Financial Regulatory Forum

from Christopher Whalen:

The cure for higher ATM fees is competition

Why are Bank of America and other large US banks increasing fees for the use of debit cards and other services?

The short answer is regulation. The Fed's low interest rate policy has a big effect on how banks price all services. Specific to ATM fees, Congress has decided to regulate the fees charged to vendors by banks on electronic transactions, essentially cutting this profit center in half for the largest banks that have $10 billion or more in assets. This fee is still far more than the actual cost to the bank providing the service, but such is life in America’s less-than-free market. Like airlines, the “too-big-to-fail” (TBTF) banks are not really profitable, thus pricing of one product is often skewed to make up for shortfalls in another.

When you look at the TBTF banks, which dominate the industry in the U.S. today, all of them feature business models where monopoly pricing power and the much abused free market operates. The reasons for this are complex, but the power of the TBTF banks – Bank of America, JPMorgan, Wells Fargo and Citigroup – largely stems from the fact that they remain heavily regulated and protected by these same captured regulators led by the Fed. Thus there is no competition for the services these large banks provide.

Despite the gazillions of words written about deregulation in the financial services industry, there is the Bank Holding Company Act of 1956, which provides the Fed with the power to regulate companies that own banks and thus it protects the TBTF institutions from competition. If Google, Wal-Mart and Amazon were permitted to own banks and thereby compete with Bank America et al in the electronic payments business, the cost of electronic payments to small vendors and consumers would plummet.

The fact that the Dodd-Frank legislation mandates some artificial relief for consumers and small businesses is lovely, but the real solution to the problem of the TBTF banks and their monopoly pricing power regarding electronic payments is competition. As former Fed of New York general counsel and White & Case partner Ernest Patrikis told me in a 2008 interview:

How the BofA settlement deal got made

There are only 30 lawyers at Gibbs & Bruns, the Houston litigation boutique that orchestrated Tuesday’s $8.5 billion settlement between Bank of America and mortgage bond investors. But good things come in small packages. This deal, struck with the noteholders in 530 trusts that issued securities backed by Countrywide mortgage loans, would not have happened without Gibbs partner Kathy Patrick. She put together a coalition of major institutional investors that BofA’s trustee on the securitizations, Bank of New York Mellon, could not afford to ignore. Patrick sent a red-alert warning to the bank last October, by announcing publicly that Gibbs & Bruns and its bondholder clients were gearing up for litigation. That move alone sent BofA’s stock down five percent. Then Patrick worked with lawyers for BofA and BoNY to structure a novel deal that makes sense for all of them.

The settlement agreement submitted to New York state supreme court judge Barbara Krapnick Tuesday morning calls for BofA to pay Gibbs & Bruns $85 million if the settlement is approved. Patrick told OTC the firm has earned it. “We’re happy we’ll get paid for our work,” she said. “We’re very proud of this outcome.”

In a way, the roots of the BofA MBS deal are more than 10 years deep, dating back to when Gibbs & Bruns began representing a predecessor of the asset manager Black Rock in a Texas legal malpractice case that the firm eventually won at trial. Patrick’s relationship with Pimco, the gargantuan bond fund manager, goes back to 2003, when she was hired to bring suits against the banks that issued $2 billion in National Century Financial Enterprises securitizations. Pimco was one of the NCFE noteholders for whom Gibbs & Brun recovered more than $500 million.

ANALYSIS-Mortgage investors will have trouble fighting banks

By Al Yoon and Matthew Goldstein

NEW YORK, Oct 20 (Reuters) – Houston attorney Kathy Patrick represents a group of powerful mortgage investors trying to wring money out of Bank of America, but many legal experts say her chances of winning are slim.

For the second time in two months, the Gibbs & Bruns partner has sent a letter to a big bank trying to get some measure of financial relief for her clients who hold $16.5 billion of home loans packaged into bonds.

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from The Great Debate:

Taxing spoils of the financial sector

If you want less of something, tax it.

That truism is often used as an argument against a tax on profits, or health benefits, or employment, but in the case of the rents extracted from the economy by the financial services industry here's hoping it proves more of a promise than a threat.

The International Monetary Fund has put forward two new taxes on banks to pay the costs of future rescues, one of which is a fairly conventional "Financial Stability Contribution," with an initial flat levy on all banks, to be refined later into something with more precise institutional and systemic risk adjustments.

More interestingly, the IMF is also proposing a "Financial Activities Tax," (FAT) a tax on bank pay and profits which, if correctly designed, could serve as a tax on rents -- the unwarranted spoils -- of the financial sector.

New York charges Bank of America, ex-CEO with fraud; SEC settles

By Jonathan Stempel and Joe Rauch

NEW YORK/ORLANDO, Fla., Feb 4 (Reuters) – New York’s attorney general charged Bank of America Corp former Chief Executive Kenneth Lewis and former Chief Financial Officer Joe Price with fraud for allegedly misleading shareholders about the acquisition of Merrill Lynch & Co.

The U.S. Securities and Exchange Commission separately said Bank of America agreed to pay a $150 million civil fine and bolster disclosure and governance practices to settle its two lawsuits alleging poor disclosure of Merrill’s losses and $3.6 billion of bonus payouts. That accord requires court approval.

Thursday’s civil lawsuit by New York Attorney General Andrew Cuomo could complicate efforts by new Bank of America CEO Brian Moynihan to revive the largest U.S. bank.

Major global banks split on regulation battle

By Lisa Jucca and Martin Howell

DAVOS, Switzerland, Jan 29 (Reuters) – The world’s top financiers are at odds about how to fight back against a global push for tougher financial regulation, with commercial and investment banks struggling to reach common ground.

Top executives from Wall Street and Europe’s leading banks have been holding behind-the-scenes talks at the World Economic Forum in the Swiss ski resort of Davos, sources close to the negotiations said, but a deal has proved elusive.

Wall Street’s largest and some major European investment banks argued in favour of a tough common front against politicians who are calling for much tougher measures to regulate the industry in the wake of the financial crisis.

Barons of Wall St concede failures, defend pay

By Kevin Drawbaugh

WASHINGTON, Jan 13 (Reuters) – Top executives of Wall Street’s biggest banks acknowledged broad failures as they testified to a U.S. commission looking into the financial crisis, while the White House said an industry apology was in order.

With U.S. unemployment near a 26-year-high after the worst recession in decades, public fury is growing over the cost of taxpayer bailouts and huge bonuses for bankers, now that the industry has rebounded from the 2008 meltdown.

The top executives acknowledged mistakes in managing risk but defended their pay packages and called for modest regulatory changes.

Bank of America’s Moynihan urges focus on “contagion risk,” not breakups

CHARLOTTE, North Carolina, Jan 13 (Reuters) – Bank of America Corp Chief Executive Brian Moynihan said on Wednesday banking regulation needs to focus more closely on limiting “contagion risk” between financial firms, rather than breaking up the biggest U.S. banks.

Moynihan called for broader changes in banking industry regulation — from accounting rules to leverage and capital requirements — to shore up a system that he said created a mix of combustible elements during the crisis.

“That starts with recognizing that ‘interconnectedness’ and not ‘bigness’ is what led to the need for taxpayer bailouts,” Moynihan said in testimony prepared for his appearance before the Financial Crisis Inquiry Commission, a 10-member panel formed by the U.S. Congress to examine the causes of the financial meltdown.

US Treasury to net $936 million from JPMorgan warrants

WASHINGTON, Dec 11 (Reuters) – The U.S. Treasury Department on Friday said it priced warrants in JPMorgan Chase & Co at $10.75 per warrant in a deal that will bring U.S. taxpayers net proceeds of $936.06 million.

The 88.4 million warrants to purchase common stock in JPMorgan were priced in a modified Dutch auction. The sale marks the disposal of the government’s remaining investment in the banking giant, which the Treasury received last year in exchange for $25 billion in bailout money.

The closing of the warrant sale is expected to occur on or about Dec. 16. Deutsche Bank Securities was the sole bookrunner, with Ramirez & Co., The Williams Capital Group and Utendahl Capital Group co-managing the offering.

U.S. banks give nod to prepaying fees, seek tweaks

By Karey Wutkowski
WASHINGTON, Nov 3 (Reuters) – U.S. banks are lauding regulators for avoiding another emergency fee to replenish the deposit insurance fund, but are suggesting tweaks to a plan for them to prepay three years of regular assessments.

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