others can choose between JPay and a handful of smaller companies, most of them created by phone and commissary vendors to compete with the industry leader. Western Union also serves some prisons.

JPay handled nearly 7 million transactions in 2013, generating well over $50 million in revenue. It expects to transfer more than $1 billion this year. (The company declined to provide any financial details; those included in this article are culled from public records and interviews with current and former employees.)

Ryan Shapiro
JPay CEO Ryan Shapiro in his office north of Miami, Florida. Eleanor Bell—Center for Public Integrity

“We invented this business,” said Ryan Shapiro, 37, the company’s founder and CEO, in a phone interview in June. “Everyone else tries to imitate what we did, and they don’t do it as well.”

Shapiro says working with corrections includes extra costs for security and software integration. He says he charges only as much as he must to maintain a razor-thin profit margin.

But others provide similar services for less.

NIC Inc., a competitor that helps states set up their websites, charges a flat fee of $2.40 in Maine to send money to inmates. Until recently, Arkansas charged 5 percent to send money through the state’s own Web portal. Floridians pay a fee of 3.5 percent to handle traffic tickets online.

Despite its kudzu-like growth, JPay so far has avoided scrutiny by consumer regulators.

In response to questions for this story, however, the New York Department of Financial Services’ consumer division is reviewing the company’s practices, according to a person familiar with the matter. The person spoke on condition of anonymity because he is not allowed to discuss active investigations.

JPay’s rapid rise stems in part from the generous deal it offers many prison systems. They pay nothing to have JPay take over handling financial transfers. And for every payment it accepts in these states — prisoners typically receive about one per month — the company sends between 50 cents and $2.50 back to the prison operator. These profit-sharing arrangements, which vendors offer as deal-sweeteners in contract negotiations, are known in the industry as “commissions.”

JPay’s payments to Illinois last year came to about $4,000 a month, according to documents obtained under the state’s open records law.

Jails often deduct intake fees, medical co-pays or the cost of basic toiletries first, leaving the account with a negative balance. This prevents inmates from buying “optional” supplies like stationery or sturdier shoes until they have paid down the debt.

Such charges levied by jails for common items are not new. The practice began prior to the rise of JPay, mainly with phone companies and operators of prison stores. But by automating the process, prison bankers make it a lot easier.

$100 underwear

Negative account balances discourage cash-strapped people from helping relatives, says Linda Dolan, 58, a manager for a defense contractor in California. Last year, when her son was sentenced to 20 days in jail in St. Lucie County, Florida, for reckless driving, Linda wanted to buy him a second pair of underwear and socks. But the county’s intake fee and daily “rent” already had put the account about $70 in the red. Linda and her husband both were out of work and couldn’t afford to pay $100 for a pair of underwear.

“If relatives are putting money on somebody’s books while they’re an inmate, it’s to help them buy necessities,” Linda says. “I didn’t think it was right that the county was stealing the money.”

Capt. William Lawhorn of the St. Lucie County sheriff’s office said that inmates are charged a $25 initial booking fee, $3 a day for “subsistence” and medical co-pays, all of which can result in a negative balance. He said nobody is denied any type of needed service or care, and when inmates do have money, it’s used for candy and other junk food. Inmates in the county receive payments through Touchpay, a JPay competitor that often partners with foodservice giant Aramark.

Funding prisons out of the pockets of families and inmates has non-financial costs too, says Brian Nelson, who spent 28 years in an Illinois state prison for murder. Nelson says he has “become an asset to society” since he was released four years ago because he stayed in touch with family and priests even when he was in solitary confinement. When inmates can’t afford to maintain contact with the outside world, he says, they are less equipped to transition smoothly to civilian life.

The effect on poor families is especially harsh, Nelson says: “It’s a wife that has three children at home, and her husband is in jail, so now she has a choice: Do I send money to him so he can afford to stay in touch with the kids, or do I feed the kids?”

Inmates’ need for money is inescapable, Nelson says. Those in northern Illinois are not issued cold-weather clothes, he says, leaving them vulnerable to frostbite unless they can get money to pay for prison-approved long underwear and boots.

Razor thin margins

JPay founder Shapiro is eager to tell his company’s story and how he believes it helps families. It’s not just about faster payments. Once an inmate gains access to the money, JPay offers several ways to spend it, including pay-per-page e-messaging, music downloads and MP3 players. When inmates in some states are released, they receive their remaining money on JPay-branded payment cards that carry higher fees than those on most consumer payment cards.

Shapiro says that if his fees were any lower, his company would lose money. He declined to make the company’s financial details available and would not say how much he is paid.

Shapiro serves on the board of a foundation that advocates for inmates and carries full-page ads for JPay in its newsletters. The foundation received an $85,400 gift directly from JPay’s corporate treasury in 2009.

He lives on a tiny harbor island near the northern tip of Miami Beach in a home he bought for about a million dollars. Last year, through a company he controls called El Caballero LLC., Shapiro bought a custom powerboat, dubbed Sea Block, that retails for a half-million dollars.

Heading to the company’s headquarters one July morning, he stopped first for CrossFit, a military-style training regime that he enjoys because it brings out his competitive side, then for daily prayer.

Families who use JPay love the company, he says. He boasts of its well-trafficked Web forum and of the 174,000 “likes” on its Facebook page, where its marketers post cheery articles about incarceration. “The Jail Cats program at Gwinnett County Detention Center in Georgia is rescuing kittens and helping to rehabilitate incarcerated women,”one recent post read.

“We go out of our way to make sure that they feel comfortable — that, you know, you’re spending money with a company that cares about you,” Shapiro says.

If people don’t want to pay his fees, Shapiro says, they can always mail a money order, except in the “couple of states” that now charge fees for them.

Nearly 400,000 people are imprisoned in states where there is no free deposit option, a fact Shapiro was unaware of during a series of interviews this summer.

“When it’s up to us, it’s absolutely free,” he says.

Slow-moving money orders

For the first 14 years of Eddie’s sentence, Pat Taylor mailed money orders directly to the prison at no charge beyond the cost of the money order and a stamp. Then last year, she was instructed to make the money order out to JPay and send it to a Florida post office box. The company would credit it to Eddie’s account.

Under the new system, she says, it would take weeks for Eddie to see funds sent via money order. So Pat, like nearly everyone else she knows, gave in and began paying $6.95 to send the money from her debit card.

Across the country, delays and other obstacles make the “free option” inaccessible to many families, the Center found. More than a dozen families in five different states said that money orders have been credited much more slowly since JPay took over.

Shapiro says he is “absolutely shocked” by the complaints that money orders are delayed because he had never heard of such problems before. Most money orders are processed within two to three days, he said, unless the person sending money fails to fill out the form properly. He said Virginia is especially efficient and processes money orders within 24 to 48 hours.

“We are not slowing it down, there is no conspiracy,” he said.

He said JPay does “want people to convert from a money order customer to a digital customer, absolutely,” but only because electronic payments are more efficient. “We’re not trying to make an extra dollar everywhere we can,” Shapiro said.

Before JPay, Virginia prisons credited money orders to inmates’ accounts in roughly three days, families say. Today, money orders can take more than a month to reach an inmate’s account, Marvin Rodriguez-Barrera, an inmate at Virginia’s high-security Red Onion State Prison, wrote in a letter to prisoners’ rights advocates in February.

Faster to Guatemala

“I am from Central America, and it is cheaper for my family, and easier, to send money to Guatemala than for my family to send me money from this very state!” Rodriguez-Barrera wrote. “The old way of using money orders was cheaper, easier and in many instances faster.”

Those seeking to avoid the fees by sending a money order must print and fill out a JPay-provided form whose instructions are dwarfed by large print barking at them to “Put down your pen! Put away your car keys!” because “There’s a faster way to send money, go to JPay.com and sign up now!”

The aggressive marketing has worked. One former marketing director for the company lists as a key accomplishment on his LinkedIn profile that he “Converted 78 percent” of money order users to online users, boosting the company’s annual revenue by $985,000.

Shapiro said the information in the profile, including the former employee’s title, was inaccurate. He said he didn’t have data on how many money order users convert to electronic payments or how much revenue the company gains when they make the switch.

Inside JPay’s secure, fishbowl-like money order processing room, reams of envelopes sit in postal bins on the shelves. Signs around the room remind the handful of workers employed there which states allow them to deduct a fee and which offer the service for free.

In Pennsylvania, the first state where JPay accepted money orders by mail, executives were surprised to see the number of money orders plunge by two-thirds in the first two months, Chief Financial Officer Mark Silverman explained in a brief interview.

Shapiro said that Missouri used to process 30,000 money orders a month before JPay came in.

“With JPay, we drove that down to only 1,000 people sending money,” he says. “And that’s by choice.”

JPay’s marketing materials urge customers to choose the higher-cost option. During her twice-monthly visits to Bland, an isolated work camp nestled between rolling, green hills, Pat Taylor now sees JPay-branded fliers warning of the misery awaiting anyone who tries to use the “free option.”

On one side, a multi-ethnic lineup of models bury their faces in their hands and complain of what a “nightmare” it was to complete the money order, how it got lost or delayed.

“There’s a better way,” the flier promises on the reverse side, which depicts an attractive young woman seated with her laptop computer. For “Faster, Easier, Next-Day Delivery,” families can choose from a menu of high-fee options.

Tequila, cigars and lobbying

To impress state corrections officials and gain their business, JPay spends heavily on industry conventions attended by agency heads with contracting authority. During a 2012 convention of the American Correctional Association, the company threw what it called an “END OF THE WORLD PARTY” at a Denver wine bar that bills itself as “about you, and your inalienable right to the unbridled enjoyment of food and wine.”

The invitation, printed on a disposable beer coaster, promised “a bash, JPay-style: *fuerte* tequila, hand-rolled cigars, a live mariachi band.” Conventioneers could catch a JPay shuttle leaving from the hotel “ALL NIGHT LONG,” it said.

For years, JPay has sponsored an award for former state corrections directors presented by the Association of State Correctional Administrators, paying for the recipient’s trip and a Wexford crystal bowl inscribed with the honoree’s name.

JPay’s outreach extends to state legislatures as well, even though many of the company’s contracts forbid it from using fee revenue to lobby. The company has hired registered lobbyists in at least seven states. Shapiro says JPay’s lawyers approved the use of company funds for that purpose.

In Ohio, it tapped Thomas Needles, a former aide to President George H. W. Bush. Needles gives generously to Republican candidates and also lobbies for for-profit universities. In Maryland, JPay hired Bruce Bereano, one of the state’s best-paid lobbyists, who was disbarred after a 1994 conviction for overbilling his clients and using the money for campaign donations.

The company also sought to lobby Washington for access to the federal Bureau of Prisons’ 216,000 inmates — what Shapiro has called “the mother ship of all contracts,” which is now held by Bank of America.

It spent $20,000 in 2012 to hire Park Strategies, run by former U.S. Sen. Alfonse D’Amato of New York, in an effort to obtain the contract. That effort was not successful.

More inmates, smaller budgets

JPay was founded in 2002, just as the U.S. prison population neared the apex of a three-decade climb that more than quadrupled the number of inmates in state prisons. Shortly thereafter, as the economy went into recession, state budgets were squeezed and officials looked more aggressively for ways to cut spending on prisons.

Already, private vendors had stepped in with a solution: They would charge prisoners sky-high prices for phone services, snack foods, hygiene products and clothing, then return a large cut back to the prisons — often 40 percent or more.

Shapiro was the first entrepreneur to see how financial services might provide another stream of revenue. For a fee, he offered to deliver cash in ways that saved time and effort for corrections agencies, and often to give them a portion of the proceeds, just as the phone and commissary companies were doing.

“When we started, the states were very much saying to us, ‘There’s no need for procurement here because there’s no one else doing what you do,’ ” Shapiro said in a 2012 interview. Ten years later, he said, all of them were asking companies to submit bids for the work.

That doesn’t mean the door is open to competitors. Most states, including Virginia, now contract with JPay or its main competitor under a master agreement negotiated by Nevada in 2011 on behalf of a multi-state consortium. Participating states can simply sign on to the deal with one or both of the companies without the hassle of separately determining the best company for the job.

JPay is protected from other market forces, as well. When states offer its music players and tablet computers for sale to inmates, they often confiscate radios that people already own, according to inmates in Ohio. This leaves inmates dependent on JPay’s music downloads, which can cost 30 to 50 percent more than the same songs on iTunes, inmates say.

The profit-sharing arrangements are at the core of JPay’s origin story, Shapiro said in 2012. A couple of years out of college, he spent months driving around upstate New York, pitching JPay to “every sheriff, whether they had five inmates or 100 inmates” — without success.

Then someone in Passaic County, New Jersey, suggested that they offer the county 10 percent of their revenue, “so the jail would be less of a tax burden on the community.” The warden signed up on the spot.

Critics including Alex Friedmann, associate director of the Human Rights Defense Center, an inmates’ advocacy group, says the profit-sharing amounts to a legal kickback. “They charge exhorbitant fees then kick back a percentage of their revenue. … The company doesn’t need that for profit,” Friedmann said.

Shapiro says he prefers the term “commission” because “the word kickback has a negative connotation, and it seems like some person is making that money and pocketing it and buying a Chevrolet or something, when in fact it’s going to use for the benefit of inmates — basketball hoops, volleyball, whatever.”

Most states put their share of the cash in an “Inmate Welfare Fund” that is supposed to be used for inmate benefits beyond what is guaranteed to them by law. As incarceration rates climbed, however, the definition of “inmate benefit” drifted, says Justin Jones, who was director of the Oklahoma Department of Corrections until last year.

“The Legislature allowed us to broaden the definition of inmate welfare and it got to the point, almost anything they would fund through appropriations could now be paid for as inmate welfare,” he says. “It ended up where we started using that money if an inmate went out to medical on an emergency and medical was end-of-year short,” he says. “We bought air conditioners, ice machines, X-ray machines.”

Jones was not a fan of the system. If legislatures want to impose longer prison sentences or “if they create new crimes, then the legislature should appropriate dollars for that,” he says. “I should not have to go in and redefine and stretch the definition of inmate welfare accounts.”

Double dipping

Taken together, JPay and other prison vendors create a system in which families are paying to send the money, and inmates are paying again to spend it, says Keith Miller, who is serving 21 ½ years at Bland for a series of drug-related, violent crimes committed in his early 20s. The earliest he may be released is 2021, when his mother will be 87 years old.

“The fact that [my mother] has to pay the fees to send the money and then the fact that [prison agencies] make a certain cut off it seems to me that [the prisons are] double-dipping into the money they’re sending,” he said in an interview at the prison. “It really doesn’t make sense to me that this should be allowed.”

Shapiro is skeptical that JPay’s fees make much of a difference for inmates’ families. He says companies that provide other services to inmates, such as phones and commissary, are the real problem.

“Compared to the commissary or phone revenue, we’re just a drop in the bucket,” he says.

That may be changing.

Last year, the Federal Communications Commission dusted off a 12-year-old petition filed by inmates’ families who argued that prison phone rates were unfairly high, preventing them from maintaining contact with loved ones. The commission capped rates for many calls under its authority to ensure that pay-phone rates are just, fair and reasonable.

Mignon Clyburn, who was acting chairwoman of the FCC when it passed the rate cap and now serves as one of three commissioners, says the action was necessary because people are “making unspeakable sacrifices to stay in touch with their loved ones.”

Vincent Townsend, president of Pay-Tel Communications, a major provider of phones for inmates, said his industry “abused the public.”

‘Ethical, right, moral’

Other prison vendors “better pay attention to what’s ethical, right, moral,” he said. “Because if you don’t then some regulator’s going to step in, and you’re going to have to deal with it.”

There is a crucial difference: The telephone industry is closely regulated by the FCC, which has explicit authority to set rates for pay-phone calls. Financial and consumer protection regulators have less power over pricing.

The Consumer Financial Protection Bureau can sue companies for offering unfair, deceptive or abusive financial services. The bureau declined more than a dozen requests to discuss specific issues related to prison financial services.

The Federal Trade Commission, which has consumer-protection authority and the power to ensure that markets are competitive, declined to comment “on specific companies or conduct.”

Regulators in seven states have levied fines totaling $408,500 against JPay for operating without a license. The actions were not designed to disrupt its business, according to the Conference of State Bank Supervisors, a trade group that represents these regulators in Washington.

“State banking regulators are concerned with ensuring that businesses operating in their states are properly licensed and with enforcing applicable laws (including consumer protection laws),” the group’s spokeswoman said in an emailed statement.

‘Invent a better way’

Shapiro says he understands the challenges faced by poor families of inmates since JPay’s startup days, when he would spend “hours on the phone with a grandmother, talking about her day at Wal-Mart.”

He says he feels trapped by the structure of the industry he has come to dominate. He wishes the fees were lower, that states didn’t force him to charge more and give them a share and that he could “invent a better way” than asking people’s families to help pay for their imprisonment.

Yet Shapiro says he is satisfied to compete within what he admits is a broken system, even if the system may be punishing some innocent family members.

For many families, JPay has become that system. When Jewel Miller, 80, phoned JPay’s call center last month to ask why her payments are delayed, and why she must submit the same form every time she sends a money order to Keith, the operator hung up on her.

In a series of interviews it became clear that Shapiro was unaware of some of the fees related to his business. He said he did not know, for example, that Florida now charges its own fee for money order deposits after JPay processes the payments.

These fees are spelled out in JPay’s contracts with states, which Shapiro signed. Florida’s says it will charge a 50 cent “Money Order by Mail” fee.

As of July, Shapiro was unaware of JPay’s own $1.95 fee to deposit money orders in Indiana, declaring, “If someone sends $100 with a money order to an Indiana inmate, that inmate gets $100. … I am positive.”

Two days later, he called back to say, “We’re working with the states right now to get some of those fees taken off.”

So far, the fees remain in place.

Eleanor Bell contributed to this story.

Watch the accompanying web documentary “Time is Money” here

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