The lies of bankers

By Felix Salmon
March 5, 2010
ruckandmaul writes this:


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It’s journalism-awards season right now, and I’ve been having a lot of discussions of late about whether and how to give out awards for blogs. And one of the points I make repeatedly is that if you’re going to do that (and I’m not convinced that it’s a good or workable thing to do), then the quality of the comments has to be a key consideration in the judging.

I’m blessed with some wonderful commenters, who really know what they’re talking about. On the subject of getting quotes from investment banks, for instance, ruckandmaul writes this:

For a long tme I had to get “marks” for month end pricing on bonds. These were simply corp bonds for month end pricing. I would call to a couple of dealers and ask for a price on XYZ bonds, “89 by 89.50″. No, I’m not looking to sell just give a price for month end, I always called the shops where we were a big client, “oh, for pricing, 93 by 93.75.” Thanks, remember us the next time you make a trade! How the “marks” were done for CDS nonsense and other esoteric offerings, I can only shudder at the thought.

In a way, it’s astonishing that Simon Treacher even needed to falsify his marks by means of clumsy forgery: wouldn’t it have been easier to just find a complaisant desk on the sell-side somewhere?

On another post, RogerNegotiator finds an astonishing OCC letter, authorizing a bank’s request to adopt largest-to-smallest check posting, thereby maximizing overdraft revenue. (If you have $100 in your account, and put a $1 candy bar on your debit card, followed by a $15 t-shirt, both transactions will end up generating a $34 overdraft fee if a $90 check comes in later in the day: the bank will end up making over $100 in fees that day alone.)

The key section in the letter is the last one, entitled “The Bank’s Consideration of the Section 7.4002(b) Factors”. That section lays out four reasons to adopt the practice, and concludes that “the Bank’s process for deciding the order of check posting is consistent with the safety and soundness considerations set forth in section 7.4002(b) and that the Bank may therefore post checks in the order it desires”.

What are those four reasons for ripping off consumers so blatantly? The very first one is “projections showing that revenue is likely to increase as a result of adopting a high-to-low order of check posting”. That’s considered a reason to adopt the practice, in the eyes of the OCC.

As for the rest of the reasons, they’re mostly ridiculous on their face. I love this one, for instance:

The Bank concludes that it needs to adopt the high-to-low order of posting so that customers who frequently write checks against insufficient funds do not do business with the Bank primarily because the Bank’s fee for checks presented against insufficient funds is lower than its competitors’.

Essentially, the bank is saying that its competitors have high overdraft fees, and that it doesn’t want to compete against its competitors, so it needs high overdraft fees too.

And then there’s this beaut:

The Bank states its belief that a high-to-low order of posting is consistent with the majority of its customers’ preferences. The Bank surmises that the intended order, which will result in a customer’s largest bills being paid first, will have the consequence of the customer’s most important bills (such as mortgage payments) being paid first. The Bank thus concludes that a high-to-low order is aligned with the majority of its customers’ priorities and preferences.

This is accepted at face value by the OCC, instead of simply being laughed at. Of course, no one bothered to ask the customers, because they knew full well that customers would never say that they preferred this way of doing things. But so long as the bank simply says that customers prefer it, no problem.

Overall, what we’re seeing here is banks lying about the value of securities and about their customers’ preferences, and regulators doing nothing about it. And, of course, we’re also seeing how wonderfully rich the comments section of a blog can be.

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Comments
9 comments so far

As for the last reason for high to low, I can attest to the fact that many consumers do want the larger item paid first. A lifetime ago, I worked in a member service center at a credit union. I clearly remember the day when we cleared a small item first which led to the return of the member’s mortgage payment. The member was irate and demanded that we reverse the ordering. That member was not alone in her views. So perhaps things a a bit more complicated that one would first think on these matters.

Posted by Ademanaonge | Report as abusive

That the large items are likely to be more important only makes sense if the banks are actually refusing the overdrawing checks; if they’re honoring the checks anyway, and simply tacking on a fee for each one that takes the balance below 0, it makes no sense whatsoever.

As for the second excerpt, though, I don’t read it as “doesn’t want to compete against its competitors”; I read it as a concern with adverse selection. (They don’t want to disproportionately draw the sort of person who would “do business with the Bank primarily because the Bank’s fee” is low, rather than for the ambiance of the bank branches or the quality of the toaster that they receive.) Of course, with high-to-low in particular, those customers may well, as a class, be profitable enough that the bank prefers to get them.

Posted by dWj | Report as abusive

It’s hard for me to muster a lot of sympathy for people who incur multiple overdraft charges. It’s very easy to know your balance and to only spend money that you have. If you need to spend money that you don’t have at the moment but will have soon, it’s very easy to get a credit card. If your mission is to systematically spend money you don’t have, well, you’re going to pay a lot of fees and interest.

Running a checking account involves costs. Someone has to pay these costs. I can go online and get a free checking account with Bank of America, which allows me to charge purchases to a debit card, earn rewards, pay bills and check balances online, and withdraw money at thousands of ATMs. They even give me money to sign up. I would much rather that other people pay for this service via disclosed fees for rule violations than that I pay via an $8.95 monthly fee.

Have I ever overdrafted? Sure – when I did something stupid. Stupidity has a cost. Punishment teaches lessons. Why should a bank pat you on the head and tell you that you’re a good person when you spend money you don’t have, in spite of numerous systems in place that allow you easily to avoid this error?

Posted by najdorf | Report as abusive

“I would much rather that other people pay for this service via disclosed fees for rule violations than that I pay via an $8.95 monthly fee.”

I appreciate your candor, najdorf. Too often we hear disingenuous arguments from the libertarian camp about how business must be giving customers what they want, otherwise they wouldn’t sign-up for “services” like platinum-clad (i.e. ridiculously expensive) overdraft protection. But I applaud your telling it like it is by thanking the poor and financially illiterate for subsidizing your free checking account (well, mostly free… your temporary lapse of “stupidity” notwithstanding).

Posted by Sandrew | Report as abusive

Sandrew: I sense a certain amount of sarcasm. The deal with the poor and financially illiterate is that you can’t regulate stupidity out of existence. Our current level of regulation does a great deal to protect people from their own stupidity and the exploitive goals of business. At some point when you’ve been told over and over again “You have $100 in your account. If you spend $120 you will pay a $30 fee”, it becomes your responsibility not to screw up.

There’s also an enormous amount of assistance to help people get out of poverty, but even if there weren’t I don’t think banking regulation is the place to try to help the poor. Help the poor with direct assistance, education, and help finding work. The alternative to overdraft fees isn’t a free lunch – it’s monthly fees on checking accounts. To the extent that this would deter the poor from getting a checking account, it would just make them more subject to the predations of payday lenders, check cashers, and other inefficient high-fee service providers.

A bank can provide these services for free to people who are able to use common sense and follow basic rules. If politicians want to provide more paternalistic regulation for the poor/stupid I would recommend they focus on denying credit cards to idiots with no money, since they cost a whole lot more than overdraft fees and are much more challenging to use responsibly.

Posted by najdorf | Report as abusive

It sounds to me like ruckandmaul had poor controls at his own institution. I mean, if you can find a broker to give you a 2-way indicative price, shouldn’t you be using whichever side matches your position?

However, as randolfduke remarks in the comment above, you are seldom given a 2-way OTC quote on the buy side. And it seems that ruckandmaul had a straight long position, so that he was getting a “favor.” The way I read the Lewis piece, Burry was saying that he was getting a high mark on the underlying because he had a short position and would thereby have to post more collateral – not a favor. The implication was that if he had been levered long, he would have got a low mark in order to extract more collateral. And no matter how heinous you think it is to give a 93 mark for an 89 bond, it has to be worse to give 93 to the shorts and 85 to the longs. Haircuts should be transparent, not rolled into the marks.

Posted by Greycap | Report as abusive

najdorf, the regulation that is needed is the proper balance of risk and liability involving extreme use of leverage and poor use of judgement that provides huge profits to bankers when the work and large costs to tax payer and even shareholders that see the common stock slaughtered as the C suite draws large bonuses.

Bankers made .42 of every dollar earned in this country in 2006, all due to unwise deregulation.

When the stakes are high enough, and the chance of success is good enough, all men are crooks.

Posted by jstaf | Report as abusive

najdorf, I too like being subsidized by stupid people, but I am afraid I must reluctantly concede that I am better off paying the $8.95 a month.

Why, you ask? Well for one thing, there are externalities to ripping off stupid people that you have not considered. An obvious example is that the smart and prudent borrower who qualified for a prime mortgage at 80% loan to value now finds himself underwater because his stupid neighbors have foreclosed. More broadly, the parasites are in danger of killing the host; stupid people have now been ripped off so thoroughly that they have no money left to spend. That is now reducing aggregate demand – putting a damper on sales at your business “Smart Guys R Us.”

Another problem is that in many contexts your mighty brains are of no use. Odds are that you cannot actually understand your 30-page credit card agreement even if you think you can because it has been written by and for lawyers in language that has a recondite technical meaning (unless you happen to be one of these lawyers of course.) You can’t fix this by switching CC providers when all of them offer the same terms (or can change terms with negligible notice.)

Consider the clause described here: http://www.nakedcapitalism.com/2010/03/m ore-credit-card-company-chicanery-ban-on -universal-default-gutted.html. It runs: “Your account may be in default if any of the following applies: . . . we obtain information that causes us to believe that you may be unwilling or unable to pay your debts to us or to others on time.” Notice that it isn’t good enough just to be willing and able to pay all your debts on time; all the CC issuer needs to do is to interpret “information” such that they “believe” you are unwilling to pay a debt to someone somewhere on time, and they are free to cancel your card and demand immediate repayment, regardless of whether that happens to be convenient for your.

Overall, I just don’t think you should be so obsessed with ripping off stupid people. For a smart person, $8.95 just isn’t a big deal.

Posted by Greycap | Report as abusive

So, what I’m hearing from the pro-bank crowd, is that it is OK to charge $30 for a $10 loan until friday?

As far as creditcards go, my GF had her rate raised to 27% for no reason at all. They even told her they had no reason to raise her rates, it was just a new policy they had. She has execellent credit and is never late on any payments. They have the right to raise rates for no reason. If I had a car or house loan, could they just raise my rates for no reason? I think it’s about time for some change.

Many people I know, who can afford it, are dumping their cards, I think the credit card companies are shooting themselves in the foot. The people who can pay for cards are dumping them, so only those who can’t afford to drop them are still using them. Those people will no doubt default as they shoulder the load of extra charges. I suspect that credit card companies will be a big story this coming year. I can’t wait to see what happens when we are asked to bail them out.

Posted by Potatoe1 | Report as abusive
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