The Federal Reserve has set the swipe fee cap mandated by legislation, and higher than expected. Image from Wikimedia Commons.

The Federal Reserve has announced it will cap interchange fees, or swipe fees, at 21 cents per transaction. The fees are now half what merchants have been charged on average, but the nation’s central bank has also announced that the cap will not take effect until October.

Swipe fee takes effect in October

Last year, the Federal Reserve was mandated to institute a cap on interchange fees, also called swipe fees, by a portion of the Dodd-Frank Act referred to as the Durbin Amendment. The Durbin Amendment ordered the Fed to determine an appropriate limit to the fees banks charge to merchants to deliver payment on purchases made by customers using bank cards. The cap was legislatively set to take effect on July 21 of this year, but the Fed has announced that the swipe fee cap will not take effect until Oct. 1 unless a new start date is announced, according to USA Today. The fee cap has been set at 21 cents per transaction, nearly double the original estimate that the Fed gave of 12 cents.

Fraud protection preserved

The Fed has still slashed the current average in half, as banks normally charge about 44 cents per transaction and now will collect 21 cents per debit card transaction, beginning on Oct. 1. The fee cap was expected to be no higher than 20 cents, but an additional 1 cent per transaction fee is also allowed for fraud prevention. The cap also allows for five “basis points” per transaction for insurance against fraud, according to the New York Times, or an additional 0.05 percent of the amount of the transaction. Retailers were estimated to have paid more than $20 billion last year in interchange fees and processing fees, and banks were estimated to have collected almost $17 billion in interchange fees. The average fee, with the cap, could average about 23.9 cents per transaction, according to MarketWatch.

Coming fallout

Interchange fees have been a money maker for the banking industry since they were instituted in the early 2000s. Prior to that, banks had previously reimbursed merchants for installing debit card and credit card terminals. Though banks with $10 billion or less in assets are exempted from the cap, there will to be fewer benefits for many customers as a result of the fee cap. Banks have been steadily eliminating programs such as debit card reward programs and free checking accounts. Banks are anticipated to raise fees, according to USA Today, in response to the loss in revenue. Minimum balances in checking accounts may become required to avoid an account fee, and people may start getting billed for receiving paper bank statements. Banks may also start encouraging people to use credit cards instead of debit cards, as credit cards are not affected by the swipe fee cap.

Sources

USA Today on Fee Cap

New York Times

Reuters

MarketWatch

USA Today on bank fallout

The Federal Reserve is going to announce the debit card swipe fee cap soon. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

The Federal Reserve will soon make a definitive ruling on capping interchange fees, or debit card swipe fees charged to merchants by banks. The Fed was mandated to set a cap on the fees by the 2010 financial reform laws, but it may set the cap higher than anticipated.

Merchants cheering prospect of lower swipe fees

For the past year, there has been a tug-of-war in the press and in Congress over interchange fees, the fee that banks charge merchants to wire money from the accounts of customers who have made purchases with debit and credit cards. Merchants ranging from small mom and pop stores to corporate juggernauts such as Walmart and Target, according to Bloomberg, lobbied members of Congress to vote in favor of the interchange fee cap. Financial industry titans such as Bank of America and JPMorgan Chase, along with small credit unions and community banks, lobbied members of Congress to do the opposite and delay any “swipe fee” cap, if not vote to get rid of the legislation outright. The Federal Reserve, according to DailyFinance, is going to announce the cap on swipe fees soon.

Cap could be set higher

The Fed had tentatively said it would cap interchange fees at 12 cents per transaction, but insiders are saying that the fees could be set as high as 24 cents per transaction. Currently, merchants are charged an average of 44 cents per transaction, according to MarketWatch. If fees are set at 12 cents per transaction, it will be a reduction of almost 75 percent. It only costs banks about a penny to make the transaction. The banking industry is estimated to take in more than $1 billion per month from swipe fees. The cap on the debit and credit card transaction fees is a portion of the Dodd-Frank Act, the financial reform laws that were passed in 2010. The card fee cap was mandated by the Durbin amendment to the Dodd-Frank Act, which will take effect on July 21.

Expect user unfriendliness

Due to the massive loss of revenues, consumers can expect that many former perks of banking will either disappear or come with far more conditions. A debit card transaction cap has been bandied about in the press by megabanks such as JPMorgan Chase and Wells Fargo, and free checking accounts have largely gone extinct. Changes to rules regarding overdraft protection fees have cost banks dearly, as well. It is estimated that banks and credit unions have lost about $1.6 billion in revenue, according to MyBankTracker, when financial reform laws mandated that customers have to be asked if they want to “opt-in” to overdraft protection programs. Faced with a drop in revenue that the banking industry is used to, the consumer is the party who will end up feeling the pinch.

Sources

Daily Finance

Bloomberg

MarketWatch

MyBankTracker

Federal Reserve Chairman Ben Bernanke is being urged to create stronger regulation of business credit cards. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

Members of Congress are urging the Federal Reserve to do more about regulating business credit card marketing, especially regarding small businesses. Currently, small business credit cards are not subject to the same regulations in the CARD Act that apply to their private counterparts.

Small businesses at mercy of banks and card companies

A group of Congressmen are lobbying the Federal Reserve to implement regulations regarding credit cards extended to businesses, especially those marketed to small businesses, according to the Wall Street Journal. A group of Senate Democrats, including Senator Charles Schumer of New York and Senator Bill Nelson of Florida, are urging Federal Reserve Chairman Ben Bernanke to do something about enhancing disclosure requirements on credit card accounts offered to small businesses. Areas of concern include interest rate hikes, fees for going over spending limits and other types of fees that are prohibited for regular consumer credit cards. Credit card companies are not mandated by law to follow the Credit Card Accountability Responsibility and Disclosure Act when it comes to business credit cards.

Clever dodge of CARD Act

Part of the concern over the non-regulated status of business credit cards is that credit card companies are offering the cards to people who aren’t business owners; all a customer has to do is apply for the account just like a normal credit card and start using it once approved. Card issuers don’t have to ask for a business license number or proof that the card is for business purposes, which Chairman Bernanke is being urged to make mandatory. The senators also are concerned that business cards make up a fair portion of direct mailed credit card offers, according to BusinessWeek, as they cite a Pew study that found 9 percent of all credit card offer mail between 2006 and 2010 was small business card offers. The same study estimated that Americans received more than 2.6 billion pieces of such mail in that period. More than 6.7 million went to senior citizens.

Small businesses grapple with credit card companies

Processing credit and debit card transactions can be a hassle f0r small businesses. Many stores have mandatory purchase amounts that customers have to meet in order to use their debit or credit card because of interchange or swipe fees. Merchants are charged to receive funds from the bank or credit card company, and they have to pay to use credit and debit card processing machines. Many simply pay, but some are finding ways around it. For instance, the Square payment processing system that allows someone to use their iPhone, iPad or Android phone as a card reader is getting 100,000 more users per month, according to Entrepreneur. Square charges 3.5 percent of the transaction, far less than traditional methods of accepting credit or debit payments.

Sources

Wall Street Journal

BusinessWeek

Entrepreneur

A stronger dollar is the key to recovery, not quantitative easing, says investment manager Abigail Doolittle. (Photo Credit: CC BY/MoneyBlogNewz/Flickr)

Quantitative easing (QE) has been referred to by some economists as the last vestige of an empire in ruin. The idea is to create money, suppress rates, promote liquidity and watch inflation spread. It’s like a plumber who tries to fill a bathtub by pouring in massive amounts of water, without plugging the drain first. According to CNBC, however, the Federal Reserve is reaching toward turning off the tap, and investors have decided to cut back.

Fed sends S&P into downward slide

The S&P 500 was down by 2 percent this week and is in the middle of a 7 percent slide that began May 2. The loss in investor confidence has much to do with drops in a variety of economic indicators, the Federal Reserve turning off the tap being one of those. And the worst may be to come, suggests United-ICAP energy analyst Brian LaRose.

“If you look at what values have been rising over the course of the quantitative easing program, it has been merely commodities and equities, nothing else,” he said. “Reality is starting to take hold.”

Pop goes the golden goose

That reality may be that the gold and oil bubbles will pop, reports Bloomberg. That, in turn, would lead to a surge in the U.S. dollar, which has lost as much as 10 percent against other world currencies since the last time Ben Bernanke and the Fed boarded the QE bus.

The possibility of further bailouts for debt-ridden Greece has dragged the euro down, as has the lack of a unified financial plan between euro-zone nations. The indecision has been less than inspiring to global investors.

In the U.S., consumer worry continues to spill over into the housing market. If people aren’t spending and housing prices continue to fall, the path of disaster for the U.S. is clear, says CNBC.

Finding the bottom with both hands

While analysts like Richard Ross claim that the U.S. economic fix is only beginning to take hold and that, as investment strategist Jeffrey Saut puts it, the market is “bullishly configured” as long as the S&P holds around 1,250, the naysayers remain out in force.

“We have mountainous inflation efforts in place with historically low yields and strong demand for bonds. That’s like a rubber band that’s going to snap at some point, and somebody’s going to get hurt,” says Bill Larkin, portfolio manager at Cabot Money Management in Salem, Mass.

In order to find out where the economic slide will stop, investment firm manager Abigail Doolittle believes the Fed should do much to strengthen the dollar and allow rates to rise. The effect will be slow but lasting.

“Force investors off of the liquidity high of the last few years, and replace immediate-term gratification with the long-term satisfaction of investing in an economy with a truly solid foundation,” she said.

Quantitative easing: When failure doesn’t sound like failure. (Contains adult language)

Sources

Bloomberg

CNBC

Huffington Post

Quantitative easing Wiki

Free money from the Fed intended to boost lending was used to pad bank profits with sweetheart bond deals instead. Image: Flickr/DoGoLaCa CC-BY-SA

The Federal Reserve loaned billions to big banks at near-zero interest to bail them out during the financial crisis. Those billions were intended to maintain the flow of credit and prop up the economy. Instead of loaning the money to individuals and small businesses, the banks reaped outrageous returns with the money by investing it in government bonds, a new study has found.

Free money, no strings attached

It was no secret that banks gorged on easy money provided by the Fed during the financial crisis and used the cash to buy Treasuries. A new study released Tuesday by the Congressional Research Service reveals the degree to which banks abused the privilege. The Fed lent more than $3 trillion to banks at interest rates as low as 0.0078 percent with no strings attached, according to the report. The banks pledged junk-rated securities as collateral for the the taxpayer-backed loans. Instead of reinvesting the money in the economy, the banks parked the money in Treasuries and took an easy profit–effectively borrowing money from one branch of the government and loaning it back to another at a much higher rate. Sen. Bernie Sanders, I-Vt., who commissioned the study, called it “direct corporate welfare to big banks.”

Abusing U.S. taxpayers for profit

Some of the taxpayer-financed arbitrage outlined in the CRS report includes a Fed loan of more than $48 billion to Bank of America at rates from 0.25 to 0.5 percent during a three-month period of 2009. In the same period B of A, the largest U.S. lender, tripled its holdings of Treasuries yielding 3.5 percent to nearly $15 billion. In the third quarter of 2009 B of A took $2.9 billion from the Fed at 0.25 percent and bought $12 billion in Treasuries paying 3.2 percent. Also in 2009, J.P. Morgan Chase, the second-largest U.S. bank, borrowed $29 billion from the Fed at 0.3 percent and bought $20 billion in taxpayer-backed U.S. debt yielding 2.1 percent. In 2008, Citigroup took $15.8 billion from the Fed at 1.2 percent; $11.6 billion at 1.1 percent and $4.9 billion at 2.7 percent. At the same time it held $24 billion in Treasuries with an average yield of 3.1 percent.

While banks count cash, credit dries up

While the big banks were adding hundreds of millions of taxpayer dollars to their balance sheets using free money from the Fed, lending decreased. According to Fed and Federal Deposit Insurance Corporation data, credit contracted at nearly the most rapid rate ever recorded. In 2009, outstanding credit to U.S. households declined by $234.5 billion. For non-corporate businesses, credit dropped by $296.1 billion. Small businesses closed. Foreclosures skyrocketed. Millions of Americans lost their jobs. For banks, it was business as usual.

Sources

MarketWatch

Huffington Post

Firedoglake

Jumbo loans, or large mortgages for lavish homes, are becoming harder to get as mortgage lending requirements are changing. Image from Wikimedia Commons.

The mortgage industry is going through a volatile period, and the product known as jumbo loans is about to become harder to come by. Jumbo loans are mortgages for large amounts, usually $700,000 or more, and fewer banks may wind up willing to lend them. Smaller mortgages may also get harder to approve.

Mortgage underwriting requirements changing dramatically

Freddie and Fannie play a huge role in the mortgage industry. When a bank wants to lend a mortgage, Fannie Mae and Freddie Mac often agree to purchase the loan from the bank and sell it to investors as a security. This increases the amount of available loan capital so banks can lend more. The mortgage houses are becoming far more discriminating, and the mortgage products called “jumbo loans” are on the way out. The amount that qualifies as a jumbo loan has been revised, according to Reuters, to $625,000 from $729,750. This means in October, Fannie and Freddie will no longer back loans of $625,000 or more. Home buyers who want jumbo loans are scrambling to get the mortgages approved before the loans can’t be underwritten anymore.

Mortgages for low income people to suffer as well

Banks are more willing to lend to people when Fannie and Freddie will purchase the loans. New lending requirements being proposed by the Federal Reserve may make it harder for low income buyers to get a mortgages. As a result of the Dodd Frank Act, the Federal Reserve has proposed that an “ability to repay” metric be established as a requirement to get a loan, according to MSNBC. Low income borrowers would be affected, as an already skittish mortgage market is not conducive to lending bad credit loans for housing. Lending mortgages to people who couldn’t pay them back, a criticism often leveled at credit card companies and payday loans lenders, has often been pointed to as one of the chief causes of the housing market crash. The Fed is only taking comments, according to the Wall Street Journal, and is handing over authority to the Consumer Financial Protection Bureau over mortgage lending practices when the agency begins operations in July.

Credit to tighten for housing

Many indicators point toward credit within the housing industry tightening significantly. Underwriting and purchasing requirements at Fannie and Freddie are already becoming far more strict. For a Freddie or Fannie affiliated lender to lend money for a condominium, 70 percent of the condo units in the building must already be sold, according to CNN. That requirement was 51 percent in 2009. The Federal Reserve and National Association of Realtors estimate that 25 percent of all mortgage application are currently denied, and fewer banks are willing to lend without federal backing from Fannie and Freddie.

Sources

Reuters

MSNBC

Wall Street Journal

CNN

Credit card use continues to decline. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

Use of credit cards is beginning to trail off as more people start preferring to use cash. Fewer people are willing to go into debt and less willing to borrow money for purchases by using a credit card. Card use has been declining for some time, and higher interest rates and fees make credit cards less attractive to the cost conscious.

Major credit bureau notes decline in credit card use

Credit bureau TransUnion has noted a decline in the use of general purpose credit cards, according to Daily Finance. The credit rating bureau asserted in a recently released study that nearly 8 million people quit using a general purpose credit card, the kind normally issued by a bank. The number of people who either don’t have or don’t use a credit card now is more than 78 million, according to TransUnion. TransUnion also noted that credit card delinquencies declined by 9.8 percent during the third quarter of 2010. TransUnion credit rating bureau compiles data used in determining a persons’ credit score.

Federal Reserve notes less credit card use

TransUnion also noted that consumers were still using other forms of credit, such as installment loans, despite the drop in credit card use. The Federal Reserve, according to the Wall Street Journal, observed that credit card use was still declining in February of 2011, but non-revolving credit use was increasing. Revolving credit use, or bank-extended lines of credit and credit cards, declined by $2.71 billion during February 2011. Revolving credit use has only risen once since 2008. Non-revolving credit, or non-mortgage consumer loans such as auto loans or personal loans, increased by more than $10 billion during the month of February. The increase was likely driven by auto sales, which have been increasing steadily for the past few months. The Federal Reserve data indicates that TransUnion’s assessment of declining use of credit cards and continued use of other forms of credit is plausible.

Interest rates and fees on the rise

Because of the Credit Card Accountability, Responsibility and Disclosure Act (the CARD Act), banks have stricter rules about how they can change interest rates. The rates are not capped, according to Fox News, but the card issuing institution is prohibited from raising interest rates without a certain amount of notice. The average interest rate on credit cards is beginning to slowly rise along with the number of memberships fees that banks are charging customers.

Sources

Daily Finance

TransUnion

Wall Street Journal

Fox News

14 financial institutions have been ordered to pay back any homeowners that were wrongfully foreclosed upon in the robosigning scandal. Photo Credit: respres/Flickr/CC-BY

Federal authorities have ordered more than a dozen large financial institutions to compensate homeowners who were victims of fraudulent foreclosures. The number of homes that were foreclosed because of robosigning have not been totaled up, and the owners of those improperly foreclosed homes will be paid for their anguish.

Largest banks in the nation to pay the price of incompetence

Federal regulators recently reached a settlement with the financial institutions involved in the robosigning scandal, in which foreclosure proceedings were improperly started against homeowners because bank officers could not be bothered to do their due diligence on the paperwork regarding the state of the homeowners’ personal loans. Part of the settlement agreement, according to Reuters, is that any homeowners who were wrongly foreclosed on have to be repaid by the bank that did it. There were 14 companies in all, according to USA Today, including lending companies Ally Financial, Aurora Bank, EverBank, HSBC, Sovereign Bank, SunTrust Banks, MetLife Bank, OneWest Bank, PNC, U.S. Bank, Wells Fargo, Bank of America, JPMorgan Chase, Citigroup and subsidiary Citibank. Loan servicing companies MERSCORP and Lender Processing Services have also been ordered to pay back improper foreclosures. Affected homeowners will likely be contacted by these institutions in the near future to make arrangements.

Total fallout to be determined

It isn’t known yet how many people will be recompensed or how much in fines lenders will have to pay. Some government officials have been recommending up to $20 billion in fines be levied against the financial institutions involved. To further add to the headaches of these institutions, this is only from the settlement with the Federal Reserve, the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Other settlements with other federal agencies are still pending as well as every state attorney general in the nation.

Costs of mortgages to increase

Banking and real estate insiders are insisting that the new legislation and increased regulatory scrutiny will increase the costs of lending a mortgage to a prospective homeowner. New Federal Reserve rules on mortgage officer compensation, according to MarketWatch, may cut into commissions for loan officers. Mortgage brokers and loan officers at lending institutions cannot receive a commission based on the interest rate at which a mortgage is lent at any longer, which analysts predict will eat into profits. The Center for Responsible Lending, a consumer advocacy group that has endorsed reform of financial products from mortgages to payday loans, insists that costs to consumers will not go up, but decreasing revenues are usually passed to consumers in the form of increased costs.

Sources

Reuters

USA Today

MarketWatch

Federal Reserve Vice Chair Janet Yellen has confirmed the Federal Reserve isn't going to tighten the credit supply just yet. Image from Wikimedia Commons.

The Federal Reserve has announced that it won’t be tightening the national credit supply just yet. The Federal Reserve has certain controls over the amount of available lending capital in the financial system. Fears of inflation have caused some to think the credit supply needs to be tightened, but the Fed does not think that is currently prudent.

Fed says economy is too shaky to tighten credit

Prices of consumer goods, such as food and gasoline, have begun rising recently, causing many to worry about economic inflation. This has prompted lawmakers and finance industry insiders to question whether the Federal Reserve, the key institution in setting monetary policy and controlling things like inflation, should start restricting the available credit supply. Members of the Fed, however, are convinced that the overall economy is too shaky to tighten the credit supply, according to MSNBC. At a recent speaking engagement at Yale University, Fed Vice Chair Janet Yellen said that conditions weren’t right, but the central bank would be easing off its current policy of keeping interest rates at near zero.

Unemployment too high

The Fed partially controls the supply of available credit funding for the banking system of the United States and influences the interest rates that banks charge. During a recessionary period, the Fed can lend short term loans to banks at zero or close to zero percent interest to stimulate lending. Those banks can lend that capital to consumers, as mortgages or personal loans, or to other financial institutions. There are, of course, many other facets to the Federal Reserve’s operations, but credit supply is a key function. Alternately, the Fed can cut back on the amount of available capital if it thinks price inflation is making the nation’s currency worth less than it should be. The price of commodities like oil and food is increasing, which means that $1 doesn’t go as far.

Banks also have CFPB to worry about

The Federal Reserve is going to eventually restrict the supply of credit, meaning interest rates on loans will start increasing in the next year or so, once the central bank feels confident enough about unemployment and other economic conditions. Banks will also have to follow rules from the new Consumer Financial Protection Bureau, which will levy fines for legal violations. The bureau will start operating in July, and spokesperson Elizabeth Warren has promised the first new regulations set in place by the bureau by January of 2012, according to Reuters. The CFPB is still a hotly debated issue in Congress, so the extent of its reach has yet to be determined, but a greater degree of regulation is soon to set in for the financial system.

Sources

MSNBC

CNBC

Reuters

The Consumer Financial Protection Bureau is due to start operating in July, but cannot seem to get past Congressional hearings and legal infighting. Image from Wikimedia Commons.

Congressional lawmakers continue to fight over the creation of the Consumer Financial Protection Bureau. The CFPB, which is intended to have regulatory jurisdiction over consumer finance, is supposed to start operations in July. So far, the rules over what it is allowed to do have not been established and it has no director.

Republicans trying to gut bureau before it starts operating

The Consumer Financial Protection Bureau, which holds regulatory sway over consumer credit like mortgages, credit cards and payday loans, is supposed to begin operations on July 21. However, Congressional Republicans are trying to dilute the regulatory powers that the CFPB is supposed to have once it begins operating, according to CNN. After a recent hearing in the nation’s capital, bills were introduced in the House of Representatives to change certain rules in how the federal agency will operate. Among proposed changes are to install a five member committee instead of a single director, easier Congressional override of any CFPB action, and to keep the CFPB from conducting any operations until a director has been appointed by the Senate.

Major objections to lack of oversight

Under the current rules, the CFPB would be an independent agency that would be funded by regulatory fees that banks pay to the Federal Reserve, according to MarketWatch. However, the formation of the organization has been repeatedly held up in Congress for a number of reasons. The most oft-repeated objections about the CFPB are that too much power would be placed in the hands of the director, and that Congress didn’t appoint Elizabeth Warren to set it up. Warren is not the head of the CFPB, but a special adviser that was handpicked by the President. However, the Treasury Secretary and Chairman of the Senate Banking Committee both announced their opposition to further restricting the bureau recent Congressional hearings, according to Bloomberg. Cynics could assume that the mere existence of another federal regulatory body is at least part of the objection.

Small banks against further regulation

A concern of small banks, community banks and credit unions has been that the new bureau could make it nearly impossible to keep the doors open, according to Reuters. Small banks have higher overhead and lower profit margins than their megalithic cousins. Bank of America and Wells Fargo are able to afford to pay fines easily, but community owned banking entities have a much more difficult time. Small banks depend on sources of revenue such as account fees and interest on short term loans just as much as large banks do, and higher costs of compliance will make operation more difficult for them. Not everyone wants to bank with corporate Goliaths.

Sources

CNN

MarketWatch

Bloomberg

Reuters

By green-lighting more shareholder dividends, the Fed has allowed banks to increase leverage, which could lead to needing another bailout. Image: CC Flickr/TheTruthAbout

Bank of America quarterly dividends will stay stuck at only 1 cent for the rest of the year on order from the Federal Reserve Wednesday. However, last week after the Fed conducted stress tests on the biggest U.S. lenders it allowed many major banks other than Bank of America to increase shareholder dividends. Many financial analysts are concerned that the Fed’s decision to allow any bank to increase shareholder dividends poses an undue risk to economic recovery.

Fed throttles Bank of America dividends

In January Bank of America told the Federal Reserve it wanted to initiate an increase in shareholder dividends in the second half of 2011. The bank was expected to raise its quarterly dividend by up to 8 cents, about 20 percent of its anticipated earnings this year. According to analysts, the Fed forbid B of A from doing so because of the bank’s exposure in the housing market after buying out Countrywide in 2008, a decision that cost it $2.24 billion last year. Investor groups have also been pressuring B of A to buy back billions in bad mortgage securities that the bank foisted on them before the meltdown. After the green light from the Fed, JPMorgan Chase, Wells Fargo and U.S. Bancorp quickly announced dividend hikes. Bank of America said it planned to submit a revised dividend proposal to the Fed by the end of June.

Why banks want to increase shareholder dividends

Wall Street banks say without increasing dividends they will have a hard time raising more equity in the future, which they say will hold back economic growth. By paying shareholder dividends, banks attract investors but lose equity. Bankers disdain equity and love leverage. While a company like Google is funded almost entirely by equity, the average bank lives on other people’s money, funding more than 95 percent of investments with debt. Banks avoid equity because their executives and shareholders make big money on leverage as long as the financial services sector is healthy. Banks also avoid equity because the more equity they hold, the more liable they are for the risks they take. If things go sour, they have to reduce the risk of default at their own expense, rather than count on taxpayers to bail them out.

Fed decision risks another bailout

During the financial crisis, highly leveraged banks caused alarm at the Fed. Some analysts believe the Fed needs to allow the economy to get stronger before allowing increases in shareholder dividends. Simon Johnson of the New York Times compared a highly leveraged bank to buying a house with a minuscule down payment on a mortgage for 98 percent of the purchase price. If home prices rise, the risk pays off. If they drop, the borrower is quickly underwater and creditors get the shaft. The difference, however, between highly leveraged banks and highly leveraged homebuyers is that the banks have learned they are too big to fail. When a highly leveraged bank fails, a government bailout rescues its executives, shareholders and creditors, and U.S. taxpayers get the shaft.

Sources

New York Times

Business Insider

CNNMoney.com

The Supreme Court has legally bound the Fed to reveal which banks took discount loans during the financial crisis and how much they borrowed. Image: CC rpongsaj/Flickr

The Federal Reserve is being forced to release details about emergency loans made to Wall Street banks during the financial crisis of 2008. The Supreme Court on Monday sided with a reporter from Bloomberg News who sued to force the Fed to reveal the Wall Street banks that borrowed from a lending program called the “discount window.” Monday’s Supreme Court ruling adds discount window data to information about six other bank bailout programs Congress required the Fed to disclose in December.

Opening the discount window

The Dodd-Frank financial reform bill required The Fed to reveaal details about the $3.5 trillion Wall Street bank bailout of 2008; however, information about the discount window was not part of that disclosure. Using the Freedom of Information Act, Bloomberg News filed a request for discount window data in 2008 and the Fed said no. In 2009 a trial court ruled in Bloomberg’s favor and the Fed appealed. A federal appeals court upheld the ruling, which was appealed by the Clearing House Association, a trade group that represents 10 of the largest banks in the U.S. Monday’s Supreme Court decision upholds the ruling once again, which requires the Fed to release details about the discount window within five days. It is the first time the Fed will release confidential information about the discount window since the program began in 1913.

Looking through the discount window

During the financial crisis, the Fed reduced the discount rate, lowered the primary credit rate and extended the maximum term from overnight to ninety days in the discount window. The documents that must be released include the names of banks and the amounts borrowed through the discount window in April and May, 2008. As the financial services industry trumpets its government-backed return to profitability for investors, the discount window data could embarrass some of the biggest Wall Street banks. If the public knows how much Wall Street had to depend on government bailouts to survive the financial crisis, it might affect investor perception about the leadership of the banks that needed help and how that could affect their future financial condition.

Wall Street wins when losing, again

There may have been something about the discount window loans made in April and May 2008 that Wall Street desperately wanted to keep secret. The Clearing House Association said releasing discount window data would make banks think twice about seeking government bailouts in the future. But even though the Supreme Court upheld Bloomberg’s case, Wall Street lawyers managed to delay the release of discount window data for more that two years. The Dodd-Frank financial reform bill requires the Fed to release data on discount window loans made after July 21, 2010, but only after a two year grace period.

Sources

New York Times

Bloomberg

Business Insider

Consumer lending, especially for housing, has been slow to recover from the recession. Image from Wikimedia Commons.

Consumer lending — loans lent to individuals — has been slow to recover from a two-year lull. Loans such as mortgages, auto loans, home equity lines of credit and personal loans aren’t impossible to get but are harder to get approved for. Banks are loathe to repeat mistakes that made them run for government cover.

Federal Reserve data indicates borrowing has slowed

Data compiled by the Federal Reserve indicates that debt levels from consumer loans have been falling since the summer of 2008, before the recessionary period began, according to Bloomberg. Total consumer debt, which includes most loans that lenders make to consumers such as personal loans, installment loans and auto loans, but excludes mortgages, stands at $2.4 trillion. That is 6.6 percent below July 2008, the peak period before the recession. Debt from housing loans has declined by more than $530 billion since 2008 with $10 trillion in housing debt still owed by homeowners in the United States. Fed Chairman Ben Bernanke was recently quoted as saying that conditions for credit markets were tight and that he didn’t expect a significant turnaround for some time in the housing market.

Housing market still lagging

The recession began in the housing market, and the return to healthy levels of activity in the housing market has been pursued for some time. Though improvements have been made, there have also been setbacks. From December 2010 to January 2011, home sales increased by a modest 2.7 percent, according to MSNBC, but the share of first time home buyers was only 29 percent of all purchases. Foreclosure properties made up 37 percent of the homes that were sold, and 32 percent of all purchases were made with cash. Given that a high number of foreclosure properties are being sold, a lot of purchases are being made with cash. The Case Shiller Index noted that high-end home sales are rising again, according to CNN, and there is every indication that this is a fantastic market for investors, not for prospective middle-income homeowners.

New models emerging

An increasing amount of regulations, such as the CARD Act and the proposed cap on interchange fees, makes it harder for large financial institutions to be able to turn the kind of profits they are used to. Some consumer credit may not be as easy to come by in coming years. For instance, since the CARD Act was enacted, free checking accounts have been disappearing from major banks, and JPMorgan Chase has been hinting at capping debit card purchases at $50 to $100 if the interchange fee cap is passed.

Sources

Bloomberg

MSNBC

CNN

The battle to return to a gold and silver standard for U.S. currency has waned, but it hasn't died. (Photo Credit: Public Domain/U.S. Mint/Wikipedia)

Producing paper dollar bills is a more expensive proposition than ever, reports AOL News. That’s why Senators Richard Shelby, Robert Casey and Tom Harkin are continuing a battle that in one form or another has been fought since U.S. President Andrew Jackson held office in the 1830s. On behalf of the U.S. Government Accountability Office (GAO), the Senators are calling on Congress, the Federal Reserve and the Treasury to pull $1 notes from circulation and replace them outright with $1 coins.

Paper dollars to coins could save $5.5 billion over 30 years

Long-term projections regarding the impact of replacing paper $1 bills with $1 coins indicate that the U.S. government could save $5.5 billion over 30 years by switching. Considering the difference in average lifespan between modern bills and coins – 3.3 years versus 30 years – less currency would need to be produced. GAO studies also indicate that coins are cheaper to produce than paper bills.

Over 30 years, taxpayers would save $184 million annually

The GAO has lobbied for the changeover for 20 years, but success has been moderate at best. The Presidential $1 Coin Act of 2005 was intended to serve as a major transition in monetary policy, and Federal Reserve banks carry an inventory of 1.1 billion $1 coins as of Dec. 2010, writes the GAO in a related report.

Only 4.2 million $1 coins are in public circulation, including the discontinued Eisenhower, Susan B. Anthony and Sacagawea $1 coins and the current Presidential and Native American series. American Numismatic Society Executive Director Ute Wartenberg attributes this relative dearth to the populace’s conservative view toward the use of coinage. Coins are heavier than bills, and many wallets are not sufficient to tote them.

Cut off the greenbacks, cut the cotton

The U.S. must completely withdraw of $1 bills from circulation, so that the public doesn’t have the option, suggests Wartenberg. British and Canadian governments went a similar route in the 1980s when lowest-denomination notes were replaced, and many other nations followed suit or had made the change before. Yet Southern U.S. legislators have resisted plans of replacing paper dollar bills with dollar coins for fear of weakening the cotton industry, which supplies the U.S. Bureau of Engraving and Printing.

The battle of specie versus greenbacks

The fight to return to “hard money” has precedence in U.S. political history, from the time of President Thomas Jefferson to the Lincoln administration and beyond. Jefferson considered paper dollars to be “the instrument of the swindler and the cheat,” according to Robert Remini’s account in “Andrew Jackson and the Bank War.” The underlying reason for Jackson’s vehement distaste was that paper money, while legal tender in the government’s eyes, could be converted into precious metal – gold, in particular.

Once Lincoln attained the presidency (1861-1865), greenbacks became official thanks to the Legal Tender Act of 1862. A system of nationally chartered banks that report to a main central bank arose, and the U.S. was quickly flooded with paper money.

Sources

“Andrew Jackson and the Bank War”

AOL News

“Lincoln, Gold and Greenbacks”

“Reassessing the Presidency: The Rise of the Executive State and Decline of Freedom”

U.S. Government Accountability Office

Fixing volatility in the International Monetary Fund

Consumer borrowing rose from non-revolving credit sources, as fewer people are borrowing money by using credit cards. Photo Credit: MoneyBlogNewz/Flickr/CC-BY-SA

An increasing number of people are borrowing money, but more people are getting personal loans rather than using credit cards. The Federal Reserve released data that show consumer borrowing rose by several billion dollars in January, but it was from non-revolving credit sources. Credit card use dropped at the same time.

Debt levels rise as consumer borrowing increases

Americans are borrowing money from loan lenders again, and it is reflected in the recently released report by the Federal Reserve detailing economic activity from January of 2011, according to Business Week. The increase in consumer debts in January was fueled by non-revolving credit sources, such as personal loans or auto loans, instead of revolving lines of credit or credit cards. Non-revolving debt increased by $9.26 billion, but consumer debts increased overall by an estimated $5 billion, in the fourth straight month of increasing numbers of people going to loan lenders for credit. The increase was fueled by strong auto sales, according to MSNBC, as the amount of money lent for auto purchases increased for the sixth straight month.

Credit card use falls

Credit card use has been plummeting for some time, as the amount of debt held by Americans on credit cards declined by $4.25 billion. Credit card debt has fallen in 28 of the past 29 months, but it increased in December 2010 for the first time since December 2008. Credit card charge-offs, or debts written off by credit card companies, declined to 7.45 percent for January 2010. Delinquencies and charge-offs have been declining for the past five consecutive months. Consumers appear to have used their plastic to cover a December shopping spree but paid down the balance quickly. Credit card interest rates have been steadily rising as new regulations prevent banks and card companies from applying fees surreptitiously, forcing them to raise fees and interest rates up front.

Student borrowing increases

Part of the increase in non-revolving debts for the month of January 2011 was a $24.9 billion increase in student loans from the federal government. However, students are likely to begin borrowing more from private lenders than from the government in coming years, as the looming federal budget cuts are likely to decrease available capital. The federal budget recently submitted by the House of Representatives cut more than $5 billion from the Pell Grant program, according to the Christian Science Monitor, though the Pell Grant program is expected to run a $20 billion deficit starting next year. A college education is still viewed as one of the most worthy investments a person can make, though the cost has been rising dramatically for years.

Sources

Business Week

MSNBC

Christian Science Monitor

Neil Barofsky was frequently critical of the way the Federal Reserve and TARP operated together. (Photo Credit: CC BY-ND/Duff McDonald/New York University School of Law Blog)

As the $700 billion Troubled Asset Relief Program winds down, a surprise defection occurred, reports Reuters. Neil Barofsky, inspector general of TARP and the top financial industry bailout auditor, handed President Obama his resignation letter. Barofsky, who will leave his post March 30, did not give a reason for his resignation.

Inspector General Barofsky appointed by President George W. Bush

Appointed in November 2008 at the height of the financial crisis, Barofsky, 40, served for more than two years. In his resignation letter to President Obama, Barofsky wrote that it “has truly been an honor to serve, particularly during such a critical time.” His dedicated service in pursuing fraud allegations, as well as pointing out where the TARP program fell short of expectations, earned Barofsky respect among his peers.

Under Barofsky’s direction, the Office of the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) grew to 140 staffers, from auditors and investigators to attorneys and others. Currently, SIGTARP continues to operate regional offices in New York, San Francisco, Los Angeles and Atlanta.

As long as banks owe, TARP will live on

TARP no longer has official jurisdiction over new spending programs, and the U.S. Treasury is weaning financial firms and automakers from Federal Reserve investments. Still, because so many banks continue to struggle making payments on their massive installment loans, TARP’s mission is ongoing. Christy Romero, who will take over at least on an interim basis for the departing Barofsky, will continue to work with the 150-plus TARP banks that have missed regular installment loan payments. In addition, the largely unsuccessful Home Affordable Modification program continues to require oversight, said Barofsky, as foreclosures have not abated significantly.

The money is there; manage it wisely

Barofsky’s parting advice to the Obama administration and the Federal Reserve is to manage with care the taxpayer money that remains on the TARP table.

“With more than $150 billion in TARP funds outstanding and close to $60 billion still available to be spent, robust and effective oversight of TARP remains vitally important,” Barofsky wrote.

In addition to the billions of dollars in installment loan payments delinquent TARP banks owe, an Obama administration forecast indicates that the administrative costs of TARP will exceed $28 billion.

Sources

Reuters

SIGTARP

Barofsky grants a window into Federal Reserve mismanagement

Mississippi banks took millions of dollars in short term loans from the Federal Reserve. (Photo Credit: CC BY-SA/Charlie Brenner/Wikipedia)

The Associated Press reports that the Federal Reserve released a report in December that shed additional light on the banks that accepted bailout money – and how much each took. According to the Mississippi-based newspaper The Dispatch, three banks in that state received millions of dollars in Federal Reserve short term loans in order to maintain stability.

Fed upped its short term loans after Lehman collapse

After Lehman Brothers disintegrated in September 2008, the Federal Reserve began issuing short term loans to banks at what can be called a manic pace. Trillions of dollars were pumped into the financial system over the course of 21,000-plus transactions nationwide. Banks, financial corporations and foreign central banks were all beneficiaries of U.S. taxpayers’ largess, whether those taxpayers realized it or not. While credit did not dry up completely, the Federal Reserve’s short term loans did not create a vigorous credit market via stimulus dollars.

Mississippi bank handouts

The AP indicates that the Federal Reserve’s transparency report names several Mississippi banks. Tupelo-based BancorpSouth, which is the largest bank based in the state, with $13.6 billion in assets, received eight short term loans – also known as Term Auction Facility (TAF) loans – from the Fed that ranged from $50 million to $300 million. Trustmark National Bank ($9.4 billion in assets) of Jackson, Miss., received short term loans by the dozen, ranging from $50 million to $150 million. Sycamore Bank, which is based in Senatobia, Miss., received a single $5 million short term loan from the Federal Reserve.

Mississippi banking customers shouldn’t worry

According to Howard McMillian, the dean of the Else School of Management at Millsaps College in Jackson, Miss., banking customers needn’t make a run on the bank to withdraw funds. The Federal Reserve assures that all short term loans granted to Mississippi banks were backed by collateral and paid in full plus interest.

“(The TAF program) was created to meet some short-term liquidity needs, and it had nothing to do with a shortage of capital reserve or anything like that,” said McMillan to the AP. “There’s really no cause for concern.”

Source

Associated Press

The Fed wants to bring swipe fees closer to what it costs banks to process debit card transactions. Image: CC MC2 Honey Nixon/Wikimedia Commons

Capping debit card swipe fees at 12 cents a transaction is part of a proposal submitted by the Federal Reserve on Thursday. The Fed is proposing the swipe fee cap and other curbs on debit card abuse by banks to comply with the financial reform bill. As expected, merchants support the measure and major credit card companies oppose it as they watched their stock take a hit on the news.

The Fed swipe limit proposal

Under the current system of debit card swipe fees, credit card companies charge retailers 1 to 2 percent of the transaction, regardless of the dollar value. The Fed debit card swipe fee proposal also includes giving merchants a choice from at least two independent debit card networks, a move that would create more competition for Visa and Mastercard. The Fed swipe limit proposal was made to comply with a provision of the financial reform bill requiring debit card swipe fees to be “reasonable and proportional” to how much it costs a bank to process electronic transactions. The Fed offered the reasoning that debit card swipe fee limits will force banks to be more cost efficient.

Banks to lose billions in easy money

Swipe fees earned credit card companies about $15 billion in 2009. The Fed swipe fee limit proposal would be a boon for retailers. An analyst at JPMorgan Chase told Bloomberg that banks that issue Visa and Mastercard credit cards could lose 80 to 90 percent of that revenue. According to UBS Investment Research, the 12 cent swipe fee cap will drive down average debit card swipe fees about 75 percent. The Fed said the new debit card swipe fee limits probably won’t translate into lower prices for consumers. But banks looking for ways to make up for their ill-gotten gains could cut back on debit card reward programs and come up with more of the creative ways to gouge consumers they are known for.

Reactions to Fed swipe fee limits

The National Retail Federation said lower costs for merchants could lead to discounts for consumers. The American Bankers Association said the Fed would allow retailers to avoid paying their fare share for the benefits they get from the card payment network. Shortly after the Fed presented the swipe fee proposal Thursday, Visa stock fell 11 percent and Mastercard stock fell 9 percent.

Sources

Washington Post

Bloomberg

Wall Street Journal

New Fed restrictions are expected to take effect in October 2011, at the earliest. (Thinkstock)

The Great Recession occurred largely as a result of unsafe lending practices that allowed consumers to exceed their means and drag the nation’s economy down with their personal finances. The extent to which this occurred could have perhaps been decreased if more proactive federal regulation had taken place.

It appears as if the Federal Reserve learned its lesson from the national financial swoon as it recently announced regulations that serve to close loopholes within the new credit card law (CARD Act) before they cause significant damage. Such a move comes in refreshingly severe contrast to the laissez fair-type policy practiced by the Fed for the last decade and seems to be a positive sign for the financial well being of the United States.

CARD Act background

The CARD Act — which took full effect in August — instituted numerous consumer protections designed to curb the predatory, harmful credit practices that were previously allowed to perpetrate unchecked and helped lead to the nation’s financial malaise. While this is the most sweeping piece of credit card legislation passed in years, sometimes vague language has allowed certain unscrupulous credit card companies to continue dangerous practices.

APR change protections

Prior to the Fed regulations, the CARD Act stated that issuers could not change a consumer’s interest rate during the first year that an account was open or apply increased APRs to existing balances unless consumers were at least 60 days delinquent. Such rules even pertained to accounts with introductory rates. However, some companies evaded the spirit of the law by offering to waive consumers’ APRs for a certain period of time while retaining the self-conferred right to revoke the waiver at will. For example, instead of offering you a 0 percent APR credit card, they would give you a card with a 15 percent APR, that they would offer to waive for the first 12 months. Their rationale was that waiver revocation would not be an APR change rate but merely a re-instituting of a normal rate. However, the Fed restrictions — expected to take effect in October 2011, at the earliest — close the door on such fee waivers.

Fee limits

The CARD Act also prohibits credit card companies from charging more than 25 percent of a card’s limit in fees during the first year an account is open, a provision that affects bad credit credit cards most significantly. Certain companies found their way around this by charging processing fees that had to be paid before an account could be opened. These fees, according to issuer thinking, did not count toward the 25 percent limit because they were not assessed during the account’s first year. However, like the fee waivers, this semantic interpretation was nullified by the Fed’s decree.

Income Determination

The Fed also banned the use of household income as a determining factor of a consumer’s ability to pay, holding that personal income will provide a far more accurate indication of how much debt someone can afford comfortably. This distinction will help protect people from the widespread severe disparities that existed between amounts owed and means of payment prior to and during the recession.

These Fed changes will surely provide consumer aid upon taking effect, but their larger implication is what’s truly important. If the Federal Reserve continues to address issues before they become significant problems, the chances of facing another recession down the road will decrease significantly. This organization had not acted so swiftly in more than 10 years, so it appears as if a policy shift has taken place. However, once could be a fluke, but two or three make a trend, so pay close attention to how the Fed acts in the coming months. Its behavior could serve as an apt indicator of our economic future.

Getting a personal loan for the holidays from a bank may be tough, but there are other ways to borrow the money you need. Image: CC NC Brian/Flickr

Personal loans customarily gain popularity during the holiday season. A personal loan for the holidays may be more difficult to secure this year than in the past, depending on your credit score. Interest rates are low, which is less of an incentive for banks, which are currently hoarding reserves, to lend.

Why personal loans may be harder to get

It may be more difficult to get a personal loan for the holidays because banks can borrow money from the Federal Reserve at interest rates approaching zero. Instead of risking default by granting personal loans, installment loans, mortgage loans and other forms of lending, banks are using that money to invest for profit. A prime example of this is the massive purchase of U.S. Treasury bonds by banks in 2010. Banks have purchased $127 billion in Treasurys since the second quarter, while loans have decreased by $68.5 billion. In essence, banks can borrow money from the Fed at near zero interest, then loan it back to the Fed at a much higher rate in the form of Treasury purchases.

What to expect when you look for a personal loan

The reluctance of banks to grant personal loans for the holidays means that only those with very strong credit scores can expect success — from banks, that is. The average interest rate on personal loans with a decent credit score is 12 to 18 percent. But if your credit is less that stellar these days, it doesn’t hurt to start with the bank or credit union where you put your money. An established relationship may improve your chances. If that doesn’t work, numerous lenders offer personal loans online. However, a lower credit score could result in interest rates as high as 20 percent.

A holiday loan alternative

An interesting alternative to those high interest rates on a personal loan may be peer-to-peer lending. Peer-to-peer lending takes the bank acting as middleman out of the equation. On peer-to-peer lending websites, consumers lend money to each other. On some peer-to-peer lending sites lenders bid to offer borrowers lower interest rates. Lenders choose who they lend to and make loans from as little as $25 up to $25,000. Getting a personal loan for the holidays from a fellow consumer could land a competitive interest rate without a perfect credit score.

Sources

Credit Loan

Forbes

Subprime Blogger