Bank of America

Right on Cue

by Ryan Young on September 29, 2011

in Economy, Politics as Usual, Regulation

In this morning’s CEI Podcast, my colleague John Berlau predicted that the new price cap on debit card swipe fees would lead to the end of free debit cards and free checking. He pointed out that while this is an unintended consequence, it is also entirely foreseeable.

It didn’t take long for that prediction to come true. Bank of America just announced that it will start charging its debit card users $5 per month. They are not the only ones:

JPMorgan Chase and Wells Fargo are testing $3 fees for debit cards in select areas, and Citibank recently announced it is raising its fees for checking accounts. Janney Montgomery Scott analyst Thomas McCrohan said last week that Visa and MasterCard, the top two debit card companies, may increase drastically increase (sic) fees on small purchases to offset the losses.

Thanks, Congress.

Voodoo Economics Behind Government Demand for Mortgage Write-Downs by Big Banks

by Hans Bader on June 14, 2011 · 3 comments

in Bailout Watch, Economy, Legal, Regulation, Stimulus to Nowhere

In 2010, Obama administration allies proposed a trillion-dollar bailout for those lucky mortgage borrowers whose loans were owned by the government-backed mortgage giants Fannie Mae and Freddie Mac — including wealthy borrowers who have no difficulty paying their mortgage — in order to increase their disposable income and temporarily pump up the economy through the next election. Now, Obama administration officials such as Associate Attorney General Tom Perrelli are trying to achieve the same goal on a much smaller scale in settlement talks with the nation’s four biggest banks. Perrelli is demanding that they reduce the mortgages of certain favored underwater borrowers (many of whom are underwater because they didn’t make a substantial downpayment, the way thrifty people do), using the banks’ unrelated foreclosure paperwork violations as a pretext (benefiting lucky borrowers who were never foreclosed upon, much less treated improperly in any way).

But as Mark Calabria notes, this demand makes no sense at all economically. Any mortgage write-off that increases the disposable income of borrowers will reduce the disposable income of investors whose mortgage-backed securities are worth less after mortgages are partly written off. The government’s demand reflects irrational, magical thinking, a kind of voodoo economics. This  proposed rip-off of investors would not create any wealth or income, but rather merely redistribute wealth and income from investors to borrowers (reducing the disposable income of the suddenly poorer investors), discouraging future investment.

[click to continue…]

Obama Administration Tries to Rip-Off Retirees in New Mortgage Bailout

by Hans Bader on March 10, 2011

in Bailout Watch, Economy, Politics as Usual, Zeitgeist

The Obama administration is now working with state attorney generals to rip off pension funds to bail out mortgage borrowers who don’t even need help. Pension funds that millions of Americans rely on for their retirement will suffer. Bank shareholders will also suffer. I  explain how and why in a commentary at The Washington Examiner website. The government is trying to get mortgage servicers to write off portions of loans that are owned by other people or institutions — like the pension funds that millions depend on. That undermines property rights. Last fall, intellectuals with ties to the Obama administration proposed a much larger, but conceptually similar, bailout that could cost taxpayers a trillion dollars, the idea being to temporarily increase consumer spending through the next election.

Taxpayers Absorb Berkshire’s Dumped Bank of America Shares

by Kathryn Ciano on February 15, 2011 · 1 comment

in Economy

Late yesterday afternoon Warren Buffett’s trading conglomerate Berkshire Hathaway dissolved all of its Bank of America shares. Berkshire’s pull-out accounted for 5 million shares — not an enormous amount, but a 100 percent dump nonetheless sends a strong signal to the market.

Berkshire is up $4B this quarter over last — their formula is working. Along with Bank of America, Berkshire dumped shares in Comcast, Nike, Lowe’s, and a few other holdings.

I wrote:

In an interview released last week, the Financial Crisis Inquiry Commission quoted Buffett as criticizing Bank of America for paying a “crazy price” to acquire Merril Lynch in the midst of a financial crisis.

Until an audit subjects the Federal Reserve to transparent decisionmaking, private investments point a clearer path to what paths the public expects will be profitable in the years to come. The Fed may shift interest, but Berkshire Hathaway deals in real dollars.

Cross your fingers for Chevy’s Volt, kids, because BofA is one national investment looking dismal this week.


This is just one more way taxpayers will bear the burden of keeping banks afloat. When Congress first approved TARP last year, Treasury was slated to buy mortgage-backed securities from the banks.

The government ultimately deemed it impossible to assess securities’ values. Instead Treasury used TARP to inject free cash flow into banks by purchasing convertible bank shares — effectively bank stock options.

As banks’ losses mount and real estate prices continue to drop the banks have been unable to push these deadweight securities from their balance sheets. Banks have accepted government cash but have not been able to match that influx with equity.

Banks that do not react to investors’ cues do not adequately protect themselves from further government ownership. Last spring the three big American banks converted government-owned stock from preferred to common. Ostensibly this move protected public resources (tax dollars gov’t used to snatch up bank shares in the first place) by paying less per share but continued to “bail out” the banks stuck absorbing our securities failure.

Government holding isn’t about ownership; it’s about control. When government dollars go to preferred stock, banks monitor what Big G owns and how many dollars are going to and from this significant stockholder. When Big G pulls out of preferred and keeps instead to common, the banks are less attentive to exactly how much the gov’t owns.

The more government hands get involved, all of its influence falls victim to mission creep. When gov’t dollars go to common stock instead of preferred, it’s not like the gov’t pulled out some of its cash to match the lower equity it was purchasing. Instead, the same number of G dollars are still flowing to the banks, but holding many more shares.

The Federal Reserve was invented to counterbalance market shifts and dips. That’s the only enterprise big enough to control for inflation.

When taxpayers have to absorb yet another private investor’s signal that BofA is flailing, that’s not inflation, that’s government failure.

Bailout of Fannie and Freddie Will Cost Double Earlier Estimates

by Hans Bader on October 22, 2010 · 5 comments

in Bailout Watch, Deregulate to Stimulate, Economy

The bailout of Fannie Mae and Freddie Mac will cost double earlier estimates, and could cost $363 billion over the next three years, report NBC and the Associated Press.

Fannie Mae and Freddie Mac are the corrupt government-sponsored mortgage giants that contributed to the mortgage crisis by engaging in fraud and misrepresenting subprime mortgages as prime.  Earlier, the Obama administration showered their executives with $42 million in pay, even as Obama’s pay czar was ordering productive private-sector banks to chop the pay of their executives and traders (leading one bank to dump a profitable trading operation), and imposing new taxes and burdens on private banks (but not Fannie and Freddie).

As Professor Roy C. Smith noted, because of the Obama administration’s attempt to restrict bank employee pay, “Citigroup agreed to sell its profitable Phibro unit at an extremely low price of only one or two times earnings in order to avoid having to pay a talented trader a $100 million contractual share of the profits he had earned. The most successful of the remaining employees of Citigroup, AIG and Bank of America have been given an incentive to leave their posts, and the firms will be constrained in hiring replacements.” Meanwhile, Bank of America’s stock has fallen over the last six months from over $19 to less than $12,  shrinking many Americans’ 401(k)s, as it has been injured by new rules and red tape such as the Dodd-Frank Act (which also is wiping out most free checking accounts).

While the taxpayers have lost a huge amount of money on the government-sponsored mortgage giants, they have actually made money on many private banks that accepted government bailout funds and then returned the money with interest.  (Healthy banks that never wanted a bailout and repaid their “bailout“ in full with interest, like BB&T, were pressured by the Treasury Department into accepting bailout money along with their unhealthy competitors, so that the public would not know which banks really needed a bailout; the Treasury Department feared that such knowledge would result in a run on those banks.)

The Free Checking Restoration Act of 2011

by John Berlau on October 21, 2010

in Deregulate to Stimulate, Economy, Nanny State, Personal Liberty, Precaution & Risk, Regulation

“Free checking as we know it is ending,” says the lead paragraph of a widely-read and tweeted story this week from the Associated Press. Noting Bank of America’s announced monthly charge of $8.50 for most checking accounts, the article reports that “almost all of the largest U.S. banks are either already making free checking much more difficult to get or expected to do so soon, with fees on even basic banking services.”

And other reports have noted the possible demise of free checking at many regional banks as well. Daniel Indiviglio blogs for The Atlantic that “free checking will soon be something only economic historians talk about.”

But the tide of economic history doesn’t necessarily have to turn this way. As noted in both The Atlantic and AP, the primary reason for free checking going by the wayside is not market forces, but new regulations from Washington.

The main culprits in free checking’s demise are the Federal Reserve’s rules that severely restrict banks from charging overdraft fees when customers make debit card purchases that exceed the balance of their checking accounts and the amendment from Sen. Dick Durbin (D-Ill.) putting price controls on the interchange fees merchants pay to banks and credit unions to process debit cards. On Tuesday, as noted in the AP story, Bank of America took a $10.4 billion charge against earnings from projected loss of revenue due to the Durbin amendment.

The rules were sold as “protecting” the majority of consumers, but in reality they shifted costs to responsible middle-class consumers from irresponsible consumers who didn’t keep track of their checking accounts. Some of the nation’s biggest retailers also used bank-bashing rhetoric to get  their share of corporate welfare at consumers’ expense. As The Atlantic‘s Indiviglio writes, “At this point, banks are forbidden from squeezing as many fees out of bad customers and have less freedom to charge merchants. So their only alternative is to demand more money from their good customers.”

I propose that, as one of its first orders of business when it convenes next January, Congress enact “The Free Checking Restoration Act of 2011″ that would remove these cumbersome rules and will almost certainly result in competitive banks and credit unions offering traditional free checking to once again attract customers. The bill would get rid of the Fed’s overdraft rule and the Durbin amendment that puts price controls on merchant interchange fees.

Of course, as the economic expression goes, there is no such thing as a free lunch, and one could argue that free checking was “subsidized” by overdraft and interchange fees. Yet it is hard  to muster an argument from either a prudential or an egalitarian perspective in favor of the cost-shifting that results from the regulations to responsible middle and lower-income consumers with small accounts.

As my CEI colleague Hans Bader noted previously on OpenMarket,  “Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time.” At Reason, Kathryn Mangu-Ward points out that, “for the most part, accounts with high balances, bank credit cards, or other products geared to the middle class and rich won’t be affected by these changes.”

But what about the minority of consumers “protected” by the overdraft rule who, as the AP story notes, were hit with a $35 fee because they “overdrafted their account by buying something small like a Starbucks latte.”  Since when was it written that there should be no cost for acting imprudently by not balancing one’s checkbooks. In the “good old days” before debit cards, folks who wrote bad checks would sometimes go to jail when one bounced — $35 seems like a much fairer punishment.

Liberals who have a problem with private institutions penalizing individuals for their behavior should think of an overdraft fee as a “sin tax” that discourages bad behavior in the same way the taxes they champion on cigarettes and increasingly on fatty food purport to do. It is no more an illicit cross-subsidy than the “subsidy” from reckless drivers paying fines that go to improve roads for drivers who obey traffic rules. Overdrawing bank accounts is certainly behavior society should discourage, so what exactly is wrong with private institutions — in innovative ways — doing so instead of the government.

And the Durbin amendment mandating “reasonable and proportional” interchange fees banks charge to merchants is completely indefensible even from an egalitarian redistributionist perspective. As Ryan Radia and I have written, capping interchange fees greatly harm consumers, community banks, and credit unions for the benefit of some of the nation’s wealthiest merchants.

Among those lobbying hard for the Durbin amendment were giant retailers like Home Depot, 7-Eleven, and Walgreens. On the Senate floor, Durbin even had the gall to invoke Walgreens lobbying him for the measure as a reason for its attachment to a bill whose ostensible purpose was to rein in “fat cats.”

These retailers benefit greatly from consumers using cards, both in increased sales and in protection from the costs of fraud from bad checks, yet they go charging to Washington to avoid paying fees for these services that the market allocates. How would Walgreens and Home Depot and other hypocritical retailers like it if the government suddenly mandated that they could only charge “reasonable and proportional” markup to consumers for the products they buy from suppliers?

At CEI, our mission is to make good policy good politics, and under current circumstances, promising voters the return of free checking accounts suddenly fits this bill. Since the  promise some 80 years ago of ”a chicken in every pot,” political “freebies” have been a mainstay of modern campaigns.

Fiscal conservatives and libertarians usually look askance at these promises since most of the time they involve either spending a sum of money to bring the ”free” good to certain member of the population or mandating that businesses spend to provide this good, and the cost will have to be made up somewhere. But  in this instance, Congress would not have to spend or mandate to provide this free good.

Rather, all it would have to do is remove misguided rules that were pushed through thoughtlessly in the Obama administration’s rush to regulate.

Say Goodbye to Free Checking

by Hans Bader on October 20, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Regulation

“Say goodbye to traditional free checking, as banks feel squeeze from new regulations,” reads the AP headline. “Free checking, a mainstay of American banking in recent years, will be nearly unheard of” at the banks that do business with most of the households in America.

“Almost all of the largest U.S. banks are either already making free checking much more difficult to get or expected to do so soon, with fees on even basic banking services. It’s happening because of a raft of new laws enacted in the past year, including the financial overhaul package, have led to an acute shrinking of revenue for the banks.”

Bank of America just wrote off $10 billion in losses due to the recently-passed Dodd-Frank financial overhaul law, and its stock value has shrunken over the last six months from over $19 to less than $12 per share, shrinking the value of millions of 401(k)s that Americans rely upon for their retirement.

Citibank is now charging Ted Frank $15 a month for his previously-free checking account, along with $0.50 per check written.

While imposing heavy new burdens on self-supporting, productive private banks, the Dodd-Frank Act harms the economy, reduces liquidity and the ability to hedge against risk, and does nothing to reform the corrupt government-sponsored mortgage giants, Fannie Mae and Freddie Mac, which helped spawn the mortgage crisis by engaging in fraud,  misrepresenting subprime mortgages as prime, and creating artificial demand for those junky mortgages (and now are collecting a bailout that may reach $400 billion).

Your Shriveling 401(K): Thank Financial Red Tape and the Foreclosure Furor

by Hans Bader on October 19, 2010

in Bailout Watch, Deregulate to Stimulate, Economy, Legal, Regulation

If your 401(K) has shrunken recently, it may be due to falling bank stocks, like Bank of America stock, which has fallen from over $19 a share to less than $12 a share over the last six months.   Most 401(K)s indirectly own Bank of America stock, because its stock is held both by most large diversified mutual funds, and by most index funds.

Bank of America just reported a $7.3 billion loss due to $9.87 billion in costs resulting from the restrictions on debit cards contained in the 2010 Dodd-Frank Act backed by the Obama administration.  (Those restrictions will also result in sizeable costs being passed on to consumers, while benefiting certain politically-connected businesses.  Other provisions in the Dodd-Frank Act not only harm banks and the economy, but are resulting in the return of some checking account monthly fees and per-check fees, while another costly law called the CARD Act is leading to the return of annual fees on some credit cards.)

But Bank of America’s stock value has fallen more due to the recent furor over foreclosures and the possibility that paperwork errors and securitization may thwart foreclosures against defaulting mortgage borrowers.  Bank of America temporarily halted foreclosures in all fifty states.  Leading law professor Richard Epstein explains how a permanent halt to foreclosures would be a disaster for “prudent borrowers and lenders,” as “those purchasers who bought homes out of foreclosure proceedings may well be forced to defend their titles against the original borrowers who went into default.”  At AOL News, Marty Robins gives additional reasons why a halt to foreclosures is a bad idea that would delay “economic recovery,” wipe out bank capital, reduce their “lending capacity,” and increase “interest rates” on mortgages.  A Washington Post story illustrates the negative ripple effects on the economy and ordinary citizens of halting foreclosures.

Bank of America stock fell more than 4 percent today after the New York Fed and others threatened to sue Bank of America to force it to repurchase $47 billion in mortgage securities that soured.  (Earlier, the Fed pressured Bank of America into buying a collapsing Wall Street investment firm whose failure it perceived as threatening the economy.   And the New York Fed, then headed by Timothy Geithner, used the AIG bailout to make billions in unnecessary payments to politically-connected financial firms that didn’t even need the money. )

Earlier this month, perhaps to appease politicians, Bank of America suspended foreclosures in all 50 states after sloppy paperwork in some foreclosures became apparent.  Now, it’s trying to resume foreclosures in 23 states, after a review disclosed no examples of innocent homeowners being foreclosed upon by it.  But state attorneys general smell blood and are pressing the banks not to resume foreclosures at all.

Congress Destroys Free Checking Accounts by Blocking Overdraft Fees for the Irresponsible

by Hans Bader on June 17, 2010 · 10 comments

in Bailout Watch, Economy, Legal, Politics as Usual, Regulation, Sanctimony, Zeitgeist

Banks can afford to offer free checking accounts with no minimum balance, to responsible people, only because they can charge overdraft fees to irresponsible people.  But Congress has now prohibited many overdraft fees, which will result in many banks eliminating free checking, and also require responsible people to subsidize irresponsible people.  This is chronicled in a Wall Street Journal news story entitled “End Is Seen to Free Checking.”

As the Journal notes,  “Bank of America Corp. and other banks are preparing new fees on basic banking services as they try to replace revenue lost to regulatory rules, in a push that is expected to spell an end to free checking accounts for many Americans. Free checking accounts, which have been widely available for more than a decade, have been a boon to middle-class consumers and attracted low-income customers to the banking system for the first time. Customers will likely be required to pay new monthly maintenance fees on the most basic accounts that don’t generate a lot of activity. To avoid a fee, customers will have to maintain certain account balances or frequently use other banking services, such as credit and debit cards, automated teller machines and online accounts. ‘If you put $1,000 in a checking account and don’t do anything with it, it will be hard to get that for free,’” thanks to the new rules.

This is becoming a pattern for Congress, passing laws forcing responsible people to subsidize irresponsible people.  It did the same thing with the bailouts, and with the CARD Act of 2009, which effectively forced responsible credit cardholders to subsidize irresponsible credit cardholders.  That credit card law, which limited what banks could charge irresponsible credit holders,  led to the return of annual fees on some credit cards, and wiped out many cash-back and rewards programs.

The elimination of free checking thanks to Congress’s unwise restrictions on overdraft fees will harm low-income people by driving them back to check-cashing stores that charge them money to cash every check. “The offers of free checking without any minimum balance requirements attracted a new wave of low-income customers, who previously went to check-cashing stores.”

Obama Administration Rewards Corrupt Mortgage Giants, Punishes Productive Private Banks, Fleeces Taxpayers and Responsible Credit Cardholders

by Hans Bader on March 10, 2010 · 3 comments

in Bailout Watch, Deregulate to Stimulate, Economy, Energy, Environment, Labor, Mobility, Natural Resources, Politics as Usual, Precaution & Risk, Regulation, Sanctimony

The Obama administration wants to increase taxes on productive banks that are self-supporting, while exempting the mortgage giants and other companies that got massive taxpayer bailouts.  For more details, click on this graph, “Bank-robbing tax lets ‘bad guys’ go free,” courtesy of a Washington think-tank, the Heritage Foundation.  It shows that the mortgage giants Fannie Mae and Freddie Mac are exempt and will never have to pay a dime, despite being bailed out by taxpayers at a cost of more than $200 billion, while Bank of America and Wells Fargo, which are solvent and returned all their TARP money, would be forced to pay billions under the administration’s proposed tax.

General Motors and Chrysler won’t have to pay a dime, either, even though the government claimed they were “financial institutions” just like banks in order to use bank bailout money to bail them out at a cost of at least $70 billion (a bailout that would not even have been needed to save the companies if they had simply been reformed to make them competitive, and received relief from burdensome red tape, like poorly-drafted CAFE and global-warming regulations that may backfire.  Instead, the Obama administration effectively gave the companies, at taxpayer expense, to the UAW, a powerful union opposed to much-needed reforms).

In other news, economists and real estate experts say that a mortgage bailout program the Obama administration spent $75 billion on has backfired and harmed the real estate market.

Obama recently expanded the bailout of mortgage giants Fannie Mae and Freddie Mac and lavished money ($42 million) on their CEOs.

Under the Bush administration, federal regulators took over Fannie and Freddie in the name of stopping their risky practices. But the Obama administration has increased their purchases of risky mortgages in a vain attempt to inflate the economy. Worse, it forced them to run up to tens of billions in losses to bail out deadbeat and at-risk mortgage borrowers, and then tried to conceal those losses, in conduct reminiscent of Enron.  But their management hasn’t objected, because the costly requirements are accompanied by massive taxpayer bailouts and lavish pay for the mortgage giants’ CEOs.

Fannie and Freddie helped spawn the mortgage crisis by acting as loan toilets, buying up risky mortgages and thus creating an artificial market for junk.  “From the time Fannie and Freddie began buying risky loans as early as 1993, they routinely misrepresented the mortgages they were acquiring, reporting them as prime when they had characteristics that made them clearly subprime.”

Why did they buy these risky loans?  They put up with Clinton-era affordable-housing regulations that required them to buy up lots of risky loans, in order to curry favor on Capitol Hill and thus retain their annual $10 billion in tax and other special privileges (which they possessed owing to their status as “Government-Sponsored Enterprises” or GSEs). They paid their CEOs millions in the process, and engaged in massive accounting fraud — $6.3 billion at Fannie Mae alone — to increase the size of their managers’ bonuses.  As GSEs, they were exempt from the capital requirements that apply to private banks, so they did not have enough reserves to cover their losses when their mortgages started defaulting.

At the direction of the Obama administration, Freddie Mac is now running up $30 billion in losses to bail out mortgage borrowers, some of whom have high incomes.  Federal regulators sought to make Freddie Mac hide the resulting losses from the SEC and the public.

Under Obama’s proposed financial “reforms,” banks will be pressured to make even more risky, low-income loans. Obama has sent to Congress his proposal to create a politically correct entity called the Consumer Financial Protection Agency, tasked with enforcing the Community Reinvestment Act. Government pressure on banks to make low-income loans was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s proposals would empower the new agency to enforce the Community Reinvestment Act, which was a key contributor to the financial crisis, without regard for banks’ financial safety and soundness.

Moreover, Obama’s proposed financial rules do absolutely nothing to reform Fannie Mae and Freddie Mac, admits Treasury Secretary Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Meanwhile, a new law backed by the Obama administration, the CARD Act of 2009, has effectively forced responsible credit-cardholders to subsidize irresponsible people, leading to the return of annual fees on many credit cards, and the elimination of many cash-back and rewards programs.  My wife, who has an excellent credit rating, was recently informed that one of her cards will now have an annual fee — of $60!  (She promptly canceled the card.)

← Previous Entries