Banks As Robbers: The $38 Billion Heist

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

How Banks Profit From Robbing Customers
(brought to you by FromDC2Iowa.blogspot.com*)
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," wikipedia.org.]

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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Global Finance: The Great Fountain Pen Robbery

September 21, 2008, 3:30 p.m.

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The Great Fountain Pen Robbery of 2008
Yesterday I promised "Rational Responses to Stolar and Global Finance," September 20, 2008. I may or may not have satisfied you with the rationality of my response to Stolar. But I left you hanging with regard "global finance," since other things intervened before I could get back to it.

Now I've seldom if ever been charged with being a man of few words -- "turn on a light bulb and he'll make a speech," my critics say -- but the events of the past two weeks (or has it only been one week?) have been so totally appalling that I really am close to speechless.

One can just sputter and scream, of course; but having done that what more is there to say?

I'm wishing we still had Woodie Guthrie around to sing to us about it. Do you remember his "The Ballad of Pretty Boy Floyd" (March 1939)? The last two stanzas of lyrics read:

Yes, as through this world I've wandered
I've seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.

And as through your life you travel,
Yes, as through your life you roam,
You won't never see an outlaw
Drive a family from their home.

Lyrics as reprinted in Woody Guthrie, American Folksong, New York, NY, 1961 (reprint of 1947 edition), p. 27. © 1958 Sanga Music Inc., New York, NY.

T. Boone Pickens has been urging us to convert our cars to run on natural gas to avoid (or at least reduce) the "transfer of wealth" represented by our purchase of foreign oil. As he notes: "Over 700 billion dollars are leaving this country to foreign nations every year . . . The largest transfer of wealth in the history of mankind."

Well, ol' T. Boone has just been one upped by Secretary of the Treasury Henry M. Paulson, Jr.

Secretary Paulson -- with the support of President Bush, candidates Senators McCain and Obama, the leadership of the U.S. House and Senate, and the urging of their campaign contributors -- is about to provide "the largest transfer of wealth in the history of the United States," $1.3 trillion, to their wealthy friends in finance, banking and real estate, ultimately to be paid by our grandchildren.

"Campaign contributors"? Yes, campaign contributors. OpenSecrets.org, which tracks this kind of thing for us by industry sectors, has calculated that the "finance, insurance and real estate sector" has been the largest single sector providing support to both McCain and Obama. (It was the leading source of Senator Hillary Clinton's contributions as well.) Massie Ritsch, "Bundlers for McCain, Obama Are Among Wall Street's Tumblers," OpenSecrets.org, September 18, 2008.

How dumb do these bandits think we are? Unlike those who play by the rules of Pretty Boy Floyd, these are outlaws who not only would "Drive a family from their home," they've already done it.

Think about it. We're roughly six weeks from a presidential and congressional election. McCain is having a tough enough time distancing himself from President Bush. He darn sure doesn't want to have to distance himself from President Hoover as well.

Nobody knows the details of what's in Secretary Paulson's $1.3 trillion proposal, or the packages of worthless debt he's offering to buy from his friends. All we know is that (a) we're going to end up paying for it, and (b) he's got a provision in there that no one can oversee or challenge what he does. He himself acknowledges he can't guarantee it will work.

Appropriately, it's a strategy comparable to the "short term gains from long term risks" strategy that the financial geniuses undertook to enrich themselves and impoverish us and create this mess. So long as we aren't dealing with the next "Great Depression" on the day we go to vote -- November 4 -- who cares what happens between then and inauguration day?

If the McCain forces had access to enough troops they could have salvaged this thing by starting a war. See, "Wag the Dog." The Iraq War is going to end up costing us $2 or $3 trillion. But we could wage a third war for far less than this $1.3 trillion bailout if we could get it over with in something between six weeks and six months -- something like the promise regarding Iraq, or the reality with Granada. The problem, as I say, is that we don't have enough troops for the two wars we're already in; and besides with two wars going on a third wouldn't give McCain that much of a bounce in the polls.

So scaring the Congress into capitulation is the best short term strategy for the next six weeks. Anything to keep Obama out of the White House.

Besides, it's a way to pay back those campaign contributors in the coin they know best.

The problem for the taxpayers is the contributors' rate of return. We're used to campaign contributors being given a 1000-to-one to 2000-to-one return on their contributions -- from us, whether as taxpayers or as consumers. That's bad enough. But the payback on this corrupt deal is more like 30,000-to-one.

Warren Buffett has been candid enough to recognize that “There’s class warfare, all right, but it’s my class, the rich class, that’s making war, and we’re winning.”

A $1.3 trillion transfer of wealth from the poor and middle class to the wealthiest class has got to be a record-setting "shock and awe" attack in class warfare.

Now I'm not saying that there may not be some problems in the financial sector of our economy. I'm not even saying that this unprecedented robbery may not produce some small benefit.

But I do see a lot of hypocrisy when those who've been most vocal in advocating free, unregulated markets -- while ridiculing socialism -- suddenly welcome the latter as an alternative to free private enterprise when their going gets rough.

It really is "heads I win, tails you lose." "If I'm lucky and make a profit, I get to keep it. If I'm not, I still get to keep my profits, salary, bonuses, stock options and golden parachutes, but I don't have to worry about the losses -- because I can just hand them off to you and all the other taxpayers." It's the very sweet deal called "socialism for the rich and free private enterprise for the poor."

By what rationale should taxpayers' money be going onto the bottom line of any for profit business at any time -- whether tax breaks, TIFs, subsidies, earmarks or bailouts? But even if you can answer that one, why should businesses be rewarded by taxpayers for their greed, risky behavior and stupidity when they fail? Isn't that just going to encourage them to continue the path of "short term gains from long term risk"? Whatever happened to Secretary Paulson's observation that "Market discipline is best served when shareholders bear both the risk and the reward of their investment"?

Consider the alternatives -- and what they say about the priorities of our elected officials who are funded by this "finance, insurance and real estate sector."

How else might we have boosted our economy with $1.3 trillion?

o We could have spent it upgrading and building infrastructure: roads and bridges, hospitals and schools -- providing employment for those 600,000 who lost jobs this year, and who would have put most all of that $1.3 trillion to circulating in our economy as well as paying off mortgages and credit card debt.

o We could use it to create T. Boone Pickens' plan: convert our cars, and build the natural gas infrastructure, to run our cars on natural gas -- plus, as he proposes, getting 20% of our energy from wind.

o We could use it to virtually eliminate future economic losses from flooding by moving homes and businesses from floodplains, and converting the floodplains to parks, pastures and prairies.

o As many acknowledge, if you really want to improve our economic position in the world, invest in education: K-12, college, graduate schools, research. The economic return on the post-WW II "GI Bill" (paying for veterans' college education) was enormous. The Sputnik "Defense Education Act" boosted our students' learning and preparation.

o If you want to use it to pay down debt, or eliminate bad debt, give it to those who have the debt: provide relief to those struggling under the weight of near-usurious interest rate credit card debt, buy up their debt, or the debt of those trying to get a college education -- or who got one, now can't find a job, and are unable to pay off their debt.

Now I'm not willing to undertake the burden of demonstrating that these expenditures would be wise either. We need more savings, not more expenditures. There is no secret slush fund from which this $1.3 trillion comes. We have a nearly one-half-trillion additional federal debt (expenditures greater than income) for just this one year. We are running our government, and country, on a credit card we never pay off with loans from the Chinese. The $1.3 trillion payment will run just our current debt to nearly $12 trillion -- the long term, unfunded obligations will now be more like $55 trillion.

No, all I'm saying is that it's kind of obvious what's going on here with this "fountain pen robbery" in terms of priorities and it's shameful.

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