Friday, August 21, 2009

Banks As Robbers: The $38 Billion Heist

August 21, 2009, 6:40 a.m.

How Banks Profit From Robbing Customers
(brought to you by*)

After years of watching bank robbers take their money, banks are turning the tables and now making billions by robbing their customers.

And, so far, the local papers are not following up on this story for their readers.

"If You Can't Trust Your Banker . . ."

[Credit: "Shady Deal at Sunny Acres," Maverick, 2nd Season, 1958. The popular early television series, Maverick, "starring James Garner and Jack Kelly, remains the most famous and widely discussed episode of the Western comedy television series Maverick. Written by Roy Huggins and Douglas Heyes and directed by Leslie H. Martinson, this 1958 second season episode depicts gambler Bret Maverick (James Garner) being swindled by a crooked banker (John Dehner) after depositing the proceeds from a late-night poker game, then recruiting his brother Bart Maverick (Jack Kelly) to mount an elaborate sting operation to recover the money." It's also the source of two oft-quoted lines: "If you can't trust your banker, whom can you trust?" and "I'm working on it." See, "Shady Deal at Sunny Acres,"]

As Woodie Guthrie put it in the lyrics to "Pretty Boy Floyd":
As through this life you travel, you meet some funny men
Some rob you with a six-gun, some with a fountain pen
And although this blog entry doesn't address the outrage of foreclosures against the banks' victims in this time of economic hardship, Guthrie's next two lines are also telling:
As through this life you ramble, as through this life you roam
You'll never see an outlaw take a family from their home
I'm indebted this morning to Stephen Phillips for bringing yet another Karl Denninger essay to my attention 10 days ago. Karl Denninger, "Bribed Regulators: Another Example," Market-Ticker, August 10, 2009.

The Financial Times made the basic story available on August 9. Saskia Scholtes and Francesco Guerrera, "Banks make $38bn from overdraft fees," Financial Times, August 9, 2009 ("US banks stand to collect a record $38.5bn in fees for customer overdrafts this year, with the bulk of the revenue coming from the most financially stretched consumers amid the deepest recession since the 1930s, according to research. The fees are nearly double those reported in 2000.").

By yesterday, 11 days later, the outrage had even attracted the attention of the New York Times' editorial writers. Editorial, "Debit Card Trap," New York Times, August 20, 2009, p. A26.

And what I'd like to know is why have so few newspapers carried this story? "Some have," you say? That's not what I mean. What I want to know is why our local papers have not responded to these shocking revelations by simply gathering and reporting the relevant data about the banks in the local community. A few phone calls should do it. It's not exactly an expensive six-month assignment requiring a team of investigative reporters. And it would be a community service that every subscriber would really appreciate -- at a time when the papers are looking for subscribers.

How about it in my home town, Press-Citizen, Gazette, Daily Iowan?

"So what's the big deal?" I hear you ask. "Overdrafts cost the banks. We've had overdraft fees forever."

"Not like these, you haven't," I respond. Read on.

The story is not in the existence of overdraft fees, it's in (a) the new way banks manipulate them to make them a major profit center, (b) the excesses this produces for some customers, and (c) who those customers are.

Here's how Denninger reports it (bracketed bold headings are mine):
[Banks' New Math] 70% of the overdrafts happen at a POS terminal or ATM, not by writing a check. . . .

There is no reason whatsoever for anyone to take such a hit. The bank knows before they approve the transaction that the money isn't there in the account.

This is not the same thing as a check, which the bank has no way to warn you about before you write it, as there is no "connection" between your checkbook and their computer. . . .

IF we had honest regulators it would be strictly unlawful for a bank to intentionally approve a debit transaction which it knew you did not have the funds to settle . . ..

In fact, it was not all that long ago, in the 1980s and early 1990s, when this was the case: If you went to the ATM and tried to withdraw $100, but didn't HAVE $100, the transaction would be declined. Every time.

But then the banks came to realize that if they let the transaction go through they could make an unregulated loan for that $100 to you, charging you $30 or more for the privilege -- an annualized interest rate of thousands of percent!

[Don't Ask, Don't Tell; The Fountain Pen Robbery] This is clearly predatory behavior. Nobody with half a brain would knowingly sign up for a "service" that would cover a POS or ATM withdrawal at 5,000% interest, yet that is exactly what nearly every bank in the land will currently do by default when you open a new account. They bury the "disclosure" in their terms and conditions, but nowhere do they state these "fees" in equivalent annual percentage rate terms.

[Watch Your Money Disappear in the Banks' Shell-and-Pea Game] It gets better: Banks will intentionally "sort" transactions from a given day to produce the maximum overdraft fee. They sort withdrawals to debit the largest-amount-first, because the fee is assessed per item.

An example: $1,000 in your account. You write checks for $20, $50, $100, $1,000 and all are presented on the same business day.

How many checks will hit you with an overdraft fee? THREE -- every time. The bank will re-order the transactions so that the $1,000 check is processed first, guaranteeing that the $20, $50 and $100 checks overdraw, thereby generating three overdraft charges.

If they processed the transactions "largest item LAST" you'd generate one overdraft fee -- on the $1,000 check.

It gets better.

You have $1,000 in your account. It is after 2:00 PM, the cut-off for a business day. You go to the mall and use your debit card four times to buy a $5 Latte, $15 lunch, a $40 pair of pants and $25 for a couple of movie tickets.

The next morning a $1,000 check hits your account.

The bank processes the $1,000 check first, even though in terms of actual presentation time the debit card withdrawals were approved first, and whacks you for four overdraft fees instead of the one legitimate fee on the $1,000 check. That Latte just cost you as much as $45!
So who bears the primary burden of these fraudulent practices? Surprise . . .
[The Poor Pay More] 3/4 of all accounts have not had an overdraft in the last 12 months. This means that one quarter of all accounts are responsible for basically all of this.

Of the remaining quarter, half of those account for nearly all (90th percentile plus) of the overdrafts. This means that roughly 12.5% of consumers are bearing the entire brunt of these fees.
Why do the regulators permit this? You tell me. These are the same regulators who thought it would be really nifty, ideologically pure, and very profitable to let the banks package what are called "toxic assets" (mortgages unlikely to be paid) and sell them as securities. It was a win-win. So long as this industry-wide ponzi scheme worked, bank managers would collect bonuses and shareholders would get dividends and higher stock prices. And if and when it all collapsed -- as it was obvious it someday would, and now has -- they could do their little Chicken Little dance and scare the Congress (funded with the campaign contributions from Wall Street and the banking industry) into handing over trillions of taxpayers' dollars to cover the losses. And if a few billion of that is paid in bonuses to reward those who brought on the economic collapse, well, hey, they have to live, too.

Karl Denninger continues:
This sort of predation is responsible for nearly $40 billion dollars a year in pure "profit" for the banks, it is directed specifically at those who have the least in resources to cover it, and it relies on lack of clear disclosure and intentionally-predatory "sorting rules" to get past what would otherwise result in a howl of protest by consumers and lawmakers alike.

This sort of practice should be absolutely outlawed, and if we had anything approaching an honest Congress and Federal Reserve it would have been years ago.
As Paul Krugman notes in an aside this morning, "I don’t know if administration officials realize just how much damage they’ve done themselves with their kid-gloves treatment of the financial industry, just how badly the spectacle of government supported institutions paying giant bonuses is playing." Paul Krugman, "Obama's Trust Problem," New York Times, August 21, 2009, p. A27.

Here are some consistent quotes from the New York Times' editorial (linked above):
Moebs Services, a research company that has conducted studies for the government as well as some banks, reported recently that banks will earn more than $38 billion this year from overdraft and bounced-check fees. Moebs also estimates that 90 percent of that amount will be paid by the poorest 10 percent of the customer base.

Federal regulators . . . stood idly by while this system evolved . . ..

[A]s more people began to use debit cards, the banks started to view overdraft fees as a major profit center and started to automatically enroll debit card holders into an overdraft program. Some banks instituted a tiered penalty system, charging customers steadily higher fees as the overdrafts mount. . . .

One college student . . . made seven small purchases including coffee and school supplies that totaled $16.55 and was hit with overdraft fees that totaled $245. . . .

Credit card companies . . . were rightly criticized when some drove up interest rates to 30 percent or more. According to a 2008 study by the F.D.I.C., overdraft fees for debit cards can carry an annualized interest rate that exceeds 3,500 percent. . . .
And so "the beat (ing up of the American consumer by the banking-governmental axis of evil) goes on."

I ask again: Where is the local media's reporting of the bank overdraft practices in our community? Are the papers on the side of the beleaguered local consumers (as newspapers openly were 100 years ago), or on the side of the rapacious, unregulated banks? They can't be both.

And to close with another song, as Pete Seeger asked the question in an only slightly different context,
Which side are you on, boys?
Which side are you on?

* Why do I put this blog ID at the top of the entry, when you know full well what blog you're reading? Because there are a number of Internet sites that, for whatever reason, simply take the blog entries of others and reproduce them as their own without crediting the source. I don't mind the flattering attention, but would appreciate acknowledgment as the source, even if I have to embed it myself. -- Nicholas Johnson
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John Barleykorn said...

Yes the banks profit from it. However, they are not making anyone overdraw their account. Is it your argument that people are simply incapable of self control?

You let the people off too easily Nick. Wayyyyyy too easily.

Unknown said...

You fail to see the point he is trying to make. The fact is that the banks are manipulating the order of debits so that they maximize the number of overdrafts that occur. That is downright ignorant and should be against the law. Another thing that banks do is take debits out of your account before they put credits in; another attempt to maximize their overdraft haul. I don't believe that he ever stated that all overdraft fees were wrong. Just the ones that the bank unnecessarily hammers you with.