Kamis, 25 September 2014

DealBook: Britain Seeks to Widen Law Against Rigging of Financial Benchmarks

Photo George Osborne, center, Britain's chancellor of the exchequer, announced a review of financial markets in June.Credit Paul Hackett/Reuters Related Links

The British government announced on Thursday it would increase its oversight of a broad array of financial benchmarks in the foreign exchange, fixed income and commodity markets, including making it a criminal offense for traders to manipulate them.

After it first consults with the industry, the government plans to extend new legislation that was put in place in 2013 to regulate the London interbank offered rate, or Libor, to new benchmarks, including the WM/Reuters 4 p.m London fix, which is the dominant global foreign exchange benchmark.

The Libor legislation was put in place after bank employees were caught manipulating that benchmark. The government's new list of benchmarks reflect regulators' growing interest in potential abuses in fixed income, currencies and commodities markets.

The Financial Conduct Authority and the Serious Fraud Office in Britain, as well as regulators and prosecutors in the United States and elsewhere,  are investigating major banks including Deutsche Bank, UBS and Barclays over potential manipulation in a wide array of benchmarks in the foreign exchange market, including colluding to fix prices and front-running customers.

Credit Aaron Byrd/The New York Times

The government will seek input from the banks until Oct. 23.  The list of benchmarks also includes the sterling overnight  index average and the repurchase overnight index average, which serve as reference rates for overnight index swaps, the ISDA fix, which is the principal global benchmark for swap rates and spreads for interest rate swap transactions, the London gold fixing and the LMBA silver price, which determine the price of gold and silver in the London market and the ICE Brent futures contract.

"The integrity of the City matters to the economy of Britain," said Andrea Leadsom, economic secretary to the Treasury, referring to London's financial center. "Ensuring that the key rates that underpin financial markets are robust, and that anyone who seeks to manipulate them is subject to the full force of the law is vital."

"That's why the government is determined to deal with abuses, tackle the unacceptable behavior of the few and ensure that markets are fair for the many who depend on them," she added.

At a speech in June, the chancellor of the Exchequer, George Osborne, announced the establishment of a joint review by the Treasury, the Bank of England, and the Financial Conduct Authority to look at the way financial markets – both regulated and unregulated – operate, including fixed income, currency and commodity markets, and associated derivatives and benchmarks.

At the time, he said he would propose a list of benchmarks to include in the Libor legislation. At the time, the speech was overshadowed by Mark Carney, the governor of the Bank of England, who during the same event announced that interest rates would rise much faster than the markets expected.

The announcement on Thursday was an interim recommendation by the review committee. The government says it intends to have the new regime for the designated benchmarks in place by the end of the year.

The final report of the committee is due in June 2015.

In 2013, Britain passed legislation to cover the manipulation of Libor, one of the main rates used to determine the borrowing costs for trillions of dollars in loans, including many adjustable-rate mortgages in the United States.

Some of the world's largest banks, including Barclays, Royal Bank of Scotland and UBS, have agreed to pay more than $6 billion to settle allegations of manipulating the Libor benchmark.

Regulators are now turning their attention to currency trading. Earlier this year, Martin Wheatley, head of the Financial Conduct Authority, said that allegations that traders colluded to rig prices in the foreign exchange market "are every bit as bad as they have been with Libor."

As was the case in the Libor investigation, he said, the authority is looking at allegations of collusion between individuals and firms using chat rooms and phones to rig prices. Regulators are also investigating whether sales traders and traders engaged in front-running — or trading ahead of their clients' trades to benefit themselves —  said one person briefed on the investigation.

Regulator Compares Currency Investigation to Libor Case Regulator Compares Currency Investigation to Libor Case

Martin Wheatley, chief executive of the Financial Conduct Authority, said at a parliamentary hearing on Tuesday that he was surprised by the breadth of the investigation into accusations of manipulation of the foreign exchange market.

Correction: September 25, 2014
An earlier version of this post misstated the total amount that the world's largest banks have agreed to pay to settle allegations of manipulating the Libor benchmark. The amount is more than $6 billion, not more than $6.
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Air France-KLM Gives 1n to Striking Pilots’ Union, Scaling Back Transavia Plan

By DAVID JOLLY September 25, 2014

PARIS — Air France-KLM has bowed to a key demand of its striking pilots' union, raising prospects that an 11-day walkout that has grounded more than 6,000 flights and inconvenienced hundreds of thousands of travelers might end as early as Thursday.

Management said late Wednesday that it had canceled the proposed Europe-wide expansion of a low-cost subsidiary, Transavia, and called for striking pilots to return to work immediately. Instead, Air France-KLM said it would focus any expansion of Transavia on France.

The pilots' strike was touched off by Air France-KLM's announcement of a plan to invest 1 billion euros, or $1.28 billion, to make the no-frills Transavia unit better able to compete in Europe's discount-travel market. Members of the French National Union of Airline Pilots said the broader Transavia expansion would move too many jobs out of France and drive down pilots' pay.

The union, which represents about 71 percent of Air France pilots, did not immediately respond to Wednesday night's offer to scale back the Transavia expansion. The proposal "is being studied currently" by union leaders, Agence France-Presse quoted Guillaume Schmid, a union spokesman, as saying on Thursday morning. "In the meantime, the strike continues for the moment," Mr. Schmid said, according to the news agency, and "both sides want to reach a deal as soon as possible."

Negotiations were set to continue on Thursday afternoon, Cédric Leurquin, an Air France spokesman, said. The airline's shares rallied 2.5 percent in Paris trading through midday, on hopes for a successful outcome.

Mr. Leurquin insisted that management had not caved in, noting that there had been no budging on plans to expand Transavia France. As such, there could still be tense negotiations if the pilots' union holds out for a guarantee that Transavia France pilots will be hired on the same terms as Air France pilots.

The decision to cancel the broader Transavia Europe plan was "a gesture," Mr. Leurquin added. "We said we wanted to remove a fear that existed" for the pilots.

The tone from the French government, which owns 16 percent of the airline, hardened in recent days as the strike dragged on, clouding the image of the country as a competitive place to do business and causing chaos in travel schedules. The strike is also costing Air France-KLM about €20 million a day, setting back the company's effort to return to profitability.

"This strike must end now," Stéphane Le Foll, a spokesman for the French government, told Radio Classique. "We're stuck here on a project that, strategically, is important for the company. We have to find the ways and means for Air France to extend its activity in low-cost flights."

In a statement on Wednesday, Alexandre de Juniac, Air France-KLM's chairman and chief executive, and Frédéric Gagey, who holds the same roles at Air France, said: "Our Transavia project is a 100 percent pro-France project. It is about developing Transavia to encourage growth in France and quickly create more than 1,000 jobs in France (including 250 pilot jobs)."

Having withdrawn the Transavia Europe project, they added, "There is now no reason to strike because there are no longer any concerns about relocation. We therefore call on the striking pilots to return to work immediately."

Whether management has merely blinked or substantially backed down, the new offer came after much confusion on Wednesday. Early in the day, the French transportation minister, Alain Vidalies, said that the Transavia Europe expansion had been shelved. Air France-KLM then issued a denial — before reversing course late in the evening and confirming that the broader expansion had in fact been canceled.

Manuel Valls, the French prime minister, helped to break the logjam on Wednesday, the newspaper Les Échos reported, quoting Mr. Valls as saying: "The creation of Transavia in France has to go forward. If Transavia Europe has to be put on hold or abandoned, that needs to be decided quickly, in the next few hours."

Even if the strike were to end on Thursday, travelers could still be affected for days, as pilots, flight crews and planes are out of position around the world.


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DealBook: With China Set to 0pen Stock Trading, 1nvestors Lay Groundwork

Photo The building housing the Hong Kong Stock Exchange.Credit Philippe Lopez/Agence France-Presse — Getty Images

O'Connor, the $5.6 billion hedge fund owned by UBS, has been expanding its presence in Asia. It has hired traders from UBS's proprietary trading desk to work in its Hong Kong and Singapore offices. In August, it hired John Yu, a former analyst at SAC Capital Advisors

It is not alone. Bankers, brokerage firms and hedge funds have all been quietly expanding their Asian operations to take advantage of one event: the biggest opening into China in years.

China plans to connect the Shanghai stock exchange to its counterpart in Hong Kong over the next month as part of an initiative announced by Premier Li Keqiang this year to open China's markets to foreign investors who have been largely shut out.

The move will allow foreign investors to trade the shares of companies listed on the Shanghai stock exchange directly for the first time, and Chinese investors to buy shares in companies listed in Hong Kong.

The potential rewards of an open market between the mainland and Hong Kong are enormous for investors. Currently, the only way for foreign investors to trade Chinese stocks is indirectly through a limited quota program that allows a trickle of foreign money into the country.

"This is the single most important development in China's intention to internationalize this market," one senior Western banker in Asia said of the planned reform, speaking on the condition he not be named because he was not authorized to speak publicly on the matter.

The program, called Shanghai-Hong Kong Stock Connect, will create the second-largest equity market in the world in terms of the market value of the combined listed companies, said Dawn Fitzpatrick, the chief investment officer of O'Connor. The largest remains the New York Stock Exchange.

"It is also going to create a much more efficient way for the global marketplace to value many Chinese companies, and this attribute alone makes the market more attractive," she added.

The formal starting date for the program has not been announced, but officials have been aiming for sometime next month. Employees at brokerage firms across Hong Kong have been working extra weekend shifts since August, participating in mock trading sessions to test their readiness for the new program. On one recent weekend, 97 brokerage firms accounting for about 80 percent of the trading turnover in the Hong Kong market simulated a failure of their backup data systems for the Shanghai-Hong Kong two-way trade.

O'Connor, for its part, is among a small group of hedge funds that have already participated in the quota program, named the qualified foreign institutional investors program. They buy and sell shares denominated in both renminbi and Hong Kong dollars.

The wide-open connection will allow hedge funds like O'Connor to expand their business between the two exchanges and trade directly.

Still, challenges remain, and some significant questions have not been answered.

The program is part of a broader reform package announced by President Xi Jinping last year. Critics point to other reform initiatives, like the building of new and planned free trade zones, that have been slow to take off.

Last September, regulators in Shanghai agreed to let a small group of United States and British hedge funds raise $50 million each from Chinese investors as part of a pilot program. One of these firms has complained that progress has been slow and weighed down by bureaucratic hurdles.

Linking the Hong Kong and Shanghai exchanges is not a new idea. In 2007, Hong Kong officials announced a similar plan to allow Chinese investors to gain access Hong Kong's stock market. That plan never took off.

And while foreign and Chinese investors will have the chance to invest in hundreds of companies that were previously off limits, they will still be limited by quotas. The combined two-way trading volume will be capped at 23.5 billion renminbi ($3.8 billion), about 20 percent of the combined average daily trading volume on both markets. Individual mainland Chinese investors will need at least 500,000 renminbi in their brokerage account to buy Hong Kong shares, a threshold that excludes most retail investors.

Foreign buyers of Shanghai stocks will not be able to buy shares and sell them on the same day. It is still unclear whether they will be allowed to buy shares using margin financing or to engage in short-selling. And, in another hurdle, all trades will be settled in renminbi, introducing additional risk for foreign investors.

Photo The Hong Kong Stock Exchange. Chinese investors will soon be able to buy shares listed in Hong Kong.Credit Bobby Yip/Reuters

There are also unresolved issues over taxes. Foreign investors in mainland China's stock markets are technically liable for paying capital gains taxes, but China has historically not taxed such investments under the existing quota scheme. It remains an open question whether that practice will change.

Given these and other uncertainties, companies like MSCI — which compiles indexes that are tracked by funds with trillions of dollars invested in stocks around the world — have so far declined to include mainland Chinese shares in their indexes.

That could change as soon as next year, when MSCI is next scheduled to review Chinese shares.

"Were China's domestic A-shares to be included in the MSCI benchmarks, it would be a game-changer, attracting billions of dollars of capital," analysts at HSBC in Hong Kong wrote this month in a research report.

Regardless, some investors are pushing ahead.

Before he was hired by O'Connor, Mr. Yu was a China analyst at SAC, which since April has become a $10 billion family office called Point72 Asset Management. He will be based with O'Connor's Asia team in Hong Kong. BlueCrest Capital Management, a hedge fund based in London, also recently hired several SAC traders.

Charles Li, the chief executive of Hong Kong Exchanges and Clearing, the stock market operator, has been forthright about the limitations of the trading program.

"It's not perfect," Mr. Li wrote in a post on his official blog last month. "While we have managed to find a solution to most of the challenges of aligning two very different markets, some of the differences were so significant that our solutions will inevitably constrain the market."

Mr. Li added that, despite these constraints, "I believe that it is important to move forward rather than let such an important opportunity pass us by."

Correction: September 25, 2014
An earlier version of this article misstated the name of the program that will connect the two exchanges. It is called Shanghai-Hong Kong Stock Connect, not Shanghai-Hong Kong Connect.

A version of this article appears in print on 09/25/2014, on page B1 of the NewYork edition with the headline: With China Set to Open Stock Trading, Investors Lay Groundwork .


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Rabu, 24 September 2014

Driven 1nto Debt: Miss a Payment? Good Luck Moving That Car

Credit John Gurzinski for The New York Times

The thermometer showed a 103.5-degree fever, and her 10-year-old's asthma was flaring up. Mary Bolender, who lives in Las Vegas, needed to get her daughter to an emergency room, but her 2005 Chrysler van would not start.

The cause was not a mechanical problem — it was her lender.

Ms. Bolender was three days behind on her monthly car payment. Her lender, C.A.G. Acceptance of Mesa, Ariz., remotely activated a device in her car's dashboard that prevented her car from starting. Before she could get back on the road, she had to pay more than $389, money she did not have that morning in March.

"I felt absolutely helpless," said Ms. Bolender, a single mother who stopped working to care for her daughter. It was not the only time this happened: Her car was shut down that March, once in April and again in June.

This new technology is bringing auto loans — and Wall Street's version of Big Brother — into the lives of people with credit scores battered by the financial downturn.

Auto loans to borrowers considered subprime, those with credit scores at or below 640, have spiked in the last five years. The jump has been driven in large part by the demand among investors for securities backed by the loans, which offer high returns at a time of low interest rates. Roughly 25 percent of all new auto loans made last year were subprime, and the volume of subprime auto loans reached more than $145 billion in the first three months of this year.

But before they can drive off the lot, many subprime borrowers like Ms. Bolender must have their car outfitted with a so-called starter interrupt device, which allows lenders to remotely disable the ignition. Using the GPS technology on the devices, the lenders can also track the cars' location and movements.

The devices, which have been installed in about two million vehicles, are helping feed the subprime boom by enabling more high-risk borrowers to get loans. But there is a big catch. By simply clicking a mouse or tapping a smartphone, lenders retain the ultimate control. Borrowers must stay current with their payments, or lose access to their vehicle.

Photo Credit

"I have disabled a car while I was shopping at Walmart," said Lionel M. Vead Jr., the head of collections at First Castle Federal Credit Union in Covington, La. Roughly 30 percent of customers with an auto loan at the credit union have starter interrupt devices.

Now used in about one-quarter of subprime auto loans nationwide, the devices are reshaping the dynamics of auto lending by making timely payments as vital to driving a car as gasoline.

Seizing on such technological advances, lenders are reaching deeper and deeper into the ranks of Americans on the financial margins, with interest rates on some of the loans exceeding 29 percent. Concerns raised by regulators and some rating firms about loose lending standards have disturbing echoes of the subprime-mortgage crisis.

As the ignition devices proliferate, so have complaints from troubled borrowers, many of whom are finding that credit comes at a steep price to their privacy and, at times, their dignity, according to interviews with state and federal regulators, borrowers and consumer lawyers.

Some borrowers say their cars were disabled when they were only a few days behind on their payments, leaving them stranded in dangerous neighborhoods. Others said their cars were shut down while idling at stoplights. Some described how they could not take their children to school or to doctor's appointments. One woman in Nevada said her car was shut down while she was driving on the freeway.

Beyond the ability to disable a vehicle, the devices have tracking capabilities that allow lenders and others to know the movements of borrowers, a major concern for privacy advocates. And the warnings the devices emit — beeps that become more persistent as the due date for the loan payment approaches — are seen by some borrowers as more degrading than helpful.

"No middle-class person would ever be hounded for being a day late," said Robert Swearingen, a lawyer with Legal Services of Eastern Missouri, in St. Louis. "But for poor people, there is a debt collector right there in the car with them."

Lenders and manufacturers of the technology say borrowers consent to having these devices installed in their cars. And without them, they say, millions of Americans might not qualify for a car loan at all.

A Virtual Repo Man

Photo "I have disabled a car while I was shopping at Walmart," said Lionel M. Vead Jr., the head of collections at First Castle Credit Union in Covington, La., who said that starter interrupt devices and GPS tracking technology had made his job easier.Credit Cheryl Gerber for The New York Times

From his office outside New Orleans, Mr. Vead can monitor the movements of about 880 subprime borrowers on a computerized map that shows the location of their cars with a red marker. Mr. Vead can spot drivers who have fallen behind on their payments and remotely disable their vehicles on his computer or mobile phone.

The devices are reshaping how people like Mr. Vead collect on debts. He can quickly locate the collateral without relying on a repo man to hunt down delinquent borrowers.

Gone are the days when Mr. Vead, a debt collector for nearly 20 years, had to hire someone to scour neighborhoods for cars belonging to delinquent borrowers. Sometimes locating one could take years. Now, within minutes of a car's ignition being disabled, Mr. Vead said, the borrower calls him offering to pay.

"It gets their attention," he said.

Mr. Vead, who has a coffee cup that reads "The GPS Man," has been encouraging other credit unions to use the technology. And the devices — one version was first used to help pet owners keep track of their animals — are catching on with a range of subprime auto lenders, including companies backed by private equity firms and credit unions.

Photo Using his computer or cellphone, Mr. Vead can monitor the movements of about 880 subprime borrowers, and if they are late in making a payment, he can disable their vehicles.Credit Cheryl Gerber for The New York Times

Mr. Vead says that first, he tries reaching a delinquent borrower on the phone or in person. Then, only after at least 30 days of missed payments, he typically shuts down cars when they are parked at the borrower's house or workplace. If there is an emergency, he says, he will turn a car back on.

None of the borrowers or consumer lawyers interviewed by The New York Times raised concerns about the way Mr. Vead's credit union uses the devices. But other lenders, they said, were not as considerate, marooning drivers in far-flung places and often giving no advance notice of a shut-off. Lenders say that they exercise caution when disabling vehicles and that the devices enable them to extend more credit.

Without the use of such devices, said John Pena, general manager of C.A.G. Acceptance, "we would be unable to extend loans because of the high-risk nature of the loans."

The growth in the subprime market has been good for the devices' manufacturers. At Lender Systems of Temecula, Calif., which sells a range of starter interrupt devices, revenue has more than doubled so far this year, buoyed by an influx of new credit union customers, said David Sailors, the company's executive vice president.

Mr. Sailors noted that GPS tracking on his company's devices could be turned on only when borrowers were in default — a policy, he said, that has cost it business.

The devices, manufacturers say, are selling well because they are proving effective in coaxing payments from even the most troubled borrowers.

A leading device maker, PassTime of Littleton, Colo., says its technology has reduced late payments to roughly 7 percent from nearly 29 percent. Spireon, which offers a GPS device called the Talon, has a tool on its website where lenders can calculate their return on capital.

Fears of Surveillance

While the devices make life easier for lenders, their ability to track drivers' movements has struck a nerve with a number of borrowers and some government authorities, who say they are a particularly troubling example of personal-data gathering and surveillance.

At its extreme, consumer lawyers say, such surveillance can compromise borrowers' safety. In Austin, Tex., a large subprime lender used a device to track down and repossess the car of a woman who had fled to a shelter to escape her abusive husband, said her lawyer, Amy Clark Kleinpeter.

The move to the shelter violated a clause in her auto loan contract that restricted her from driving outside a four-county radius, and that prompted the lender to send a tow truck to take back the vehicle. If the lender could so easily locate the client, Ms. Kleinpeter said, what was stopping her husband?

"She was terrified her husband would be able to find out where she was from the tow truck company," said Ms. Kleinpeter, a consumer lawyer in Austin, who said a growing number of her clients had the devices installed in their cars.

Lenders and manufacturers emphasize that they have strict guidelines in place to protect drivers' information. The GPS devices, they say, are predominantly intended to help lenders and car dealerships locate a car if they need to repossess it, not to put borrowers under surveillance.

Spireon says it can help lenders identify signs of trouble by analyzing data on a borrower's behavior. Lenders using Spireon's software can create "geo-fences" that alert them if borrowers are no longer traveling to their regular place of employment — a development that could affect a person's ability to repay the loan.

A Spireon spokeswoman said the company takes privacy seriously and works to ensure that it complies with all state regulations.

Corinne Kirkendall, vice president for compliance and public relations for PassTime, which has sold 1.5 million devices worldwide, says the company also calls lenders "if we see an excessive use" of the tracking device.

Even though the device made her squeamish, Michelle Fahy of Jacksonville, Fla., agreed to have one installed in her 2001 Dodge Ram because she needed the pickup truck for her job delivering pizza.

Shortly after picking up her four children from school one afternoon in January, Ms. Fahy, 42, said she pulled into a gas station to fill up. But when she tried to restart the truck, she was not able to do so.

Then she looked at her cellphone and noticed a string of missed calls from her lender. She called back and asked, "Did you just shut down my truck?" and the response was "Yes, I did."

To get her truck restarted, Ms. Fahy had to agree to pay the $255.99 she owed. As she pleaded for more time, her children grew confused and worried. "They were in panic mode," she said. Finally, she said she would pay, and within minutes she was able to start her engine.

Borrowers are typically provided with codes that are supposed to restart the vehicle for 24 hours in case of an emergency. But some drivers say the codes fail. Others say they are given only one code a month, even though their cars are shut down more often.

Some drivers take matters into their own hands. Homemade videos on the Internet teach borrowers how to disable their devices, and Spireon has started selling lenders a fake GPS device called the Decoy, which is meant to trick borrowers into thinking they have removed the actual tracking system, which is installed along with the Decoy.

Oscar Fabela Jr., who said his 2007 Dodge Magnum was routinely shut down even when he was current on his $362 monthly car payment, discovered a way to circumvent the system.

That trick came in handy when he returned from seeing a movie with a date, only to find his car would not start and the payment reminder was screaming like a burglar alarm.

"It sounded like I was breaking into my own car," said Mr. Fabela, 26, who works at a phone company in San Antonio.

While his date turned the ignition switch, Mr. Fabela used a screwdriver to rig the starter, allowing him to bypass the starter interruption device.

Mr. Fabela's car eventually started, but it was their only date.

"It didn't end well," he said.

Government Scrutiny

Photo "I felt like even though I made my payments and was never late under my contract, these people could do whatever they wanted," said T. Candice Smith, who testified before the Nevada Legislature that her car, which had a starter interrupt device installed, was shut down while she was driving on a Las Vegas freeway, nearly causing her to crash.Credit John Gurzinski for The New York Times

Across the country, state and federal authorities are grappling with how to regulate the new technology.

Consumer lawyers, including dozens whose clients' cars have been shut down, argue that the devices amount to "electronic repossession" and their use should be governed by state laws, which outline how much time borrowers have before their cars can be seized.

State laws governing repossession typically prevent lenders from seizing cars until the borrowers are in default, which often means that they have not made their payments for at least 30 days.

The devices, lawyers for borrowers argue, violate those laws because they may effectively repossess the car only days after a missed payment. Payment records show that Ms. Bolender, the Las Vegas mother with the sick daughter, was not in default in any of the four instances her ignition was disabled this year.

PassTime and the other manufacturers say they ensure that their devices comply with state laws. C.A.G. declined to comment on Ms. Bolender's experiences.

State regulators are also examining whether a defective device could endanger the borrowers or other drivers on the road, according to people with knowledge of the matter who spoke on the condition of anonymity.

Last year, Nevada's Legislature heard testimony from T. Candice Smith, 31, who said she thought she was going to die when her car suddenly shut down, sending her careening across a three-lane Las Vegas highway.

"It was horrifying," she recalled.

Ms. Smith said that her lender, C.A.G. Acceptance, had remotely activated her ignition interruption device.

"It's a safety hazard for the driver and for all others on the road," said her lawyer, Sophia A. Medina, with the Legal Aid Center of Southern Nevada.

Mr. Pena of C.A.G. Acceptance said, "It is impossible to cause a vehicle to shut off while it is operating," He added, "We take extra precautions to try and work with and be professional with our customers." While PassTime, the device's maker, declined to comment on Ms. Smith's case, the company emphasized that its products were designed to prevent a car from starting, not to shut it down while it was in operation.

"PassTime has no recognition of our devices shutting off a customer while driving," Ms. Kirkendall of PassTime said.

In her testimony, Ms. Smith, who reached a confidential settlement with C.A.G., said the device made her feel helpless.

"I felt like even though I made my payments and was never late under my contract, these people could do whatever they wanted," she testified, "and there was nothing I could do to stop them."

Articles in this series are examining the boom in subprime auto loans.


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DealBook: Miss a Payment? Good Luck Moving That Car

Credit John Gurzinski for The New York Times

The thermometer showed a 103.5-degree fever, and her 10-year-old's asthma was flaring up. Mary Bolender, who lives in Las Vegas, needed to get her daughter to an emergency room, but her 2005 Chrysler van would not start.

The cause was not a mechanical problem — it was her lender.

Ms. Bolender was three days behind on her monthly car payment. Her lender, C.A.G. Acceptance of Mesa, Ariz., remotely activated a device in her car's dashboard that prevented her car from starting. Before she could get back on the road, she had to pay more than $389, money she did not have that morning in March.

"I felt absolutely helpless," said Ms. Bolender, a single mother who stopped working to care for her daughter. It was not the only time this happened: Her car was shut down that March, once in April and again in June.

This new technology is bringing auto loans — and Wall Street's version of Big Brother — into the lives of people with credit scores battered by the financial downturn.

Auto loans to borrowers considered subprime, those with credit scores at or below 640, have spiked in the last five years. The jump has been driven in large part by the demand among investors for securities backed by the loans, which offer high returns at a time of low interest rates. Roughly 25 percent of all new auto loans made last year were subprime, and the volume of subprime auto loans reached more than $145 billion in the first three months of this year.

But before they can drive off the lot, many subprime borrowers like Ms. Bolender must have their car outfitted with a so-called starter interrupt device, which allows lenders to remotely disable the ignition. Using the GPS technology on the devices, the lenders can also track the cars' location and movements.

The devices, which have been installed in about two million vehicles, are helping feed the subprime boom by enabling more high-risk borrowers to get loans. But there is a big catch. By simply clicking a mouse or tapping a smartphone, lenders retain the ultimate control. Borrowers must stay current with their payments, or lose access to their vehicle.

"I have disabled a car while I was shopping at Walmart," said Lionel M. Vead Jr., the head of collections at First Castle Federal Credit Union in Covington, La. Roughly 30 percent of customers with an auto loan at the credit union have starter interrupt devices.

Now used in about one-quarter of subprime auto loans nationwide, the devices are reshaping the dynamics of auto lending by making timely payments as vital to driving a car as gasoline.

Seizing on such technological advances, lenders are reaching deeper and deeper into the ranks of Americans on the financial margins, with interest rates on some of the loans exceeding 29 percent. Concerns raised by regulators and some rating firms about loose lending standards have disturbing echoes of the subprime-mortgage crisis.

As the ignition devices proliferate, so have complaints from troubled borrowers, many of whom are finding that credit comes at a steep price to their privacy and, at times, their dignity, according to interviews with state and federal regulators, borrowers and consumer lawyers.

Some borrowers say their cars were disabled when they were only a few days behind on their payments, leaving them stranded in dangerous neighborhoods. Others said their cars were shut down while idling at stoplights. Some described how they could not take their children to school or to doctor's appointments. One woman in Nevada said her car was shut down while she was driving on the freeway.

Beyond the ability to disable a vehicle, the devices have tracking capabilities that allow lenders and others to know the movements of borrowers, a major concern for privacy advocates. And the warnings the devices emit — beeps that become more persistent as the due date for the loan payment approaches — are seen by some borrowers as more degrading than helpful.

"No middle-class person would ever be hounded for being a day late," said Robert Swearingen, a lawyer with Legal Services of Eastern Missouri, in St. Louis. "But for poor people, there is a debt collector right there in the car with them."

Lenders and manufacturers of the technology say borrowers consent to having these devices installed in their cars. And without them, they say, millions of Americans might not qualify for a car loan at all.

Photo Credit

A Virtual Repo Man

From his office outside New Orleans, Mr. Vead can monitor the movements of about 880 subprime borrowers on a computerized map that shows the location of their cars with a red marker. Mr. Vead can spot drivers who have fallen behind on their payments and remotely disable their vehicles on his computer or mobile phone.

The devices are reshaping how people like Mr. Vead collect on debts. He can quickly locate the collateral without relying on a repo man to hunt down delinquent borrowers.

Gone are the days when Mr. Vead, a debt collector for nearly 20 years, had to hire someone to scour neighborhoods for cars belonging to delinquent borrowers. Sometimes locating one could take years. Now, within minutes of a car's ignition being disabled, Mr. Vead said, the borrower calls him offering to pay.

"It gets their attention," he said.

Mr. Vead, who has a coffee cup that reads "The GPS Man," has been encouraging other credit unions to use the technology. And the devices — one version was first used to help pet owners keep track of their animals — are catching on with a range of subprime auto lenders, including companies backed by private equity firms and credit unions.

Mr. Vead says that first, he tries reaching a delinquent borrower on the phone or in person. Then, only after at least 30 days of missed payments, he typically shuts down cars when they are parked at the borrower's house or workplace. If there is an emergency, he says, he will turn a car back on.

None of the borrowers or consumer lawyers interviewed by The New York Times raised concerns about the way Mr. Vead's credit union uses the devices. But other lenders, they said, were not as considerate, marooning drivers in far-flung places and often giving no advance notice of a shut-off. Lenders say that they exercise caution when disabling vehicles and that the devices enable them to extend more credit.

Without the use of such devices, said John Pena, general manager of C.A.G. Acceptance, "we would be unable to extend loans because of the high-risk nature of the loans."

The growth in the subprime market has been good for the devices' manufacturers. At Lender Systems of Temecula, Calif., which sells a range of starter interrupt devices, revenue has more than doubled so far this year, buoyed by an influx of new credit union customers, said David Sailors, the company's executive vice president.

Mr. Sailors noted that GPS tracking on his company's devices could be turned on only when borrowers were in default — a policy, he said, that has cost it business.

The devices, manufacturers say, are selling well because they are proving effective in coaxing payments from even the most troubled borrowers.

A leading device maker, PassTime of Littleton, Colo., says its technology has reduced late payments to roughly 7 percent from nearly 29 percent. Spireon, which offers a GPS device called the Talon, has a tool on its website where lenders can calculate their return on capital.

Fears of Surveillance

While the devices make life easier for lenders, their ability to track drivers' movements has struck a nerve with a number of borrowers and some government authorities, who say they are a particularly troubling example of personal-data gathering and surveillance.

At its extreme, consumer lawyers say, such surveillance can compromise borrowers' safety. In Austin, Tex., a large subprime lender used a device to track down and repossess the car of a woman who had fled to a shelter to escape her abusive husband, said her lawyer, Amy Clark Kleinpeter.

The move to the shelter violated a clause in her auto loan contract that restricted her from driving outside a four-county radius, and that prompted the lender to send a tow truck to take back the vehicle. If the lender could so easily locate the client, Ms. Kleinpeter said, what was stopping her husband?

"She was terrified her husband would be able to find out where she was from the tow truck company," said Ms. Kleinpeter, a consumer lawyer in Austin, who said a growing number of her clients had the devices installed in their cars.

Lenders and manufacturers emphasize that they have strict guidelines in place to protect drivers' information. The GPS devices, they say, are predominantly intended to help lenders and car dealerships locate a car if they need to repossess it, not to put borrowers under surveillance.

Spireon says it can help lenders identify signs of trouble by analyzing data on a borrower's behavior. Lenders using Spireon's software can create "geo-fences" that alert them if borrowers are no longer traveling to their regular place of employment — a development that could affect a person's ability to repay the loan.

A Spireon spokeswoman said the company takes privacy seriously and works to ensure that it complies with all state regulations.

Corinne Kirkendall, vice president for compliance and public relations for PassTime, which has sold 1.5 million devices worldwide, says the company also calls lenders "if we see an excessive use" of the tracking device.

Even though the device made her squeamish, Michelle Fahy of Jacksonville, Fla., agreed to have one installed in her 2001 Dodge Ram because she needed the pickup truck for her job delivering pizza.

Shortly after picking up her four children from school one afternoon in January, Ms. Fahy, 42, said she pulled into a gas station to fill up. But when she tried to restart the truck, she was not able to do so.

Then she looked at her cellphone and noticed a string of missed calls from her lender. She called back and asked, "Did you just shut down my truck?" and the response was "Yes, I did."

To get her truck restarted, Ms. Fahy had to agree to pay the $255.99 she owed. As she pleaded for more time, her children grew confused and worried. "They were in panic mode," she said. Finally, she said she would pay, and within minutes she was able to start her engine.

Borrowers are typically provided with codes that are supposed to restart the vehicle for 24 hours in case of an emergency. But some drivers say the codes fail. Others say they are given only one code a month, even though their cars are shut down more often.

Some drivers take matters into their own hands. Homemade videos on the Internet teach borrowers how to disable their devices, and Spireon has started selling lenders a fake GPS device called the Decoy, which is meant to trick borrowers into thinking they have removed the actual tracking system, which is installed along with the Decoy.

Oscar Fabela Jr., who said his 2007 Dodge Magnum was routinely shut down even when he was current on his $362 monthly car payment, discovered a way to circumvent the system.

That trick came in handy when he returned from seeing a movie with a date, only to find his car would not start and the payment reminder was screaming like a burglar alarm.

"It sounded like I was breaking into my own car," said Mr. Fabela, 26, who works at a phone company in San Antonio.

While his date turned the ignition switch, Mr. Fabela used a screwdriver to rig the starter, allowing him to bypass the starter interruption device.

Mr. Fabela's car eventually started, but it was their only date.

"It didn't end well," he said.

Government Scrutiny

Across the country, state and federal authorities are grappling with how to regulate the new technology.

Consumer lawyers, including dozens whose clients' cars have been shut down, argue that the devices amount to "electronic repossession" and their use should be governed by state laws, which outline how much time borrowers have before their cars can be seized.

State laws governing repossession typically prevent lenders from seizing cars until the borrowers are in default, which often means that they have not made their payments for at least 30 days.

The devices, lawyers for borrowers argue, violate those laws because they may effectively repossess the car only days after a missed payment. Payment records show that Ms. Bolender, the Las Vegas mother with the sick daughter, was not in default in any of the four instances her ignition was disabled this year.

PassTime and the other manufacturers say they ensure that their devices comply with state laws. C.A.G. declined to comment on Ms. Bolender's experiences.

State regulators are also examining whether a defective device could endanger the borrowers or other drivers on the road, according to people with knowledge of the matter who spoke on the condition of anonymity.

Last year, Nevada's Legislature heard testimony from T. Candice Smith, 31, who said she thought she was going to die when her car suddenly shut down, sending her careening across a three-lane Las Vegas highway.

"It was horrifying," she recalled.

Ms. Smith said that her lender, C.A.G. Acceptance, had remotely activated her ignition interruption device.

"It's a safety hazard for the driver and for all others on the road," said her lawyer, Sophia A. Medina, with the Legal Aid Center of Southern Nevada.

Mr. Pena of C.A.G. Acceptance said, "It is impossible to cause a vehicle to shut off while it is operating," He added, "We take extra precautions to try and work with and be professional with our customers." While PassTime, the device's maker, declined to comment on Ms. Smith's case, the company emphasized that its products were designed to prevent a car from starting, not to shut it down while it was in operation.

"PassTime has no recognition of our devices shutting off a customer while driving," Ms. Kirkendall of PassTime said.

In her testimony, Ms. Smith, who reached a confidential settlement with C.A.G., said the device made her feel helpless.

"I felt like even though I made my payments and was never late under my contract, these people could do whatever they wanted," she testified, "and there was nothing I could do to stop them."

Articles in this series are examining the boom in subprime auto loans.


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Lithuania Feels Squeeze in Sanctions War With Moscow

Slide Show | Trying Not to Cry Over Unsold Milk Caught in the sanctions war between NATO and Russia, small farms in Lithuania that can no longer count on exports to Russia are struggling to survive. By JACK EWING September 24, 2014

ZIBENAI, Lithuania — In the sanctions war between Russia and the West, Kasia Jankun's 80 dairy cows seem to be losing.

The sanctions, which are taking a toll on Russia's economy, cut both ways. And Ms. Jankun and other small farmers in this Baltic nation of three million people are bearing an overwhelming share of the pain from a Russian ban on European dairy products.

Former Soviet bloc countries that, like Lithuania, are part of the European Union and the NATO military alliance might seem safe from the Russian strong-arming that made Ukraine so vulnerable. But in economic standoffs, it is often the most vulnerable that suffer most.

The loss of the Russian market created an oversupply of milk, which pushed prices in Europe well below the break-even point for farmers like Ms. Jankun, whose 250-acre farm in eastern Lithuania lies at the end of a dirt road in rolling country dappled by groves of pine and alder.

A dairy product stand in a market in Vilnius, Lithuania.

"If nothing changes by spring, at these prices, it's bankruptcy, " Ms. Jankun, 50, said recently, as she served visitors thick slices of homemade cheese that she sells at outdoor markets to make up for lost income.

If the sanctions battle were not underway — and if the eurozone economy were not still so listless — Lithuania might seem to be heading in a positive direction. At the beginning of next year, it is set to become the 19th member of the euro currency union, joining its Baltic neighbors Latvia and Estonia in that inner circle of countries that the European Union ostensibly considers among the most economically worthy.

Mario Draghi, the president of the European Central Bank, was scheduled to speak in Lithuania's capital, Vilnius, on Thursday, symbolically putting his imprimatur on the country's eurozone membership.

And yet, a quarter-century after Lithuania, Latvia and Estonia won independence from the Soviet Union, their economies remain deeply intertwined with Russia's. Farming is a major industry in the Baltics, and Russia was the largest and most profitable market for Lithuanian products like cheese and yogurt. Unlike big industrial agricultural producers, Lithuania's small farmers — the most vulnerable segment of the country's dairy industry — cannot easily redirect their products to other markets.

Kasia Jankun on her 250-acre farm. "If nothing changes by spring, at these prices, it's bankruptcy," Ms. Jankun said.

Nor can they hope to replicate elsewhere the premiums on Baltic dairy goods — so meager are most Russian alternatives — that merchants in cities like Moscow and St. Petersburg have been willing to pay.

Without doubt, tensions stemming from the Ukrainian conflict are having a broader effect on world trade, especially in countries like Germany, where many auto and machinery companies until recently saw Russia as a promising and fast-growing market. General Motors' Opel unit said last week that it was cutting production and jobs at its car plant in St. Petersburg, mostly because of the sagging Russian economy and the sinking value of the ruble.

But the economic impact of the sanctions may be most acute in Lithuania, which is also a major processing center for milk produced by the other Baltic countries and, via ports on the Baltic Sea, a transportation hub for Russia-bound goods.

Food exports to Russia account for 2.7 percent of Lithuania's gross domestic product, according to the European Bank for Reconstruction and Development, a far greater share of the economy than in any other European Union country. More than a third of the companies on Lithuania's benchmark stock index are in agriculture or related industries.

The economic disruption is not likely to derail plans for Lithuania to join the eurozone on Jan. 1. On the contrary, many Lithuanians see euro membership as a milestone in the country's tighter integration with Europe, and validation of its recovery from a severe downturn in 2009, when gross domestic product plunged 15 percent.

But this month, the country's central bank reduced its growth forecasts because of slowing trade with Russia. This year, the Lithuanian economy will grow 2.9 percent instead of the 3.3 percent that was forecast earlier, the bank said. Next year, growth is expected to be 3.3 percent instead of 3.6 percent.

That would still be among the fastest growth rates in the European Union. "Our expectation is that it will influence our G.D.P. figures, but not so very significantly," said Vitas Vasiliauskas, chairman of Lithuania's central bank. He noted, though, that even before the sanctions, Lithuanian exports were squeezed by sputtering growth in Russia.

For most Lithuanian farmers, there is not much room for reduction. More than 70 percent of Lithuanian farms are smaller than 25 acres, earning an annual average profit of only 5,849 litas, or $2,176, per farmworker, according to the Lithuanian Institute of Agrarian Economics.

Lithuania's large agricultural conglomerates are feeling the effect of sanctions, too, but are in a better position to find new markets.

"We are not in a desperate situation," said Andrius Pranckevicius, deputy managing director of Linas Agro, a Lithuanian company that trades grain and other agricultural commodities and is also a major milk and poultry producer.

But he added, "The situation for smaller farmers is very serious right now. They are absolutely below break-even."

Rightly or not, Lithuanians say they believe that President Vladimir V. Putin of Russia feels special resentment toward the Baltic countries because they were the first Soviet states to demand independence in the late 1980s. Last fall, well before Russia imposed formal sanctions, customs officials were blocking imports of Lithuanian farm products, ostensibly on health grounds.

In Lithuania, dismay about the economic impact of the sanctions is amplified by the fear that Mr. Putin intends to restore the old borders of the Soviet Union, using military force if necessary. Unlike Ukraine, of course, Lithuania is a member of NATO, whose members have pledged to defend one another. Still, Lithuanians feel exposed.

Vilnius, the picturesque capital, is only about 20 miles from the border of Belarus, which many Lithuanians regard as a state that Russia could use as a jumping-off point for a military incursion. Lithuania also shares a 136-mile border with Kaliningrad, the Russian enclave on the Baltic Sea.

As a result, despite the economic pain that sanctions have caused, many Lithuanians advocate a hard line in dealing with Russia.

"Everyone feels strong solidarity with Ukraine," said Linas Linkevicius, the Lithuanian foreign minister. He has pushed the NATO countries to establish a more demonstrative presence in the Baltics, for example, by staging maneuvers and stationing equipment in the region.

"We need some physical presence, a tangible something," said Mr. Linkevicius, a former defense minister.

Mr. Linkevicius has convened groups of business people to talk about ways to develop other markets for Lithuanian goods. But fully replacing Russian sales will be difficult. Lithuanian dairy products have a reputation for quality in cities like St. Petersburg and Moscow and command higher prices than in other markets.

Despite historical resentments, Russia's size and proximity make it the most logical market for Baltic goods. Although English has become the second language of choice for younger Lithuanians, after their native tongue, many people speak Russian.

"A lot of people feel more comfortable working with Russians in Russian than other cultures," said Kasparas Jurgelionis, deputy chairman of Koncernas Achemos Grupe, a Lithuanian fertilizer producer that is also involved in handling cargo passing through Baltic ports. "There is a lot of sacrifice in terms of lost opportunities."

Ms. Jankun, the farmer, said she was uncertain what the policy toward Russia should be. "I am in favor of Russian people buying my cheese," she said in her large but unfinished home next to the fields where she grows hay and potatoes and lets her cows graze. "I don't care about politics."

Dressed in a red sweater and battered rubber clogs, Ms. Jankun said she worried that her two grown children would despair and decide to emigrate, following tens of thousands of other Lithuanians who left during the economic turmoil in 2009.

Then no one will be able to take over the farm, which belonged to Ms. Jankun's family before the Soviet Union annexed Lithuania in 1940 and was returned after the collapse of communism.

Given that tortured history, Ms. Jankun was uncertain how to deal with Mr. Putin. "If we have a nervous and unpredictable neighbor, we avoid him," she said. "But," she added, "when he starts breaking your windows, you have to do something."


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Bits Blog: With Apple’s i0S 8, Your Fingerprint Can Become the Master Password

Photo Craig Federighi, Apple's senior vice president of software engineering, discussing the fingerprint sensor at the company's developer conference in June.Credit John G. Mabanglo/European Pressphoto Agency

Passwords stink. That was the lesson learned from the recent episode in which hackers broke into the Apple accounts of a number of celebrities.

And not only are passwords weak protection against break-ins, they are also tough to memorize when complex, and a pain to reset when you forget them.

But when I set up my new iPhone 6 earlier this week, I took a glimpse into a future without passwords. It was replaced with something no one could easily replicate, and something that was with me at all times: my fingerprint.

By following a few steps, I was able to set up my iPhone to log into websites I regularly use with a touch of my finger. No more passwords. I was relieved when I effortlessly logged in to my bank, my Facebook profile and my Amazon account.

Apple's fingerprint sensor, called Touch ID, is hardly new. It was introduced in the iPhone 5S as a feature for logging into the phone instead of punching in a code.

But along with the new iPhone 6, Apple recently released iOS 8, its new mobile software system for mobile devices. It includes an important feature that allows third-party apps to hook directly into Apple's native apps.

With iOS 8, Apple also opened the fingerprint sensor to work with third-party apps (whereas before it could primarily be used only to log in to the phone or buy apps through the App Store). With these tweaks, Apple only just recently unlocked the true potential of its fingerprint sensor.

One caveat: Setting up the device to accept fingerprints for entering passwords was not very simple. It required installing the free third-party app 1Password on my iPhone. Then I had to follow some steps to create a shortcut to 1Password that could be accessed inside Apple's Safari web browser.

After that was set up, I went into the security settings of the 1Password app and enabled Touch ID to work. And on top of that, I had to use 1Password to log in to every site by typing each of my passwords — just once — to store the password inside the app.

But from there, when logging in to the websites from Safari, I could use my fingerprint to enter my user name and password. You can also set this up to use your fingerprint to enter credit card numbers for shopping online. It saves valuable time, plus it feels safe because your fingerprint becomes the master password.

No more tedious memorization or typing. Imagine if and when the fingerprint sensor makes it way into not just Apple's iPads, but also its laptops. While it doesn't look like the password will go away anytime soon, memorizing and typing it in could soon become a thing of the past.

Good riddance.


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