Thursday, September 1, 2011

Oh the Banks of America

Has your bank added new fees yet?  You can thank Obama and the Stimulus package; but first I want to discuss the banks themselves.

I've never run a business so I couldn't call myself and expert on the subject; however of all businesses I imagine running a bank would be one of the easiest.  I would guess the hardest part would be the start-up - gaining enough trust and having enough capital to begin must be a massive hurdle.  After that is done though you are the bank, keeping money in the bank should be cake.  You check credit, give loans, repeat.  If you start doing poorly you adjust rates, change the algorithms, get stricter with credit - repeat.  Maybe dish out some credit cards with higher rates, charge fees for certain types of processing, etc...

As certain banks found the sweet spot for these numbers and keeping customers happy I can see how some grew faster than others (as always).  These began to buy other smaller banks ...  You get the point, now we are at the stage where we have gigantic banks controlling most of the money.  That doesn't bother me, it is all a part of the essence of capitalism.  What starts to happen though is what I would call Government backed greed.  These banks are now big enough they can start playing with our money in large quantities.  Similar to most of what the stock market is used for now, the banks want to find ways to move money around enough that they can take some as it moves.  People/Corporations love to move extremely large amounts of money around because if they can just get a small percent from it they are rich.  They use the continuous flow of money and low rates from the Fed (side: weren't we supposed to raise rates during the boom? Wasn't that the entire point of the Federal Reserve) to bolster their creating of money from thin air for loans (mostly for houses).  Things were good, too good, but they got even better when ideas like the National Homeownership Strategy from Bill Clinton came along in 1994.  Politicians were pushing bills through that would assist more and more people to own homes.  Demand was skewed (sort of like education at the moment) and supply couldn't keep up; therefore housing prices climbed fast.  The banks liked this even more.

There was virtually no risk for a bank to give a mortgage, even with zero down.  The market outpaced the risk.  Even if someone defaulted on their loan only a year in - the bank had made a good chunk on closing costs and the market had risen enough they could sell the house at a higher price anyway.  Even if half their loans defaulted in 5 years the bank would still be positive cash.  Add in Freddie/Fannie and Credit Default Swaps and you've got unlimited money flow.  Dump risky mortgages on Fannie - no worries since the government will back them even if they run out of cash (sweet).  Still not good enough, package up the other risky mortgages and get insurance on them - brilliant.  They took this perfect system that created ungodly amounts of income and got insurance for it.  If that wasn't enough - if someone stops paying their mortgage we'll cash in our CDS and get our money back from AIG/Lehman, etc... and then take their house too.

It all caught up to them

As it always does.  One could argue (and I would be one) that none of it would have been possible if it weren't for the government and Fed's awful policies, but we can't just blame the drug dealer but the druggie too.  There is a difference though because in a capitalistic society someone will always use the advantages they can find - it is its nature.  However, the free (somewhat) market corrected itself and the big banks were going down.  Probably would get split up, become much smaller, go back to where they started and let the good bank rise above.  Enter Bailout time.  Someone as intelligent as Larry Summers can't possibly believe Christina Romer's multiplier, but being around the system for so long I think he was afraid of the consequences.  He knew how connected the system, the banks, the NY Fed was/is.  He must have seen the dominoes and shook his head in agreement.  We destroyed the failures of the free market - which is as important as every success.  The financial sector is a government backed mess and at the end of the day more money from our kids went to the executives that couldn't do simple math and run a bank.  Ironically we forced the wrong rich to stay rich because we needed them.  If Obama really believe in anything he has said through the years he would have said 'f u' to the bankers and hedge fund guys.  Of course that would have also been ironic seeing that those guys run a far tighter ship than the government has in over 100 years, but it still would have been right.

Now I'm mad
To get back at those bad banks the President created all sorts of new regulations.  Those banks are out to get those poor people.  Yes they are.  Starbucks is too, and Best Buy, and SouthWest, and the Lemonade stand at the corner.  Regulating something because you don't like their ways helps very very few while hurting everyone else.  Have you noticed on your credit card bills they tell you things like, "If you pay the minimum balance on this it will cost you ... and take x years to pay off."  Wow, no way did you use a calculator for that?  Did you know that if you didn't pay your bills sometimes there is a fee or raise in rate?  Yes way.  If you didn't, no offense but you deserve to pay them.  That is also part of capitalism.  Who is smarter the Casino owner or the gambler?  Anyway, the vast majority of people that got hit with hidden fees and higher interest rates  are now going to get hit with non-hidden fees with higher-but-not-quite-as-high-yet-so-you-can-put-it-off-until-it-is-as-high fees.  The banks now have to make up for their lost revenue from these regulations.  Many small companies couldn't even afford the changes to the system to keep their own credit card line open.  Did he (Obama) really think they would eat the losses?  Do any of them think they can regulate all the holes and make everyone money at once?  I already had to close one bank account because of the fees (I used it as a 3rd bank for small things and management).  I think we'll move toward local banks and credit unions again but not in a smooth fashion as it should have happened.  We're on borrowed money just hoping to not wake up.