Hope to Prosper » Regulation

The Benefits of Financial Reform

Bret — Thu, 22 Jul 2010 07:03:26 +0000

The Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama today. Anyone who follows my blog has heard me clamor for years about the need for these types of reforms. And, although this bill is far from perfect, it is very comprehensive and it addresses most of the critical areas where reform was necessary. To be honest, I didn’t think most of these provisions would make it past the banking lobby, but they have.

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:

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.
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

Why Banks are out of Control

Bret — Fri, 16 Jul 2010 00:51:58 +0000

I just had an interesting comment debate with my buddy Matt over at the Online Investing AI Blog. Matt’s a big fan of derivatives and a laissez-faire kind of guy. He views government regulation with a heavy dose of skepticism. I am not a big fan of cumbersome regulation myself. But, I have become firmly convinced the banking industry is out of control and they need to be more effectively governed.

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

Bank Troubles in the News

Bret — Sun, 18 Apr 2010 02:48:42 +0000

There is a plethora of exciting stories in the news this week. The common theme is that banks are in the cross-hairs of regulators, who have finally started to pull the trigger. It will be interesting to see how effective these legal actions are. I’m hoping for nothing less than a complete return to sanity and fairness in our financial systems. Hey, I like to dream big.

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

Customers Sue Banks for Compliance

Bret — Sun, 28 Mar 2010 17:58:56 +0000

I have noticed a new trend in the conflict between banks and consumers. Customers are suing their banks for a variety of reasons and these lawsuits are starting to become problematic for banks. It seems that consumers are tired of the predatory treatment and they are taking their grievances to court. And, the courts appear to be sympathetic to consumers, especially in cases where the bank’s activities defy any reasonable sense of fairness.

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.”

I’m certainly no legal expert. But, it seems unjust to customers when banks reorder transactions to maximize overdraft fees. And, since overdraft fees generated by banks are in the Billions of dollars each year, the damages from these lawsuits could be substantial. There is already a $35M settlement in Closson v. Bank of America. And, I suspect this case was settled to avoid a precedent. This is likely just the beginning.

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

Consumer Protection & Responsibility

Bret — Sat, 13 Mar 2010 17:20:04 +0000

Last week, Andrea from one of my favorite blogs Fools and Sages wrote a piece called The Slippery Slope of Consumer Protection. Her conclusion was that a double-standard exists in the area of consumer protection. Here on Hope to Prosper, I am a bit of a consumer advocate. So, I decided to write a post dedicated to consumer protection and responsibility. This is a topic that has a host of financial ramifications and a number of moral dilemmas.

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

The End of Reckless Spending

Bret — Fri, 22 Jan 2010 09:06:42 +0000

Yesterday, the Democratic establishment got a huge shock when the state of Massachusetts voted Republican Scott Brown into office for the U.S. Senate. Massachusetts is a staunchly Democratic state and Brown was elected to take Edward Kennedy’s seat. Kennedy was a big supporter of Government health care, which Brown and most voters are not. Brown’s election victory has revoked the Democrat’s super-majority and killed any prospects for a Government run health care system.

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

Overdraft is Over

Bret — Fri, 20 Nov 2009 15:00:05 +0000

The Federal Reserve announced Thursday new banking rules, which require consumers to opt-in before overdraft protection fees are allowed on their ATM and debit cards. This is a huge win for consumers who are being soaked for close to $40 billion dollars in overdraft fees in 2009 alone. These new rules will take effect on July 1, 2010. What is missing from the Fed’s reform is a limit on the number of overdrafts charged in one period and a ban on the reordering of transactions. Congress is promising even tighter overdraft reforms.

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

Plight of the Consumer

Bret — Sat, 07 Nov 2009 00:44:18 +0000

As American consumers, 70% of the economy is based upon our spending. This makes us very powerful in some ways. It also makes us a target for aggressive sales tactics and deceptive marketing claims. You may think companies would appreciate the consumer’s contribution to their bottom-line, but the opposite is often true. Many companies now look upon consumers as easy marks. And, fleecing the American consumer has become the new business strategy.

Dirty Tricks with Overdraft

Photo by Tony the Misfit

Most of the younger generation doesn’t realize that overdraft is a recent phenomenon. Before 2001, if you didn’t have enough money in your bank to complete a transaction it would be declined or the check would bounce. According to banks, this new “service” was added for the convenience of customers. The truth is that banks are the ones who benefit from overdraft, to the tune of billions of dollars per year. And, since many banks order transactions starting with the largest item first, unwary customers can get hit with hundreds of dollars in overdrafts from a single transaction that is over their balance. An interesting fact I discovered is that many banks pay a third-party company a percentage to maximize their overdraft fees. So, this isn’t a new service for customers, it’s a new revenue stream for banks.

The good news is the Government has heard a lot of complaints and soon you may be able to choose whether or not you want overdraft on your account. And, you may be warned of an overdraft occurring before you complete a transaction, so you can choose whether or not you want to pay the fee. The bad news is that banks earn 74% of their total fees from overdraft or NSF and they aren’t happy about giving up that income.

Check Out: FDIC Study of Bank Overdraft Programs

Junk Fees and Services

I have been a customer of the phone company for over 25 years. And, every couple of years, I notice they add new services to my bill, such as inside wiring insurance. Of course, I never asked for this “service” and as soon as I complain they are happy to take it back off. After the third time this happened to me, I noticed a pattern. Whenever I made any changes to my phone service, extra items would appear on my bill. I suspect the customer service rep or the computer systems add these services automatically. And, phone companies make millions of dollars from them each month, unless customers figure it out and cancel.

Junk fees, added services and fake taxes are the new revenue enhancers. It is almost to the point where customers expect to see them on bills and contracts. And, very few people read their bills or contracts in detail any more. Another sneaky trick is the evergreen contract, which renews automatically, unless you cancel in writing. When companies combine an evergreen contract with a hefty cancellation fee, customers are trapped by the provider. Companies known to add sneaky fees are banks, mortgage brokers, phone and utility companies, car dealers, hospitals and insurance companies.

Check Out: Secrets for Negotiating a Better Contract

Interest Rate Abuse

Anyone with a credit card knows most banks are raising interest rates dramatically. They are doing this ahead of the new CARD law that will go into effect in February. Banks are spinning this abuse of consumers as necessary because of rising defaults. In my opinion, this is simply a defiant way to punish consumers and to rake in as much revenue as possible, ahead of the reform. Thankfully, the Government is not happy about this attitude, which is causing them to be more aggressive with the overdraft reform. Banks may be slitting their own throats by thumbing their noses at reform.

There are many other forms of finance that customers need to be wary of. Those offers for zero interest until 2010 come with a nasty surprise. If you are late on even one of the payments, you may be hit with an astronomical interest rate. Another thing to avoid are store credit cards. They often have very high interest rates and unfriendly policies towards consumers. Auto financing is another dicey prospect, where funding fees and kickbacks are common. But, the worst of all financing fiascos in my opinion are mortgages. Did you know that millions of people stuck in sub-prime loans could have qualified for better loans? There is only one explanation for this. Points and commissions are higher on sub-prime loans.

Check Out: Raising Rates Ahead of New Law

Know Your Rights

One of the reasons businesses have been so successful in taking advantage of everyone is the apathy of consumers. There was a time when people worked hard for their money and they would get angry if they felt cheated. And companies that took advantage of people would have a hard time finding new customers. Now, with slick advertising campaigns, inept regulation and millions of consumers, companies are getting away with murder.

Unless you don’t mind being cheated by companies with unfair business practices, you need to know your rights as a consumer. Different types of companies are regulated by different branches of the Government, so it can be confusing trying to find someone to help. For example, utilities are regulated by the PUC, Securities Dealers are regulated by FINRA and automotive repair shops are regulated by the Department of Consumer Affairs. The most important thing you can do whenever you have a problem, is to figure out which authority oversees a company before you call them.

If you have been cheated, it is much more effective to say something like, “this is in violation of the Fair Credit Reporting Act and if you don’t correct this immediately, I am going to file a complaint with the Department of Consumer Affairs.” By knowing your rights, you will often get much better results from a Customer Service Rep.

Check Out: Credit and your Consumer Rights

The Bottom Line

The bottom line for consumers is “Caveat Emptor” or “Let the Buyer Beware”. Despite recent legislation designed to protect consumers, we still have a long way to go. Consumers are on the short end of almost every commercial relationship, because of sneaky fees, one-sided contracts and shifting terms and conditions. Only by carefully monitoring your purchases, bills and agreements will you avoid the ignorance premium placed on unsuspecting consumers.

The Dangers of Derivatives

Bret — Fri, 31 Jul 2009 04:49:57 +0000

Risky derivatives and leveraged securities were the primary cause of the Global Financial Crisis of 2008. It’s no coincidence this happened after Congress repealed provisions from the Glass-Steagall Act, which was created during the Great Depression to protect depositors. Without this protective legislation, banks were free to create and sell these types of securities, which later became known as ”Toxic Assets”. The bad news is that we are all still at risk from these securities.

Size of the Problem

The notional amount of outstanding positions in the derivatives market was almost $700 Trillion in 2007. That’s about 11 times the combined GDP of every country in the world. I don’t know how others feel about this, but it seems pretty irresponsible to me. The recent explosion in the volume of derivatives highlights their profitability, but it also creates a lot of risks.

Why this is Risky

There are way too many complex derivatives products and they are often used to gamble for profits, instead of being used responsibly for hedging. Another problem is that over-the-counter trading is non-transparent and poorly regulated. Also, there are some highly leveraged and naked securities, which have such a high loss potential they never should have been legal in the first place.

The only reason this is allowed to go on is because bankers and brokers are making a fortune off of these products. In case anyone thinks I’m overstating this problem, here are some examples.

High-Profile Failures

AIG Bailout - Taxpayers are painfully aware that over 100 billion dollars was spent to bail out AIG. What most taxpayers don’t understand is why. AIG was engaged in the selling of Credit Default Swaps, which exposed them to total losses of around $100 billion. Since they weren’t properly reserved or hedged against these losses, the Government stepped in to bail them out, with our money.

Bankruptcy of Orange County - In 1994, Orange County, CA was bankrupted by Treasurer Robert Citron. Citron purchased derivatives called Inverse-Floaters that were tied to interest rates. When interest rates rose, these securities lost two billion dollars in value and the county was forced into bankruptcy. Citron plead guilty to six felony counts, but never spent a day in jail. Orange County taxpayers were stuck with the tab and 3,000 public employees lost their jobs.

Long-Term Capital Management - LTCM was a high-profile hedge fund, which failed in 1998. LTCM engaged in various leveraged trading strategies, including Fixed Income Arbitrage, Interest Rate Swaps and Pairs Trading. The East Asian Financial Crisis and a Russian Bond Default caused liquidity problems for LTCM, resulting in $4.6 billion of losses. The Federal Reserve engineered a bailout by a number of large investors to avoid further disruption to the financial system.

Failure in Regulation

Bank regulators don’t seem to have learned anything from their continuous series of failures, except how to unload the losses onto taxpayers. Speculation-based bank defaults date all the way back to the Great Depression and the Bank Panics of the 1800s. Yet, we seem no better protected today then we were back then. Even as the Federal Reserve grabs for more power over our financial institutions, it has become obvious they are a source of the problems.

New Laws on the Horizon

According to Reuters, Congress is considering curbs on speculation in the Credit Defaults Swaps markets and they may ban naked swaps outright. Congress also wants to shift oversight from the Federal Reserve to the Securities and Exchange Commission (SEC).

The Obama administration wants to curb over-the-counter trading, by forcing these derivatives through a clearinghouse, if they are not traded on an exchange. This would make these trades more transparent to regulators. The White House is expected to release this proposed legislation sometime today.

The Bottom Line

The bottom line is that financial institutions can’t be trusted when profits are at stake. And, our banking systems will never be secure as long as high leverage is allowed for speculation. Until we get some real oversight and practical limits on leveraged securities, we will all be at risk of more banking failures in the future.

We can’t allow bankers to regulate themselves.

“In gambling, the many must lose in order that the few may win.”

George Bernard Shaw – Irish Playwright

Fixing Health Care

Bret — Thu, 23 Jul 2009 00:20:41 +0000

There is a lot of rhetoric and arm-twisting regarding the Obama health care plan. President Obama is scheduled to appear on television tonight to rally support for his plan. Although there are claims of partisan bickering, it is the “Blue Dog” Democrats who are holding up this plan. They, like most Americans, want to see real cost containment in health care, instead of an expensive boondoggle.

I usually avoid political posts, so I will try to keep this strictly related to finances. The cost of our health care is unsustainable, considering the number of people retiring and others using Medicare services. If we don’t come up with some sound financial solutions, Medicare may become insolvent. Plus, there are an estimated 45 million people who are uninsured and medical costs are the single largest cause of personal bankruptcies. This has become a huge problem that will affect everyone at some point.

Why Costs are so High

Political Clout - Our politicians are primarily to blame for high medical costs. Powerful special interests in the legal, medical and insurance industries are enriching themselves at our expense, with the aid of our elected representatives. These special interests have a vested interest in maintaining the status quo, which has been very lucrative for them. Politicians have a vested interest in getting re-elected and they welcome the campaign contributions. None of this works in the favor of affordable health care.

Administrative Overhead - One huge component of cost inflation is administrative overhead. There are dozens of proprietary medical systems which don’t integrate to the standardized EMR systems. And, there are many different codes, forms and insurance plans, which contribute to medical mistakes and make billing a nightmare. Standardization has been slow to occur and the costs of computerized medical systems are staggering for large organizations.

Medical Malpractice - Another heavy cost that is passed onto the consumer is in the legal and insurance costs of medical malpractice. Granted, there are medical mistakes and patients are sometimes harmed by the health care system. But, our litigious society and an abundance of aggressive lawyers aren’t helping to contain medical costs.

Drug Costs - The U.S. is one of very few countries in the western world that allow advertising of prescription drugs and this is a recent change. A number of years ago, you didn’t see commercials on TV telling you to “ask your doctor” for drugs. This simply wasn’t allowed and it shouldn’t be now. There are also a lot of “promotional” programs that reward doctors for prescribing drugs. There are a lot of new drugs that are less effective and more expensive than their predecessors. Also, a suspicious number of new drugs must be taken for life, instead of being taken for a couple of days or weeks. Finally, prescription drugs are more expensive in the U.S than they are in other countries, even though they are often made right here. All of these things add up to skyrocketing prescription drug costs with no relief in sight.

What is Wrong with the Obama Plan

I applaud President Obama for recognizing that there is a crisis in the coverage and cost of health care in America. Unfortunately, his plan does virtually nothing to contain costs and instead cuts everyone in for a big share of taxpayer money. This is supposed to be paid for by the rich, but this cost will ultimately fall on the working class. And, the last thing we need is our Government becoming our health insurance company. Just look at all of the fraud in Medicare and you will get an idea of how effective this plan would be. And, if you are worried about the quality of health care provided by the Government, you can gauge that by the health care provided to our Veterans. I foresee a lot more problems than solutions.

My Solutions to the Crisis

Direct Provider Model - I selected Kaiser for my health care benefit, because they provide the health care directly. This means that I don’t pay an insurance company in addition to the provider. By cutting an insurance company out of the loop, medical costs are greatly reduced. In addition, there is greatly reduced administrative overhead, because the provider doesn’t have to fill out dozens of unique forms to get paid by dozens of insurance plans. And, I don’t receive letters from doctors who didn’t get paid by the insurance companies, who rejected the claims. Although you give up some freedom in choosing your medical care, the reduction in costs and hassles are well worth it.

Cost Containment - One scary aspect of an HMO provider is that they have incentives to cut costs, even if it means cutting necessary medical procedures. The alternative, which is equally scary, is a system of providers who have incentives to run up costs, even if it means providing medical procedures which may not be necessary. This is not a pleasant choice to think about. But, medical costs must be contained, so a model that provides incentives for controlling costs makes a lot of sense.

Health & Prevention - This may sound like an absurd claim and I have no scientific basis for making it. But, I personally believe we could cut our long-term health care costs by at least 20% just by removing six key ingredients from our food supply. (nitrates/nitrites, hydrogenated oils, artificial sweeteners, corn sweeteners, MSG and preservatives such as Sodium Benzoate, BHA and BHT) If we could reduce the epidemic numbers in cases of diabetes, obesity, heart disease, strokes and cancer, this would not only reduce medical costs, but improve our quality of life.

Alternative Medicine - More and more Americans are aware of the issues and limitations related to our traditional form of medicine, including the nasty side effects of synthetic drugs. It’s a crime that very little research is being conducted on natural remedies and alternative forms of medicine. There is no doubt in my mind that these options are being limited by vested interests in the status quo. People would welcome these alternative solutions, but they simply aren’t available through traditional medical channels.

The Bottom Line

The bottom line is that there isn’t an easy solution to our health care crisis. We can’t continue to pay 16% of our GNP for health care, we can’t have millions of uninsured citizens and we can’t have the looming disaster called Medicare bankrupt out Government. What we really need is a vibrant, private direct provider system, with portable benefits and no pre-existing conditions. We need to eliminate the proprietary nature of health care and standardize medical records, forms and coverages.

Unfortunately, the current Obama proposals are bloated, inefficient and costly corporate giveaways. We simply can’t afford that if we are going to remain healthy and solvent as a nation.

Hope to Prosper » Regulation

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Credit Where Credit is Due

What this Means for Americans

Issues with the Reform Law

The Republican Response

The Bottom Line

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Overdraft is Over

Federal Reserve Press Release

The Impact on Consumers

My Experience with Overdraft

Props to Carolyn Maloney

The Bottom Line

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Plight of the Consumer

Dirty Tricks with Overdraft

Junk Fees and Services

Interest Rate Abuse

Know Your Rights

The Bottom Line

Recommended Reading

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The Dangers of Derivatives

Size of the Problem

Why this is Risky

High-Profile Failures

Failure in Regulation

New Laws on the Horizon

The Bottom Line

Recommended Reading

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Fixing Health Care

Why Costs are so High

What is Wrong with the Obama Plan

My Solutions to the Crisis

The Bottom Line

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