Archive for October, 2009
Democratic Lawmakers Call for Regulations To Limit Bank Overdraft Charges
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In a move that would affect commercial banks like Bank of America (NYSE: BAC), Wells Fargo & Co. (NYSE: WFC), and JP Morgan Chase (NYSE: JPM), Democratic lawmakers on Friday publicly called for regulatory changes to banks ability to charge overdraft fees. Rep. Barney Frank, chairman of the House Financial Services Committee, and Chris Dodd, Chairman of the Senate Banking Committee called for legislation that would allow bank customers to opt out of overdraft protection.
Banks typically allow customers to overdraft their accounts, temporarily withdraw more money than they have, and then charge them a fee of between $25 and $40 for the convenience. Banks have long argued that their customers want overdraft protection, and would prefer not to have their transaction rejected at the sales counter. But public backlash at the size of overdraft fees charged, and the perception by bank account holders that the timing of credits and debits were being manipulated in order to generate additional fees has led to the cry for legislation to regulate and modify this bank practice.
Over the past few weeks, in a gesture of political goodwill and to gain some positive public relations capital, Bank of America (NYSE: BAC), Wells Fargo & Co. (NYSE: WFC), and JP Morgan Chase (NYSE: JPM), announced that they would allow their customers to decide for themselves whether they wanted overdraft protection. This would allow account holders to opt out of any overdraft protection program, rather than making it mandatory for all account holders. These new changes to internal bank policy were generally hailed as “too little, too late” by lawmakers in the House and Senate, and the fear is that once public focus is removed from this area, banks will quietly shift back to their previous methods and fee structures.
It is widely expected that the Federal Reserve will announce new regulations on bank overdrafts by the end of 2009, but Democratic lawmakers would like to see any new regulations codified into law. Representative Carolyn Maloney (D-NY) decided not to wait, and recently introduced a bill in the House that would require banks to ask customers whether or not they wanted overdraft protection.
Congress already has a full plate with health care reform taking up most of their time as well as the headlines, but both Congress and the Administration have made it clear that reform of banks and the financial markets are also very high on their list. We will see what becomes of this bill, though it is fairly small in scope, it does promise consumers some protection and could be the catalyst for additional regulations of the financial markets and banking industry.
Although the projected surge in commercial loan defaults is expected to be felt largely by regional and community banks, some experts say big banks including Citigroup (C), Bank of America (BAC), and Wells Fargo (WFC) may not be immune to the expected commercial loan collapse in 2010.
Ill-defined or inconsistently applied rules for valuing securities and handling loan modifications has some analysts questioning the health of all banks including large firms who have received federal bailout money.
“The credibility of the banking system could take another step back,” said Paul Miller, an analyst at FBR Capital Markets. “Everyone is expecting we’ve seen the peak in losses, but it’s impossible to know for sure because you can’t get an apples-to-apples comparison.”
Banks have been swimming in losses since mid-2007, when credit demand slowed for all sorts of goods and services. Although the commercial real estate losses have been occurring at a slower pace, the high season for defaults is not forecast until 2010.
Banks are facing a perfect storm in commercial mortgages and construction loans made when prices were much higher and demand for space much stronger. The pace at which U.S. commercial banks are adding to their loan loss reserves has slowed this year, while loans continue to go bad at a brisk pace.
How bad is the problem? According to the Moody’s/REAL commercial property price index, prices on apartment, industrial, office and warehouse properties dropped 33% over the past year. Add to that an estimate from real estate research firm Foresight Analytics that says banks have only booked about one-third should of their projected losses of $110 billion on defaulted commercial real estate and construction loans.
That means the banks could face a backlog of $70 billion or so defaulted but unreserved loans as we head into the teeth of down cycle in commercial real estate — where the bulk of bubble-era loans are due to be repaid or refinanced between 2010 and 2012.
Loans written off as uncollectible hit their highest level on record in the second quarter, according to government data. Loan loss reserves are also at a peak since the government started keeping track in 1984, according to data from the Federal Reserve Bank of St. Louis.
Taking losses on souring loans and troubled assets eats into profits, which tends to drive down share prices and executives’ pay. The losses also erode capital, reducing lendable funds and forcing banks to raise new money by selling stock or businesses.
Accordingly, banks have been eager to stretch their losses across as long a period as possible. Facing a triple-digit bank-failure count and trying to manage hundreds of troubled lenders, regulators are willing to go along, up to a point.
In April, accounting rule makers reversed controversial “mark-to-market” regulations, giving banks more leeway in valuing hard-to-trade securities. But many regulators are now concerned that this has only delayed the inevitable day of reckoning when banks will have to bring some off balance-sheet assets and liabilities back in house.
Saying it would give the executive branch far too much “unprecedented power,” both Republicans and Democrats struck out at the bill introduced to battle against financial risk in the economy.
Responses were it would not only institutionalize “too big to fail,” but would also offer “permanent, unlimited bailout authority,” to the executive branch.
What it essentially does is take away the checks and balances of Congress and allow implementation of taxes and spending without congressional approval, a major reason for the increasing attacks from all quarters of the political spectrum. It would evidently, based on whatever an administration would want, allow the transfer of money to Wall Street from the Treasury whenever they wanted.
In other words, huge Wall Street firms could use the taxpayers’ money as their piggy bank whenever they went looking for a handout from the President and his people, based on any type of alleged or supposed crisis. We all know where that would go.
Embattled Treasury Secretary Timothy Geithner tried to make a case for the proposed legislation saying, “Without the ability for the government to step in and manage the failure of a large firm and contain the risk of the fire spreading, we will be consigned to repeat the experience of last fall. It’s a really stark, simple thing.” He’s even saying that with a straight face.
Geithner attempted to blast the bankruptcy code as not being an “effective tool” for handling large, global financial institutions which fail, citing Lehman Brothers. He added that government interference would only apply to banks, while other financial firms could continue to go the bankruptcy route.
As usual, the executive branch’s response is to increase regulations and power, while attempting to limit the feedback and checks other branches of the government would provide so they don’t run amok like they have been even under the current economic conditions.
The bill even allows for increased powers for the Federal Reserve, which has been a major culprit in the the global economic crisis in the first place, and continues to be as it keeps on printing money at unprecedented levels.
New powers afforded the Federal Reserve would include restricting the pay and bonuses of executives, limiting credit exposure, forcing bankruptcies and blocking acquisitions. This of course is an agency which battles and refuses to allow its books to be audited by anyone. They only let out the information they choose to with the faux audits currently used.
As far as the FDIC, they would be allowed to offer more credit to solvent banks and other financial corporations in order to allegedly protect against the financial markets becoming unstable again.
Leaders of these governmental entities, like Sheila Bair at the FDIC, assert taxpayers won’t flip the bill for this but the financial companies will. But that’s far from the truth, as when money is extracted from banks and other financial institutions, it is passed on to consumers through higher prices for products and services they offer. It’s just a hidden consumer tax rather than one that is up front and easy to identify.
The idea that you can take all the risk out of life in general, and the financial sector in particular, is a messianic complex and not one based in reality. Lawmakers rightly oppose this as all of us should, and we need to go back to allowing the market to make these decisions and not megalomaniac members of this confused and socialist administration trying to take over the free market, which has only partially existed for some time as it is.