Former MasterCard International chief executive officer H. Eugene Lockhart testified Monday that he had looked favorably on the idea of banks' being permitted to issue American Express and other nonbank brands and thought Visa had taken a "radical position" against it.

Mr. Lockhart, who led MasterCard from March 1994 to May 1997, told the government lawyers who had called him to testify that before he left the card association "I was beginning to debate this issue within MasterCard." He had raised the possibility, he said, because "some members were expressing to me that they were prevented from thinking about the matter."

Lawyers for the U.S. Department of Justice who are trying their antitrust case against Visa and MasterCard in U.S. District Court in Manhattan presented memos and documents from 1996 that encapsulated Mr. Lockhart's views on the subject.

In one memo he wrote: "I believe it is unrealistic to stop our members forcefully from issuing other card products." In another memo, which discussed the merits of giving MasterCard banks the green light to issue Amex cards, Mr. Lockhart wrote: "If we are clever, this is an opportunity to come out okay."

Mr. Lockhart wrote that he thought such deals could benefit MasterCard, as long as the banks involved were required to dedicate 80% to 90% of their card portfolios to the MasterCard brand. In testimony Monday afternoon, he said that these writings were just thoughts, not concrete proposals.

But other MasterCard executives did not agree with Mr. Lockhart. Alan Heuer, in particular, a MasterCard senior executive vice president who was at the time the head of MasterCard's U.S. region, disagreed. He said in the documents that Amex should "wither" and that letting members issue Amex cards would be "giving away the banking franchise." Mr. Heuer has since been promoted at MasterCard.

In morning testimony, Visa's lawyers tried to show that American Express' partnerships with foreign banks are far less successful than previously thought. M. Laurence Popofsky, a Visa attorney, cross-examined James Cracchiolo, president of travel related services international, Amex's international division.

Mr. Popofsky pointed to American Express' deal with National Westminster Bank of the United Kingdom, which in 1997 agreed to issue a cobranded Amex/United Airlines credit card. The deal had raised fears and expectations that Amex would edge its way into the U.S. consumer card market, but Mr. Popofsky called the arrangement a "colossal disaster," and Mr. Cracchiolo conceded, "It didn't meet our expectations."

Visa U.S.A.'s and MasterCard International's rules against U.S. banks' issuing other card brands - the rules that the Department of Justice is attacking - were powerless to prevent NatWest, a foreign issuer, from soliciting consumers for an Amex card. The airline tie-in was viewed as a particularly appealing hook for a population addicted to frequent-flier miles.

But the number of cards issued fell short of American Express' projections, and charge volume never approached the $3 billion annually that was expected by the end of the deal's third year. Worse still, relations deteriorated between American Express and NatWest; Amex was unhappy that NatWest was marketing the card primarily to United Airlines customers, not to the bank's own customers. NatWest said Mr. Cracchiolo had promised a merchant processing arrangement and then reneged, but Mr. Cracchiolo said in testimony that he had never agreed to handle merchant processing for the product.

Mr. Popofsky's cross-examination of Mr. Cracchiolo revealed that Amex had asked at least five banks, including NatWest, to talk to the Department of Justice about the successes of their programs with Amex. But sore feelings about the United Airlines program had by then prompted the NatWest executive in charge of the bank's relationship with Amex, Patrick Boylan, to stop talking to Mr. Cracchiolo.

Another Visa attorney, John Gordon, used Amex's partnership with a French bank, Sovac, to illustrate problems Amex has had with such partnerships. Amex and Sovac joined in cobranding deals with Citroen and Peugeot, the French automakers, to let Amex put cobranded cards in the glove compartments of each car sold. The Sovac partnership is Amex's largest network deal in France; people get an Amex card without filling out forms or applications, according to trial testimony.

Mr. Gordon of Visa sought to show that the program was a "disaster." Mr. Cracchiolo disagreed but did not dispute figures showing that the activation rate for these cards was just 7%.

At other points in the proceedings, the card associations seem to have been trying to turn the tables by depicting Amex as the real anticompetitive culprit in this lawsuit. For example, Visa's Mr. Popofsky produced Amex documents titled "Visa Vulnerabilities" that identified corporate credit cards as a product area in which Visa could not effectively compete. American Express is the market leader in corporate cards and had approached some banks about teaming up on this product.

"One of the consequences of Amex opening up its network would be to disrupt Visa," Mr. Popofsky said.

On Friday, government lawyers introduced as evidence a confidential American Express document, dated Sept. 9, 1996, titled, "Trench Warfare, a Battle Plan vs. Citibank, First USA, and Visa." Amex lawyers said the document was prepared by consultants from Bain & Co. and that its recommendations were never adopted.

The report said that "Visa in particular has launched a sophisticated assault on American Express, actively convincing banks that we are the enemy." In response, the report said: "Citibank, Wells Fargo, Nations, Banc One, Bank of America are a bigger threat to most banks than American Express, and we should make them the enemy, not us."

Among other recommendations were that American Express "attack competitors' most profitable customer and member relationships"; "expose [Visa's] product failures," such as the Visa Cash smart card trial at the Atlanta Olympics; "raise dissension among acquirers, processors" by highlighting Visa's "archaic nickel-and-diming fee schedule"; and use the Justice Department as an ally in getting out the message that "Visa is the Microsoft of credit cards."

"American Express has fought back with a broad scale of responses but not with the offensive surgical strikes needed to win a guerrilla war on multiple fronts," the document stated. Amex should "continue cooperating with [the] Department of Justice" and set up a "war room that maintains up-to-the-minute assessments of competitor actions - product launches, mailings, advertising, etc."

Visa and MasterCard lawyers say this document and others show that American Express is using the Justice Department as a pawn to serve its own anti-competitive ambitions and to bring a lawsuit that the company did not want to litigate itself.

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