by Jefferson Pinto
Issue #14, May 2009: When my son was in his early teen years, he had an affinity toward video games. Attempting to be a good parent, I blocked inappropriate content and imposed time limits. Ok son you can only play video games for two hours a day after your homework is done. Wow that was easy, not only was I a good parent but a smart one too.
A few days later, I noticed he had been playing for quite a while. I thought, hmmm that sure seemed like longer than two hours. So I asked him, “How long have you been playing?” “I dunno” came the answer. OK, new rule: you must use a timer to ensure you don’t exceed your time limit. Ah, I’m smart again – so I thought.
A few days lapsed and I observed him playing and the timer wasn’t running. “Hey, how come the timer is not on?” “Oh, I forgot to start it.” I thought, if I impose a penalty, he’ll comply. New rule: If the timer isn’t on and I catch you, you loose an hour. All was well for a few days and, once again, I caught him without the timer running. OK son you loose an hour. “Dad, that’s no fair I wasn’t playing the game, it was paused.” I said, “Too bad.” New rule: if the screen is on and the timer’s not running you loose all your time for the rest of the day. I remember thinking wow I finally got this kid figured out. Things ran smoothly for a few weeks. One Saturday morning, I slept in late. When I opened my bedroom door, I heard the distinct sound of the timer starting (It makes a chirping sound when you press the start button). Knowing I’d been duped, I made my first stop the TV room. Just as I had suspected, the timer had less than 10 seconds on it and the game on the screen appeared to be well along. New rule: You can’t play if I’m not awake. A few more iterations of the newer rules and the boy did get limited to two hours a day.
I thought, wow, this parenting thing is a lot of work. What happens when I die ? What will stop him from being a “professional” gamer ? My goal is to teach him to “police” himself (self-restraint). This testing your limits and the “you didn’t tell me” excuses is something I know to expect from a teenager. After all, the human brain doesn’t completely develop until about age 25.
That’s really nice Jefferson; what does that cute little story have to do with economics or public policy. Unfortunately, the same behavior for a grown adult is completely inexcusable.
Have you noticed that since our government passed the Troubled Asset Relief Program (TARP), it was said, to purchase assets and equity from financial institutions in order to strengthen its financial sector, there have been several iterations of new do’s and don’ts ? (lots of new rules!)
By way of background:
• Loot During the Riot: As the economy started to flounder, the government stepped in and said: We have to act now! We have to stabilize the economy. We need to stabilize these large financial institutions (Banks and Insurance companies). Not to pass this legislation, is “unthinkable”. They almost got it right. It would have been more accurate to say, “We’re federal politicians. It would be unthinkable to have our wealth eaten up by the very monster we created.”
• We Can Legislate Our Way Out Of This: In October 2008, the Emergency Economic Stabilization Act of 2008 (EESA) - (Wikipedia Link) was signed into law (Also known as: The Bail Out).
• Quick, Change My Order: A modification of the ESSA or TARP Trouble Assets Relief Program was passed. It sounds sort of like something you put on a leaky roof during the rainstorm. Folks, don’t confuse the Bail Out with the Stimulus Package – that’s a whole other $800 billion - (Wikipedia Link).
• It’s Official: Last Fall, the government announces: We’ve “officially” been in a recession since last December… Duh! That’s sort of like saying the flooding in Iowa was “officially” a disaster. What a surprise, I may have a myocardial infarction (heart attack) from that surprise. It would have been nice if Japan had sent an “official” declaration of war before they bombed Pearl Harbor. Then again, there’s the opposite strategy – the element of surprise. Go ask General Custer how well that worked on Sioux Indians at the Battle of Little Big Horn?
• Great Job, Here’s Your Bonus: Many of the recipients of the TARP funds paid huge bonuses to their employees. AIG was to pay $165 million in bonuses on the largest quarterly loss in their history of $61.7 billion. Thanks for doing such a great job of running the company into the ground. Here’s your bonus. As a side Note: AIG lost $99.3 billion last year making it the Fortune 500s largest loss of all time. My first recommendation: cut back on bonuses. Secondly, stop redirecting almost $40 billion of TARP funding to foreign companies.
• I Know The Horse Is Already Out Of The Barn, But Could You Lock It Anyway: It didn’t take our president (Obama) and national leaders long to say “How do you justify this outrage to the taxpayers who are keeping the company afloat ?” The banks response rationalization “Sorry we were contractually obligated to pay the bonuses.” Hey you can’t do that when everyone else has taken a financial haircut. Well, there was nothing in the rule book about that. I have to raise a healthy skepticism about the legitimacy of the “contract” and the compensation structure.
• Somebody missed the point of TARP: Lending has declined at the top banks who received TARP funds. These institutions lent out 23 percent less money in February 2009 than October 2008 of last year. Easter is over; stop hiding the nest eggs. Thanks for doing your part to help the economy recover.….
• FOR YOUR PROTECTION: Last Month, J.P. Morgan Chase (a $25 Billion TARP recipient) reported “solid profits” and said: 1) “We could pay it back tomorrow. We have the money.” 2) “We are frustrated with the ‘Bail Out’ stigma.” 3) “We only took the money because it was in the country’s best interest.” 4) Word for word out of the Wall Street Journal, “It isn’t fair we are painted with the same brush stroke as the weaker banks.”
Jefferson’s Take: CALL THE WAMBULANCE. All’s fine and dandy when you are on the receiving end of a hand out, but when its time to “pay the piper” and the rest of the orchestra, your tune seems to have changed a little bit. Maybe they should have taken Nancy Reagan’s advice – Just say NO!
• But It Really Was An “Emergency”: If it was such an emergency, why does it seem the banks that were “too big to fail” didn’t need the cash and are ready to pay it back so quickly? Note to politicians: check your homework before you turn it in. Oh yeah, be sure to include your conflict of interest with the beneficiaries of public funds, via Lobbyists, Political Action Committee’s (PACs), etc.
• Kick ‘Em While They’re Down: TARP banks raise their fees to bolster profit. These are tough times for all of our customers, but we are raising fees for the good of the whole.
• It’s Not My Fault: The Former CEO of AIG (American International Group) Maurice Greenberg said, “I don’t feel any responsibility at all.” If the CEO isn’t responsible, who is? This sounds a lot like Kenneth Lay, the former CEO of the now defunct Enron, “The media was the cause of Enron’s failure.” I think he borrowed that line from every Scooby-Doo episode; “I would have gotten away with it too, if it weren’t for you meddling kids.”
• The Mummy Unravels: Bank of America President, Kenneth Lewis, testified under oath: as part of Bank of America’s acquisition of Merrill Lynch he was told by former Treasury Secretary Henry Paulson not to disclose the $21 billion dollars because it would “impose too big a risk to the financial system.” That’s sort of like saying, I’ve got some good news and some bad news. The good news is you only have one day to live. The bad news is I forgot to tell you yesterday and it was for your own protection.
This behavior is disturbing on many levels: 1) High ranking government officials advised the president of one of the largest banks in this country not to disclose something he was required to disclose 2) The bank CEO breached his ethical duty and followed the advice 3) the whole thing came to light during an investigation of the bonuses paid to Merrill Lynch employees. Who needs Reality TV or The Jerry Springer Show when we’ve got CSPAN?
• NOW the “Truth” Comes Out: Fired President of Merrill Lynch says he didn’t approve the bonuses. That’s nice why come forward now? Why not object several months ago when you were accused?
• It Isn’t Fair: TARP recipients who are willing and able to pay back the monies now are whining because the government still has an equity stake (Stock Options). One executive said, had we realized that was the case we wouldn’t have taken the money. This sounds an awful lot like the same sort of loans you (the banks) were handing out to us (the homebuyers) not too long ago, which borrowers didn’t comprehend the agreement and thought it was unfair too. That’s what’s referred to as a cruel irony, or mild economic justice. Is there a pattern here? The government overfeeds the dog; the banks lock him in the house; and then asks the citizens to operate the pooper scooper. I think you get the picture, and the fragrance.
Stress Test ? The bank regulators are now conducting stress tests on selected banks. Why would you prescribe a medication (Bail Out cash) before examining the patient (Banks)? This is like prescribing morphine to a patient in the emergency room without examining the patient. By any other standard this is gross professional negligence.
The Big Picture: How much faith do you put on the rules and how much do you put on the person? I suppose that all has to do with the person. When you can’t hold the CEO accountable, that’s a real problem. With many years as both a public and private auditor, it is my opinion an unlimited number of rules is no substitute for personal integrity. Or in the words of my father, “locks are for honest people.”
I had a teacher who said if you can choose between a Class A person in a Class B scenario or a Class B person in a Class A scenario, always put your bet on the class A person.
In short, choose leaders who have consistently demonstrated competence and good character. Resist the temptation to go to the flashy “prestigious” new guy on the block with all the quick fixes. There are really two choices, either trust them or fire them.
The banks and the government aren’t solely to blame. The citizens’ insatiable taste for cash has contributed to their financial inflexibility and lack of options (whether or not to pay the higher fee or interest rate). The bank is charging, but you are paying. This is sort of like when a drug addict complains the dealer is charging too much – get help go to rehab and GET OFF DRUGS.
Jefferson’s Recommendations: Huge chunks of legislation are implemented too quickly and surreptitiously. Any piece of legislation that has been passed by both houses ought to be available for inspection and comment for a reasonable period of time (at least 30 days) prior to signing it into law.
If the economy hinges on a few very large corporations, maybe we ought to consider diversifying the risk and prevent the imbalance of power into such overgrown institutions. Adjust the balance of power: 1) Pay off your consumer debt. Next time earn it first, then buy it. 2) Move your accounts to one of the institutions that didn’t receive TARP funds – vote with your feet (or in this case your dollars). The smaller banks and credit unions probably have lower fees anyway.
In the land of opportunity, we ought give equal opportunity to fail. Let the criminals (CEOs) out of jail and let them fend for themselves among the rioting crowds (Investors). So long as it’s legal and ethical, laissez-faire (leave alone or Hands off). To the victor go the spoils. The bankruptcy goes to the investors not the American citizens.
Lessons Learned: There is no substitute for integrity. Mr. Sears and Mr. Roebuck built the largest retailer in the world on a handshake. Do you think their partnership would have worked without integrity and trust? Giving money to someone who has proven to be incompetent is like lending more money to a crack addict and putting the pimp in charge as the Czar.
Lastly, the vast majority of banks in this country are well managed and neither solicited or received TARP funds. So it seems, the larger the size of the financial institution, the more top heavy and unstable it is.
While it is imperative, in any analysis, to start solely with the facts and science, it is equally important to address the human and ethical factors.
Case and point: the manor in which the financial institutions in the country have treated people is deplorable. Big picture: John and Johanna Q. Public feel hosed by the colossal national banks. The general attitude is folks aren’t so much frightened as they are angry.
Let’s be clear here, it’s not because of the lack of bank parking or because the candy dish is empty (if there is one). Nor is it that the pens are chained down and don’t work very well. People expect to be treated honestly and fairly. The assumption is that the rules in effect are fair. But in reality, the banks figure if you can’t convince them; confuse them. One of the best ways to walk away with bad feelings is to not have an understanding. Unfortunately, according to “The Golden Rule: Those who have the gold make the rules.”
Since the United States went off the gold standard in 1933, it seems the bankers have been making the rules. In short, the rules are too complicated, confusing and tend to be in favor of the rule maker. There are a myriad of rules to protect the bank and ensure they get their money day-to-day, but when the banks “fall” on hard times, we citizens have to pay again in the form of a Bail Out and higher taxes.
Trust me on this one folks the still higher taxes are coming.
I know the colorful and bright Las Vegas Strip lights up the desert night, but who do you think pays for the electric bill - the tourists! What happens in Vegas Stays in Vegas - including your money. What the government spends, the people pay.
Given, there are many good rules to protect the banks from unscrupulous individuals. However, citizens are angry about the incongruency in the justice of having to pay dearly for the clearly poor choices of banking lenders and complicit borrowers.
Here are some recent changes to the rules that ended up costing the honest and responsible folks: (It’s a horrible job, but someone has to pull the curtain to expose the shenanigans hiding out behind in the form of our financial wizards).
Float Not Want Not: Before the recent “change”, you could write a check and get a few days of float (Before the money came out of your account…). Nowadays, the banks can scan an image of your check-payment and clear it almost instantaneously. By the way you don’t get your cancelled check back and the transaction appears as an electronic debit on your bank statement bearing the check number.
Paper vs. Plastic: Do you like the free airline miles, hotel points, Barney Bucks, and store credits you rack up when you pay by credit card? It may not be intuitively obvious, but the cost of those programs is charged back to the merchant from whom you made the purchase. Hello boys, and girls; can you say higher priced products? I knew you could.
Most jurisdictions prohibit the merchant from charging a fee for using a credit card, but they are allowed to offer a lower cash price for… By the way, cash and checks (good ones that don’t bounce) carry no additional transaction fee to the merchant.
“Free” On-Line Bill Pay: It’s true the banks transmit electronically or otherwise mail the payment. Here’s the catch; the money is removed from your account several working days prior to the disbursement date. That’s a lot of things, free isn’t one of them. They get to use your money.
Rule Changes: Periodically a new set of rules gets stuffed into the credit card bill. “These are our new rules. I hope you can read the 8 point font on the five fold double sided brochure printed on semi transparent rice paper. By the way if you don’t like the new terms and conditions, let us know in writing and we’ll cancel your card; otherwise the new rules take effect automatically.” Like most people really understand the banking legalese. Let me pay my attorney $300 per hour to review it, and I’ll get back to you – NOT!
Usury Laws ? The concept of usury (A maximum limit on the interest rate that is charged) dates back to 325 AD. Usury comes from the Medieval Latin usuria, “interest” or “excessive interest”. Each state has laws on the books. Most of these rules apply to person-to-person loans. Other rules apply only to other lenders (car loans, mortgages). Implemented in 1980, there are national laws that override state laws for Nationally Chartered Banks. (These banks have the word “National” or “NA” in their name.) In the 1960s your home mortgage was at 4 percent and your “charge cards” were at 6 percent or 7 percent. Nowadays, conventional mortgages are between 4 percent and 7 percent (depending upon when you commenced the loan) and your credit cards are between 19 percent and 30 percent. The borrow/savings spread seems to have increased from 3 percent to about 23 percent. Ouch, that’s gonna leave a mahk on your bank balance!
Debit Card Rules: When you pay with a debit card, the cash comes directly out of your account. Unless there’s fraud involved, you have no recourse in the case of a “computer error.” In the case of a credit card, there is a formal dispute and resolution process that doesn’t require payment until the dispute is resolved.
Punitive/Predatory Bank Fees: So it seems the fees schedule is untamed. In the case of the bounced check (assuming you do make good on it) cost is $25 charged to the check writer and $25 charged to the check receiver. The banks get paid from both sides.
Given how long it takes a computer to reverse the charge and whack the account for the fee (at the speed of light with little or no human intervention), $25 seems a little high considering the National Average Hourly Wage is around $18 per hour. Forget the interest; the fee is exorbitant! The demographic reality in this country is that the lowest income individuals pay the highest interest rates, and more and higher fees than their less impoverished counterparts. This is sort of like watching the nature channel when the lion picks the weakest gazelle for lunch.
Loan Application Fees: “Thanks for the loan application; I’m sorry your request has been denied.” Home loans are being denied at an alarming rate, making loan fees a growing source of revenue for the banks. Why charge the fee before the loan is approved? Think about it; if you took a new car for a test drive, would you flinch if the sales person told you you’d have to pay for the gas to cover the test drive whether or not you bought the car? It seems a pre-screening without fees policy would be a whole lot more fair to the applicant.
For Sale ? I have a personal friend who had an offer for the asking price of a home he’d like to buy that has gone unanswered since November of 2008 (6 months). Other acquaintances with pre-approved loans had offers for the asking price go unanswered for several months. Some banks did finally respond and raised their original asking price. This sort of behavior reeks of stalling the sale of the foreclosed homes until the market “recovers.”
Auctions and the fine print: Have you noticed the commercials touting the purchase of homes for pennies on the dollar have subsided? After the auction is over, the bank still has the right of refusal. And they have refused quite a few.
Must be received by: In the old days, when I was young, the payment was required to be postmarked by a certain date to be considered “on time.” Nowadays, with the exception of my mortgage, the payment must be received by a certain date. When you’re mailing the payment from Southern California to North Dakota, that adds up to a few days transit time.
Now all of a sudden the citizens have become the guarantor for the delivery schedule of the U.S. Postal Service. If your payment is one day late you get whacked with a huge late fee; however, if your payment is a few days early there is a clear lack of symmetry.
People are mad and are tired of being the bank’s whipping boy. The incremental rule changes over the years have been taken out on the people.
Drive down the street, and observe which buildings are newly completed or under construction. Have you noticed a disproportionate number of them are banks?
Don’t get mad, get smarter. Just say “NO” to nationally chartered banks, make your payments on time and don’t bounce any checks.
- Jefferson Pinto
Jefferson Pinto is a retired CPA, holds an MBA from one of the finer accredited universities in this country, and is the VP of corporate operations for his day job.
Source (pdf, Page 6): Issue #14, May 2009
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