Now, here at Wallet Blog we’re no strangers to high-yield, interest-bearing checking accounts. Wrote about Focus Bank back in May and yes, their offer still stands. But how could I be content, knowing that I’ve only alerted you to one 4.51% checking account? Time to rectify that situation with a few other options.

For instance: Bank of the Sierra, based in my beloved California, also offers a 4.51% yield checking account. And you don’t have to be a millionaire to enjoy their top interest rate; you can open the account with only $50, and you’ll earn 4.51% APY on balances up to $25,000, so long as you meet the minimum qualifications for that statement cycle. (Qualifications include a minimum of 12 Sierra Check Card purchases per statement cycle, minimum of one direct deposit/automatic payment monthly, one Sierra BillPay payment per cycle, eStatements, and you must open the account line.) And, if that’s not enough, there are no monthly fees, you can earn up to $25 in ATM refunds each statement cycle, and there is a beautiful picture of Sequoia redwoods on their Sierra Reward Checking Web page. Click here to learn more and to open an account. Please note that the account is available nationwide, but you must be a U.S. resident or a U.S. resident alien to apply.

Last week, we posted a blog entry that called out Bank of America for its plans to begin testing the introduction of annual fees on active credit card accounts. Relative to the October 6th media frenzy that occurred after BofA wrote letters to both Sen. Chris Dodd (D-CT) and Rep. Barney Frank (D-MA), pledging that it would stop re-pricing its existing credit card customer base, these new annual fees are unethical and contradictory to the promise the bank made to both lawmakers and to its customers. Additionally, it is our belief that if Bank of America moves forward with its plans to raise membership fees on existing customers into 2010, it will be breaking the laws mandated under the CARD Act, which is slated to take effect in February of next year.

We knew our blog post might spark some controversy, and that it would likely circulate quite a bit. Nonetheless, we were still surprised when we were contacted by Bank of America’s corporate communications department. The spokesperson who contacted us insisted by phone that Bank of America’s letter to Sen. Dodd and Rep. Frank referred to interest rates and interest rates only, and that it made no mention of annual fees. We found the letter. Here’s what it said:

It seems that Bank of America has already reneged on the October 6th promise it made to stop raising the interest rates on the credit cards of its existing customer base.  Just a week after making this pledge, BofA announced that it would begin introducing annual membership fees, ranging from $29 to $99, to select customers next year.  Combined, these two announcements result in a net win of zero for consumers, and in an unethical bait and switch play on the part of Bank of America.  Why?  Because, according to regulation, interest rates and annual membership fees fall under the same umbrella.  They are both considered finance charges.

While BofA postured as if was taking a step towards consumer protection in making the announcement that it would stop raising rates, the introduction of new annual fees to existing credit card accounts will still result in increased finance charges for account holders, even if those finance charges are referred to and assessed by another name.  For insight, consider that the addition of an annual fee of $50, on a credit card account with $500 balance and a ten percent interest rate, would double the overall yearly finance charges associated with that card.

The Federal Housing Administration will be the next financial disaster to fall on the shoulders of American taxpayers.  Created in 1934 to help low income and first time buyers get housing loans, the agency was designed to guarantee a relatively small percentage of mortgages, for instance, two percent in 2005.  Since its inception, FHA’s budget and operational infrastructure have followed this low-ratio model, and have been designed to absorb losses without having to ask for money or help from the Federal Government.  However, the GAO is now projecting taxpayer funded subsidies for the FHA of half a billion dollars over the next three years, if no changes are made to the agency’s program.

With the housing and credit markets in dire straights, private lenders are asking for better credit scores and higher down payments.  This means fewer people are able to qualify for conventional loans.  According to the website for Housing and Urban Development (the parent organization for the FHA), the FHA’s restrictions on the kinds of loans it will guarantee are more lenient relative to conventional loans, and as such, the FHA is being called into service more and more frequently in this particular economic climate.  Up by over 1200 percent since 2005, the FHA is now expected to back one quarter of all new U.S. mortgages.

Certain economic factors, like unemployment and credit card default rates are intertwined.  So it’s absolutely natural that in an economic climate where experts are predicting a ten plus percent unemployment rate before the end of the year, credit card companies will have to change the way they do business in order to remain safe and profitable.  As we all know, most issuers have been doing this by raising interest rates on both new and existing customers.

Wells Fargo has recently joined its peers in announcing that it too will raise the rates on the credit cards it offers.  According to Kevin Rhein, group head of card services at Wells Fargo, “this is something we’ve been contemplating for quite a period of time… We had just reached the point that we don’t think we can offer credit cards at the current pricing and keep credit flowing.”  Rhein’s announcement is interesting because it seems to suggest that Wells Fargo waited as long as it could before instituting these new rates.  He states that the impetus for this change was the bank’s recognition that the flow of credit was actually in danger, which is another way of saying that the profitability of Wells Fargo’s credit card department was at risk.  This, and the fact that the rate hikes are not scheduled to go into effect until November 30, one day before Congress’ new suggested enactment date for the CARD Act, suggests that Wells Fargo really has waited until the last minute before raising rates.

Recently, Bank of America announced that it would stop raising interest rates on the credit cards of its existing customer base.  This news comes ahead of the February 22nd deadline mandated in the Credit CARD Act, and is certainly a step in the right direction.  However, there is an issue that hasn’t been raised that would put this announcement into better perspective.  How much of Bank of America’s existing credit card portfolio does this news really affect?

Even after the bank has already re-priced millions of credit card customers into higher interest rates, the national media seems to be treating BofA’s announcement as a sign that the North Carolina-based bank is falling in line with the spirit of consumer rights—that it has ended the practice of raising rates in the midst of this credit crunch.  Unfortunately, it is not at all clear what this announcement actually implies given that the media has toed the company line, and has not asked the necessary questions to put this announcement into perspective.

Fair business practices and consumer rights in the credit card industry are being regulated by six different entities depending on the classification of the card issuer.  This fragmented system exists despite the fact that the rules regarding business practices and consumer rights laws are the same for all credit card issuers.

Imagine you discover a burglar in your house and call the police.  They arrive to make an arrest, but when they show up, they do nothing.  They tell you you’ve called the wrong police.  The police officers that arrived at your home only deal with criminals whose last name start with Q through S and this guy’s last name starts with a B.  Moreover, the officers who are in your home tell you they won’t call the officers who deal with bad guys with last names beginning in B because they’re in competition with each other.  Too bad too, because the guys who showed up are really good at prosecuting burglars but the guys you should have called are a little behind the times in that capacity.  And of course, because of the competition, the two different police departments don’t share information.

As we all know, the competitiveness of U.S. companies is measured by their ability to innovate and also by their operating costs.  Operating costs can come in the forms of labor and overhead, but they are also the result of less tangible forces like those produced by a nation’s laws, regulatory bureaucracies and taxes.  As a nation, we need to recognize that we are unlikely to meet competitive equality with China or India as far as labor costs are concerned.  Instead, we should focus our attention on reducing the other elements that contribute to the cost of doing business in the United States.  A large part of that can be traced to complying with the various regulatory bodies.

The insurance industry, which is regulated at the state level rather than the federal level, provides a prime example of how over-regulation can significantly increase the operating costs of a business.  If insurance were regulated at the federal level, the number of regulatory bodies would be reduced from 50 to 1.  This would allow insurance providers to both lower their cost structure and more easily compete on a national level.  Moreover, a single regulatory body for the U.S. insurance industry would monitor the industry more efficiently than would 50 such bodies working independently of one another.  The reduced bureaucracy, the increased efficiency in regulation and the resultant increase in market competition would pass savings on to American consumers.

In response to my recent blog post, “Modified Plans for the Consumer Agency Still Doomed to Fail,” I received an email from Reuters blogger Felix Salmon that questioned the idea that consumer protection and prudential protection can coexist.  In layman’s terms, Felix’s challenge was that what’s bad for the card issuer is inherently good for the consumer and vice versa.  Given that this is a question that many people likely have, my response to Felix follows:

It’s important to remember that one of the best ways to protect consumers is to prevent them from securing loans that they clearly cannot afford (i.e. “toxic loans).  As you very well know, when someone gets a loan that is significantly higher than what they can afford, they get into all kinds of trouble, including being forced into bankruptcy and/or foreclosure.  As it stands now, prudential protection and consumer protection are combined, and there are various regulatory agencies that have the knowledge, experience and authority to prevent toxic products to the market. Unfortunately they’ve been asleep at the wheel. Under the CFPA prudential protection and consumer protection will be split.  This means that the very agency responsible for protecting consumers won’t have the required data or experience, not to mention the authority, to protect consumers against toxic products. 

Last week, Representative Barney Frank, Chairman of the House Financial Services Committee, made a push to scale back the proposal for the Consumer Financial Protection Agency (CFPA), part of a financial regulatory reform bill, which is expected to be voted on by the end of the year.  Some of the paring down of the CPFA includes the elimination of the requirement for financial firms to offer plain “vanilla” products and services, such as mortgages with simple terms and credit cards with easy to understand contracts.  Additionally, in the memo that was circulated by Rep. Frank, outlining the modifications he envisions with respect to the CFPA, it was noted that, “ the CFPA will not have authority to approve or change business plans” for financial institutions.  As one would imagine, plans for the CFPA have been amended in order to assuage industry concerns about its restrictiveness and to appease legislators whose support is needed if the full bill is to pass through Congress. 

This is par for the course in Washington, and we’ve all seen how much the healthcare bill has shifted over the past few months.  However, the CFPA has been doomed from the start because it is disjointed at its core, and no amount of amendments or adjustments will fix the problems that are inherent to this new regulatory agency.  The CFPA won’t work because its basis is the idea that consumer protection can be separated from the oversight of the soundness of the financial institutions themselves.  Thus, while Congress and the Obama administration have been spot on in their diagnosis of the problems that plague America’s financial regulatory system, embracing the CFPA as a solution will not help the industry nor will it protect consumers.

Recent waves of bank failures, and the expected continuance of those failures, has put the FDIC in an uncomfortable position.  Covering the accounts held by the failing banks is depleting the FDIC’s coffers, leaving them with only two options on how to get that money back.  Unfortunately, neither option is particularly attractive. 

On one hand, the FDIC could borrow the money from the Treasury, but the size of the FDIC and its position as a bedrock American financial institution loads its actions with enormous relevance for the rest of the economy.  If the FDIC has to borrow money from the Treasury for the first time in twenty years, it creates serious doubts concerning the strength of our economy and our recovery.  If there is another large collapse, moreover, having already borrowed money from the Treasury, the FDIC will be in a more precarious position to guarantee the safety of America’s bank accounts.  On the other hand, if the FDIC decides to turn to the industry to build up its funds by charging banks more insurance fees, it will end up putting more ‘at risk’ banks into further danger of collapse, which would, in turn, force the FDIC to cover those accounts.

Recently, a judge denied Bank of America’s attempt to settle with the SEC for $33 million dollars under accusations that the Bank presented false information to its shareholders about Merrill Lynch employee compensation packages.  The judge reasoned that the $33 million would end up being paid by shareholders, effectively forcing them to pay a bill twice which they should have never had to pay at all.  While we agree with the decision we clearly can not continue operating in a manner where shareholders are helpless in running their own companies.

Does it not seem odd that the owners of the company are not responsible for hiring corrupt or incompetent management or for allowing that corruption to continue?  Unfortunately, the reality with the current Board of Directors system is that shareholders cannot be responsible because they have very little power to decide who will sit on that board or to quickly remove board members when their attitudes or behaviors work against the shareholder interests.  If shareholders could have ousted Ken Lewis at any point in time, then they should have been responsible for any wrongdoings under his leadership. 

As Chair of the Congressional Oversight Panel, which has been charged with reviewing the current state of financial markets and the regulatory system, Harvard professor Elizabeth Warren has been quite vocal in her support of the administration’s proposal for a Consumer Financial Protection Agency (CFPA).  The CFPA would be the regulatory body that ensures that financial institutions provide clear and simple disclosures, which would ostensibly deter consumers from opting for risky and “exotic” financial products, and would be the eighth agency involved in consumer credit regulation.  While I agree that there has been little effectiveness in the regulatory system as far as consumer financial protection is concerned, this is no reason to create yet another agency.  The CFPA, which was actually conceived by professor Warren several years ago, would separate the regulation that provides consumer financial protection from the regulation that ensures the banks that serve these consumers are solvent, and do not introduce toxic products to the market.  If our hope is for a solid financial system, then it must be understood that these two areas of regulation go hand-in-hand.  Warren is right, “the credit market is broken,” but she herself proves that the CFPA won’t fix it. 

Warren lays out her arguments for the CFPA in two articles that appeared recently in Business Week and in The Baseline Scenario.  While she is spot on in her analysis of the nature of the problems that plague our financial system, her solutions do not address the problems that she identifies.  It’s true, traditional financial products cannot compete with “exotic” products whose terms seem attractive up front, but hide surprises and changes that are revealed only after the consumer has committed.  Further, the more complex these “exotic” financial products become, the less able consumers are to make comparisons.  Right now our financial system lacks a level-playing field, transparent in its operation, which encourages competition, and also engenders product innovation. 

The bulls are pointing to the end of a recession and a robust recovery ahead for the American economy.  Their optimism is based on a definition of the recession, in economic terms.  For economists, a recession ends when the economy ends its negative growth.   These terms, however, are theoretical.  In practice, a robust recovery must parallel a robust recovery at the American household level, which is unlikely to happen for a number of reasons: 

• The Unemployment rate:  We hear a good deal of optimism coming from economists concerning the fact that the unemployment rate is slowing, but we ought to remember that it isn’t actually going down, but continues to rise.  According to the Associated Press, we are at the worst unemployment crisis since 1983 and economists are predicting the unemployment rate to peak above 10% by the middle of next year. 
• State Deficits:  We are suffering huge deficits at the state level which the Federal Stimulus package can not correct.  This means additional job losses for state employees.
• Unemployment Insurance:  Not only is America facing a dangerously high unemployment rate, but the unemployment level in this country has been high for so long that benefits are now running out.  We are in a situation far worse than simply having people who are out of work; they are out of work, have few prospects for new jobs, and are receiving no income.
• Continuing Bank Failures:  Despite the federal government’s intervention, we continue to see banks fail.  The number of banks on the FDIC’s “Problem List” (banks in danger of failing) has gone from 305 to 416 at the end of June ‘09.  Some analysts are afraid that the FDIC will go into the red by the end of this year.
• Continuing Credit Crunch:  In these uncertain times, credit markets continue to be very tight.  Because of the continuing failure of the nation’s banks, regulators and bank executive remain cautious, which means less credit availability.  Companies who need to deal with debts that are coming to maturity are likely to find less opportunity to refinance.  As a result, we can expect more corporate bankruptcies and more job losses.   
   

Many economists are calling for more stimulus money by the federal government, but it is clear that what the country really needs is smarter spending.  We desperately need to make investments with government funds that will deliver strong returns on the nation’s money, and thus, we believe that the federal government ought to invest in new technologies that will turn America’s trade deficits into strong surpluses. It is precisely for that reason that this is the right time for a ‘Manhattan Project’ on energy independence.

Last year, for the first time, spending on VISA debit cards surpassed spending on VISA credit cards – not just by the total number of transactions, but also by the total number of dollars spent.   With the ubiquity of debit card use and given that there are certain misconceptions about fraud coverage on both debit and credit cards , we, at Wallet Blog, thought consumers should be offered a comparison centered around the level of protection and convenience both types of accounts provide to consumers who have been exposed to fraud.

According to the FTC, consumer liability for fraudulent debit and credit card charges is limited to $50.  VISA and MasterCard, who control 100 percent of the U.S. debit card market, as well as most of the major credit card networks, have gone beyond what the law requires, and mandated that all of their card issuers adhere to a zero percent liability rate for their customers, and that they grant immediate refunds on disputed charges.