Banks and Their Buddies Learned Little to Nothing from the Great Recession

New Orleans     When we can muster up the attention span to read past the latest Mueller investigation activity and the Trump tantrums, we can see what Congress is doing to try to make life easier for the banks and gut Dodd-Frank requirements that force them to pay more attention in class rather than going the “greed is good” route.  It turns out that there is little relief in revisiting the lessons our old friends, the banks, have learned from their reckless behavior that led to the real estate bubble and the Great Recession only a long decade ago.

Of course, they certainly learned to be careful in dealing with the subprime lending market and its exorbitant and often predatory interest rates.  Wrong!  They only learned that they shouldn’t lend in their own names and through direct subsidiaries, but instead should supply nonbank middlemen with billions so that they can take the first fall when that bubble crashes.  The Wall Street Journal calculates that between 2010 and 2017, yes within 2 years of the meltdown and their repeated mea culpas to politicians and customers, they jumped in hard and collectively have made $345 billion in loans to such companies.  Many of these subprime loans are not in real estate, but in auto financing and similar areas that are even more unstable, if that’s possible.   Don’t for a minute think that this is just something the smaller fry are feeding on, because the big fish are goring on these loans.  Major bank loans to nonbank financial companies that loan money to subprime borrowers include Wells Fargo at $81.1 billion, Citigroup at $30.5 billion, Bank of America at $30.2 billion, JP Morgan Chase at $28.1 billion, Goldman Sachs at $22.2 billion and Morgan Stanley at $16.3 billion.

That’s not all that banks and their buddies haven’t learned.  On the wild right there are still pundits and posers who claim that loose credit standards, ACORN and the Community Reinvestment Act triggered the real estate meltdown and the recession, rather than their own activity.  Two researchers from the Urban Institute, which is the real estate industry and developers own think tank, in a working paper plainly state that the blame game is misplaced.

we … show that First-Time-Home-Buyers have similar loan performance as that of repeat buyers. This evidence indicates that the expansion of lending to include more marginal borrowers may not be the main cause of the financial crisis. Instead, the poor performance of the cash out refinances and refinances more generally, are more important contributing factors.

They put the shoe firmly on the foot of cash out refi’s that were popular for hordes of speculators and investors trying to take money out of properties as the bubble got bigger and then being caught short in their ability to pay as the market became overloaded and crashed.  In plain language speculators, big and small, with the help of bank’s emphasis on refinancing, were a much larger factor.

When banks won’t even admit to themselves what their role was in the crisis, how can they learn the lessons to avoid the next disaster?  Playing button-button on subprime loans and having their lobbyists dissemble in Congressional hallways about where the blame really lies are both signs of more meltdowns to come by the refusal to learn the lessons of the last one.

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Credit Card Act Shows a Win for Disclosures to Consumers

credit_cards.topNew Orleans  I have to confess I have often been skeptical of programs claiming to protect consumers that trumpet transparency as a major feature of the reform.  I can show the scars still from negotiations with predatory lenders and tax preparation companies, who would easily agree to full disclosure of their effective interest rates and offer to put them on posters or computer screens even when they stated clearly that the interest might be 300 or 400% annually. 

            All of which had me reading closely a column featuring an analysis of the impact of the Credit Card Accountability Responsibility and Disclosure Act or Card Act (yes, they are sometimes so cute in Congress!) written by Floyd Norris in his “High and Low Finance” column in the Times looking at a study by economist Neale Mahoney from the University of Chicago and others of the impact of the Act on bank and card company practices.   To most of their surprise, this effort at regulation seems to have actually worked, saved consumers what will likely end up being $20 billion in bank rip-offs, and hasn’t led to banks larding up fees to compensate, although there’s a likely reason for that we’ll get into later.

            The success seems to have turned on two sets of very important things.

            On the consumers’ side there are several very clear things that it turns out we concentrate on, which helps us focus and sort out the various bank offers:  most importantly the stated interest rate, then whether there is an annual fee, and any sort of awards for card usage, which some folks like.

            On the banks’ side the law and its regulations plugged a lot of the holes in the dike that banks had been using to siphon off billions.   Consumers were given 21 days, not 14 to pay.  There was a 45 day notice on rate changes and they could not be applied to purchases already made.  Only one late charge or overpayment charge could be assessed.  There were also limits on the size of the fee and on other charges like paying by phone or internet.   You get it; they actually took their jobs seriously and reined in the banks.

            The study of course found that the banks were making the most from the most predatory products and desperate customers, who were their subprime borrowers.  In fact Mahoney says that in the aftermath of the Great Recession, “…when banks were hemorrhaging money on subprime loans, subprime credit cards were a major source of profits.” 

            Good intentions are not protecting us, but it turns out that even without highway robbery fees they still make crazy money, so the banks are restraining themselves, and probably more importantly given the consumer razor like focus on the actual interest rates on the cards, the banks are forced to keep their hands out of our pockets because the card business is so competitive. 

            The fierce competition in the general credit card market backed up by the Card Act is probably the only thing as well that makes disclosure actually work in this case.   On credit cards banks are forced to compete for our business, rather than in more predatory situations where our own desperation makes us sheep for the slaughter.

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