Stupid Banker Tricks

Posted: February 4, 2010 | Author: | Filed under: U.S. Economy, Uncategorized, Voter Ignorance | Tags: , , , | 2 Comments

I have a really great guy in our library that takes care of the business college that digs up some of the most interesting reports and

sends out the links. It’s kind’ve like having my graduate assistant back but on a different level. He doesn’t do grades, but he keeps me current on things I used to follow when I spent more time at my desk and less time in my car driving across bayous and lakes.

I became aware of all the issues surrounding the unbanked, predatory lending practices, check cashing companies, and abusive credit card fees when I spent 5 weeks in Omaha right after Hurricane Katrina.  A very old friend of mine–a math teacher at the community college I once taught at for a few years when my eldest was a toddler–took me to a seminar filled with social workers who were complaining how many of their clientele were being gamed by fraudulent lending practices.  I returned to New Orleans to spend a lot of time researching things and predicted it was one big house of cards that would bring down the economy eventually.  The research was interesting but turned out to not be ‘glamorous’ enough for publication.  The other thing was I was basically told my assertions that these practices would bring down the economy part was over the top because, well you know, financial innovation is such a handy dandy thing and these sweethearts were just offering up much needed services to under-served consumers. Yeah, right.

So, this study from the Center for Responsible Lending showed up in my email this morning. I admit to having spent a huge amount of time looking at their studies about 4 years ago, but was told to quit the line of research by my peers. I switched to something more marketable. This report is very useful and it outlines a lot of the new tricks that credit card issuers are using to get around credit card reform. Banks are taking steps to ensure we continue our indentured servant status.  I’ve now torn up all by two credit cards and I’m on the verge of just saying no to all loans and credit cards; big or small. Here is a list of ways they’re getting around new legislation to curb their excesses. The name of the report is Dodging Reform and you should at least read the Executive Summary and check out the charts. (Yes, I like nifty charts as well as nifty graphs.) Here’s the stated purpose of the study.

Faced with pending and proposed reforms designed to protect consumers from a series of unfair charges, credit card issuers have established or expanded the use of at least eight hidden charges across more than four hundred million accounts. The May 2009 Credit CARD Act addressed the hidden and deceptive pricing strategies that had been the most costly to credit card users. However, some issuers appear to be working to compensate for part of this lost revenue by instituting or accelerating new practices that increase hidden costs on consumers. Some of the tactics discussed here are not well known, while others are known.

Since the FIRE Lobby has us all in a state of borrower beware, I’d like to outline some of the worst of these new abusive practices for you. These are hidden charges that will cause your credit card balance to compound and keep you paying them forever.

The first practice is called “pick-a-rate” and impacts around 117 million accounts according to the study. This is basically a practice that puts you on a variable interest rate. Since the FED has signaled their willingness to return to higher interest rates within a the year, do not get on one of these plans! Your rate is bound to increase if it hasn’t already. The trick though, is that the APR actually is computed in a way to be higher than the rate you pick and the details about the rate are buried in the fine print. These are the problems according to the study.

  • Hidden “pick-a-rate” pricing charges consumers APRs 0.3 percentage points higher ona verage than traditional pricing.
  • Pick-a-rate results in a total cost to consumers of $720 million per year and may reach $2.5 billion per year if the practice becomes the industry standard.

There are a lot of nifty graphs that show the impact of interest rate changes on the pick-a-rate plans. These things will get incredibly more expensive as we return to a more normal set of interest rates and monetary policy.

A second practice is that of using Minimum Finance Charges. This practice is aimed at the people who partially pay off their balances every month.

In 2001, the minimum finance charge for 7 of the Top 8 issuers was $0.50. By 2009, most issuers charged a dollar or more as their minimum finance charge, with the highest being $2.00. Currently, they average $1.28.6 Borrowers pay more than $430 million annually as a result of minimum finance charges and that figure is rising as these charges are increased.

Again, the graphs in the study will say everything you need to know here. These charges are expected to skyrocket this year for the top 8 issuers. As this market gets more concentrated into the hands of those eight top issuers, their practices are becoming more in sync with each other in keeping with the game theory model of rivalry. (The McClatchy graph up top will show you exactly how concentrated this market is becoming.) You’ll not be able to avoid these if you EVER take a cash advance on your credit card so DO NOT DO THIS.

These minimum finance charges take effect when a consumer borrows money—a cash advance—on their credit card, but the amount borrowed is low enough (or the interest rate is low enough) that the finance charge would normally be below the minimum. For example, if a consumer charged $50 on their credit card, had an interest rate of 12% and did not pay the balance in full, they would normally owe 50 cents in finance charges. But if the issuer had a minimum finance charge of $1.50, they would instead be required to pay this amount

Variable rate floors are the third practice to worry about. Basically, your issuer will tell you that your interest rate is “variable,” but it only goes up from its starting value and never down. Again, in a situation where interest rates are probably going to increase, this is a bad situation. Don’t get a card with these terms.

Other practices to watch include compression of balances categories into tiered late fees. This practices applies the highest late fee amounts to smaller balances and is predicted to cause in 9 in 10 consumers to pay the highest fee. Inactivity Fees are now being instigated which charge you an annual fee if you do not use a card. They are aware that closing an account impacts your credit card rating so many folks just keep them open for that reason or for precautionary purposes. You’ll now pay for that privilege.

They are also a series of fees being planned for balance transfers, cash advances, and international transactions. The deal is that none of these practices were addressed by the Credit Card Act of 2009 which effectively makes the new law behind the times already. The proposed Consumer Financial Protection Agency would have the ability to identify these practices and control them. I’m not sure if you remember me mentioning recently in the news that Senator Dodd is now actively considering dropping the clause in the proposed financial reform that would create this entity. This is really bad news.

Senate banking committee Chairman Sen. Christopher J. Dodd (D-Conn.) has discussed jettisoning plans for a standalone Consumer Financial Protection Agency, as part of an effort to secure bipartisan support for legislation to reform financial regulation, said people familiar with the matter.

One possibility raised during recent talks between Dodd’s staff and Republican counterparts would be to assign new consumer protection powers to another agency. Such a compromise might offer an opportunity for Dodd to preserve the goal of expanding safeguards while appeasing Republicans who have chafed at any suggestion of a new agency.

“If there’s a bipartisan deal, that’s likely how it’s going to come out,” said one Democratic aide, who was not authorized to speak on the record about the discussions.

President Obama proposed last June the creation of an agency to protect consumers against abuses in mortgages, credit cards and other forms of lending.

It remains unclear if the President will fight to keep the agency in the legislation. I shudder every time I see the the words “secure bipartisan support” because that usually means that congressional Democrats will cave to their Republican counterparts at the first sign of disagreement. The banking industry appears to have both parties captured.

“This is the litmus test about whether Congress is serious in their efforts to overall financial regulation,” said Travis Plunkett, legislative director for the Consumer Federation of America. “If they can’t take consumer protection out of the hands of regulators who failed” at that task before, he added, “then they’re not really serious about doing things differently than in the past.”

Heather Booth, executive director of Americans for Financial Reform, a coalition of nearly 200 consumer, labor and civil rights organizations, on Friday urged Dodd “not to cave to the big banks and their armies of lobbyists.”

Given my take that they’ll cave under the least bit of pressure, it is definitely a borrower beware environment. Again, find out what opportunities you may have with a credit union in your area that is mutually owned by its depositors and see what arrangements it has made with a credit card provider if you must have credit cards. Check out this report and be sure to look for these things in the fine print. You can’t afford not to examine these details because you’ll be indentured to these jerks for a long period of time if you miss the imposition of these terms and fees.

Market Manipulation 101 or How to Rob Fort Knox in front of a Congressional Panel

Posted: February 3, 2010 | Author: | Filed under: Bailout Blues, Equity Markets, Global Financial Crisis, The Media SUCKS, U.S. Economy, Voter Ignorance | Tags: , , , , , | 1 Comment

Every day, as the AIG saga unfolds, I have to wonder if there is any vestige of a functional regulatory scheme left in this country. I’ve already decided that there is no shred of decency left in any one whose hand came close to unraveling the insurance giant and its deals. I know this is an area where eyes glaze over, but really, it’s like solving a crime that even Miss. Marple couldn’t fathom. Ladies and Gentlemen, we’ve been robbed.

It may be too complex for most journalists to report about, but the financial blog realm, full of individual investors, academics and pissed off Americans is keeping the story alive. The headline today from the Atlantic is there are $100 Million More in AIG bonuses. Don’t forget, we basically OWN this company so this is OUR money. Most voters are wise enough to know that this alone does not pass the threshold of decency. You don’t have to have a PHd with an emphasis on corporate governance to figure out that something is very wrong when people can bankrupt a company one year, and still collect bonuses the very next.

In the ongoing AIG bonus saga, the troubled insurer will distribute around $100 million in bonuses today, that’s likely much to the dismay of taxpayers who now own the firm. Despite the fact that AIG is technically under compensation restrictions, many so-called “guaranteed bonuses” that were in place before AIG’s collapse still must be honored by law. This is a regrettable situation, and speaks loudly to the messy problem that bailouts pose.

This is the headline today in many of the mainstream papers. This includes the NY Times that reports those bonuses may have been lowered by$20 million to lessen the blow. This is a mere trifling compared to what was pilfered from the dying AIG by Goldman Sachs as it was in the throes of death. Those Revenuers let Goldman Sachs pick clean the dead body of AIG before we got the bill for the funeral.

“A.I.G. has taxpayers over a barrel,” said Senator Charles E. Grassley, an Iowa Republican, in a statement on Tuesday night. “The Obama administration has been outmaneuvered. And the closed-door negotiations just add to the skepticism that the taxpayers will ever get the upper hand.”

A.I.G. first promised the retention bonuses to keep people working at its financial products unit, which traded in the derivatives that imploded in September 2008, leading to the biggest government bailout in history.

The contracts, which were established in December 2007, were intended to keep people from leaving the company and called for the bonuses to be paid in regular installments to more than 400 employees in the unit. The final payment, which was for about $198 million, was due in mid-March, but was accelerated to Wednesday as part of the agreement to reduce its size.

Fearing a firestorm like the one last spring, A.I.G. had been working with the Treasury’s special master for compensation, Kenneth R. Feinberg, on a compromise that would allow it to keep its promise in part, without offending taxpayers.

So, the bonuses plays into the theme of the moment–Populist Outrage–which is driving everything from angry teabots to high ratings for media screamers like Glenn Beck. It hides a bigger problem. What is going on behind the schemes in the books and the deals as we attempt to bailout a group of bad gamblers is far worse. Yves Smith of Naked Capitalism lays out some of the issues on HuffPo as well as a series of thread at her own blog. While we rage at the bonuses, the real crime happened behind the curtains, where you’re not supposed to notice Timothy Geithner, pulling the strings and blowing the steam from the giant talking head of Glenn Beck.

Although the focus of press and public attention has been the decision to pay out “100%”, this issue has not been framed as crisply as it should be. Remember, the underlying transactions were crap CDOs that the banks (or bank customers, a subject we will turn to later) owned, and on which the banks had gotten credit default swaps from AIG. The Fed in fact paid out WELL MORE than 100% on the value of the AIG credit default swaps by virtue of also buying the CDOs.

That is one simple paragraph to describe the scheme behind the bailout of AIG. The facts are nearly beyond belief and as Congressman Dennis Kucinich put it, the testimony provided by Timmy-in-the-Well-again Geithner and among others doesn’t “pass the smell test.” I’m not sure how you miss the smells coming from an open, festering mass grave. But, the majority of Americans, and Congressio Critters, seem to think it could be just a few dead birds in the attic. The evil is the ledger accounts at the New York Fed.

Smith says the details show the FED as either captured regulator exhibiting ‘crony behavior’ or the behavior of Geithner was duplicitous and merits legal action. That is even mild. Her Huffpo article lays out the arguments for both scenarios. Either way, Giethner’s NY Fed comes off badly and Paulson and the Bush Treasury come off as co-conspirators to a heist.

Another article which demonstrates palpable anger at both the ineffective Fed and Congress is written in the financial/investment blog Money Morning by Shah Giliani who is a retired Hedge Manager. Again, the lack of knowledgeable staff could be the reason the pieces to the puzzle are being put together outside of the mainstream media. It could be the story is too complex to be glamorous and deemed beyond the reach of the average 5th grade reading level achieved at most major newspapers. It’s even possible no one wants to take on the financial industry. The deal is what happened as outlined in the testimony–had some one on that Congressional Panel actually had a background in something other than professional politics subsidized by the FIRE lobby and a plethora of worthless law degrees and knew finance–should’ve caused outrage around the country and sent subpoenas flying out of the justice department and the SEC. The central players in this are Goldman Sachs and the New York Fed whose people are so entrenched now in the Treasury and the West Wing that you have to wonder if there ever will be enough justice left in this country to counteract what should be the cries of lynch mobs. Following through with the legal obligations to pay out the bonuses–with the smallish $20 million concession–is just the sprinkles on the cake. Perhaps it’s easier to pay them than to have the AIG financiers talk about the details as the FED and Treasury unwound their deals.

The rationale for what is essentially the breaking of so many laws is the rescue of the U.S. and the world from another Great Depression. There are always ignoble deeds, however, done in the name of the most noble causes. This should go down in the press and in history as The Great U.S. Treasury and Financial Market Heist. The last two secretaries of Treasury-Paulson and Geithner–should be hauled before a government tribunal and stuck in Gitmo with the rest of the terrorists and enemies of the state. The dirty details follow the fold.

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A Dismal Outlook from ‘Not a gay Science’

Posted: February 1, 2010 | Author: | Filed under: Uncategorized | Comments Off on A Dismal Outlook from ‘Not a gay Science’

“Not a “gay science,” I should say, like some we have heard of; no, a dreary, desolate and, indeed, quite abject and distressing one; what we might call, by way of eminence, the dismal science.”

I’ve been perusing several economic sources for better news since this Monday’s GDP growth announcement for the 4th quarter was higher than anticipated.  This was mostly due to a better of inventory re-ordering and really didn’t set any one’s hair on fire.  The markets were up so I was thinking maybe the budget announcement today was going better than I thought possible.  Serves me right to try to be an optimist among dismal scientists.  I think I would characterize the market today as slap happy.  What I found in the devilish details follows and, of course, mostly sourced from the British Press whose economy is so wrapped up with ours they could hardly be wishing us harm.
I introduced you to the Volcker Rule which is a modest attempt at reviving something akin to the Glass Steagall Act of 1933. The Financial Times is reporting that the Senate will either ‘significantly modify’ or drop the rule. Evidently the new spirit of bipartisanship is the same as the old spirit of bipartisanship, the Republicans say no to everything responsible and reasonable and the Democrats cave immediately. As I said, the proposed regulations are tepid by the old standards but still too much for the laissez-faire Republicans who would rather enable monopolies than promote true market capitalism. I thought we had basically had it with the excesses of Reagan Bush Crony Capitalism and voted the buggers out. Silly me!

Speaking to this news service on Thursday, Shelby said if Democrats push forward with the proposals they risk unravelling much of the bipartisan support already reached regarding the passage of financial regulatory reform in the Senate. Shelby said that the Obama administration risks losing Republican support for the bill if they begin to “politicise” the issue.

However, Shelby said he expects to hold a meeting with Banking Committee Chairman Chris Dodd (D-CT) regarding the way forward on regulatory reform in two weeks time. A Democratic banking committee staffer confirmed that the meeting between Dodd and Shelby will be critical as Dodd needs to determine the level of bipartisan agreement and the timing of bringing the bill through committee and on the Senate floor.

With the election of Republican Scott Brown to the Senate, the Democrats no longer have the necessary 60 votes to force through a Regulatory Reform package, and any bill will need at least some Republican support to pass. A Dodd staffer said the senator is likely to quietly drop or modify many of the recommendations in the Volcker rule to ensure Republican support for regulatory reform.

“Chris is retiring so he wants to end his career with an important regulatory reform bill and he wants to make the bill bipartisan,” the staffer said. “He is not going to risk bipartisan support to make the White House happy.”

The Democratic staffer said there is an ongoing debate among members of the banking committee about whether the Volcker rule would effectively push risk out of regulated markets and thus ultimately create more risk to the financial system.

HuffPo is even reporting that Frank Luntz is penning memos that demonstrate a willingness to kill any attempt to regulate anything in the financial services sector which is akin to showing the barbarians the secret location to your daughters and silver during a Viking raid. It’s a virtual talking points instruction memo for enabling moral hazard via active promotion of information asymmetry.

Nine months after he penned a memo laying out the arguments for health care legislation’s destruction, Republican message guru Frank Luntz has put together a playbook to help derail financial regulatory reform.

In a 17-page memo titled, “The Language of Financial Reform,” Luntz urged opponents of reform to frame the final product as filled with bank bailouts, lobbyist loopholes, and additional layers of complicated government bureaucracy.

“If there is one thing we can all agree on, it’s that the bad decisions and harmful policies by Washington bureaucrats that in many ways led to the economic crash must never be repeated,” Luntz wrote. “This is your critical advantage. Washington’s incompetence is the common ground on which you can build support.”

Luntz continued: “Ordinarily, calling for a new government program ‘to protect consumers’ would be extraordinary popular. But these are not ordinary times. The American people are not just saying ‘no.’ They are saying ‘hell no’ to more government agencies, more bureaucrats, and more legislation crafted by special interests.”

If these things come to pass, you might as well give Bernie Madoff a get out of jail free card. His crimes and misdemeanors will seem paltry compared to what will come. If you were hoping to buy yourself out of indentured servitude from your privateering financial middle man with your own well paying job (we should all have those $100,000 million dollar bonuses for acting on government tips), forget it. CEA Chair Christina Romer has dropped the other shoe on the unemployment data. I knew that structural unemployment was bad, but I had no idea until this came out. (Yes, it’s The Economist, again. Why oh WHY do I have to consult the foreign press to get to the bottom of things?) I have no idea where they are going to find customers for businesses or tax receipts for government with this nasty bit of data.

OMB head Peter Orszag is giving a press conference just now with Christina Romer, head of the Council of Economic Advisors, on the president’s Fiscal Year 2011 budget. Ms Romer explained the economic assumptions underlining the budget forecasts. She noted that expected fourth quarter-over-fourth quarter real GDP growth would be 3% in 2010, 4.3% in 2011 and 2012, and would average 3.8% in the five years thereafter. These figures are in line with Fed projections.

She then gave the unemployment forecast. At the end of 2010, the unemployment rate, according to the administration’s forecast, will be 9.8%. At the end of 2011, the rate will be at 8.9%. And at the end of 2012, after the next presidential election, the unemployment rate will be 7.9%.

Deficit reduction has a lot to do with the strength of the economy.  It also has a lot to do with people finding jobs so they pay taxes and buy things that also come with taxes.  Balancing the budget with this kind outlook for unemployment is playing Russian roulette with more than one bullet in the chamber.   Increasing taxes is likely to choke off a recovery but so is any increase in interest rate that could come from a skittish market that doesn’t fell comfortable with the Orzag scenario presented today of a budget deficit coming in around 10% of output eventually even though the Obama administration says that level is unacceptable and wants to bring down to 3%.  However, we put the national defense budget off the table along with medicare and social security so there’s really no place to go.  Even sunsetting the Bush tax cuts that went to households over $250,000 at this point isn’t going to cut it.  We’ve had 8 years of two wars and no war bonds sold to any one.  The silly thing compounds, you know, even when the interest rate is low.  Where’s Cheney with his deficits don’t matter mantra now?

If this is the most likely or the best scenario, consider my investment advice to be a gun and a rocking chair for the front porch. Oh, and make a big ol’ fort like fence around your Michelle Obama Organic Nutritious Great Recession Victory Garden. You’re going to have to use the butter and eggs money for your bullets.

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