1. History of Economic Failure

Image by Byzantine K

If you have ever studied American history one thing is perfectly clear.  Most economic problems for the past two hundred years were caused by banks and speculators.  From the bank panics of the 1800s to the Great Depression, banks have contributed to economic hardship for millions of hard-working Americans.  After the great depression, sound banking reforms, such as the Glass-Steagall Act, ensured economic stability and prosperity for over 70 years.  Unfortunately, these reforms were quietly gutted in a bi-partisan effort, which lead to the financial collapse of 2008.  Some of these reforms were restored under the Dodd-Frank law of 2010.  But, they haven’t been fully implemented and regulated.  Banks are still ignoring and undermining these reforms, which means we are all still at risk for future economic problems.

2. JP Morgan Chase Lost $2 Billion

Just in case you haven’t seen the financial news lately, JP Morgan Chase bank may have lost 2 billion dollars on some extremely complex hedges.  It’s unclear even to management and regulators how much money was lost or how they lost it.  But, it has something to do with credit default swaps.  If you don’t know what a credit default swap is, it’s the financial instrument that caused AIG to lose $100 billion dollars during the financial crisis of 2008.  Of course, the taxpayers of America were kind enough to bail out AIG and Goldman Sachs for 100% of every dollar they lost.  The funny thing is that Jamie Dimon, the CEO of JP Morgan Chase, has been railing against all of the new “unnecessary” banking regulations at the same time his bank was hedging with these dangerous derivatives.

3. U.S. has Exposure in Europe

There is a reason the U.S. stock market tumbles every time bad news comes out of Europe.  Investment banks and hedge funds know the U.S. has huge exposure to the banks and currencies in Europe, while most taxpayers have no idea.  The Fed and Treasury both recently testified the European crisis was “contained”, but this is similar to the statements they released about investment banks, right before Bear Stearns went bankrupt.  During the financial crisis of 2008, the Fed lent $16 trillion in emergency funds, $3 trillion of which went to foreign banks.  Since the Fed has no transparency, Americans have no idea what type of monetary guarantees or exposure we have to European nations and currencies.  EU nations can’t be kicked out of the union for being reckless and insolvent.  That equals a blank check and the debtor nations have figured this out.  If Spain, Italy, Portugal and Ireland follow Greece into insolvency, America could be drug down with the EU.

4. Derivatives are too Risky

There are some legitimate business reasons to sell commodity futures.  There are legitimate reasons to hedge positions.   But many of the new derivatives and instruments are so complex and dangerous, they should be made illegal.  And, they should only be traded on regulated exchanges, never over-the-counter in private.  The continuous fallout from credit default swaps, Collateralized Debt Objects (CDOs) and synthetic CDOs highlight the need shut down the gambling by financial institutions.  These instruments are so complex it often takes months to figure out how much was lost and where the money went.  The risk is way too high and their business purpose is dubious.

5. Extreme Leverage is Legal

Back when I took economics in college, I was taught banks could lend $10 for every $1 in deposits.  Now, because of over-the-counter derivatives and other synthetic instruments, it’s obvious banks, hedge funds and other financial institutions are using much higher leverage to maximize profits.  One example is the recent collapse of MF Global, where $1.6 billion of its customer’s deposits went missing.  Estimates of MF Global’s leverage ratio were around 40:1 at the time of their bankruptcy.  According to Forbes, their leverage ratio was 80:1 back in 2007.  This much risk and leverage should be illegal.

6. The Fed is Unaccountable

Most Americans believe the Federal Reserve is a government agency, accountable to Congress and the President.  This is not true whatsoever.  The Federal Reserve is an independent central bank, who is mostly accountable to member banks.  Although they testify regularly in front of Congress, they are self-funded and virtually unaccountable to voters or the government.  They have become increasingly secretive and uncooperative, while trillions of treasury dollars flow around the world.

7. Money is Practically Free

Another thing I learned in college Economics is that banks never wanted to borrow at the Discount Window of the Fed, because they didn’t want anyone to know they were having liquidity problems.  Since the Fed no longer discloses who is borrowing money or how much they are borrowing, it’s a virtually unlimited source of money for banks.  Many of these are foreign banks who are borrowing our money at near zero interests rates.  Yet, taxpayers don’t seem to have the right to know who our money is being lent to.

8. Too Big to Obey the Law

Big banks have vigorously resisted consumer and financial reforms, before and after they were passed.  They stifled loan modifications and used robo-signers to illegally foreclose on homeowners.  They re-ordered transactions in order to collect billions in overdraft fees from customers.  Basically, they act as though the law doesn’t apply to them.  Who can blame them, since they rarely receive anything more than a slap on the wrist.  Until bank executives are sent to jail for breaking the law, they will continue to do it.

9. Lobbying is Unlimited

Ever since the Supreme Court struck down campaign finance limits as a violation of free speech, the amount of special interest money going to candidates has exploded.  The overwhelming majority of contributions from the banks are going to Mitt Romney.  They are upset with President Obama for his banking reforms and hope to have most of them overturned after the next election.  Until reasonable reforms and limits are placed on campaign finance, voters will never have a voice that equals the deep-pockets of special interests.

10. Bailouts are Inevitable

For all of the tough talk coming from politicians in an election year, there is virtually no chance they won’t support the banking agenda in times of a crisis.  Most of the key political posts in the Fed and Treasury are held by bankers, with strong ties to the banking community.  Congress and the President will likely fold again, under the pressure of a financial collapse.  The only way to avoid future bailouts is to establish solid regulations that keep banks from taking extreme risks.

The Bottom Line

The bottom line is that banks can’t be trusted to regulate themselves and there are no free market forces to contain them.  Bankers and traders receive massive bonuses for taking extreme risks, which are borne by the depositors and taxpayers.

As the nation’s central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

Source: FederalReserve.gov

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A Vexing Global Problem

Drugs, the related criminal activity and the costs to our society are issues that have been difficult to solve.  And, the ensuing “War on Drugs” in America doesn’t seem to have made much progress in combating this global problem.  The demand for illegal drugs have fueled violent drug wars on the streets and in countries that produce and traffic the drugs.  Currently, Mexico is paying a heavy price, with the murder rate exploding in the past couple of years.

Costs to the Nation

According to the Bureau of Justice Statistics (BJS) in 2009 about $2.28 million people were incarcerated and another 5 million were under correctional supervision (parole or probation).  This is a slight decrease from 2008.  But, it’s still a lot of people.  In 2007, Federal, State and local governments spent a combined $227 billion dollars for law enforcement.  That’s more than the Federal government spent in 2007 for commerce, energy, education, HUD, homeland security, NASA, transportation and veterans combined.  Justice costs around $756 each per year, for every person living in the U.S.

In my opinion, the escalating presence of law enforcement and the stiffened penalties to combat drugs aren’t an effective solution by themselves.  Only by reducing the demand for drugs can the tide be turned.  How can we reduce the demand for drugs?  I wish I knew.  It’s a complex problem, with many root causes.  There is no single solution that has proven effective in stemming the demand, including education.  In the end, some people are simply going to do whatever they want.  No law or deterrent is going to stop them.

Personal Costs

The personal cost to millions of Americans is a lot harder to quantify.  The lost wages, fines and lack of opportunity don’t show up in government statistics.  Some people recover quickly from the affects of drugs, while others spend their entire lives fighting addiction.  Friends and family are powerless to help them, often becoming the victims of their latest charade to obtain drugs.

At my last job, I worked with a lot of people who were recovering.  Their lives revolved around taking drug tests and working dead-end jobs to stay out of jail.  Every couple of weeks, the marshals would come in and escort one of our employees off to jail.  A few people were in college, trying to climb out of the hole they were in.  Others were still trying to play the game, staying one step ahead of the law, until their luck ran out.  It all seemed pretty senseless to me.  But, I never had to struggle with these kinds of problems.

My Take on the Situation

I believe the Justice Department should recognize the states’ rights to legalize Marijuana and concentrate on harder drugs like Heroin, Cocaine and Methamphetamine.  I believe most of the criminal activity surrounding Marijuana is related to the profit, not the drug itself.  In other words, people aren’t likely to break into a house or rob a liquor store to buy pot.  But, the criminal enterprises that traffic the drug will kill to protect the millions in profit.  There is a direct historical parallel to alcohol and prohibition.  Once alcohol became illegal, vicious criminals started supplying booze, instead of the corner pub.  Prohibition didn’t reduce the number of people who drank alcohol.  It just turned ordinary people into criminals.  We should have learned our lesson the first time.

In my opinion, the new pushers of our age are pharmaceutical companies.  I’m not a medical doctor, but it seems to me that certain classes of drugs, such as pain killers and anti-depressants, are way over-prescribed.  The dependency problems and criminal activity surrounding prescription pain killers are well known and documented.  And, there are a lot of deaths and overdoses from prescription medicines, often by teenagers who steal them from adults.  Most reprehensible are the thousands of TV commercials encouraging people to “ask your doctor” for prescription drugs.  These commercials used to be illegal in the U.S until a few years ago.  They should be banned, just as they are in almost every other industrialized nation.

The Bottom Line

The bottom line is that drugs are a vehicle for profit.  They quickly redistribute wealth from the user to the supplier.  Whether the substance is illegal, such as meth or heroin, or the substance is sanctioned, such as tobacco, alcohol or Oxycontin, the game is the same.  The only difference are the players.

“Drugs are a waste of time. They destroy your memory and your self-respect and everything that goes along with your self esteem.”

Kurt Cobain – Lead Singer of Nirvana (1967 – 1994)

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The Fed is a Joke, Literally

Whether or not you are interested in politics, economics or the future of our nation, you owe it to yourself to watch this video.  It explains exactly how the Fed is undermining America and why we need to stop them.

What is the Federal Reserve?

Most people think the Federal Reserve is a government agency that answers to our elected officials and ultimately voters.  But, nothing could be further from the truth.  The Fed is actually a central bank, that is primarily a private entity and much of its input comes from member banks.  Although the Chairman testifies in front of Congress and the Board of Governors is appointed by the President, the Fed is virtually unaccountable to the public.

As the nation’s central bank, the Federal Reserve derives its authority from the U.S. Congress. It is considered an independent central bank because its decisions do not have to be ratified by the President or anyone else in the executive or legislative branch of government, it does not receive funding appropriated by Congress, and the terms of the members of the Board of Governors span multiple presidential and congressional terms.

Source: FederalReserve.gov

Why the Fed is Being Criticized

The Fed has gotten touchy lately as the criticism mounts and they have become more vocal in defending their actions.  Bernanke’s speech in Germany is a prime example of the Fed’s attempt to stem the criticism and sell QE2 as necessary for America.  But, it’s increasingly obvious the Fed is working for the benefit of bankers and not for the benefit of Americans.  There are valid reasons for criticism of the Fed and these problems need to be addressed.

• Economic manipulation, causing boom and bust cycles
• Ineffective oversight as a regulator of member banks
• A culture of secrecy and refusal to allow public audits
• Suspicious favoritism in deals with investment banks 
• Questionable economic data compiled and published

Fixing the Problems

Stopping Quantitative Easing - The proposed QE2 program, which benefits investment banks at our expense, needs to be stopped immediately.  America cannot tolerate another $600 Billion in debt, a weaker dollar and dangerous stimulus for inflation.  International economists are universally critical of QE2, because it’s a potential disaster for the global economy.

Federal Reserve Transparency Act - The Federal Reserve should be audited by an independent source and the results of this audit should be made available to the public.  According to the proponents of H.R. 1207, the Federal Reserve hasn’t been audited by Congress since their creation in 1913.  This law would reform the way the Fed is audited and set a deadline for an audit.

Limiting the Fed’s Mandate - I watched Senator Bob Corker (R-TN) on CNBC Wednesday and he proposed limiting the Fed’s mandate to controlling inflation.  A growing number of Republicans want to eliminate the Fed’s mandate for full employment, because it may conflict with the stability mandate.  The Fed’s original stimulus seems to have been ineffective in reducing unemployment, but it provided a huge windfall for banks and businesses.

The Bottom Line

The bottom line is that a growing number of critics are starting to question the motives and allegiance of the Federal Reserve.  And, this is a very good thing for America.  The sooner the Fed’s books are made public, the sooner we can defend our treasury from opportunistic special interests.

“Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States.”

Barry Goldwater – Former U.S. Senator (R-AZ)

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This post was featured on the Carnival of Personal Finance over at Sweating the Big Stuff.  If you aren’t familiar with the Carnival of Personal Finance, you need to check it out. It’s the greatest carnival on the net.

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Credit Where Credit is Due

Image by SEIU International

Although I didn’t vote for President Obama and I don’t agree with most of his policies, I applaud his effort to provide these reforms, which I believe are critical to the financial security of our nation.  This is the third major financial reform, following the CARD Act and Overdraft Protection.  I don’t think President Obama gets nearly enough credit for pushing these reforms and the positive impact they will have for America.  

It probably won’t surprise anyone that I’m not a big fan of Barney Frank.  And, I’m happy Chris Dodd is not seeking another term.  In my opinion, the Sub-prime Crisis happened on their watch and they bear responsibility for the sad financial condition our nation is in.  Having said that, I appreciate the hard work they put forth in bringing this reform and I think it is fitting their names are on the bill.  

What this Means for Americans

Consumer Financial Protection Bureau – There is now a single consumer protection agency that will ensure all financial transactions are fair to consumers.  The emphasis of this new agency will be to simplify contracts, so they are clear and understandable.  Hopefully, the fine print and dirty tricks will be eliminated or at least greatly reduced.

Banking Institution Reform- Key elements of the Glass-Steagall Act have been restored which require the separation of deposit and investment banks.  This law also requires the divestiture of hedge funds, beyond a 3% stake.  Most important, failed institutions will now be wound down with shareholders taking the hit, instead of being bailed out with taxpayer money.

Oversight of the Federal Reserve- The way the Fed has been operating in secrecy is a huge problem for America.  What most Americans don’t realize is that the Fed is actually a banking institution and not a true government agency.  Huge sums of treasury money have been flowing from the Treasury to banks through the Fed.  How much is anyone’s guess, since they refuse to open their books.  The reform bill allows the Government Accountability Office (GAO) to audit the Fed, but their powers are limited.

Mortgage Reforms- Everyone knows that sub-prime mortgages were a primary cause of the Financial Crisis.  What most people don’t know is that millions of customers were steered into sub-prime mortgages, even though they qualified for regular funding.  The reason this happened is because brokers were paid yield spread incentives to do so.  From now on, lenders cannot be rewarded for steering borrowers into higher cost loans.  And, consumers will have to prove they can repay their loans.   No document loans are a thing of the past.  

Derivatives Reform- Derivatives will now be traded on a central exchange, which will be monitored by the SEC and CFTC.  Regulators are also given greater enforcement authority to punish parties who use complex derivatives to defraud others.  Finally, a new code of conduct is established for dealers, especially when dealing with pension, endowment and governmental entities.

Issues with the Reform Law 

Increased Powers of the Federal Reserve- In addition to banks, the Fed can now regulate insurance and investment companies, if they are primarily engaged in financial activities.  In my opinion, the Fed has proven to be a poor regulator and I have serious reservations about expanding their authority.

Over 2,300 Pages- I’m not sure why laws have become encyclopedias, but I suspect it is to hide all of the earmarks and loopholes.  How much of this law was written by staffers and lobbyists?  How much was read by the people who signed it?  I believe 100 pages would have been sufficient.

Fannie Mae & Freddie Mac – These two quasi-government agencies are bleeding taxpayer dollars at an alarming rate.  And this bill does absolutely nothing to reduce our liability or to stem the foreclosures.  I believe the government should divest itself of Fannie and Freddie and leave the lending to the private sector.

Reach and scope of the Federal Government – One big issue I have with this bill is how much it increases the authority of the Federal Government.  It is possible that it could be abused by agencies and officials.  However, I believe incompetence is more likely problem.

The Republican Response

About 15 minutes ago, my Mom forwarded an email response to the reform law from one of our local members of Congress.  This email was a whining diatribe, explaining how this reform bill will cost the country jobs and make credit difficult to obtain.  It was mostly a partisan attack and some scare-mongering, along party lines.  The final sentence pretty much tells it all.

“When all of this happens over the next year, remember who caused it – the people who voted for and supported this bill.”

John Campbell – Congressman (R-CA)

Here is my response to the Republican Response:

1. If the Republicans have a reform plan, I would love to hear about it.  So far, the Republican plan seems to be blame Democrats for everything and continue to let banks rip everyone off and destabilize our country.
2. Deregulation during the past decade (since the repeal of Glass-Steagall) contributed to the dot-come bubble and the sub-prime crisis.  During the Financial Crisis, 8 million jobs were lost, credit markets seized up and equity markets lost 40% of value.  Unemployment and housing will take years to recover.  How many jobs will be lost to reform?

Now you know why the approval rating for Congress is so low.  This is your tax dollars at work, for the benefit of special interests.  I couldn’t make this up.

The Bottom Line  

The bottom line is that no legislation is perfect.  What ensures the rights of one person places limitations on another.  However, banks and financial institutions have shown complete disregard for business ethics and the rights of citizens.  For their arrogance, recklessness and lack of integrity, they have brought reform upon themselves.

“History’s lesson is to make the most of reform opportunities when they arise because they do not arise often and they do not last long.”

Christopher Bond – British Playwright

Recommended Reading

This post was featured on the Carnival of Personal Finance over at Beating Broke. If you aren’t familiar with the Carnival of Personal Finance, it’s the premiere carnival of its kind. If you want to read informative articles from knowledgeable bloggers, this is the place.

My buddy Nickel, over at Five Cent Nickel, put together a great breakdown of the Financial Reform called What’s in it for Me.  I’m certain you will enjoy it.

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Our economy, industry, currency, investments and the very future of our nation depend on the stability of our markets and financial systems.  In the past decade, we have allowed banks to gamble with our future to increase their profits and this turned into a disaster.  Banks have shown no remorse for the financial crisis they created and they remain defiant in the face of reform. If left unchecked, the potential for disaster will only increase.  

The Seeds of Failure

Image by The Consumerist

The Glass-Steagall Act was created after the Great Depression to protect depositors from risky bank speculation.  And, it worked very well for over sixty years.  However, it was quietly dismantled in 1999 in a bi-partisan effort signed by President Clinton and lobbied for by the banking industry.  Many economists now agree this key piece of legislation could have prevented the Sub-prime Crisis of 2008.  

The reason Glass-Steagall was so crucial and the reason it should be restored, is because it mandated the separation of deposit and investment banks.  The repeal means a number of scary things.  Most important, deposit banks can now trade in risky derivatives with your money and if they go under, the FDIC must pay the depositors.  This places the total risk of speculation on everyone but the bank.  Also, bank holding companies can now be formed with the rights of both deposit and investment banks.  Many investment banks quickly reformed as holding companies to grab a share of the TARP money, even though deposits and lending wasn’t their primary business. 

The Bailout Mentality

Our government has set a dangerous precedent of bailing out banks, which in my opinion, encourages them to take unwarranted risks.  This started with the Savings and Loan Crisis of the ’80s and continued with RTC crisis of the ’90s.  During the Sub-prime Crisis of 2008, the financial industry received almost a trillion dollars of taxpayer money, in addition to an unknown amount received from the Fed for lending.  And, the foreclosures are far from over.

Banks will continue to speculate wildly and then expect a bailout, as long as the government is willing to shift the burden onto taxpayers.  It’s no different than if you visited a casino and you got to keep your winnings, but they refunded your losses.  Of course, you would gamble as much as possible.  Especially, if you received huge bonuses win or lose.  That’s what has been happening in America and it has to stop.

Derivatives Reform

There is a huge reason we need derivatives reform.  As I have posted before, the notional amount of derivatives volume is approximately 11 times the combined GDP of all the nations in the world.  This is an insane risk to let bankers, hedge funds and insurance companies gamble for profits with so much leverage.  The potential for disaster is overwhelming and the next financial crisis is inevitable.

There are many forms of derivatives that should have never been legal in the first place.  Securities with unlimited loss potential, such as naked shorts, should be banned.  Securities without underlying assets, such as synthetic CDOs, should be banned.  And, securities should be limited to a leverage multiple that is reasonable, such as 10-1.  Purchasers should be required to prove they can cover their positions, so we don’t have any more defaults like AIG and LTCM.  Finally, all derivatives should be traded on a regulated exchange, so they can be monitored by the SEC.

The Bottom Line

The bottom line is that I’m not opposed to bankers making a profit.  And, they have plenty of opportunities, without gambling with our economy.  Unless we limit their reckless activities, taxpayers will continue to pay the price in lost jobs and growing deficits.

“We need smart regulation. But we have a stupid government.”

Matt – Online Investing AI blog

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SEC Accuses Goldman Sachs of Fraud

Photo by Americans 4 Financial Reform

According the Associated Press (Yahoo Business), the SEC accused Goldman Sachs of civil fraud for selling mortgage securities that were crafted with input from a client who was betting on them to fail.  When they did fail, two German banks lost close to $1 billion while the Goldman hedge fund client, Paulson & Co., capitalized on the deal.  The SEC alleges Goldman misled the investors by failing to disclose Paulson & Co. played a role in selecting the mortgage pools and stood to profit from their decline.

“Goldman wrongly permitted a client that was betting against the mortgage market to heavily influence which mortgage securities to include in an investment portfolio, while telling other investors that the securities were selected by an independent, objective third party.”

Robert Khuzami – SEC Enforcement Director

I am thrilled the SEC is finally taking action against Goldman Sachs.  Their arrogance seems to have only grown since the financial crisis, which was resolved nicely in their favor.  And, I honestly believe they were feeling untouchable, because of their political influence.  We shall see if they can be brought to justice for this and other crimes.  The political mood has changed, as the elections are fast approaching and the banker’s misdeeds are becoming too obvious to sweep under the carpet.  Allegedly, this is just the tip of the iceberg and more banks are expected to be charged by the SEC.

This action validates what Matt Taibbi and many others have been reporting for years, that Wall Street firms are manipulating markets, rigging bids and betting against the securities they are selling to their own clients.  President Obama is pushing very hard for derivatives reform.  And, it appears that as many as eight Republicans may break ranks to support the reform.  This type of legislation resonates strongly with voters, who are furious with the handling of the bail outs.  And, they are unhappy with bank-friendly politicians. 

Massachusetts Fires Bank of America

According to Bloomberg News, Massachusetts’s treasurer Timothy Cahill says the state will withdraw more than $231 million from a Bank of America Corp. account because the company refuses to cap interest rates on its credit cards at 18%.  The state said it would invest its funds with banks and other companies willing to follow the state’s usury law, which limits rates to 18%.  This action follows the introduction of bills in Massachusetts, Maryland, Minnesota and New Mexico, to divert more money to smaller financial institutions.

I believe very strongly in limits on interest rates.  When I was young, interest rates were capped at 21.99% and anything above that was considered a usury rate that was illegal.  Banks got around this by moving their headquarters to Delaware and North Dakota, who eliminated their usury limits in exchange for the banks relocation.  Those two states may have won some jobs and tax revenue, but consumers definitely lost in that deal.  I would love to see more states join in to put pressure on banks to cap their rates.

Foreclosures on the Rise

According to Realty Track, foreclosure activity rose 7 percent in the first quarter of 2010.  This was a 16 percent increase over the first quarter of 2009.  Banks are accellerating their repossession and auction activity.  The holidays are over, inventory is swelling and banks have decided to get on with it.  Delinquent homeowners are being kicked to the curb.

Personally, I am torn over this kind of a story.  On one hand, it saddens me to see people being evicted from their homes.  Many have lost their jobs and have no emergency capital to deal with the loss of income.  Others were duped into sub-prime mortgages with exploding interest rates, when they should have been qualified for conventional loans.  As part of the bailout, banks were supposed to modify loans for worthy people and they have stifled most efforts to negotiate in good faith or to permanently modify loans. 

On the other hand, part of buying a house entails paying the mortgage.  And, that means earning enough to make those payments.  It also means knowing what you are signing and expecting to hold up your end of the bargain.  I’m not a fan of the bailout mentality or the bankrupt morality of shifting losses onto others.  When someone buys a house, there is no guarantee it will increase in value.  And, people shouldn’t expect that as part of the deal.

The Bottom Line

The bottom line is that banks have been bending the rules for years and the crackdown has finally arrived.  Their defiance in the face of reform and the extravagant bonuses following the bailout has cost them political support.  It’s time to level the playing-field for consumers and at the same time to remind banks that we still have laws in this country.

“Banks are an almost irresistible attraction for that element of our society which seeks unearned money.”

J. Edgar Hoover – Former Director of the FBI

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Normally, I’m not a big fan of civil suits.  These types of lawsuits are often baseless and unwarranted.  They amount to obvious extortion, by the crass and the irresponsible.  But, there are instances where justice and regulation have failed.  And, the only recourse available is to sue for damages.  The civil case against O. J. Simpson is an example which comes to mind.  Judgments have also been effective in cases against polluters, wrongful deaths and perpetrators of harassment and discrimination.  So, civil suits can offer some consolation, as a choice of last resort.

Lawsuits for Loan Modifications

Photo by Frog Miller

A study conducted by the Federal Reserve of Boston found that payment-reducing modifications were received on only about 3 percent of seriously delinquent loans.

There are a suspiciously high number of lost applications, resubmission requests and denials based on questionable criteria.  It is obvious to anyone who has gone through the loan modification process that banks are simply stonewalling the requests and Congress has no effective way to force their compliance.  But, after some frustrating years without progress, that is quickly starting to change.

The federal government’s Home Affordable Modification Program (HAMP) has been passed in order to increase modification compliance and to stem the foreclosure that are undermining our economy.  This seems to have increased the number of trial modifications.  But, the 2009 HAMP numbers show only 31 thousand of the 3.1 million loans have been permanently modified.

The individual lawsuits, which haven’t gotten much attention, are now seeking class-action status, in an effort to bring relief to more homeowners.   The Attorney General from many states are adding pressure to banks, which are finally starting to talk about ”principal forgiveness” for some customers.  Unless banks take the loan modification process seriously, I expect the lawsuits to increase and the judgments to become larger.

Lawsuits for Overdraft Fees

According to the Miami Herald, customers from all over the country are suing a number of banks for excessive overdraft fees.  These lawsuits were filed against most of the major banks and they were consolidated in federal court in Miami.  Banks tried to get the lawsuits dismissed, claiming that customers had no right to sue over their fees.  But, U.S. District Judge James Lawrence King disagreed and threw out the bank’s request to drop the lawsuits.

Here are the judge’s comments:

“Specifically, plaintiffs claim they are not challenging the bank’s right to charge overdraft fees.  Instead, they are challenging the banks’ practice of manipulating the overdraft fees, in order to maximize a benefit to them and to the great detriment of the parties who are their account holders.”

The Bottom Line

The bottom line is that customers may have finally found an effective way to hold banks accountable for their devious practices.  It’s a shame consumer’s rights were neglected for so long and they had to resort to lawsuits.  But, banks don’t seem to respect the rights of consumers or the intent of the latest regulations.  Litigation may be the only way to get their attention.

“When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes, Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”

Napoleon Bonaparte – Emperor of France

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People without Conscience

Photo by DaveToaster

There is a segment of the population who feel they shouldn’t be held accountable for their actions.  They believe it is their basic right to do whatever they choose and allow the responsibility to fall upon others.

They know how to work the system that was put in place to protect the weak and the vulnerable.  They run up debt and then declare bankruptcy.  Or, they look for opportunities to sue others, even if they are primarily at fault.  They have no qualms about taking from others nor are they embarrassed by their lack of integrity.  Often, they will joke or boast about their transgressions.

It’s fairly easy to cast judgements upon people.  But, it’s not so easy to legislate morality.  It’s nearly impossible to write effective laws to protect consumers, without allowing opportunities for the caniving.  There is no perfect solution to this problem.  Compromises are inevitable.

What is the most effective way to deal with schemers?

Failure of Leadership

Consumers have been attacked by many for taking on too much debt, for signing contracts they didn’t understand and for walking away from debt, even when they could afford to pay it off.  But, how is this different from the actions of business or Government?  Aren’t corporations structured in ways that allow them to declare bankruptcy and keep their assets?  Doesn’t our Government sign laws that they don’t understand and run up debt they can’t afford to pay back?  How can we expect consumers to abide by a moral obligation that is absent from the conscience of business and Government?

America seems to have lost it’s moral compass.  And, the example was set by fraudulent corporations and a corrupt Government.  No rule of law will force a return to an ethical America as long as these unjust conditions are allowed to exist.  The Government must lead by example and business must be held accountable, before consumers will regain their principles.

Have business and Government set an unscrupulous example?

Role of the Consumer

I believe most people are honest and want to do what is right.  After all, our country was founded the principles of liberty and justice and it has survived because of the honor and courage of it’s citizens.  Unfortunately, there isn’t much respect for the rights of the consumer or for their enormous contribution to society.  Consumers are now looked upon as ”piggy bank” by the Government and a “mark” by business.  We must stand up against this injustice or risk financial enslavement to the Government and the wealthy.

The role of the consumer is to power the economy with their purchases, fund the Government and supply brain and muscle power to business.  Since our country is no longer producing goods at levels seen in the past, our economy is now based primarily on consumption.  Unfortunately, much of our consumption is based on debt, which erodes our future ability to purchase.  Consumers have begun to delay purchases and pay down their debt, but this has slowed the economy.

Can we sustain an economy that is based on consumption?

The Role of Government

There has been a systemic failure in almost every aspect of Government.  Corruption has subjected us to pillaging by the wealthy; politics have obstructed our ability to govern; and incompetence has undermined our financial stability.  Even with valiant efforts towards reform, not a whole lot has been accomplished.  There have been small victories, such as the CARD Act and overdraft reform.  But, the Government has failed to reign in business or to provide critical reforms in the areas of derivatives and market manipulation. 

The Government’s role is to provide a structured set of rules for business and consumers to follow.  And, they have an obligation to enforce these rules in a fair and consistent manner.  Their role is not to protect people and businesses from themselves.  Their role is to protect them from the deceitful and predatory practices of others.  Failure to define and enforce the law risks anarchy.  Also, the Government’s role is not to create wealth.  They can only consume and redistribute wealth.  Their misguided effort to stimulate the economy only places a larger debt burden upon business and consumers.

Will consumers be protected from increasingly hostile businesses?

The Role of Business

Without effective regulation from Government, business has been allowed to set their own greedy agenda.  The Financial Collapse of 2008 was blamed on consumer defaults, but it was caused by the unsafe leverage used by business, as a way to increase profits.  Business grows bolder in their contempt every day, as they find new ways to skirt consumer laws and manipulate the markets.  This will not end until it is stopped.  There is a lot of money at stake.  And, money buys influence.

The role of business is to create jobs, develop products and provide goods and services.  Business used to be the primary generator of wealth within our economy.  But, now they seem to shuffle and divert more wealth than they create.  Business cannot be allowed to operate without regulation when profits are at stake.  And, business cannot be allowed to corrupt our political system to take advantage of consumers.

How can we refocus business on the creation of wealth?

Regulation that Works

The moneyed interests in this country effectively “influence” our politicians to such a degree that voters have lost their voice and their protections.  And, since incumbents have such a tremendous election advantage they aren’t inclined to listen to voters over campaign contributors.  The recent Supreme Court ruling that repeals the McCain-Feingold law will only make this worse.

Instead of creating a bunch of new laws, which have few teeth and many loopholes, we need to aggressively enforce the laws we have and to let business know they will be held accountable.  A prime example would be the dismantling of Arthur Anderson after the fall of Enron.  A message was sent to business that this type of fraud wouldn’t be tolerated.  Until business respects the rule of law, there will be no justice for consumers.

How can we regulate business without creating red-tape?

The Bottom Line

The bottom line is that consumers, business and the Government each have a responsibility to each other and to the economy.  As all three parties selfishly take advantage of each other, the golden partnership has begun to break down.  And, prosperity may be sacrificed, with the balance of power.

“When government accepts responsibility for people, then people no longer take responsibility for themselves.”

George Pataki – 53rd Governor of New York

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Most important, it has sent a message to politicians that voters will no longer be ignored.  They are angry with the Government and they are doing something about it.  They are voting out incumbents, as they did in November to the Governors of Virginia and New Jersey.  I predict incumbents will lose a lot of seats in the next election and not just Democrats.  Republicans have shown an equal am0unt of arrogance and incompetence.  And, they share the blame for our Government’s failures.

Balancing the Budget

The Federal Government is slow to catch on to what most Americans figured out last year.  No one can keep spending money they don’t have.  But, while most Americans have started to balance their own budgets and save for their futures, the Federal Government has gone on a wild spending spree, with the taxpayer’s money.

Just as the Government is attempting to raise the debt limit by another 1.9 Trillion dollars, Americans are starting to realize our precious tax dollars are being squandered away.  There is very little benefit to Main Street Americans, because most of our tax money is finding its way to wealthy entities, like banks and energy concerns.  Our economy cannot recover under the burden of a voracious Government.  And, there are very few opportunities for the hordes of unemployed.

Rise of the TEA Party

I have written before about the rise of the TEA Party and the possibility of many politicians being voted out of office.  And, it appears that my predictions are starting to come true.  The TEA Party has been marginalized by the Government and the media alike.  They have been portrayed as a right-wing gang of rednecks and fundamentalists.  The power elite believed the TEA Party represents a small minority of vocal zealots.  Nothing could be further from the truth.  Everyone seems to be concerned about the future of our nation, whether they watch Glenn Beck or not.

History is definitely repeating itself.  Just like the aristocracy in England, our Government feels they are above the whims of common folk.  And, just like the original Boston Tea Party over 200 years ago, the people of Massachusetts have sent a message regarding representation.  How far this revolt will go is anyone’s guess.  My opinion is that it’s far from over.

Government Health Care

The Health Care bills proposed by Congress and the Obama administration are a microcosm for all that is wrong with our Government.  They start by adding trillions of dollars in costs to a health care system that is already insanely expensive.  And, they create legislation that is so convoluted even their own experts can’t predict how it will affect us.  Then, they cut back-room deals with labor unions and hold-out states.  Finally, they shift choice and control away from employers and citizens and back to the Government.

I can’t speak for every taxpayer.  But, I believe I am in the majority when I say most Americans don’t want the Government to take over health care.  What most Americans want is our current private health care system to be more affordable.  And, they want benefits to be portable, while doing away with pre-existing conditions, blanket claims rejections and frivolous lawsuits.  They want to choose their own coverage and doctors, without having to answer to a Government official.  It sure seems a lot easier to reform our existing health care system than to create a new one.

The Bottom Line

The bottom line is that America’s experiment with socialism is coming to an end.  We cannot afford the higher taxes or the burden of a larger Government.  All of the bills from years of reckless spending are coming due and we can’t afford to pay them.  It’s up to voters to demand responsibility.

“You cannot keep out of trouble by spending more than you earn.”

Abraham Lincoln - 16th American President

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To be honest, I am shocked this reform came so quickly.  Banks will lose billions of dollars per year in fees and they can’t be happy about this.  As I wrote in my previous post, Plight of the Consumer, the banks arrogance in raising interest rates ahead of the deadline for the CARD Act has infuriated consumers and politicians alike.  And, it has caused a backlash by the Fed, who is under tremendous pressure to act like a bank regulator.

Federal Reserve Press Release

Image by Cliff1066

“The Federal Reserve Board on Thursday announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

Before opting in, the consumer must be provided a notice that explains the financial institution’s overdraft services, including the fees associated with the service, and the consumer’s choices. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act.” …

The Impact on Consumers

Overdraft charges are grossly unfair to consumers, because of the predatory way in which they have been implemented.  Even those who place blame directly with the consumer for overdrawing their bank account would have a hard time arguing the high fees are reasonable to cover the bank’s cost of an overdraft.  And, there is no justification to support the way banks reorder transactions to generate cascading fees.  Or, that banks pay third party vendors a percentage of the fees to maximizes overdrafts.

Here are some fun facts about the demographics of NSF fees:

• Among young adult accounts (ages 18 to 25), 46.4 percent incurred NSF activity, compared with 12.2 percent of accounts held by seniors (over age 62).
• More than 38 percent of low-income accounts had at least one NSF transaction, compared with 22 percent of upper-income accounts.
• Customer accounts with 20 or more NSF transactions (4.9 percent of accounts) were charged $1,610 per year in NSF fees on average.

Source: FDIC Study of Bank Overdraft Programs

My Experience with Overdraft

Back in 2000, I opened a joint account for a widowed relative to help with her expenses.  This worked great until 2001, when the new overdraft policies went into effect.  Soon, I was being hit with hundreds of dollars in fees as she was now able to overdraw the account without any warning to her.  I went into the bank and asked them to remove the overdraft protection, but they said it wasn’t possible.  We both knew they were lying.  So, I promptly closed the account and will never do business with that bank again.

A different relative, racked up close to $1,000 in overdraft fees last year and he asked me for help.  He was foolish enough to buy a lot of small items using his debit card and in one week he incurred a cascading overdraft that cost him $250 in fees on about $25 in overages.  I asked the banker to reset the overdraft on his debit card to zero and he said that he couldn’t.  I told him that I knew that he could and asked him why he wouldn’t.  He quietly told me that he wasn’t allowed to.

In either case, we should have been able to set the overdraft limit to zero, which is exactly what this new reform will allow.  Consumers didn’t ask for overdraft.  It was forced on us by banks and they are profiting handsomely.  To give consumers a choice on overdraft is only fair and long overdue.

Props to Carolyn Maloney

Rep. Carolyn Maloney (D-NY)

I have never held back in criticizing our Government and lately there has been plenty to criticize.  However, there are some public servants who work tirelessly on our behalf and these people are rarely praised or recognized for their contributions.

For years, Carolyn Maloney has stood up to predatory banks on behalf of consumers.  She was the impetus for the Credit Card Bill of Rights, which was recently passed as the CARD Act of 2009.  And, she was a champion for the overdraft reform that was just implemented by the Federal Reserve.

Despite personal tragedy in her life and many setbacks from the powerful banking lobby, she stood up for the little guy and she won.  American consumers may save hundreds of billions of dollars in future years because of Carolyn Maloney and Chris Dodd (D-CT), Chairman of the Senate Banking Committee.  We owe them a debt of gratitude.

The Bottom Line

The bottom line is that banks have finally pushed the public too far and they are starting to pay for it.  The arrogance shown by banks after receiving a trillion dollar bailout has made voters fiercely angry and politicians are feeling the heat.  This has shifted political influence away from lobbyists and back to voters.  I just hope this reform lasts beyond the next election.

“Bank failures are caused by depositors who don’t deposit enough money to cover losses due to mismanagement.”

Dan Quayle – 44th Vice President

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