Debit Card Rules WILL Affect You

My employer is apoplectic over the so-called "Durbin Rule" that passed as part of Chris Dodd's banking legislation. But when I try to talk to normal folks about it, their eyes glaze over. So, I was thrilled to see that BusinessWeek has up the first really good summary of the issue, and why the average American should care.

Framing brawls about money as essentially consumer issues is a time-honored tactic in Washington. However, the debit-card fee issue is primarily a conflict between big business and big banks. Up for grabs is $16 billion in annual revenues. That's the amount merchants collect—at an average of 44 cents per debit-card swipe—and turn over to banks. Retailers have been complaining for years about the hefty fees. The fight is reaching a crescendo as an April deadline nears for the Fed to decide what is a "reasonable" fee, as required under last year's Dodd-Frank financial regulation law. "This is a battle between the large retailers and the large banks," says Clifford Rossi, executive-in-residence at the University of Maryland's Center for Financial Policy, who has done financial industry-sponsored research on swipe fees. "The voice lost in the shuffle is the consumer's."

Here's the bottom line:

1. If the new 12-cent cap on Debit Card transactions is enacted, you may see cheaper prices at retailers. BUT you will lose free checking, rewards programs, and possibly free debit cards altogether.

2. If the new 12-cent cap on Debit Card transactions is NOT enacted, you may see prices rise at retailers. BUT you may also see them starting to refuse to accept Debit Cards from some providers.

Either way, your life just got a lot more complicated in the name of "consumer friendliness".

Banks accounting for unpaid mortgages as "income"?

There is a fundamental difficulty with regulating banks in the modern age. Unlike days past, banks often no longer derive value from tangible assets like gold and silver, but instead are number-engines creating value out of mathematics. That is not to say what they do is illusory - not at all! - but it means it is easy to game the system by tweaking the way the engine runs.

For example, Forbes is reporting that even after accounting-rules changes, many banks are still allowed to count mortgages as "income" even if no one is paying them... until the house is actually foreclosed upon. This means that banking giants like Bank of America and Chase can continue creating value from these properties (in the eyes of shareholders) even though they no longer have any real benefit to the company.

I can't help wondering if this explains a number of anecdotes I have heard of late from people trying to buy short sales (i.e. homes not actually foreclosed upon) where the bank showed very little interest in selling. After all, a sale is a real loss (assuming they sell for less than the mortgage is worth) whereas a continued unsold property is producing phantom income for the balance sheet.

Be alert, new banking fees are on the way

Most consumers are not aware of it, but the CARD Act of 2009 and the new Regulation E (which seeks to reduce Overdraft fees) are sure to have a significant impact on the way they do banking. These two regulatory changes are designed to cut down on practices which are consumer-unfriendly, but which contributed significantly to the bottom line. Without these options, be expecting banks to go out of their way to create and assess new fees to make up the lost revenue. Be especially mindful of inactive accounts which you may have forgotten, which banks may now start charging "inactivity" fees against.

Is I.T. Responsible for the Economic Crisis?

I work in Information Technology, so I am sharply aware of the dangers inherent in a badly-built set of systems. It is not just the risk of the Blue-Screen of Death that Windows users are familiar with, or the spinning beachball that haunts Apple users. Even a system that never crashes can be a danger to your business if it doesn't get you the info you need, when you need it. A logical question then, is whether better I.T. systems could have prevented the Economic Crash.

This fragmented IT landscape made it exceedingly difficult to track a bank’s overall risk exposure before and during the crisis. Mainly as a result of the Basel 2 capital accords, many banks had put in new systems to calculate their aggregate exposure. Royal Bank of Scotland (RBS) spent more than $100m to comply with Basel 2. But in most cases the aggregate risk was only calculated once a day and some figures were not worth the pixels they were made of.

During the turmoil many banks had to carry out big fact-finding missions to see where they stood. “Answering such questions as ‘What is my exposure to this counterparty?’ should take minutes. But it often took hours, if not days,” says Peyman Mestchian, managing partner at Chartis Research, an advisory firm.

Of course, it never helps to blame technology for the failings of human nature and human decisions. But poor human decisions about technology can lead to even more poor human decisions. Quality counts.

Overdraft Policies Changing

Overdraft policies at banks are always a tricky subject. When a customer tries to cash a check and goes over their funds, what should a bank do? If the bank refuses to honor the check, they are within their rights but the customer may miss their mortgage payment, car payment, rent, etc. If the bank does pay the check and charges a fee to cover it, that could further overdraw the account and lead to more debt. Different banks handle it different ways. Which confuses customers trying to understand how to play by the rules.

Now, the Fed is looking to standardize overdraft policies by making Overdraft Fees an "opt in" proposition. This means it will be LESS likely that you'll see excessive fees when you try to buy a stick of gum, but it means you'll be MORE likely to see a rent or mortgage payment bounce without payment. The changes go into effect July 1, 2010. Be sure to contact your bank before then, to make an informed decision.

Unintended Consequences - Bank Bonus Edition

The banking system is still in disarray after last year's crash. Propped up by government loans (i.e. taxation and national debt), we are looking at an uncertain future. One way that regulators sought to punish bank executives whose policies lead to the crash was to decrease mandated bonuses. One way to do this was to make the bonuses payable in depressed stock. Brilliant idea, right? After all this would encourage executives to take actions that would be in the long-term interests of the company.

Instead, the stock payments are liked to end up in huge windfalls as stock prices have risen from their original valuation, giving executives an excellent reason to sell and reap large cash payments.

Economics - the game whose rules you never really know until afterward.

Welcome to the Oligopoly

Many years ago, Federal regulators looked at AT&T and realized that a single company running all phones in America was bad for customers. It limited choice, and gave a single CEO too much power over national communications. So, they broke up the behemoth and brought about our modern world where multiple landline, cellular, and VOIP providers are competing for your business. This has brought down prices and increased choice.

But when the economy tumbled, regulators decided that some banks were "too big to fail" and moved to prop them up with taxpayer dollars. The idea was that these banks should be given support for a short time, to allow the economy to heal, at which point they could be safely returned to the wild. Instead, as it turns out, all of the banks declared "too big to fail" have gotten substantially bigger and more powerful, while smaller banks are failing in record numbers. And what happens when a smaller bank fails? Inevitably, it is sold to one of the "too big to fail" banks.

How much do you want to bet that the NEXT economic crisis is precipitated by bad behavior by one of the "too big to fail" banks with too much power and no incentive to act cautiously, in light of a guaranteed bailout?

Banking Evolution

When I began working for a bank, I did some research into the history of banking and money. It surprised me to learn that banking goes back to the Roman empire, where blacksmiths would store gold in their vaults and offer documents to their depositors attesting to how much value they had available. Eventually, this evolved to the point where people simply carried the documents, which other blacksmiths would accept in lieu of real gold, and the "checking account" was born.

Many would argue that banking has not changed significantly since the Middle Ages, but I find it interesting to see that some banks are still trying to transform the experience for customers. It is proof that even ancient professions have a lot to learn and a long ways to go to be the best that they can be.

Dilbert on "Financial Services"

Some days, you can't win

These days, a bank can't afford to have a bad day. The Mortgage Meltdown was the fault of bad banking policies and poor oversight, and it has lead to an economic downturn that is now being called "The Great Recession" by many. Many of the largest U.S. banks of 2008 don't even exist anymore in 2009.

So, one can't help being amazed by stories like this one, where a bank sold a house out from under a woman whose mortgage was in excellent standing. It took a Miami judge to set things right, after police officers forcibly evicted her family and locked them out of their own house for 3 days.

The eviction came after Ramirez’s home was mistakenly auctioned off to the highest bidder by her bank, Washington Mutual (yes, we know WaMu is now Chase, but we're in denial). Usually, you get a warning before you get the boot. A foreclosure letter. Maybe a sign saying your house is up for sale. Not Ramirez, who found her belongings bashed and battered in the street...The man who bought the house told Ramirez he paid $87,000 for it, which shocked Ramirez, who bought the house for $260,000.

This is a good reminder to keep a close eye on your creditors in these dark economic days. Just because you are playing by the rules, that does not mean some lazy bureaucrat can't harm you.

Depositing a check via the iPhone's camera

It is not widely known amongst consumers, but a law called "Check 21" went into effect October 28, 2004. This law essentially eliminates the use of paper checks between banking institutions - all checks are now scanned and turned into images which allow faster processing and exchange of checking info. It also means that consumers can now scan their own checks and upload them for processing, assuming your bank supports the feature.

Hat tip to @RobFay for discovering an article about a bank taking Check 21 to its next logical step. They are allowing customers to upload checks by taking a picture with their iPhone camera! This was impractical with the camera on the original iPhone, but the iPhone 3GS's 3.2 megapixel camera is more than up for the task! And supposedly a Blackberry app is on the way, as well.

Keep an eye out. Mobile technology like this will be transforming the way you bank before you know it!

Another Reason It's Tough Being a Banker These days

I love "Not Always Right"! As a bank employee, this tickled me.

Me: “Would you like to sign up for our free checking account?”

Customer: “No, I usually keep my money in my sofa for safe keeping.”

Me: “You shouldn’t do that.”

Customer: “But it gains interest.”

Me: “How does that work?”

Customer: “When people come over, they keep losing their change in my couch.”

"Bank Stress Tests" may be too Stressful for the Market

When they were first proposed, the "Bank Stress Tests" that were part of Treasury Secretary Tim Geithner's economic plan seemed prudent. If the government has a clearer picture of the actual state of troubled banks, then it could react more intelligently. What could be more logical? But now, it appears such revelations could do more harm than good as a jittery market rushes to judgement over the slightest whiff of weakness in a bank's balance sheet.

While weaker banks deemed to need additional capital will be given six months to raise it, financial markets may have little more than six minutes of patience before punishing them if the information is publicly released, one official said...

The economy has worsened since the Treasury announced the tests in February, raising questions about whether the scenarios regulators are applying to bank portfolios are rigorous enough. Officials are considering taking a tougher stance in judging the tests’ results given the job market’s deterioration, the Financial Times reported today without citing anyone.

Under the assessments’ “more adverse” scenario, the unemployment rate is seen rising to 10.3 percent in 2010. When officials designed that scenario, the most-recent jobless rate was 7.6 percent. It has already soared to 8.5 percent since then.

Of course, since the economy - or at least Wall Street - is essentially mass psychology, we have a lose-lose situation here. If the report is released and it contains bad news, then there will be a panic. But if the report is NOT released, it will create additional uncertainty which will drive the market down steadily. Knowledge is power, but knowledge untempered by wisdom is a bull in a china shop.

Obama seeks to regulate ALL bank CEO's pay

We're all familiar now with the AIG bonuses debacle. A group of AIG employees ran their business into the ground, sought a taxpayer-funded bailout, and then walked away with millions of dollars. This is clearly an injustice, which numerous government agencies and authorities are now looking to rectify.

But now the administration is looking for authority to regulate the pay of all bank executives. This means that the government could mandate the maximum amount that your bank - whether a one branch shop or a multinational corporation - can pay the people most responsible for how your money is protected. Presumably a bg part of this will be keeping salaries to "reasonable" levels.

What will this mean? One of two things. Either (1) the smartest people leaving banking for less regulated and thus more dangerous industries (energy conglomerates, perhaps) or (2) the people really running your bank leaving "executive" positions to places on the org chart with equal power but far less accountability. Do either of these options sound good for your future financial safety?

Understanding Bank Fees

Working for a bank, I am amazed every day to see how many fees our customers pay. To some, this may seem like a criticism of the bank, but overall I am amazed by how many customers are paying fees that there is no reason for them to pay. For example, millions of people every day are paying transaction fees to take money out of ATMs, when they could save $5 and simply walk across the street or down the block to an ATM at their own bank. I am sure some of this is laziness, but some of it is also ignorance. This article is a good summary of the main kinds of fees that banks charge, and how you can reduce the impact to your bottom line. In this current economy, consumers need ever extra dollar they can find, and these simple tips can help you save big bucks.

Citigroup & Bank of America fall further, get bailed out further

Working in the banking field has been tough this week as bank stocks across the market have been hammered. Why? Primarily because of announcements out of Citigroup and Bank of America which underline how much risk they have gobbled up, and how poorly they have managed as they have acquired small bank after small bank. Citigroup has actually been split this week into two different companies - albeit still under the Citigroup umbrella of management - one of which is likely to be allowed to fail in the next six months. Both banks have also accepted large new sums of capital from the government, making the U.S. government primary shareholders in these companies.

Have we crossed the Rubicon here, on the weekend between presidencies, at a time when Bush is no longer president but Obama has not yet taken on the mantle? This looks and smells just like complete nationalization of the banking system, something our Founding Fathers (and Mothers) were absolutely against and which has lead Europe into a malaise which has kept unemployment high and growth low for decades. The timing of this move is suspicious as it gives all politicians the excuse of not having been in charge when it happened, thus there being no accountability for such a fundamental change to our economic system.

As a bank employee, I am happy to see it as a potential bringer of stability to an unstable market. As an American, I am sad to see it, as it may be the beginning of an era of extreme governmental intrusion and limitation of personal liberties.

Do banks understand this is how they are viewed?

My sense is no. Bankers are like anyone else, and think they are the victims and innocent in the current economic slump. From here.

Banks Refuse to Detail Bailout Money Useage

There is an old saying, "A fish stinks from the head," which means that corruption (in both the moral and physical sense) begins with those in leadership. A few weeks back, the Treasury Department began refusing to disclose how the TARP bailout money was being used. Other than theatrical cries of outrage, no one did anything about it. No lawsuits, no independent investigations, no press outlet pledging to track the money to the ends of the earth. (Please correct me in the comments, if I am wrong and just missed it.) Is it any surprise therefore that apparently banks are following the leader and refusing to account for how bailout money is being used? Why potentially compromise competitive disadvantage when it appears that no one is going to make you play by the rules of the game?

This "secrecy" needs to be broken ASAP. I understand the attitude of banks - they are not used to publicly accounting for where the money raised from stock sales are used and such an accounting could well inadvertently disclose information that could be used by a competitor. (For example, if a big bank were about to roll out an innovative new lending product that they expect to capture a good deal of the market.) But the fact is that he who pays the piper, gets to choose the tune. The cost of taking this money was to be held accountable for its use. And every day that the money's use is "kept secret" is undermining trust in banks and the economy, and simply making things worse.

Mr. President, Give the order. Force banks to disclose the use of bailout funds before the inauguration of Barack Obama. Otherwise, there is little hope for a restoration of trust in the drivers of the American economic system. "Trust me," only works BEFORE the Fall.

Welcome to the Age of Nationalized Banks

We knew it was coming, but now the White House has announced plans to buy equity stakes in the countries top 9 banks. This will make the Federal Government a shareholder in all of these companies, and is interpreted as an implicit guarantee that they will not fail. The UK did this over the weekend and some place the Monday rebound of the stock market on the shoulders of this action.

To kick off Tuesday's expected announcement, the government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp., according to people familiar with the matter.

I am of many minds about this. First, I am against the socialization/nationalization of banking. It places significantly more power in the hands of the Federal Government over our lives, and may actually one day require you get permission to own a home (i.e. get a mortgage or write a large check). Second, I am concerned that only large banks are being backed. This means smaller institutions (like the bank I work for) might see depositors fleeing in favor of Federally-owned banks, figuring they will be more secure for the future. Is this the end of the local bank branch? Third, where does this end? We all know the automakers are likewise on the edge of bankruptcy. Should we expect equity stakes there, in order to protect jobs? What about power utilities or internet providers, to protect our infrastructure against collapse? You see where I am going with this - where does it all end?

The inevitable Supreme Court challenge here will be fascinating to watch. Bank ownership is definite NOT among the enumerated powers for the Federal Government, but this policy probably fits under "interstate commerce" in the implied powers section. Will the Supremes endorse the full action, and pave the way for massive nationalization of industries? Will they strike it down, and possibly destabilize the economy? Will they selectively strike down aspects to walk a middle road? Whatever happens, it will transform our American notions of government for generations to come.

And the Bailouts Continue

And here are the details on the latest plans by the Federal Reserve. First, they will buy up short-term debt so that banks can lend out more money to businesses which are currently having trouble getting more than a one day loan. The upswing of this is that businesses which are currently not able to get the credit they need to pay their payroll and buy inventory will be able to do so, hopefully building the economy back up. The downside is that it means even more of our money at risk. It also presents the possibility for a conflict of interest for the Fed. On the one hand, their job is to try to keep the economy healthy long-term. On the other hand, they have a responsibility to the tax-payers to protect these "investments" they're making.

And there are more loans to come. With entering the holiday season, banks need to have more cash on hand, which means more money printed and lent from the Federal Reserve. The increased printing of money could cause the overnight interest rate that the central bank offers to reach zero, so the Fed is going to be artificially paying interest to the banks that deposit money with it.

But there's more... The Fed is looking into how they can get into the unsecured lending markets. Yes, let's put tax payer money in even HIGHER risk investments.