The Audit
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July 02, 2009 05:48 PM
Amplifying the Drumbeat on the “Overdraft Protection” Racket
The issue picks up momentum in the financial press
It's The New York Times turn to do a nice story on "overdraft protection" practices.
The Journal had one yesterday and the Washington Post did this weekend. Today, Felix Salmon of Reuters picks up the ball and advances it, too.
First, the Times piece. Eric Dash has a snappy take on the issue, rounding up lots of good points and making it clear he's on your side (emphasis mine):
Even now, after all those bailouts, banks never seem to tire of dipping a little deeper into your wallet. Despite the tough economic times and increased scrutiny from Washington, they are keeping most fees at record highs, and are eking out slight increases on others like overdraft charges — a step they rarely took during past recessions.
I submit that one way to turn around circulation numbers is to report and write more like this. Some might say that's taking sides, but it's no journalistic sin to empathize with the public. I'll bet the antipathy to this gouging is almost unanimous among those who aren't bank executives (think 99.9 percent of us). Why should the paper's prose be clinical and detached when writing about something that's clearly a ripoff? I think readers would love to know their paper is fighting for them. Too often they don't. Papers make you read between the lines to appreciate what they do.
Digression aside, the Times has some very interesting stuff here. The argument for allowing banks like Citigroup and Bank of America to get so inordinately huge is that they become more "efficient," lowering costs for consumers. Tell that to their customers getting slapped with overdrafts (emphasis mine):
The nation’s biggest banks — those that received the biggest bailouts from taxpayers, and are once again gaining strength — charge fees that are on average at least 20 percent higher than those at smaller lenders, according to Moebs Services, a economic research firm used by banks and federal regulators.
So your neighborhood bank, which presumably has a higher percentage cost of overhead than GinormaBankCorp, is somehow able to charge a fifth less than said behemoth. Hmm.
Salmon's on this, too, finding a report by bank consultant Michael Flores that shows just how much more big banks depend on overdraft charges and the like:
It’s the biggest banks who are the worst offenders here, making much more money off noninterest income (ie fees) than their smaller counterparts.
Here's his chart:
It gets worse. Salmon quotes Flores:
Active households (defined as the 20.2 million households with bank or credit union accounts who write the majority of NSF items) pay $1,374 in annual NSF fees.
I'm skeptical of that $1,374 number (can it really be that high?) but if it's even half that, it's an outrage. As Salmon says:
This is a tax on poverty, it’s substantial, and it ought to be stopped: the 20% of bank customers who pay 80% of the overdraft fees are the banks’ poorest customers.
This is certainly right. And it's good to reframe these fees for what they really are: exponentially high-interest loans.
Think about it. If you accidentally overdraw your account, Bank of America, say, covers the excess amount of the purchase and charges you $35 for the privilege. They never asked if you wanted them to do that. And as we saw yesterday, some banks make it difficult or impossible to turn off "overdraft protection," a term that I said ought to be in scare quotes every time it's used in a news story. It's Orwellian. This "service" allows overdrafts (most occur via cards these days), it doesn't protect you from them.
Salmon reports that the median overdraft is $36. If you waited a year to pay that $35 fee, it would basically be a 100% interest loan. Of course, a bank would shut your account down by then. I'd guess most are paid within two weeks, when the next paycheck is deposited. A report (PDF) by East Carolina University professor Mark A. Fusaro put the median annual interest rate paid on overdrafts at 4,547 percent.
While you might dismiss overdrafts as a simple personal-responsibility issue, Fusaro found that 57 percent of account holders in its sample had overdrawn at some point, meaning that most of us are irresponsible.
Salmon calls this a "poverty issue," which is red meat for a certain kind of commenter (bring it on!). But he's certainly right. Fusaro found that 20 percent of account holders used overdraft protection for personal loans. Well-off folks aren't doing that. Basically, these are payday loans that make that loathsome industry's interest rates look tiny.
Let's not forget about credit cards. When my wife and I got married, I put her on my bank accounts. She accidentally used my Bank of America credit card instead of my BofA check card and racked up $33 overdraft fees. Now, fine, it's our mistake and we're in a better position to take those hits than many. I'll take my lumps. But I'm old enough to remember when credit cards got refused when you reached your credit limit. Any wonder why they don't now?
That's a key answer to this big problem. The default setting on all accounts, including credit cards, ought to be to decline overdrafts (this wouldn't affect bad checks, of course, which are more problematic). Consumers should have to consciously opt in to "overdraft protection." That's fair, right? Defining and regulating "overdraft protection" as "loans" ought to help, too.
Don't think the banks will go along without a massive fight. This is a $38 billion a year business that's almost pure profit.
The new press attention to this practice is a welcome development indeed. Keep it up.
UPDATE:
After posting this, I saw the prolific Salmon had added some excellent thoughts on the subject, dropping a little behavioral economics on the laissez-faire crowd. Here's a taste:
...I wrote that the banks “should be stopped”. In response, Fernando says that “we need to keep holding people responsible” and that “some people just need to manage themselves better”. But here’s the difference: stopping banks is, conceptually, possible. But the $38 billion in annual overdraft fees are clear proof that Fernando’s “people” just aren’t going to magically start managing their finances in an optimal manner.
Empirically speaking, it’s clear that the 20% of checking account holders who pay, on average, $1,374 in annual overdraft fees apiece are precisely the people least able to afford them. They’re probably also the 20% of people who, for whatever reason, find it very difficult to manage their personal finances. Not everybody is as numerate and sophisticated as Vincent Fernando — a lot of people can’t even manage simple addition and subtraction. Is it fair for the highly-sophisticated and numerate executives at international banking giants like Bank of America to take advantage of that financial illiteracy in order to line their own pockets with multi-million-dollar paychecks? Or should people be able to trust their banks implicitly?
Can't put it any better than that. Go read the whole thing.
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July 02, 2009 09:36 AM
Journal: Wall Street Pay Could Set Records
That didn't take long.
The Journal reports this morning that Wall Street compensation is on track to possibly outdo 2007 levels. The paper doesn't explicitly say it, but that would set an all-time record.
Goldman Sachs employees are on pace for a $673,000 payday, according to the WSJ average of analysts' estimates. Morgan Stanley employees are headed for a much lower—but still nice—$275,000, which wouldn't be that much more than last year's and would be well below 2007's $343,000, which doesn't fit with the story's thesis.
But Morgan Stanley did set aside 68 percent of its revenue in the first quarter for compensation—well above the usual 50 percent. The paper doesn't say why its 2009 increase is so much less than Goldman's, so I'd assume it's because their earnings have rebounded less. And there are other things going on in the pay area: Deutsche Bank is offering two-year pay guarantees for new hires, for instance.
As the Journal understates:
...the comeback in compensation so far this year shows how hard it is for Wall Street to break its old habits. Repaying last year's capital infusions from the government freed Goldman, Morgan Stanley and other big financial firms from curbs on compensation.
Seems like we ought to get the billions back from their backdoor bailout via AIG before Wall Street goes too crazy, but that's just me.
The paper does note that Wall Street is making some steps toward pay reform:
While Wall Street firms remain loath to cap pay levels, some are changing the mix of salary and bonus, partly in response to the financial crisis and added scrutiny from Washington. Some are boosting salaries and adding more stock, as well as so-called "clawback" provisions aimed at tying employee pay packages more closely to the long-term fortunes of their firms.
Give them a golf clap.
UPDATE:
It's been pointed out to me that The New York Times had pretty much this exact story—more than two months ago. Indeed they did.
Reporter Louise Story, a sharp up-and-comer who once was forced to endure a whole summer sitting across from me at The Wall Street Journal (bonus trivia: Story found me commiserating with Journal colleagues at the paper's watering hole the night Murdoch locked up the deal for Dow Jones and quoted me moaning about it), was early to latch on to this trend:
Workers at the largest financial institutions are on track to earn as much money this year as they did before the financial crisis began, because of the strong start of the year for bank profits.
She also had numbers for JPMorgan Chase, something the Journal didn't include:
At other banks, pay scales tilt in favor of particular units. JPMorgan Chase, for example, is setting aside what would total $138,234 on average for workers. But in the bank’s trading and investment banking unit, if revenue stays at first-quarter levels, workers are on track to earn an average of $509,524 over the year. That figure was $345,147 in 2006.
So a retroactive tip of The Audit's green eyeshade is due Story and the Times for being early on this.
But that doesn't mean it's any shame for the Journal to run this story. Far from it. Journalists are too enthralled with the idea that "if it's been done before we can't do it." Bogus. Important stories need to be visited and revisited —the drumbeat thing. I think that's a critical reason why so much of the press's good work during the bubble didn't make much of a difference.
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July 01, 2009 05:21 PM
WSJ Shows How Personal-Finance Pieces Ought to Be Done
It's rare to read a genuinely good personal-finance story, so I was glad to see Karen Blumenthal's column in The Wall Street Journal today take a hard look at how banks aid scam artists.
Blumenthal's relative was getting involved with those telemarketer scam artists that prey on the elderly. He ended up sending money to scammers and overdrawing his account numerous times. For the privilege he was charged $33 a whack. The column points out that "overdraft protection" allowed the scammers to get more money from the relative.
I like this piece because it has an urgency you too often don't find in personal-finance journalism. Perhaps because the author's own family took the hits, Blumenthal is pretty blunt about what's going on here. And the headline doesn't hem and haw, either, saying "How Banks, Marketers Aid Scams."
And look at this (emphasis mine):
What the son didn’t count on was that the bank would automatically cover up to several hundred dollars a month of his father’s overdrafts, which essentially gave him more money to send to scammers. In addition, he was charged $33 for every overdraft—running up hundreds of dollars in fees. When the son called Sovereign Bank, his father’s longtime bank, he was told that the protection was standard and that he couldn’t turn it off.
Those hundreds of dollars in fees are exactly why the Orwellian "overdraft protection" is there in the first place. It doesn't protect you from overdrafts, it allows you to overdraft. It's essentially an unregulated high-interest, short-term loan from a bank to a depositor.
Here's the weaselly response from the bank:
Steven Mantelli, Sovereign’s senior vice president for retail banking, says the bank provides overdraft protection “on a courtesy basis” for customers, and it isn’t typically shut off. But in isolated situations, he says, the bank will stop it.
"Isolated situations" like when a customer has the biggest financial newspaper in the world on the phone on their behalf.
I have a quibble with this paragraph:
Just a few years ago, banks simply declined to cover overdrafts. But a Federal Deposit Insurance Corp. study of 462 banks last year found that three-quarters of the banks now automatically enroll customers in overdraft programs and that overdraft charges generated about $2 billion in bank fees in 2006, or about 6% of the banks’ operating revenue.
Somebody who's not reading closely could come away with the idea that the whole industry only came away with $2 billion from overdraft fees in 2006. There are better statistics out there. The Washington Post this weekend in an excellent personal-finance story (keep 'em coming!) reported that the industry will rake in $37.5 billion from overdraft fees this year. That comes out to about $125 for every man, woman, and child in the country, which seems like a stretch to me, but I'm through being surprised by the banks doings.
And the Post has a good anecdote that shows how that $37.5 billion "overdraft protection" number may be plausible (my scare quotes are intentional—the Post should not have called this protection without quotes, even if it is sarcasm):
Since May, Lori Harris, a Laurel resident, has been the inadvertent recipient of such protection.
Early last month, she deposited money into her Bank of America checking account, but the check did not clear before several charges were posted.
Each time Harris overdrew her account, she paid $35, totaling nearly $300 in fees in May. That set off a chain of events that has left her with about $600 in overdraft fees this month.
Ever had that happen to you? I have, back in college and in my early days in New York as a poorly paid reporter. The "overdraft-protection" scam is particularly brutal on folks who live paycheck to paycheck, or like me back in college: Stafford Loan to Stafford Loan.
Blumenthal broadens her piece to look at companies who sell direct-marketing lists to scammers.
Another eye-opener was how quickly our relative’s phone calls and mail increased once he began replying to sweepstakes and lottery offers. Law-enforcement officials say his response likely landed him on so-called sucker lists that were repeatedly sold.
The lists Blumenthal finds might as well be labeled "marks" or "scam these people!" (emphasis mine):
NextMark Inc. of Hanover, N.H., offers an online database of mailing lists, and a quick search yielded dozens of mailing lists of sweepstakes players, including the “Lucky Sweeps and Lottery Players” list, described as “an ideal audience for business opportunity, subprime credit offers, online betting services, travel and more!” and the “Consumer Centric Sweepstakes Players,” another list of players who “are very responsive and thrive on winning.”
Want to get more outraged?
Other lists offered names, addresses and other data on “Wealthy Widows who Donate” and “Suffering Seniors” who have maladies such as Alzheimer’s and are described as “perfect prospects” for holistic remedies, financial services, subscriptions and insurance.
Unreal. Add marketing lists to the long list of areas that should get more attention from the press—and from Congress. Who's regulating these guys who have such troves of private information about us?
Blumenthal points out that at least Obama's regulation remix is supposed to crack down on things like "overdraft protection." We'll see about that.
In the meantime, we need more personal-finance pieces like this.
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July 01, 2009 02:57 PM
NYT: Banks Gearing Up to Kill New Consumer-Protection Agency
Continuing the theme of the press focusing on the lobbying efforts of the financial industry to keep the status quo, The New York Times reports today that the banks are gearing up to fight the new consumer financial-protection agency—hard.
The Times writes that killing the agency is now the financial industry's top goal, which is not that surprising since most everything else in Obama's plan is hardly onerous to the industry that shattered the economy. This comes on the heels of the release of Obama's plan for the agency, which seems to have broad political support.
But industry executives vowed on Tuesday to fight Mr. Obama’s plan with everything they have, even though banks are still heavily dependent on many taxpayer-supported loans and loan guarantees to get through the crisis.
“It’s going to be a huge fight,” said Edward L. Yingling, president of the American Bankers Association. “This agency would have broad powers that go beyond every consumer law that has ever been enacted.”
Of course, the banks know they're not going to "kill" the agency—although they'll pray for that outside chance. What they want to do is water its mission down until its something like a toothless regulator that won't be able to affect them so much. I wouldn't bet against them on that one. They've got cash, after all, which the NYT euphemistically calls "close ties":
Opponents include JPMorgan Chase and Wells Fargo as well as thousands of regional and local banks that have close ties to lawmakers in every part of the country. But the opposition could also include countless mortgage lenders and independent mortgage brokers.
Why anyone would listen to the mortgage folks is beyond me. Oh wait.
The Times pulls an unintentionally funny quote from a banks mouthpiece:
“We know the optics are bad,” said Scott Talbott, vice president for government affairs for the Financial Services Roundtable, a trade association in Washington. “If you are against a consumer regulatory agency, then everybody will say you’re against consumer regulation.”
I can't imagine why opposing a consumer regulator would make people think you oppose consumer regulation. That's a stunning leap of logic "everybody" is making!
The industry prefers its own regulators, which it's spent decades co-opting, and which have been enablers of financial industry interests (or so they thought) in recent years rather than arms-length overseers in the public interest.
Here's what the industry is so scared of:
It would give the new agency marching orders to set standards for traditional mortgages, and the agency would have the authority to demand that lenders offer those kinds of loans or give consumers the chance to opt out of riskier products.
It would also give the new agency the power to restrict or prohibit mortgages that come with hidden fees and steep penalties for borrowers who pay the loan off early. It would also be empowered to interpret and enforce the new credit card law that Congress passed last month, aimed at restricting banks from arbitrarily raising interest rates.
It would also have examiners, much like existing bank regulatory agencies, who would have the authority to go into specific institutions, issue subpoenas and scrutinize their practices, demand changes and seek penalties.
No more devious loans that trick consumers into forking over billions of dollars in fees and penalties. No more exploding mortgages. No more putting prime borrowers in subprime loans. No more lending people thousands of dollars and then doubling their interest rates overnight. At least I'd hope this agency would mean no more of that stuff. The Times just says it would "be empowered" to stop these things. Regulators of all kinds were empowered to stop the craziness that went on during the bubble, but they didn't.
A key thing to watch on this new consumer agency will be who staffs it. If its officials come from the revolving door of the financial industry, it'll be more or less business as usual. If they're outsiders, then it will have a real chance of changing how the business operates.
The obvious choice would be an outsider like Harvard professor, author and Congressional Oversight Panel chair (and NPR punching bag) Elizabeth Warren, who after all came up with the idea. Wall Street would fight that nomination to the death, though, and as we've seen, the press probably wouldn't favor it too much.
Don't hold your breath on that one.
The key point to remember here is that had their been a consumer-protection agency, we would have had a critical bulwark against the unethical and often downright criminal lending that ran rampant from 2004 to 2007. That doesn't mean the regulator would have stopped the conditions on the ground, especially since its mandate from a Bush administration would have been to pretty much get out of the way. But it surely would have had a moderating effect on the predatory lending that went wild. That would have put a damper on the bubble and its aftermath would have been less of a disaster.
If anything's been made clear from this crash it's that the banks don't care a whit about their customers and are so myopic that they don't understand that overloading them with debt for their own short-term profits makes them unlikely to pay them off in the medium term.
Or as a consumer advocate says:
“It’s obvious from the history of the last 20 years that the regulators never understood that protecting consumers is also a way of ensuring the safety and soundness of financial institutions,” said John Taylor, president of the National Community Reinvestment Coalition.
Right.
Let's be thankful the press has risen to the occasion in recent weeks on Wall Street's lobbying efforts. This is critically important.
Keep it up.
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July 01, 2009 09:33 AM
ProPublica, Post Watchdog Senator’s TARP Meddling
ProPublica and the Washington Post are making a nice little team this week.
On Monday they wrote about how General Electric lobbied its way into billions of dollars in bailout money—without suffering the regulatory consequences.
Today they report that Hawaii's Democratic Senator Daniel Inouye intervened in the fall on behalf of a bank he founded and in which two-thirds of his personal wealth is invested. The bank was an "unlikely candidate" to get TARP funds, ProPublica and the Post say, but it got $135 million of them —two weeks after the senator's office called the FDIC.
Many lawmakers have worked to help home-state banks get federal money since the Treasury announced in October that it would invest up to $250 billion in healthy financial firms. But the Inouye inquiry stands apart because of the senator's ties to Central Pacific. While at least 33 senators own shares in banks that got federal aid, a review of financial disclosures and records obtained from regulatory agencies shows no other instance of the office of a senator intervening on behalf of a bank in which he owned shares.
Reporters Paul Kiel and Binyamin Applebaum report that the bank was an unlikely candidate for the bailout because it had been tagged by regulators, but the story isn't clear on why the bank got in trouble:
Central Pacific's situation was even bleaker because it was in trouble with the FDIC. Regulators had raised concerns about the bank earlier in the year. The bank would soon sign an agreement with its state regulator and the FDIC requiring it to raise an additional $40 million in capital and to improve its management practices.
The piece seems to imply that the regulatory action was because of a capital shortfall, but it's unclear:
The report by the FDIC inspector general found that 26 of the 408 companies whose applications were sent to the Treasury faced enforcement actions as severe as those against Central Pacific. Because the FDIC inspector general did not name these 26 banks, it is unclear how many ultimately won the Treasury's approval. Nor is it clear whether any other bank used the Treasury money -- as Central Pacific did -- to address a capital shortfall identified by regulators.
Several financial analysts said they know of no other instances in which Treasury money was used this way.
The piece adds some helpful context about why this action isn't a violation of Senate conflict-of-interest rules, and points out that another controversial instance of politicians—Maxine Waters and Barney Frank—stepping in to help a bank they have ties to.
Good stuff.
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June 30, 2009 02:23 PM
NY Times Chugs the Dr Pepper
How can The New York Times be this gullible?
The paper writes about Dr Pepper Snapple outsourcing its information technology to an Indian company but somehow comes up with the idea that this will (or, weasel word: "may") result in more jobs in the U.S.
The story says the Indian firm, HCL Technologies, "may be hiring in the United States to do it." Lots of "mays" here. Here's the lede:
Even Snapple, an American iced tea maker with a homespun image, is outsourcing work to an Indian company. But in a twist, the deal may increase jobs in the United States.
And:
HCL said that Dr Pepper Snapple would be its “anchor service desk customer” in an operation in Raleigh, N.C., that would eventually employ 500. With the new deal, HCL is continuing to “bring on new staff at our new facility in North Carolina,” Shami Khorana, president of HCL America, said in a statement.
Glad to see them hiring here. But pardon me if I find it hard to believe their spin that this will increase jobs in the U.S. How many of that 500 are directly related to Dr Pepper Snapple.
The Times acts like Dr Pepper Snapple doesn't have any IT jobs in the U.S. But if you're outsourcing a function, it typically means you've already got it, right? So it's fair to assume that means Dr Pepper Snapple will axe its in-house IT jobs. The NYT doesn't get into the details here.
If you're going to rewrite press releases, especially on sensitive issues like this, you ought to be on the lookout for implausible claims. The Times doesn't do that here.
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June 30, 2009 09:57 AM
LAT Raises the “Nexus” Sales-Tax Issue
The LA Times has an interesting article today on an overlooked aspect of tax policy: The "nexus" exemption for Internet and catalog retailers.
It focuses on Amazon's threats to remove an affiliate program that several states are using to try to tax the online giant's sales. As it is, most states can't charge sales tax on a book if you buy it from Amazon.com but can if you buy it from, say, barnesandnoble.com.
That's because of law that says you can't charge sales tax on an entity unless it has a physical location in your state. But the states are saying the affiliate programs, where a person gets 5 percent or so from sales made through clicks on his site, constitute nexus. So Amazon and smaller sites like Overstock are cutting bait:
On Monday, Amazon cut its ties with Rhode Island affiliates after the state's Assembly passed legislation requiring the company to collect taxes; three days earlier, Amazon canceled its program in North Carolina.
"We feel that the way the state legislatures are going about this is inappropriate," said Patty Smith, an Amazon spokeswoman. "It places an unconstitutional burden on interstate commerce for a state to require a seller without a physical presence in that state to collect sales tax."
Here's the disingenuous quote from Overstock's president Jonathan Johnson:
"We turned off over 3,400 affiliates in New York and we're looking at doing it in every state that's got that kind of legislation proposed," Johnson said. "In our view, it's just not worth it to run an affiliate program where the state's going to make us a tax collector."
Tax collector, huh? Like every mom-and-pop store in the state that your $300 million corporation gets an unfair advantage over?
At a time when tax revenues are plummeting across the country, states are looking for ways to find new ones, as the LAT points out. Cities and states have chafed against the nexus rule because it hurts their sales-tax revenue.
It doesn't seem like we've heard this issue raised in the last several years. The excuse for not levying sales tax on Internet retailers used to be that we didn't want to kill the baby in the crib—we had to let the Net mature.
But it's been sixteen years since the release of the modern Web browser and I think it's safe to say the Internet's here to stay. Amazon is a $36 billion company with large revenues in every state. Why can't it collect sales tax like everybody else?
The LAT reports:
Opponents argue that collecting sales taxes would be both burdensome and costly for Internet retailers; for consumers, it would raise the total cost of purchases. Thousands of people who rely on commission fees would be affected by the programs' cancellation.
I know from my own reporting on this area a few years ago that retailers can use the nexus exemption to threaten states. Cabela's, the big outdoors retailer and huge corporate welfare recipient, used to (and may still, for all I know) threaten not to locate one of its huge stores in a state unless it got a sales-tax exemption for its catalog business.
This topic needs to be revisited by the press in an era of declining tax revenues and when shops owned by actual residents of the state are hurting—and having to pay taxes their competitors don't.
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June 29, 2009 05:28 PM
ProPublica, the Post Bring GE Into the Light
Props to ProPublica and the Washington Post for a joint story on how General Electric has benefited from $74 billion in bailouts in the form of guarantees on its debt—without being subject to the normal level of regulation for banks.
It shouldn't have been in the program, the Temporary Liquidity Guarantee Program, but regulators let it in after a lobbying effort that included one of the most powerful banking attorneys in the world, Rodgin Cohen of white-shoe firm Sullivan & Cromwell.
And by doing this:
GE's finance arm is not classified as a bank. Rather, it worked its way into the rescue program by owning two relatively small Utah banking institutions, illustrating how the loopholes in the U.S. regulatory system are manifest in the government's historic intervention in the financial crisis.
Yet even though GE Capital accounts for half of GE's total earnings, it escaped Fed regulation and had to suffer under the not-exactly-firm hand of the Office of Thrift Supervision—a regulator so poor it's going to be phased out.
But the Post reports that this could change:
The Obama administration now wants to close such loopholes as it works to overhaul the financial system. The plan would reaffirm and strengthen the wall between banking and commerce, forcing companies like GE to essentially choose one or the other.
"We'd like to regulate companies according to what they do, rather than what they call themselves or how they charter themselves," said Andrew Williams, a Treasury spokesman.
To be clear, it wasn't necessarily a bad thing that regulators exempted GE Capital. Its failure would have had nasty consequences for markets around the world at a time when they couldn't take it. But why GE and not, say, CIT?
One of GE's competitors in business lending markets, CIT Group, a smaller company, has had a harder time raising cash. It has been unable to persuade the FDIC to allow it into the debt-guarantee program, at least in part because of its lower credit ratings. A recent Standard & Poor's analysis cited CIT's "inability to access TLGP" as a factor in the company's declining financial condition.
Where would GE be without the government guarantees? It's obvious that it, too, is Too Big to Fail.
This next graph raises a question for me:
Unlike the banking giants, GE Capital is part of an industrial company. That allows GE to offer attractive financing to those who buy its products.
Is it in the best interests of a competitive marketplace for one company to make a product and finance it? Especially if that company is one as powerful as GE Capital. It seems like that would help cement its position as a market leader and help squelch scrappy upstarts. It would be easier to put those upstarts out of business if you can offer 0 percent financing deals.
And it certainly hasn't helped the automakers, who delayed their necessary restructurings by subsidizing the financing of their cars. And it seems like such conglomerates raise regulatory problems beyond what the Post and ProPublica raise here. If GE's industrial businesses got in trouble, wouldn't it be tempted to shuffle money from GE Capital to its other units—hurting the bank's safety?
This is an area that would seem to be flush with possible stories. I love stories that suggest other stories. You know you're on to something.
Like this interesting piece of info the Post and ProPublica drop at the bottom.
Much of the $340 billion in debt will come due in 2012, the year the FDIC guarantees expire. At that point, known in banking circles as the "cliff," the agency will have to make good if companies such as GE are unable to honor their obligations. FDIC officials say they are comfortable that the agency has collected more than enough money to cover potential losses.
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June 29, 2009 03:13 PM
LA Times Soft-Pedals Wired Editor’s Plagiarism
It's bad enough to write a two-source story about plagiarism. It's worse when the two sources are the plagiarist and a defender.
But that's what the Los Angeles Times does in its piece on Chris Anderson's new book Free: The Future of a Radical Price in which he borrows liberally from Wikipedia, of all places.
The LAT primarily quotes Anderson, the Wired editor, who while defending himself at least admits that he "screwed up," though it would be extremely difficult not to admit this one. The other source is a former Wired editor, something LAT reporter Carolyn Kellogg doesn't point out.
It's particularly bad that the LAT doesn't talk to the person who discovered the theft, the Virginia Quarterly Review's Waldo Jaquith. How do you miss that one? Or if you can't reach him, how about a journalism professor?
Without this stuff, the piece comes off like, well, let me "borrow" from Edward Champion, who caught other instances of Anderson's borrowing in Free:
With quotes like “My attribution failures aside, this is an important book,” the piece reads like it (came) from a press release issued by Anderson’s publicist.
Indeed.
Anderson defends himself by saying it was hard to figure out how to attribute to Wikipedia, since its entries are subject to constant changes, so he didn't:
Typically, the passages Anderson took from Wikipedia would be accompanied by a footnote or end note in standard citation format. For Web pages, citations include a date and time -- a time stamp -- indicating exactly when the Web page was accessed. Anderson disagreed with his publisher about the citation format to use in the notes.
"I made the decision to nuke the notes because we couldn't come up with a compromise citation form," Anderson said by phone Wednesday afternoon. "I thought time stamps looked silly in books and my publisher insisted on time stamps. I made the decision to nuke the notes entirely -- and then to integrate the attribution into the text, which I -- " he took a breath, "then screwed up."
And the LAT regurgitates this bit of spin whole:
For Anderson, the worst part is that it was Wikipedia that was shortchanged, because the site has been the target of frequent criticism about its accuracy as a source.
As opposed to getting caught.
The LAT's other source is Mark Frauenfelder, who, oddly enough, defended Chris Anderson on Anderson's own website on Wednesday at noon, the day before the story went to press.
Here's Frauenfelder's extremely supportive comment at longtail.com, Anderson's site:
I'm surprised that the VQN is coming down so hard on you about it. It's obvious you didn't try to pull a fast one. You just made a mistake of carelessness, which is human and forgivable...
Because it's so easy to copy and paste, this kind of thing is going to happen to other writers...
Your candor and proactiveness in this matter is commendable. You are doing the right thing.
Yes, if this were one or two cases it wouldn't be a problem. But this is clearly more than that. More baffling, the LAT doesn't even quote Frauenfelder defending Anderson's offenses. He gets to flack Anderson's book:
Frauenfelder offers an example. If his words are available for free, "the way I can survive is to use that in my favor -- so people download my book, know who I am and are willing to pay for a live presentation somewhere, which is something that can't be copied."
Something else that's not explored is that Anderson took whole paragraphs verbatim from Wikipedia, an offense that is presumably more difficult to catch than if it were a theft from a more stable source like a book. An author may well conclude that he can steal from Wikipedia and by the time the book is printed, the hive mind will have changed the wiki's text enough to render the plagiarism uncatchable.
Look, Anderson is of course entitled to present his side of the story. Everyone screws up—though plagiarism is a deadly sin for a journalist, especially one so senior—and I'm not saying the LAT should have written a crucifixion piece.
But there's no one here to independently comment on Anderson's missteps, and there's no excuse for that.
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June 29, 2009 09:43 AM
NYT Listens in as the Mortgage-Mod Plan Hits a Wall
The New York Times descends into customer-service hell on A1 today, reporting on the effort to modify mortgages under the Obama foreclosure plan.
Reporter Peter S. Goodman spent two days listening in on calls at a mortgage-modification company to come back with this dispatch, which illustrates well why the foreclosure-prevention plan hasn't done a whole lot in the few months it's been in existence.
The anecdotes are painful to read. Banks repeatedly lose customers' files (three times in one case) and force the whole process to start over again.
“I don’t know what happened,” says a customer service officer who identifies himself as Chris. “I don’t know if there was a glitch in the system, whether it was transferred from one call center to the other.”
Think of the documents as being part of a pile massing inside the bank, Chris suggests. “This pile is not going to be moved forward at any point in time.”
Meanwhile, homeowners fall further and further behind.
The Obama plan wasn't ever exactly going to make a huge dent in foreclosures, but it sure isn't going to help much if this kind of banking incompetence continues. Even the banks admit their systems are screwed.
But the Times buries the lede on this one—though it does make for a sweet kicker. It appears to have caught GMAC acting—if somehow not illegally, then incredibly unethically—on one home loan:
His clients, Dean and Nancy Piercy, owe $380,000 on the loan for their home in Shasta Lake, Calif. A logger, Mr. Piercy has lost work hours, making it hard for them keep up with their $2,048 monthly payment — soon set to rise.
Mr. Wasser has already negotiated a solution: GMAC will accept only $270,000 in repayment, allowing the couple to get a fixed rate mortgage from another bank.
But that suddenly is in disarray. The Piercys have been making their payments, but GMAC has been putting their checks aside, holding the money as “loss mitigation fees,” until their application is completed. It has notified credit bureaus that their loan is more than 90 days delinquent, which has lowered their credit score, disqualifying them for the next mortgage.
Mr. Wasser reaches GMAC’s loss mitigation department. He asks for the delinquency to be removed from their status. But that must be handled by a different department: customer service. He is transferred there, where Jessica picks up the call.
“We are not going to amend,” she says, after a strained back and forth.
So GMAC is preventing the mortgage from being modified by telling credit bureaus the couple is delinquent on their mortgage when they're not. How is that not fraud? This is a revealing look at a separate story, too: The unaccountable power that creditors and credit bureaus have over people's lives. Good luck challenging them.
You'll cringe reading this story because it hits too close to home. All of us have been in similarly frustrating situations with, say, insurance companies more than we can count.
You know you're read a good story when it clearly opens the door for a couple more. Great reporting by the Times
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June 26, 2009 05:27 PM
A Community Reinvestment Act Reader
We still have to debunk this myth?
Felix Salmon takes John Carney of Clusterstock to task for latching on to the right-wing effort to blame the housing bubble and financial crisis (or at least a good part of it) on the Community Reinvestment Act, a law passed in the year of my birth thirty-two years ago.
I thought we had dispensed with this discredited argument, but Carney brings it up, so here's his smackdown.
First, if you must, read Carney's posts here, here, here, and here.
Salmon's posts are here and here. He says at one point:
The fact is that the CRA did not encourage banks to extend the kind of toxic loans which ended up being such an important component of the financial crisis. Indeed, most of those loans weren’t made by banks at all — they were made by unregulated subprime lenders who had no CRA responsibilities whatsoever.
Salmon does a good enough job of demolishing Carney's argument, but let's see how deep we can bury it.
Barry Ritholtz of The Big Picture goes off on Carney here with a "CRA Thought Experiment":
In reality, the precise opposite of what a CRA-induced collapse should have looked like is what occurred. The 345 mortgage brokers that imploded were non-banks, not covered by the CRA legislation. The vast majority of CRA covered banks are actually healthy.
The biggest foreclosure areas aren’t Harlem or Chicago’s South side or DC slums or inner city Philly; Rather, it has been non-CRA regions — the Sand States — such as southern California, Las Vegas, Arizona, and South Florida. The closest thing to an inner city foreclosure story is Detroit – and maybe the bankruptcy of GM and Chrysler actually had something to do with that.
Ritholtz, fairly, asks for one bit of evidence that CRA is responsible in any significant way for the bubble and resulting crisis.
Daniel Gross took a whack at the CRA speciousness back in October over at Slate.
The Community Reinvestment Act applies to depository banks. But many of the institutions that spurred the massive growth of the subprime market weren't regulated banks. They were outfits such as Argent and American Home Mortgage, which were generally not regulated by the Federal Reserve or other entities that monitored compliance with CRA. These institutions worked hand in glove with Bear Stearns and Lehman Brothers, entities to which the CRA likewise didn't apply. There's much more. As Barry Ritholtz notes in this fine rant, the CRA didn't force mortgage companies to offer loans for no money down, or to throw underwriting standards out the window, or to encourage mortgage brokers to aggressively seek out new markets. Nor did the CRA force the credit-rating agencies to slap high-grade ratings on packages of subprime debt.
And it must be said:
These arguments are generally made by people who read the editorial page of the Wall Street Journal and ignore the rest of the paper—economic know-nothings whose opinions are informed mostly by ideology and, occasionally, by prejudice.
Here's Federal Reserve Governor Elizabeth A. Duke talking to the American Bankers Association in February, noting that a tiny minority of loans were under the CRA:
I would like to dispel the notion that these problems were caused in any way by Community Reinvestment Act (CRA) lending. The CRA is designed to promote lending in low- to moderate-income areas; it is not designed to encourage high-risk lending or poor underwriting. Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis.... In fact, the analysis found that only 6 percent of all higher-priced loans were made by CRA-covered lenders to borrowers and neighborhoods targeted by the CRA. This very small share makes it hard to imagine how CRA could have caused, or even contributed in a meaningful way, to the current crisis. Further support for this conclusion comes from our finding that serious delinquency rates for subprime loans are high in all neighborhood-income categories, not only those in lower-income areas, as might be thought if the CRA were a contributing force to the subprime crisis.
One problem with the CRA-is-bad thesis is that the act was passed in 1977. Carney and other anti-CRAers say it wasn't really enforced until Clinton refined it in 1995. But CRA enforcement was gutted by George W. Bush during the 2000's—aka "the bubble." Paul Krugman quotes from the administration's new white paper on financial reform:
Some have attempted to blame the subprime meltdown and financial crisis on the CRA and have argued that the CRA must be weakened in order to restore financial stability. These claims and arguments are without any logical or evidentiary basis. It is not tenable that the CRA could suddenly have caused an explosion in bad subprime loans more than 25 years after its enactment. In fact, enforcement of CRA was weakened during the boom and the worst abuses were made by firms not covered by CRA.
Aaron Pressman of BusinessWeek had a good roundup back in September of evidence against a CRA role, and he mentioned the Bush-era laxity (emphasis mine):
Finally, keep in mind that the Bush administration has been weakening CRA enforcement and the law’s reach since the day it took office. The CRA was at its strongest in the 1990s, under the Clinton administration, a period when subprime loans performed quite well. It was only after the Bush administration cut back on CRA enforcement that problems arose, a timing issue which should stop those blaming the law dead in their tracks. The Federal Reserve, too, did nothing but encourage the wild west of lending in recent years. It wasn’t until the middle of 2007 that the Fed decided it was time to crack down on abusive pratices in the subprime lending market. Oops.
Pressman points to a post by Robert Gordon in The American Prospect back in April 2008 noting that even the banks (!) don't have the chutzpah to blame CRA:
It’s telling that, amid all the recent recriminations, even lenders have not fingered CRA. That’s because CRA didn’t bring about the reckless lending at the heart of the crisis. Just as sub-prime lending was exploding, CRA was losing force and relevance. And the worst offenders, the independent mortgage companies, were never subject to CRA — or any federal regulator. Law didn’t make them lend. The profit motive did.
The Orange County Register's Ronald Campbell had an illuminating story in November looking at the CRA question. You don't (alas) see many news stories point-blank tell you something is BS, especially when they also call out their own editorial page:
From the editorial pages of The Wall Street Journal to talk shows to the op-ed page of The Register, people are charging that the Community Reinvestment Act of 1977 forced banks to make bad loans, leading to financial Armageddon.
There's just one problem: It isn't true.
Awesome. In addition to a load of statistics that call the lie, Campbell reports this:
The criticisms of the reinvestment act don't make sense to Glenn Hayes. He runs Neighborhood Housing Services of Orange County, which works with banks to provide CRA loans to first-time homebuyers. In its 14-year history, the nonprofit has helped 1,200 families buy their first homes. Score so far: No foreclosures and a delinquency rate under 1 percent.
"It is subprime that's really causing it," Hayes said of the mortgage crisis. "But CRA did not force anyone to do subprime."
And the coup de grace is the quote from the American Bankers Association:
Bob Davis, executive vice president of the American Bankers Association, which lobbies Congress to streamline community reinvestment rules, said "it just isn't credible" to blame the law CRA for the crisis.
"Institutions that are subject to CRA – that is, banks and savings associations – were largely not involved in subprime lending," Davis said. "The bulk of the loans came through a channel that was not subject to CRA."
Last year, the law firm Traiger & Hinckley LLP found that (PDF) CRA banks were 58 percent less likely to issue high-cost loans (read: the loose-termed subprime ones Carney's blaming on them) than non-CRA lenders and when they did their interest rates were a whopping 74 basis points (0.74 percent) below those of non-CRA lenders.
And another Federal Reserve Governor, this time Randall S. Kroszner, who gave this speech in December:
...we found essentially no difference in the performance of subprime loans in Zip codes that were just below or just above the income threshold for the CRA.9 The results of this analysis are not consistent with the contention that the CRA is at the root of the subprime crisis, because delinquency rates for subprime and alt-A loans in neighborhoods just below the CRA-eligibility threshold are very similar to delinquency rates on loans just above the threshold, hence not the subject of CRA lending...
To gain further insight into the potential relationship between the CRA and the subprime crisis, we also compared the recent performance of subprime loans with mortgages originated and held in portfolio under the affordable lending programs operated by NeighborWorks America (NWA). As a member of the board of directors of the NWA, I am quite familiar with its lending activities. The NWA has partnered with many CRA-covered banking institutions to originate and hold mortgages made predominantly to lower-income borrowers and neighborhoods. So, to the extent that such loans are representative of CRA-lending programs in general, the performance of these loans is helpful in understanding the relationship between the CRA and the subprime crisis. We found that loans originated under the NWA program had a lower delinquency rate than subprime loans. Furthermore, the loans in the NWA affordable lending portfolio had a lower rate of foreclosure than prime loans. The result that the loans in the NWA portfolio performed better than subprime loans again casts doubt on the contention that the CRA has been a significant contributor to the subprime crisis.
How about more from the Fed? This time from the Minneapolis bank:
Two basic points emerge from our analysis of the available data. First, only a small portion of subprime mortgage originations is related to the CRA. Second, CRA-related loans appear to perform comparably to other types of subprime loans. Taken together, the available evidence seems to run counter to the contention that the CRA contributed in any substantive way to the current mortgage crisis.
Here's Ellen Seidman, former head of the Office of Thrift Supervision, who wrote against the CRA haters here, calling it "patent nonsense."
While many of us warned against bad subprime lending before the turn of the millennium, the massive breakdown of underwriting and extension of risky products far down the income scale-without bothering to even check on income-was primarily a post-2003 phenomenon. To blame a statute enacted in 1977 for something that happened 25 years later takes a fair amount of chutzpah.
Also see this good McClatchy story we've linked before.
Next.
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June 26, 2009 12:31 PM
Bartiromo and BizWeek with an Embarrassing Summers Interview
Maria Bartiromo's BusinessWeek interviews aren't exactly must-read business journalism. But this is ridiculous.
What would you ask if you got a sitdown with Obama's economic svengali Larry Summers? I'm sure you can think of a dozen or so off the top of your head, any of which would be better than Bartiromo's softballs.
Bartiromo, whose day job, of course, is on CNBC (which explains a lot), leads off with a perfectly dumb question:
What impact would the proposed regulatory reforms have on banks and investment banks?
You'll be shocked to know that Summers somehow was able to muddle through his answer to that one.
But you know, sometimes you've got to serve up the softballs early to get your subject to warm up a bit. So question No. 2:
How is this different from what the Fed has been doing for 70 years?
Kind of a weird follow-up, but maybe No. 3 will brush him back a bit:
Since most of these institutions are global, do you need an overseer in step with other economies?
What's he going to say? "No"? A better question might have been: Do you need an international overseer to coordinate global finance rules? That might actually get an interesting thought out.
No. 4:
What about ratings agencies? Will they be regulated?
Good topic. Not-good question. How about: Why did your plan not say anything about ratings agencies? How will you change their business model and their role in the financial system?
You just knew that No. 5 would probably be out of deep concern for Big Business's point of view:
Right now a lot of businesspeople are unnerved about the proposed new taxation on the international profits of American companies. Where does that stand?
But it's an important topic and one that will be a big fight, so okay.
No. 6:
Have you been hearing about this from a lot of business owners and CEOs of multinationals?
Are you serious?
No. 7 comes from the good ol' "liberal media":
The Congressional Budget Office predicts that the deficit will hit $1.43 trillion in fiscal 2010. We all know taxes alone won't really put a dent in the deficit. What programs would you recommend cutting?
Well, actually, when we get through bailing out Bartiromo's pals in the banking industry and the economy recovers from the hole blown in its side by said bankers, that deficit will shrink dramatically because tax receipts will increase. And much of that $1.43 trillion hole is for one-time expenditures for the stimulus package required to patch that hole in the economy. Two years later, the CBO projects it to be $633 billion.
No. 8 is the kicker. It's your last chance, Maria:
The buzz is you'd like to be chairman of the Fed when Ben Bernanke's term ends. Do you want that job?
Who cares?
Now these are edited down from the real interview, which aired on CNBC, but this is all BusinessWeek readers get. Still, the unedited transcript isn't much better.
Bartiromo—again—doesn't ask Summers about his being "bought and paid for" by Wall Street, as Portfolio's Ryan Avent put it—pointing to a Felix Salmon rundown of Summers' earnings from DE Shaw—after the last Bartiromo-Summers faceoff just two months ago.
As Avent said then:
But at least he’s smart enough to pick an interviewer who won’t ask him the really tough questions, like whether his actions as Treasury secretary helped to pump up the financial-services bubble whose implosion we’re all now suffering through, and whether he owes the American people an apology.
Right. And here are some other questions she doesn't ask:
Hey, Larry, why did you fight so hard against your own administration for Wall Street to keep derivatives unregulated back in the 1990s? Do you want to apologize to Brooksley Born? Why should anyone listen to what you say after you've gotten so much so wrong? Why and how have you pushed aside Paul Volcker in the Obama administration? Why not put a cap on the size of Too Big to Fail institutions and break them up? Why do you still get F's in "plays well with others."
Poor showing.
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June 26, 2009 09:37 AM
Journal States the Obvious—In a Good Way
The Wall Street Journal looks at how the new consumer-protection regulator is likely to make banks less profitable. I like how the paper all but says that's because the banks won't be able to screw their customers as blatantly anymore.
The paper says the new regulations would "take the industry back in time" and force it to offer "plain-vanilla" products. Or maybe not. The Journal calls them "plain-vanilla guidelines," which I guess could just as easily mean that the guidelines are just boring. And "guidelines" doesn't sound very promising. How about "hard and fast rules"? I think "guidelines" isn't the right word because the Journal says this:
Card issuers wouldn't be allowed to "change the rules of the game" on consumers, as in cases where a 0% rate is applied to only part of their balances.
But the bottom of the story confuses the issue all over again.
According to the administration's "white paper" on the proposal, the agency "could impose a strong warning label on all alternative products; require providers to have applicants fill out financial experience questionnaires; or require providers to obtain the applicant's written 'opt-in' to such products."
The paper should have been more careful with its language and explained what will be rules and what will be guidelines, but it's pretty good at not pussyfooting around the fact that banks have made lots of lucre in recent decades by snowing consumers.
The complex loans of recent years didn't just confuse consumers. The bankers themselves ultimately misjudged whether customers would repay them.
So the Consumer Financial Protection Agency wouldn't just be looking out for borrowers; it would be protecting bankers from themselves.
And here's another forthright explanation of banks' behavior:
Most people, for example, don't understand the effects of compounding of interest -- which leads them to undersave and to overborrow -- a basic human failing that some financial institutions have an incentive to exploit.
All true, but usually not stated so boldly in the WSJ.
More like that, please.
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June 25, 2009 06:44 PM
What the WSJ Looked Like in 1930
Here's a great idea for a business blog.
An anonymous somebody is going back through Depression-era Wall Street Journals day by day and summarizing just what was going on back then. The result is "News from 1930, which tells us what was going on on this date in 1930.
It's interesting in a history-buff kind of way but also for the parallels between then and now. Including happy talk from the Street:
When this economic and market readjustment has been completed, it will merely be represented by a small curve downward in our steadily mounting curve of prosperity, consumption, production and efficiency ...”
As The Atlantic's Megan McArdle writes regarding her own research with Depression-era publications:
What always surprises me is the optimism of those early depression years--during what may well have been the worst financial crisis in American history, people mostly expect things to get better. This gives me pause whenever I examine our "green shoots", even though I'm very sure we've got much better fiscal and monetary policy than our ancestors did.
Indeed.
Audit Feature
“There Is a General Bias Toward Management By the Press”
Excerpts from a CJR panel with Ackman, Madrick, Morgenson, Starkman, moderated by Grueskin
We’ve seen some pretty good panels on the financial collapse, but the one we hosted the other night on its lessons for financial journalism was, if we do say so ourselves, a cut above. Convened by The Columbia Journalism Review, with support from The Nation Institute, the panel asked a simple question: “What Now?”
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Audit Arbiter
Audit Arbiter is CJR's Ombudsman for the business press: if you feel you've been wronged, write us and we'll weigh in on the matter.
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