Banks Get Bailed Out; Punish Consumers In Turn

14 Nov Banks Get Bailed Out; Punish Consumers In Turn

Large U.S. banks are receiving billions of taxpayer investments and cheap loans. How is that being passed on to consumers? With higher interest rates and fees, harsher lending standards and mass layoffs.

Unless you live under a rock, you have heard that banks are being bailed out of their poor lending practices in ever way the government can think of. The government hopes that this will unfreeze the credit markets and allow business and consumers to start borrowing again, at reasonable rates. There’s a sucker born every minute.

Large banks like Citigroup, Chase, Bank of America, Wells Fargo and so on are getting direct government aid in the form of government equity investments in their preferred stock. They have access to very cheap funding from the Federal Reserve through the “discount window” and “Term Auction Facility.” Banks can now offer government-guaranteed protection for deposits (loans to a bank) up to $250,000 which allows the bank to pay out less interest than might be demanded otherwise. And even though the FDIC and federal government have increased their guarantee of those loans to banks by 150%, the FDIC is barred from increasing the premium the banks are paying into the FDIC insurance fund. So banks have government assistance coming at them from every direction.

What are American consumers getting out of it?

Well, if you are well-heeled and have substantial money to put on deposit, there are surprisingly high interest rates being offered. The Wall Street Journal reports banks are now competing with each other for large long-term deposits.

What else? Despite declining interests in most places, Citibank and American Express are moving forward with raising interest rates on some of their credit cards. So the minimum payments will increase, most likely for consumers most at risk of not being able to pay.

And what do they have to offer lower-end depositors? Higher fees for bounced checks are coming to Citibank, Chase, Wells Fargo, and Bank of America customers. Fees on ATM transactions, stop-payment orders, cash advances, are reportedly going up for many bank customers. Most of these fees have long-since stopped being related to the actual cost of dealing with the transaction and now represent a significant profit center for banks.

At least we know that all the government help is going to encourage banks to open their wallets and lend now, right? Nope. The majority of banks now report they have tightened their lending standards at almost every level.

Well, maybe they’re finally going to get serious about helping modify mortgages since we know the government’s own program is falling short, right? Don’t hold your breath. Most of the large “loss mitigation” proposals that have been announced with great fanfare only apply to mortgages the bank is actually holding as an investment — not servicing on behalf of other investors. That means typically only about one out of five — 20% — of the homeowners who think they might get help will even be let in the door. And since banks continue to reduce their staff — Citigroup announced this week that as many as 10,000 employees will lose their jobs with the bank — it doesn’t seem likely there will be enough people to answer the phone, much less negotiate a mortgage modification.

So what are consumers and taxpayers going to get out of all this? We know one thing for sure, higher tax bills to pay off all the new government debt. The only real question is: How much?

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2018 I am also serving on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website:
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