And now, a Game of Concentration

When I saw this NYT Headline, “As Big Banks Repay Bailout Money, U.S. Sees a Profit”, it really did not send me to a

Expecting Customer service?  Fat Chance!

Expecting customer service? Fat Chance!

happy place. You’re probably going to raise a Spock-like eyebrow and ask me to explain. Why, Kat, you’re probably saying, isn’t a 15% return on our “money” a good deal in this market? Remember finance 101, rates are relative to risk so let me tell you why I’m a concern troll on this. First, here’s what the author thought was the punch line to this story.

But critics at the time warned that taxpayers might not see any profits, and that it could take years for the banks to repay the loans.

As Congress debated the bailout bill last September that would authorize the Treasury Department to spend up to $700 billion to stem the financial crisis, Representative Mac Thornberry, Republican of Texas, said: “Seven hundred billion dollars of taxpayer money should not be used as a hopeful experiment.”

So far, that experiment is more than paying off. The government has taken profits of about $1.4 billion on its investment in Goldman Sachs, $1.3 billion on Morgan Stanley and $414 million on American Express. The five other banks that repaid the government — Northern Trust, Bank of New York Mellon, State Street, U.S. Bancorp and BB&T — each brought in $100 million to $334 million in profit.

What the author really missed was that information also comes on the back of this information last week that shows that the government has created incredible high concentration ratios in the banking market. I discussed it here in a piece where I called it a big ol’ game of monopoly. This is an ongoing policy disaster and many folks appear to be missing it.

J.P. Morgan Chase, an amalgam of some of Wall Street’s most storied institutions, now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government-owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.

There are so many headlines buried in that NYT piece that you’d think it was written by ostriches. This is one alone should’ve grabbed a banner headline.

But the real profit came as banks were permitted to buy back the so-called warrants, whose low fixed price provided a windfall for the government as the shares of the companies soared.

Well, isn’t that nice, the best borrowers paid back first. Some one over there ever take any finance classes? I doubt it. Of course, that’s going to happen you twit!! It’s the implication of what that means that scares the pants off me. The fact they’ve borrowed funds allows us to regulate their actions. Now, the big ones are paying them back so they’re out of the reach of tighter TARP regulation! They like their old loosey goosey nonsense regulations especially now that they’re all set up as a de facto cartel with government blessing. They’re ready to price discriminate, restrict services, and create extraordinary profits all they want with FEW RESTRICTIONS. Just wait until we get to witness the new and improved, unregulated CEO pay schemes!

It’s similar to handing all of our energy needs and policy over to OPEC.

We’re already seen the signs of the four banking horsemen of the financial market apocalypse. You think you’re getting screwed with ridiculously high fees and interest now, just wait, when all those small to mid size banks go under and you’ve got no place else to go. Consumer choice will be a thing of the past. You think it’s hard to find a bank ATM now? Just wait. Notice they’re being replaced by a middle man who charges you a fee and then your bank charges you a fee. You think that’s just a coincidence that you now have to find the actual bank to use the ATM now? Notice they’ve taken them out of your friendly grocery store parking lots because that was back in the day when they actually had to compete for you deposit dollar by providing things like convenience. Now they use a limited number so the machines at the bank can replaces the tellers. Tellers would be service providing people that require salaries and benefits along with their smiles. The ATMs around your neighborhoods and grocery stores churn fees for transactions. How far do you have to go now days to find your bank’s ATM? Isn’t it getting farther every year unless you live close to a still open brick-and-mortar branch?

I’ll let you go to Yves Smith at Naked Capitalism to explain the major weirdness in this article and also why part of the payoff probably is bogus reporting which is still the big problem among huge corporations. Creative accounting is always at the heart of every good corporate scam and this appears to be growing into an even bigger one than it was a few years ago. However, there really is no need on my part to re-explain that problem since she does so well. Also, here’s another piece there that lets you know that while their paying is “profits” with one hand, they’re robbing us blind with the other.

I’m going to concentrate (no pun intended) on what it means to be a Cartel or Monopoly free to screw over your customers with no real government law to stop you. First, do you remember any time in our history when the government set up what is basically an oligopoly that acts like a monopoly or cartel without placing incredible restrictions on its pricing and activities? We used to really regulate companies like AT&T who got the blessing of government monopoly. This goes for the post office, local energy providers and your cable company. We regulate what they can charge by using an average pricing mechanism and we watch their activities like hawks. Monopolies in the wrong hands will basically wring every last bit of profit to be had out of their customers by restricting their output to people that can pay for it at higher prices than a perfectly competitive market would achieve.

So, let’s see, how many of you live in fairly rich neighborhoods that have bank branches or in the hearts of downtown where businesses use branches? Yes, good show of hands. But are there as many as there used to be? Can you actually go talk to some one who can ‘do’ something other than take a deposit, cash a check or open or close an account? No? Right, I thought so.

Now come to my neighborhood. You wanna bank? Then be prepared to drive where the rich people and businesses are or go use the EZ Credit Payday loan place because you’re going to be joining the ranks of the unbanked and the unbanked may be poor but they provide incredible fee income. There’s always one of those places that fee you into poverty for check cashing or bill paying and bankrupt you with pay day loans and interest rates that mostly are in the triple digits and up, but you’ll find no real bank or for that matter bank ATM. Drive through any poor or working class neighborhood and you’ll see what I mean.

Most of the community banks got gobbled up the last few years. It’s even more rare to find a well run community credit union. My old bank branch (pre-Katrina) is now a Dollar Store with a private fee-heavy ATM. I have to drive downtown and fight parking to get to a branch of what used to be Hibernia and is now Capital One. One of the branches lost a deposit of mine over a year ago and still can’t figure out what to do with it because ‘customer’ service consists of opening and closing accounts now. They also seemed to have misplaced all the loan officers. They aren’t in the branches any more. I think you have to call the telephone menu driven hell realm to find one and they’ll probably send you to a form you fill out on line.

Personal services go away under monopolies because they don’t have to worry about driving customers off when they have no place else to go. Service just gets in the way of those monopoly profits because it drives up costs. You compete based on service only if you have a competitor that offers service. But hey, as long as none of your other competitors don’t do it, you don’t have to worry. As a customer, you go from this model of perfect competition where everything is based on finding the highest quantity of services and products at the cheapest price to game theory over night. Not an expert in Game Theory? Ah, well, too bad. You’re just going to have to go to the library and get a book on it. The government has no law right now to sort that behavior out for you, so you’re on your own or maybe, now you’ll have some third party (like an insurance company, stock broker or real estate agent) you’ll have to pay to sort it all out. Isn’t that special? Remember I said that folks like that are basically the distill tumors of a failed market wrecked with cancer? They feed off of moral hazard, information asymmetry, adverse selection and the inability of the market to correctly price risk and assets. These folks happen when capitalism fails. They’re not the healthy result of it.

I’m going to have to research this, but my guess is probably the last time we saw the government set up a monopoly and let it do what it wanted (poorly regulate it)was some where back in time like the East India Tea company. (Remember, some of us got really pissed about that one!) If the loons in the Republican party ever got their act together and went after a market that was actually losing all of its free market feel, they’d fight these mergers tooth and nail. They would also be asking the Attorney General to remember his duties to enforce the laws of the land. That would include the Sherman Antitrust Act of 1890. YES, that’s 1890. Again, the Republican party is not the party of free market capitalism. The Democratic party is not the party of the little guy. They are delivering monopoly powers to corporations, the only voters that matter these days. They are both the parties of corporatism and concentration. They just serve varying functionaries.

Merger guidelines were put together in 1982 under the Reagan administration of all people. We basically look at three things to determine if a merger hurts or helps us. Those three things are our standard definitions of markets (which you should have learned in microeconomics), results of calculations of key measures of concentration like the Hefindahl-Hirschman Index (HHI) and Merger Standards. What the Department of Treasury, the FDIC, and the FED did this last year was basically violate the Sherman Antitrust Act because their mergers created a highly concentrated market that violates the Reagan standards which are basically looser than a lot of the previous ones we’ve had.

Let me share some data from 1994 and then 2006 with you. It comes from the FDIC call reports via the book we use to teach Principals of Economics at my university. That would be Economics by Hubbard and O’Brien, Second Edition. I retyped the table for you and my Pearson Prentice Hall rep is going to have to forgive me for it, but we bring in a lot of bucks for you and this is basically a nonprofit, educational use and I’ve cited you (free advertising).

Now, look at these figures then go look at what I highlighted in RED. BOA in 2006 had the most concentration which was 9% in Domestic Deposits. JP Morgan had close to 7%. Their combined market share was 16%. In 1994, that was less than 7% which is what the second place bank held alone in 2006. It’s now 20%. If you look at the top four (typical concentration measure used for busting trusts per item two above called 4 firm concentration ratio) in 1994, they’re combined concentration over deposits is 12.7%. The 4FCR for 2006 is 29.8% Right now it sits at 40% and is likely to rise because there are a number of medium banks still out there that are likely to be merged into the top four. That’s just deposits. That means the government just created an oligopoly with out your permission. (Also, it wasn’t your elected officials, it was a bunch of Presidential Appointees.) I could repeat it for home loans or credit cards and it wouldn’t be any more pleasant or safer for us. Holy Monopoly batman, can we get some trust busting from the Justice Department please or are they still understaffed and demoralized? (Again, the data is from the FDIC call reports which are available to the public).

bank concentration

In case you may have missed something here, I’m trying to be an alarmist. I’ve searched almost all the economics and finance blogs and found them to be looking at one tree instead of the entire forest. Digging into the details of how these funds were financed and how they’re being paid back is necessary, but only one part of the bigger analysis and it misses the biggest policy issue.

We just handed over 40% of the domestic deposit market over to the top 4 banks. Under similar circumstances,historically, the justice department has either gone after the merger to stop it or we call it a natural monopoly and heavily regulate their pricing schemes and behaviors or we nationalize their assets. That’s because these kinds of markets are murder on the consumer and they’re not really free market capitalism. Not at all! I’ve detailed some of the already noticeable actions above.

It’s only going to get worse. If these mergers are allowed to stand and continue with no major change in regulation, the next financial crisis will bring us down. The next financial crisis may not be that far away because we still have yet to solve the systemic problems that caused our recent disaster and we continue to ignore those badly priced and accounted for Toxic Assets. This entire situation transfers public welfare to a small bonus class and is not only positively immoral, it is illegal under our current law. They’ll create and up fees, decrease access to services and facilities, and transfer the resultant extraordinary profits right into bonuses and stock dividends.

Remember me? I worked in the biggest S&L in the middle of the country during the S&L crisis. I’ve also worked in banks and for the Federal Reserve. All my degrees are in financial economics. I’ve lived and breathed this stuff since 1980 while trying to implement the MCA for two financial institutions. We’re being set up for fleecing and for a huge disaster. Write your congress critters and complain. Something has to be done now!

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