Too Big to Care: Why Equifax hasn't been credit worthy

It should not come as a shock that Equifax, one of the three big agencies that track credit status, has failed to protect the data it has on 143 million people. Nor should it be surprising that the company didn't inform its affected customers for six weeks after discovering that hackers had gained access to their private information. Collecting, selling and sometimes misusing mountains of sensitive data for decades, Equifax has evidently become too big to care.

Instead, three executives sold $1.8 million of their company shares days after the company discovered the problem, more than a month before it was made public. "If that happened, somebody needs to go to jail," threatened Sen. Heidi Heitkamp, a Democrat on the Senate Banking Committee. In the days following the breach announcement Equifax shares dropped 20 percent. 

At first, the company wanted customers to pay for a freeze to their accounts. That would protect their personal data. But after a deluge of complaints, the offer changed, with Equifax opting instead to waive fees for customers who want to freeze their credit files -- but only until November 21. Going forward, it could face the largest class action lawsuit in history, with the potential to bankrupt the company. 

1978 investigative feature
Original Publication PDF Here 

When I first looked into Equifax in 1978, it was already a corporate force, with 1,800 offices, 14,000 employees, and a nationwide investigative system maintaining dossiers on 46 million people. The oldest of the three largest US credit agencies, it had revenues of $275 million a year. Equifax's services at the time ranged from credit reporting, insurance investigations and underwriting to motor vehicle data tracking and assorted "management system services" - aka private investigations. 

Today Equifax holds information on more than 800 million consumers and almost 90 million businesses. Operating in 14 countries it produces annual revenues of more than $3 billion. On the other hand, the employee roster is down to about 9,000. 

Founded in 1899, Equifax had not fully committed to computers by the late 1970s. But an industry transition was underway. In Vermont, the Credit Bureau of Burlington had taken an early lead, working with Trans-Union Systems, a national computer network used by retailers and credit card companies. Data flowed in multiple directions, with stores seeking information on potential customers and other clients using the data those businesses amassed.  

Before the digital age, collecting information and creating a customer profile -- to establish what was known as "creditworthiness" -- involved a larger staff and considerable legwork. For Equifax "field investigators" it meant conducting interviews, with the subject as well as friends and neighbors. From courts and police departments they gathered any criminal information, while desk-bound staffers clipped newspapers and gathered reports. To complete a dossier, an investigator might talk to your employers, hunt down old government records, or even strike up conversations with local shop keepers. 

But mass producing customer dossiers (investigators worked on up to 40 a day), particularly profiles that included not just hard data but also tidbits of gossip, could lead to mistakes and abuses. Creditworthiness was a slippery concept, an imprecise composite of job patterns, credit and bank accounts, character, habits, family status and morals. As a result, Equifax was hit with a batch of lawsuits during the 1970s, losing some and quietly settling others. 

One Michigan woman collected $321,000 when the company falsely reported that she was an excessive drinker. Another woman from South Dakota won a settlement when Equifax said that the money for her new Chevy had come from prostitution -- also proven false.

There was also the California insurance broker who won $250,000 when Equifax investigators alleged she was dishonest. In New Jersey there was trouble when State Farm refused coverage to a Princeton faculty member after Equifax reported (accurately but irrelevantly) that she was living with a man "without the benefit of wedlock."

When I called up Ralph Bushey at the Equifax office in Burlington, the first thing he asked was how I spelled my name. Frankly, the same thing happened every time I interviewed someone in the industry. But Bushey was more cautious than most and said he had to check with higher ups. After he didn't call back, I decided to make a personal visit. 

Equifax had outposts in Burlington, Rutland and Bennington, all reporting to a branch office in Albany, New York. A Barre office, along with the rest of eastern Vermont, reported to Manchester, New Hampshire. The regional office was in Boston. 

The Burlington station was small and didn't maintain files, in contrast with Burlington Credit's relatively high tech layout. But the modest appearance was deceptive. Bushey explained coyly that Equifax  handled "all the major insurance groups," specifically mentioning Prudential and National Life. "We've gotten away from the credit line of work, and have picked up more types of business."

At times, Equifax operated like a private detective agency. In at least one case, it was caught helping a corporation to obtain gossip about a critic. An executive at American Home Products, a major drug manufacturer, had hired the company to dig into the personal affairs of Jay Constantine, a congressional staffer who was helping to write legislation opposed by Big Pharma.

This was before the Retail Credit Company of Atlanta, Georgia changed its name to Equifax. After 77 years in business, the 1976 rebranding was prompted by all the bad press, including a Federal Trade Commission lawsuit filed in 1975. The charges, as outlined for me by an FTC staffer, included illicit use of consumer information, failure to disclosure terms, and false and misleading advertising. 

The technology of data gathering has changed since then, but the shabby tactics have survived.  In 2000, Equifax, along with Experian and TransUnion, was fined $2.5 million for blocking and delaying phone calls from consumers trying to obtain information about their credit. In 2013, a federal jury in Oregon awarded $18.6 million to Julie Miller against Equifax for violations of the Fair Credit Reporting Act. 

In contrast, Equifax has had no problem sharing files and data with the FBI and other government agencies, according to George O'Toole, a former CIA agent. While reporting on Vermont's private intelligence industry, I was told that Equifax tended to hire ex-State Police officers, possibly because they might have access to government information that was off limits to the public.

Another ex-CIA operative, Harry Murphy, claimed that Equifax was especially useful to federal agencies. The draw was its enormous files of auto and life insurance applicants. Even back in the 1970s, however, big data transfers between public and private entities were difficult to control, and law enforcement and intelligence officers often moved into the private sector after retirement, or for the paycheck. 

The emerging private dossier industry was run largely by law enforcement and intelligence alumni, an Old Boy Network that closely linked it with government operations. The data moved freely, but the potential for mischief was not widely recognized.

During my research into the activities of Equifax and other big data agencies, I also heard about an odd encounter with Earl Hanson, a Barre resident who applied for insurance with Colonial Penn Mutual. In return he received a letter from Equifax asking for more information about an auto accident he had forgotten to report. Hanson was cooperative, explaining all about hitting a deer. But the exchange made him curious to know what else they had discovered about him, from the Motor Vehicles Department or anywhere else. 

After writing to the company's Dataflo center and to the New Hampshire branch office, however, Hanson was told that Equifax actually had no file on him. Unsatisfied with that response, he filed a complaint with the Attorney General's office. But the State lost interest, eventually closing the case, and Equifax didn't share any further information. As usual, it was too big to care. 

Merger Madness and the Reagan Revolution's Big Fail

"Over the last 30 years there has been a transfer of trillions of dollars from the middle class to the top one-tenth of one percent." 

- Bernie Sanders on Twitter, Dec. 26, 2015

The conservative economics of the Reagan era deeply affected the lives of millions. What George H.W. Bush once called "voodoo economics" -- before he forgot and signed on as vice president -- became the biggest redistribution of wealth since the New Deal. As Bernie Sanders has pointed out, the gap between the rich and poor widened dramatically during those years, big corporations got bigger, and politicians backed away from social welfare programs.

The central article of faith at the time was that money rerouted to the rich would produce a burst of productivity and industrial growth. Give to corporations and the already wealthy, advised "supply side" economists, and "job creators" will invest the money in new factories, research, technology and jobs. The country will be restored to greatness.

We've been hearing this gospel for years. And we're hearing it again today from Reagan impersonator Donald Trump. But did it work the first time?

Even before Saint Ronald took office, he let corporate interests know they could have virtually whatever they wanted. Once in the White House, he immediately began to undermine or suspend government regulations of business, adamant in the belief that when business was given freedom and cash it would invest in new productive capability.

It didn't work out that way. The nation's biggest businesses did not put their money into jobs, research or equipment. Instead, they went on the largest merger binge in history, buying up smaller companies in a trend that meant less competition, less productivity, and more control of the economy by fewer people.

Multi-million dollar war chests were assembled to finance takeovers of large oil and coal companies, communication giants, and financial institutions. In just the first half of 1981, mergers involving $35.7 billion were arranged, a 60 percent rise over the previous year. Yet this was just a prelude to the largest merger in US history. On July 6, 1981, DuPont, the country's top-ranked chemical company, offered $6.8 billion to acquire Conoco, a major oil company that owned the second-largest US coal company, Consolidated.

DuPont was playing what merger watchers called the "white knight," so named because its offer was invited by Conoco's board to stave off yet another bid by Seagram, a Canadian corporation and the world's largest whiskey business. Within two weeks Mobil, then the second-ranked US oil company, weighed in with an "unfriendly" attempt to outbid both DuPont and Seagram. It hoped to gain Conoco's large oil and coal reserves, but was also testing Reagan's more lenient anti-trust policies by trying to buy a company in the same business.

The price reached $7.7 billion before DuPont won the bidding. By this time more than $16 billion in credit had been extended to the three competitors. Most of the money was still available afterward, plus another $20 billion in credit to other corporations either planning takeovers or trying to prevent them. Five major oil companies alone had $24 billion in credit lines; Texaco, Gulf, Marathon and Mobil were actively seeking mergers with "second tier" companies.

It wasn't a Left-wing think tank that labeled this phenomenon "merger madness." The name was coined by The Wall Street Journal. At first corporate leaders tried to sell it as simply a competitive necessity. But the truth is that the merger wars of the 1980s actually undermined the "economic recovery" so often touted by Republicans. In agreeing to let corporations run free, Reagan's administration brought on the rapid, public failure of supply-side economics.

There were warnings, of course. The Independent Bankers Association, for example, predicted that financial industry mergers would limit the availability of credit to agriculture, small business and individuals in thousands of small communities. The effect will be like a "giant vacuum cleaner" sucking up money, their spokesman predicted. 

Merger mania also slowed economic growth. Investments in production of new capital equipment, research and exploration took a back seat to acquisitions that strengthened a corporation's competitive position. The trend even fouled up the Federal Reserve's "tight money" policy. Both raiders and white knights were able to get credit through infusions from the European market. Even if the Reagan administration had wanted to halt the spree, little could have been done quickly, except maybe to impose limits on credit allocation. But far from fearing the madness, most Reaganites considered mergers perfectly acceptable.

"The Government of Business"

Two days after DuPont announced its historic merger, Reagan's assistant attorney general for anti-trust previewed the new administration philosophy -- by dropping two antitrust lawsuits. One of these charged that Mack Truck and its distributor had conspired to fix pricing discounts of Mack Truck parts. The Carter administration's antitrust division considered such vertical deals anti-competitive. The other case involved a government attempt to block the acquisition of the Northeast's leading outdoor brick seller by a British company. The issue here was market concentration: the merged business would command about 20 percent of brick sales in 13 states.

On this and other matters, the Reagan team did little to make its stand on mergers clear. It did, however, also decide to drop a long-standing anti-trust suit against American Telephone and Telegraph. Filed in 1974, the lawsuit claimed that AT&T had tried to obstruct potential competitors by refusing to let them hook into the Bell system. The proposed remedy was to break up the company. But the Reagan administration suggested that new FCC regulations would be an appropriate substitute. Top officials claimed they were more concerned about international competition from the Germans and Japanese than domestic monopoly practices.

Overseeing the merger boom, the administration was quiet and often encouraging. As Treasury Secretary Donald Regan put it, "Our economy is growing, our nation is growing, and the world is growing. So why shouldn't companies grow?"

Yet this wave of consolidation was only one in a series of attempts by major corporations and financial institutions to reshape the US economy. They started more than a century ago, but the initial public response was weak and half-hearted. Before some limitations were placed on the emerging monopolies, the Standard Oil Trust already included 40 companies representing 90 percent of the oil refineries and pipelines in the country. Trusts -- groups of corporations entrusting their stocks to small boards of directors -- also controlled the sugar, beef, whiskey and several other industries. 

A big slogan of that era was pure laissez-faire: "The government of business is not part of the business of government."

Nevertheless, a populist campaign to halt monopolization and protect the public interest gained steam in the 1880s. It grew out of resentment by small business over strong-arm corporate tactics, consumer complaints about price-fixing, and attacks by muckraking writers and alternative political parties. By 1888, both major parties were attacking the trusts, at least rhetorically.

When the Sherman Antitrust Act passed in 1890, only one dissenting vote was cast in Congress. The law declared illegal "every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce." It authorized prosecutions and lawsuits for damages. But enforcement was far from aggressive at first and the number of trusts grew from 18 to 157 over the next decade. 

As president Theodore Roosevelt did attempt to put some teeth into the law; his Department of Justice pressed lawsuits calling for dissolution of the Standard Oil and American Tobacco Company trusts. Roosevelt also urged more indictments for anti-competitive practices. Merger activity boomed anyway. Two subsequent booms occurred in the 1920s and 1950s.

Antitrust enforcement was highly selective from the start. Take sugar refining, which the US Supreme Court defined as a "manufacturing monopoly" in 1895 and therefore exempt from regulation. A year earlier the same Court ruled that the Sherman Act could be used against striking workers because they were in restraint of trade. Eventually the Court decided that the law barred only "unreasonable" combinations.

Even when a firm was convicted for monopoly practices, an effective remedy was hard to devise. Roosevelt successfully prosecuted DuPont for monopolizing the explosives business, but the Court was at a loss to design a solution. The eventual decision was to set up two new powder companies. But DuPont shaped the plan and picked the executives for both new firms.

During the Carter years, the spotlight shifted to what were then called "shared monopolies," industries in which a few large companies shared control of the market. After identifying 50 such industries, the plan was to file a lawsuit against IBM on the basis of its "overtly predatory" practices. But that didn't go far, since Reagan's team saw federal regulations as the real problem and looked away as competitors gobbled one another at an accelerating pace.

Laffer's Folly

According to conservative legend, the basic outline for the "Reagan revolution" was originally sketched freehand on a napkin. The draftsman, UCLA economist Arthur Laffer, portrayed with a simple curve his idea that the health of the economy depends on the level of taxation. Laffer also argued that the US was taxing too high on the curve to keep business strong.

Armed with this specious doctrine, conservative "supply-siders" promised that tax reduction, combined with reduction of the "regulatory burden," would increase profit rates. And with this windfall corporate America would make new investments to decrease unemployment and increase productivity. More jobs and income would mean increased revenues for the government, even with lower tax rates. Increased productivity would mean more goods and, some day, lower prices. That was the gospel.

Meanwhile, antitrust "restrictions" were targeted as too "burdensome." Trust-busting kept companies from growing enough to compete against foreign rivals, the supply-siders warned. In fact, some consolidation should be encouraged. "Mergers are an important part of a healthy economic system," advised US Attorney General William French Smith, while economic theorist Robert Heilbroner declared antitriust laws "old-fashioned."

The bottom line: US corporations needed more money, supposedly to invest in new technology and development in order to stay competitive. But the theory was flawed; as it turns out, there is only the most tenuous connection between today's profits and tomorrow's investments. 

Looking back at the $100 billion that was passed around in ownership shuffles between 1975 and 1980, Harold Williams, former chairman of the Securities and Exchange Commission, noted that the same money "could have been devoted to new production and employment opportunities." But when used for mergers, it didn't "flow back as new capacity, improvements in productivity, innovation, new products or jobs."

Oil companies scouting for merger targets in the 1980s certainly didn't show much sensitivity to calls for expansion and investment in new technology. Others on the merger bandwagon were bidding up the prices of old facilities rather than investing in new ones. Even when bribed to make capital improvements with tax breaks, many corporations chose mergers as the shortest, easiest road to profit. 

During the Reagan era, income, wealth and control over economic life shifted dramatically into fewer hands. The trend toward economic consolidation seriously undermined the spirit of independent entrepreneurship that had once been the heart of the American economic system. Interest rates remained high as funds were drained for acquisitions. By 1983 the unemployment rate was over 10 percent, one more obvious sign that the supply-side gospel was a fraud.

Greg Guma is the author of The People's Republic: Vermont and the Sanders Revolution and other books, and former Executive Director of the Pacific Radio network.