Tag Archives: Associated Press

America’s ‘Unbanked’ Masses.

Millions have lost access to credit or essential banking services due to regulatory reforms.

Fewer Americans have access to traditional banking services such as checking accounts, consumer loans and credit cards than they did five years ago. Part of this has to do with the housing bust severely damaging the finances of U.S. households. But millions more have lost access to credit or essential banking services due to regulatory reforms imposed over the past four years.

If you looked back in 2005, the number of “unbanked” Americans was closer to one in four. At the current rate, that number will reach one in three in 2013.

Excluding millions of Americans from traditional banking services is not an efficient means of commerce and will result in long-term negative consequences for our economy. The negatives include higher transaction costs, lower household savings, and the concentration of credit in the hands of the few—conditions more commonly associated with Third World countries.

Banks are partly to blame for the post credit-crisis shrinkage in banking services. They have not figured out a way to reprice consumer loans effectively in a post-securitization world. For decades, banks could underprice consumer loans (mortgage, home-equity and other personal loans) because they were subsidized with the high fees from securitizations. That all ended with the collapse of the subprime mortgage market.

Still, four years after the death of securitization, many banks are still pricing second mortgages cheaper than first mortgages (one is priced off the London Interbank Offer Rate and the other off of the 10-year Treasury bond yield). Instead of changing this archaic pricing structure, the banks have simply pulled back from this once heavily relied upon financing product. Note, more than 75% of American mortgages are not underwater and could be eligible for this product. This is just one example of a host of consumer-lending products.

But importantly, banks are not to blame for the unintended consequences of ill-planned and ill-timed regulatory reform. The Credit Card Accountability, Responsibility, and Disclosure Act (CARD) essentially restricted a bank’s ability to quickly reprice credit-card interest rates. It was passed in 2009 after the peak of the credit crisis, with most of the provisions going into effect in February 2010.

Since mid-2008, over $1.6 trillion in credit lines have been expunged from the system. Under the new law, banks could no longer use other credit bureau information to reprice, as decisions had to be based upon the credit experience of the issuer alone. These restrictions made it far more difficult to effectively price for the evolving risk of a consumer.

Overdraft protection (“Reg E”) reform has had a similar impact on retail bank customers. By limiting the fees banks can charge customers, regulators have in effect made the expense of servicing some customers greater than the revenue they generate. In many cases, regulations have made the overall economics of branch banking uneconomic. Consequently, many bank branches have shuttered, nearly 1,500 since 2009.

Pre-paid debit cards have grown exponentially over the past few years. (Pre-paid cards are vehicles that essentially allow a consumer to borrow from themselves.) Many of these come with high fees. They are not the solution, but merely the only viable option in the current regulatory environment. Will they be the next target for well-intentioned regulatory reform?

There are examples of individual banks getting this right. One example is PNC, which recognized early into the crisis the need to create a “halfway house” of sorts to rehabilitate customers under newfound distress. Programs like PNC’s Foundation Checking account allow customers with tarnished credit histories to maintain an account with no minimum balance after completing a workshop on managing it. Unfortunately, this example is more the exception than the rule.

As an industry, banks need to get in front of this debacle and establish a sensible pricing matrix for the new post-securitization world of financial products and consumer banking. Meanwhile, regulators should seriously reconsider the restrictive provisions in the CARD Act and Reg E, and lawmakers should subject to heightened scrutiny anything forthcoming from the newly established Consumer Finance Protection Bureau.


Absolute Must Read.

DAVID STOCKMAN: You’d Be A Fool To Hold Anything But Cash Now

This is an Associated Press story.
NEW YORK (AP) — He was an architect of one of the biggest tax cuts in U.S. history. He spent much of his career after politics using borrowed money to take over companies. He targeted the riskiest ones that most investors shunned — car-parts makers, textile mills.

 That is one image of David Stockman, the former White House budget director who, after resigning in protest over deficit spending, made a fortune in corporate buyouts.

But spend time with him and you discover this former wunderkind of the Reagan revolution is many other things now — an advocate for higher taxes, a critic of the work that made him rich and a scared investor who doesn’t own a single stock for fear of another financial crisis.

Stockman suggests you’d be a fool to hold anything but cash now, and maybe a few bars of gold. He thinks the Federal Reserve’s efforts to ease the pain from the collapse of our “national leveraged buyout” — his term for decades of reckless, debt-fueled spending by government, families and companies — is pumping stock and bond markets to dangerous heights.

Known for his grasp of budgetary minutiae, first as a Michigan congressman and then as Reagan’s budget director, Stockman still dazzles with his command of numbers. Ask him about jobs, and he’ll spit out government estimates for non-farm payrolls down to the tenth of a decimal point. Prod him again and, as from a grim pinata, more figures spill out: personal consumption expenditures, credit market debt and the clunky sounding but all-important non-residential fixed investment.

Stockman may seem as exciting as an insurance actuary, but he knows how to tell a good story. And the punch line to this one is gripping. He says the numbers for the U.S. don’t add up to anything but a painful, slow-growing future.

Now 65 and gray, but still wearing his trademark owlish glasses, Stockman took time from writing his book about the financial collapse, “The Triumph of Crony Capitalism,” to talk to The Associated Press at his book-lined home in Greenwich, Conn.

Within reach was Dickens’ “Hard Times” — two copies.

Below are excerpts, edited for clarity.


Q: Why are you so down on the U.S. economy?

A: It’s become super-saturated with debt.

Typically the private and public sectors would borrow $1.50 or $1.60 each year for every $1 of GDP growth. That was the golden constant. It had been at that ratio for 100 years save for some minor squiggles during the bottom of the Depression. By the time we got to the mid-’90s, we were borrowing $3 for every $1 of GDP growth. And by the time we got to the peak in 2006 or 2007, we were actually taking on $6 of new debt to grind out $1 of new GDP.

People were taking $25,000, $50,000 out of their home for the fourth refinancing. That’s what was keeping the economy going, creating jobs in restaurants, creating jobs in retail, creating jobs as gardeners, creating jobs as Pilates instructors that were not supportable with organic earnings and income.

It wasn’t sustainable. It wasn’t real consumption or real income. It was bubble economics.

So even the 1.6 percent (annual GDP growth in the past decade) is overstating what’s really going on in our economy.

Q: How fast can the U.S. economy grow?

A: People would say the standard is 3, 3.5 percent. I don’t even know if we could grow at 1 or 2 percent. When you have to stop borrowing at these tremendous rates, the rate of GDP expansion stops as well.

Q: But the unemployment rate is falling and companies in the Standard & Poor’s 500 are making more money than ever.

A: That’s very short-term. Look at the data that really counts. The 131.7 million (jobs in November) was first achieved in February 2000. That number has gone nowhere for 12 years.

Another measure is the rate of investment in new plant and equipment. There is no sustained net investment in our economy. The rate of growth since 2000 (in what the Commerce Department calls non-residential fixed investment) has been 0.8 percent — hardly measurable.

(Non-residential fixed investment is the money put into office buildings, factories, software and other equipment.)

We’re stalled, stuck.

Q: What will 10-year Treasurys yield in a year or five years?

A: I have no guess, but I do know where it is now (a yield of about 2 percent) is totally artificial. It’s the result of massive purchases by not only the Fed but all of the other central banks of the world.

Q: What’s wrong with that?

A: It doesn’t come out of savings. It’s made up money. It’s printing press money. When the Fed buys $5 billion worth of bonds this morning, which it’s doing periodically, it simply deposits $5 billion in the bank accounts of the eight dealers they buy the bonds from.

Q: And what are the consequences of that?

A: The consequences are horrendous. If you could make the world rich by having all the central banks print unlimited money, then we have been making a mistake for the last several thousand years of human history.

Q: How does it end?

A: At some point confidence is lost, and people don’t want to own the (Treasury) paper. I mean why in the world, when the inflation rate has been 2.5 percent for the last 15 years, would you want to own a five-year note today at 80 basis points (0.8 percent)?

If the central banks ever stop buying, or actually begin to reduce their totally bloated, abnormal, freakishly large balance sheets, all of these speculators are going to sell their bonds in a heartbeat.

That’s what happened in Greece.

Here’s the heart of the matter. The Fed is a patsy. It is a pathetic dependent of the big Wall Street banks, traders and hedge funds. Everything (it does) is designed to keep this rickety structure from unwinding. If you had a (former Fed Chairman) Paul Volcker running the Fed today — utterly fearless and independent and willing to scare the hell out of the market any day of the week — you wouldn’t have half, you wouldn’t have 95 percent, of the speculative positions today.

Q: You sound as if we’re facing a financial crisis like the one that followed the collapse of Lehman Brothers in 2008.

A: Oh, far worse than Lehman. When the real margin call in the great beyond arrives, the carnage will be unimaginable.

Q: How do investors protect themselves? What about the stock market?

A: I wouldn’t touch the stock market with a 100-foot pole. It’s a dangerous place. It’s not safe for men, women or children.

Q: Do you own any shares?

A: No.

Q: But the stock market is trading cheap by some measures. It’s valued at 12.5 times expected earnings this year. The typical multiple is 15 times.

A: The typical multiple is based on a historic period when the economy could grow at a standard rate. The idea that you can capitalize this market at a rate that was safe to capitalize it in 1990 or 1970 or 1955 is a large mistake. It’s a Wall Street sales pitch.

Q: Are you in short-term Treasurys?

A: I’m just in short-term, yeah. Call it cash. I have some gold. I’m not going to take any risk.

Q: Municipal bonds?

A: No.

Q: No munis, no stocks. Wow. You’re not making any money.

A: Capital preservation is what your first, second and third priority ought to be in a system that is so jerry-built, so fragile, so exposed to major breakdown that it’s not worth what you think you might be able to earn over six months or two years or three years if they can keep the bailing wire and bubble gum holding the system together, OK? It’s not worth it.

Q: Give me your prescription to fix the economy.

Broccoli Vegetables

A: We have to eat our broccoli for a good period of time. And that means our taxes are going to go up on everybody, not just the rich. It means that we have to stop subsidizing debt by getting a sane set of people back in charge of the Fed, getting interest rates back to some kind of level that reflects the risk of holding debt over time. I think the federal funds rate ought to be 3 percent or 4 percent. (It is zero to 0.25 percent.) I mean, that’s normal in an economy with inflation at 2 percent or 3 percent.

Q: Social Security?

A: It has to be means-tested. And Medicare needs to be means-tested. If you’re a more affluent retiree, you should have your benefits cut back, pay a higher premium for Medicare.

Q: Taxes?

A: Let the Bush tax cuts expire. Let the capital gains go back to the same rate as ordinary income. (Capital gains are taxed at 15 percent, while ordinary income is taxed at marginal rates up to 35 percent.)

Q: Why?

A: Why not? I mean, is return on capital any more virtuous than some guy who’s driving a bus all day and working hard and trying to support his family? You know, with capital gains, they give you this mythology. You’re going to encourage a bunch of more jobs to appear. No, most of capital gains goes to speculators in real estate and other assets who basically lever up companies, lever up buildings, use the current income to pay the interest and after a holding period then sell the residual, the equity, and get it taxed at 15 percent. What’s so brilliant about that?

Q: You worked for Blackstone, a financial services firm that focuses on leveraged buyouts and whose gains are taxed at 15 percent, then started your own buyout fund. Now you’re saying there’s too much debt. You were part of that debt explosion, weren’t you?

A: Well, yeah, and maybe you can learn something from what happens over time. I was against the debt explosion in the Reagan era. I tried to fight the deficit, but I couldn’t. When I was in the private sector, I was in the leveraged buyout business. I finally learned a heck of a lot about the dangers of debt.

I’m a libertarian. If someone wants to do leveraged buyouts, more power to them. If they want to have a brothel, let them run a brothel. But it doesn’t mean that public policy ought to be biased dramatically to encourage one kind of business arrangement over another. And right now public policy and taxes and free money from the Fed are encouraging way too much debt, way too much speculation and not enough productive real investment and growth.

Q: Why are you writing a book?

A: I got so outraged by the bailouts of Wall Street in September 2008. I believed that Bush and (former Treasury Secretary Hank) Paulson were totally trashing the Reagan legacy, whatever was left, which did at least begin to resuscitate the idea of free markets and a free economy. And these characters came in and panicked and basically gave capitalism a smelly name and they made it impossible to have fiscal discipline going forward. If you’re going to bail out Wall Street, what aren’t you going to bail out? So that started my re-engagement, let’s say, in the policy debate.

Q: Are you hopeful?

A: No.

A Mortgage Settlement That Is As Bogus As The Mortgage, And The Foreclosure.

Details about the $25 billion mortgage settlement signed off by 49 state attorneys general tamp down early expectations about how many mortgage borrowers might receive relief.

The much-ballyhooed bank settlement over mortgage lending and foreclosure abuses is eerily reminiscent of the scandal itself. Beware of the fine print.

Forty-nine state attorneys general signed off on a $25 billion deal with five major banks — one is tempted to say robo-signed — that first and foremost protects the banks from government lawsuits.

Exactly which struggling homeowners will benefit is still being sorted out. If a mortgage is owned or backed by Fannie Mae or Freddie Mac — about 55 percent of all mortgages — it is not eligible for help. Underwater, but making your payments? Do not expect any relief.

Borrowers who lost their homes to dodgy foreclosures might collect $2,000 for what they went through. In theory they could sue their lender, but imagine how much legal time two grand would pay for.

The New York Times reported an audit of recent foreclosures in San Francisco County found most all involved legal violations or suspicious documentation. It is not clear the settlement goes after the abuses found in the audit.

Past industry standards of confirming a borrower’s credit, capability and collateral sound so ’70s. Instead the lenders signed documents without verifying information. Those instincts carried through at the other end with foreclosures that did not follow legal processes of notice and filings.

The latest wrinkle in the settlement story comes via The Associated Press, which reported that $2.75 billion for states to help prevent foreclosures is being sucked up in state budgets. Governors and legislators covet the cash to plug budget holes.

Lessons learned from the mortgage scandal are about the details. Same for the settlement. And at the end of the day, the tiny, elite minority who govern and control this country slide out the back door. Un-accountable, un-controllable and un-punished.

Greek Limbo Slams Global Financial Markets a Day After Apparent Breakthrough.

A man looks at an electronic stock board of a securities firm in central Tokyo, Japan, Friday, Feb. 10, 2012. Asian stock markets dropped Friday after Europe’s finance ministers demanded more spending cuts from Greece before clearing a €130 billion ($170 billion) bailout to stave off the country’s bankruptcy.

Stock markets and the euro fell sharply Friday after Greece’s crucial bailout was put on hold by its partners in the 17-nation eurozone and the leader of a small partner in the country’s coalition government said he would vote against the demanded austerity measures.

Just a day earlier, the feeling surrounding Greece was very different. Following weeks of discussions, the Greek government appeared to have done enough to pacify creditors. Uh, those of you following this blog know better. See “Take the Money and Run”.

Greek Prime Minister Lucas Papademos and heads of the three parties backing his government — including George Karatzaferis who Friday railed against the deal — agreed to deep private sector wage cuts, civil service layoffs, and significant reductions in health, social security and military spending.

Investors had breathed a sigh of relief Thursday that the agreement would allow Greece to get a €130 billion ($173 billion) bailout package and avoid a bankruptcy next month that could send shockwaves around the financial markets.

But finance ministers from the other 16 eurozone states threw up a roadblock later in the day and insisted that Greece had to save an extra €325 million ($430 million), pass the cuts through a restive parliament and guarantee in writing that they will be implemented even after planned elections in April. News that the leader of a small partner in Greece’s coalition government would now vote against the austerity measures deepened the gloom on Friday.

The renewed fears of a Greek default, which could send shockwaves around the global economy, dented sentiment in the markets Friday.

In Europe, the benchmark index in Athens 3.3 percent down by late afternoon local time. The FTSE 100 index of leading British shares was down 0.8 percent at 5,846 while Germany’s DAX slid 1.7 percent to 6,675. The CAC-40 in France was 1.4 percent lower at 3,379.

The euro was also hit hard, trading 0.7 percent lower at $1.3182.

In the U.S., the Dow Jones industrial average was down 0.9 percent at 12,769 while the broader Standard & Poor’s 500 index fell the equivalent rate to 1,339.

The prevailing view remains that a deal will be cobbled together but the uncertainty is weighing on stocks. Once all the demands have been fulfilled, the eurozone will give Greece the green light to start implementing a separate bond swap deal with banks and other private investors designed to slice some €100 billion ($132 billion) off Greece’s debt load.

“For all the rhetoric, it is probable that a deal will still be reached because the consequences of not doing so would be so damaging for the EU as a whole,” said Gary Jenkins, managing director at Swordfish Research.

However, it is possible that the Greek politicians “suffer from negotiating fatigue and decide that putting their people through the austerity measures are not worth it.” Again, I say they take the money and flee from the Euro. What do you think happens with the Global markets then?

Earlier in Asia, Japan’s Nikkei 225 index fell 0.6 percent to close at 8,947.17. Hong Kong’s Hang Seng lost 1.1 percent to 20,783.86 and South Korea’s Kospi dropped 1 percent to 1,993.71.


25 People to Blame for the Financial Crisis. Next Up, #24.

Wen Jiabao


Think of Wen as a proxy for the Chinese government — particularly those parts of it that have supplied the U.S. with an unprecedented amount of credit over the past eight years. If cheap credit was the crack cocaine of this financial crisis — and it was — then China was one of its primary dealers. China is now the largest creditor to the U.S. government, holding an estimated $1.7 trillion in dollar-denominated debt. That massive build-up in dollar holdings is specifically linked to China’s efforts to control the value of its currency. China didn’t want the renminbi to rise too rapidly against the dollar, in part because a cheap currency kept its export sector humming — which it did until U.S. demand cratered last fall.