Companies That are Too Big To Fail Should Not Exist

by Odysseas Papadimitriou on July 1, 2009

too-big-to-failThis recession has been characterized by the presence of companies that are so vast and influential that their failure actually endangers the American economy.  The names of these companies, GM, Chrysler, AIG, Citibank, Bank of America, and so on, are all too familiar to us from their prominent place in news stories about economic disaster.  In order to prevent systemic economic collapse, America has resorted to bailouts and political bankruptcy,  essentially changing the “rules of the game” in order not to have these failing companies take our economy down with them.  What is clear is that the benefits reaped by the economy in allowing the existence of these financial giants is nothing as compared to the damage caused by their collapse.  Companies that are too big to fail should simply not be allowed to exist.

We should remember that capitalism is based on free market principles in which companies compete with each other.  If one fails, other and presumably better companies take its place.  Thus, the market evolves so as to better meet consumer demands.  Companies fail in a free market economy because they are unable to compete with stronger business models.  Moreover, they should be allowed to fail in these circumstances so that better business models can take their market share.

Want Better Yields? Try a Credit Union

by Lynn B. Johnson on June 30, 2009

High-Yield Checking AccountI recently found a great high-yield savings account. United Federal Credit Union has introduced a 6.01% APY Interest Plus Checking account on balances up to $25,000 for qualifying members. The rate is guaranteed “until at least 2010,” and the account also includes “free ATMs nationwide.”

Unfortunately, I don’t qualify for this credit union. I can’t become a member based on this list, nobody in my family is a member, and I don’t do business in their geographic area on a regular basis.

FDIC Restricts Interest Rates on Weak Banks

by Lynn B. Johnson on June 25, 2009

FDICThe Federal Deposit Insurance Corp, aka FDIC, has voted to bar shaky banks from hiking up interest rates to attract more customer money. This change is known as Section 29 and will go into effect on  January 1, 2010. Section 29 says that banks that are struggling to stay in business will only be able to offer interest rates with a top limit of 75 basis points above the national rate.  The national rate is an average of all rates paid by reporting banks.

As a result, you will be getting the best interest rates from well-capitalized banks and we should expect around 3 percent of banks to be affected by Section 29. Some higher-yield banks, such as  Ally, the institution formerly known as GMAC Bank, which has been advertising all over the place and boasts of high capitalization, will likely be able to continue offering high interest rates to its depositors.

Obama Wrong About the Need for Yet Another Regulatory Agency

by Odysseas Papadimitriou on June 18, 2009

ObamaPresident Obama has come out strongly in favor of overhauling the financial regulatory system by introducing another watchdog agency known as the Consumer Financial Protection Agency.  This agency will be set up to monitor the marketing of mortgages, credit cards and other loan products.  President Obama’s proposal is obviously a response to the dangerous and deceptive practices recently brought to light in these industries.

To be clear, we agree that there were deceptive practices in the lending industry.  The mortgage industry was allowed to operate rife with fraud. Mortgage agents would misrepresent borrowers on applications to get loans for which they otherwise would not have been approved.  The excesses of the credit card industry have been blatant enough to require the federal government to step in and protect consumers.  We acknowledge that the industries have been allowed to ride roughshod over consumer rights without anyone stepping up for the little guy.

Ken Lewis is Fully Responsible for the Merrill Lynch Acquisition

by Brian Johnson on June 14, 2009

ken-lewisRecently, lawmakers have been questioning Bank of America’s motives for its acquisition of Merrill lynch last September.  Some are calling the merger a shotgun wedding directed by Fed chairman Ben Bernanke.  Investigations are now underway to determine whether the federal government threatened Bank of America Chief Executive Kenneth Lewis into acquiring Merrill Lynch under the duress that if he didn’t, Bank of America management would be removed from their positions.

We would like to suggest two possible scenarios related to this investigation and regarding Lewis’s responsibility in the purchase of Merrill Lynch.  Either Lewis truly believed that the Merill Lynch acquisition was a smart move for Bank of America, or Lewis, having his job threatened, abandoned all responsibility he had to his shareholders in order to maintain his position.  In the first case, we have to question Lewis’s judgment.  If his company is in financial trouble, the worst thing he could do would be to acquire another financial institution that was even worse off. Knowing what he knew about his company’s financial health, it was a ridiculous idea to put Bank of America further in danger of financial collapse by buying a company that was already collapsing.

Dow Jones Accurately Priced? Don't Count on That

by Odysseas Papadimitriou on June 10, 2009

dow-jonesAccording to CNNMoney, all of the news surrounding the stock market in the past few months, “has been good news, or at least neutral news,” but nothing bad.  The rationale for all of these happy feelings is that the market has the ability to prognosticate for the worst of times, and did so in March when we saw the Dow dip to around 6,500.  Additionally, it’s believed that 6,500 represented a worst-case scenario that never actually happened, and that therefore we’ve seen the lowest of the low. 

While this perspective fueled the three-month surge, it lacks fundamentals that can be found on page one of Investing for Dummies.  Before we fall for the hype, let’s face the facts.  We are in uncharted economic conditions, and face headwinds that we’ve never seen before and that cannot yet be fully understood. 

AIG - Still a Danger after $180+ Billion

by Odysseas Papadimitriou on May 26, 2009

AIG BankruptAt the beginning of its trouble, AIG held $2.7 Trillion dollars worth of exposure on the derivative market.  Now that the United States Government has given the company $180 Billion dollars of bailout money, they still have $1.5 Trillion in exposure.  To make matters worse, AIG’s fourth quarter loss of $61.7 Billion was the worst corporate loss in U.S. history.  

We believe that AIG needs to go into prepackaged bankruptcy for three reasons: 

We are still vulnerable to the CDS Scandal

by Brian Johnson on May 26, 2009

ScandalThe most infamous offshoot of the derivative market, the Credit Default Swap (CDS), is continuing to operate in an unregulated manner.  This despite the various collapses that this $60 Trillion unregulated market has caused, and the resulting government bailouts that have forced all of us to become financially responsible for lumbering economic giants such as AIG – a company which was deemed too big for the government to allow its collapse. 

Surely, given the damage caused by this unregulated market, the first order of business for lawmakers should be, and should have been, to put laws into place which would end derivative trading in its current form.  In short, we would expect that the current recession would inspire lawmakers to make laws that would prevent another recession of this kind in the future…but they haven’t.  They’re now trying, and that’s admirable, but those laws haven’t been passed as of yet. As recently as May 13th, Treasury Secretary Timothy Geithner sent a two-page letter to congressional leaders urging them into action.

The New Credit Card Bill & Your Wallet

by Odysseas Papadimitriou on May 15, 2009

LegislationCurrently, a credit card reform bill is making its way through Capital Hill as law makers attempt to stem the tide of consumer complaints against credit card companies.  Having already passed through the House of Representatives (gaining 357 votes for the bill with only 70 votes against it), the popular bill entered the Senate floor nearly assured of success there.

As so often befalls popular bills, unrelated amendments have stalled the proposed bill which reached the floor of the Senate on Wednesday May 13th.  Some of the credit card proposals within the original bill would:

4.51% Checking Account from Focus Bank

by Lynn B. Johnson on May 13, 2009

High-Yield Checking AccountLooking for a checking account that handsomely pays you back? Focus Bank of Missouri and Arkansas is offering a “MAXimum Free Checking Account” with no monthly service charges, no minimum balance requirements, and no direct deposit required.

Balances up to $25,000 earn a whopping 4.51% Annual Percentage Yield (APY). MAXimum Free Checking account holders also enjoy ATM fee refunds up to $25 per statement cycle, free wallet-style checks, free ATM/debit card, free 24-hour telephone banking, free online banking, free bill pay (with eStatement sign-up), and free direct deposit/automatic drafts. Additionally, qualified customers receive a $500 overdraft privilege, though if you’re earning 4.51% APY, I’d say that it behooves you to maintain the largest account balance possible.

Senate Voted Wisely on Cram Down Bill

by Brian Johnson on May 8, 2009

StimulusOn April 30th, the Senate defeated the “cram down” bill that would have allowed bankruptcy judges to adjust mortgages so as to allow those people going through bankruptcy to keep their homes.  The defeat came as some democrats sided with the bill’s opposition, mirroring a general weariness from within the banking community towards this piece of legislation.

The media balked at this defeat with claims that echoed the bill’s sponsor Richard Durbin (D-Illinois) that the banks essentially controlled congress and that senators needed to vote along with the needs of the American people rather than according to the desires of the banking and mortgage lobbies.  The accusation from Durbin, and from the media following the defeat, was that these senators (particularly the 12 democrats who voted against the bill) were essentially bought out.  The media portrayed the senate as under bank control.

A Government of Zero Accountability

by Odysseas Papadimitriou on April 30, 2009

ZeroThe barbarians, so the saying goes, are no longer at the gates.  They’ve stormed through.  In many cases, they were practically let in by negligence of the regulators whose job it was to protect us from greedy swindlers, inventive accountants, and fraudulent lenders.  The gatekeepers themselves, the various federal regulators, have not been punished for failing in their duty to protect America.  They remain, even now, at their posts as the country reels from the damage it has taken from the various scandals and crimes committed against its economy and its taxpayers.  Those whose job it was to police against these crimes have failed us and we wonder why they have not been made accountable.

Why, for instance, didn’t Christopher Cox, the head of the SEC, not resign after the Madoff scandal?  Surely the crime was glaring enough to call his competency into question.  Shouldn’t he have taken some responsibility as the scheme was carried out on his watch?  Cox offered no public apology and was never taken to task for the calamity that resulted from his oversight.  He just stayed in, despite the very real complaints of his critics, until he was replaced by the next administration.

Open a Checking Account, Get a $200 Savings Bond

by Lynn B. Johnson on April 15, 2009

$200 Checking AccountLooking for some free money? Ask and you shall receive! Wainwright Bank (of Boston, MA) is offering a free $200 savings bond to new customers who open a Value Checking account with Direct Deposit. You do not have to be a Massachusetts resident to apply, and you can complete your application online.

The skinny: You only need ten dollars for an opening minimum balance, but Wainwright bank requires that you have a $500 minimum balance to avoid a $6 monthly service charge. If you link your account to Direct Deposit, though, the account is “free with no minimum balance required and unlimited check writing.”

Who is responsible for the CDS Scandal?

by Brian Johnson on April 15, 2009

ScandalHere at Wallet Blog, we have been reporting on the fallout of the CDS scandal by looking not only at the issue as it is affecting us now, but also at who is responsible for allowing unregulated trading of Credit Default Swaps (CDS) to occur in the first place.  We have pointed out that the laws that made Credit Default Swaps illegal, which had been in place for over 90 years, were repealed by congress in its passing of the Commodity Futures Modernization Act in December of 2000.  The repeal of these laws has cost hundreds of billions of dollars in tax payer money, including the $180 billion that taxpayers are paying for the collapse of AIG alone.

Since our reportage, some of our readers have asked us for an explanation as to why there has been no significant mention of congress’s role in the production of the CDS scandal within mainstream media.  Here at Wallet Blog, we too are troubled that the media has, in general, avoided taking lawmakers to task for their votes.  We are equally troubled by the overwhelming number of congressmen and women who voted this bill into law and who are, therefore, responsible for the legislation that is currently devastating the American economy.  In the House of Representatives, the bill passed 291 with only 60 representatives voting no.  In the senate, the bill passed unanimously without a single voice of objection.

We're All In This Together…Except For Bondholders

by Odysseas Papadimitriou on April 8, 2009

Boat WavingAs more and more big name companies become insolvent, taxpayers and shareholders in these companies are losing money.  Bondholders, on the other hand, are not feeling the hit and are actually making money out of bailed out companies.  Given the size of America’s economic problems and the ways in which these problems seem to affect all of us, it makes no sense that bondholders aren’t feeling the effect as well.

A bondholder is essentially someone who has loaned money to a company.  When a company needs cash, it either issues stock to shareholders or takes out loans.  Thus far, if the stock goes down, investors take the hit.  If the company requires government bailout, taxpayers must pay for the company.  However, even when a company is on the brink of total collapse, and must be brought under federal regulation to keep it from failing, that company is still expected to pay off its debt at the rate set at the time of the loan.  So long as the company has not gone bankrupt, it must still repay its creditors, including its bondholders.

Money, TV Shows, & Entertainment

by Brian Johnson on March 30, 2009

CassandraMoney shows should not treat finance as entertainment by turning the buying of stocks into a joke or by turning a discussion of serious economic situations into an occasion for groundless argument.  These shows discuss issues directly involved in the managing of people’s money, pensions, savings, and 401ks. The networks that produce these shows, then, have a moral responsibility to treat the subject matter with the seriousness that it requires. 

To fulfill this obligation, the networks should do two things.  First, the network should only invite experts to discuss financial topics.  Participation should be limited to those who have actually worked in the field that they will be discussing.  All too often, financial reporters who have little or no work experience in a particular field are invited to comment on very serious economic issues and their presence drowns out the founded insights of real experts who should be listened to.  Second, the networks should see themselves as obliged to foster a healthy debate founded on factual evidence and cogent argument, and not gut feeling.  The moral obligation of these networks should be a constant pursuit of the truth.

Analysis: Obama's Plan for a Financial Overhaul

by Odysseas Papadimitriou on March 28, 2009

OverhaulAccording to the Associated Press the Obama administration has released its new proposal for dealing with the economy.  In response, we would first like to recognize the effort made by Treasury Secretary Timothy Geithner for realizing the need for an overhaul.   We feel that 50% of solving a problem is recognizing its scope.  Here at Wallet Blog, we’d like to throw our own advice into the mix, point-by-point, as outlined by Martin Crutsinger in his article.  The administrations proposals are:

  • “Imposing tougher standards on financial institutions that are judged to be so big that their failure would threaten the entire system.” AND “Creating a regulator to monitor the biggest institutions. Geithner did not say which agency should wield such authority, but the administration is expected to favor the Federal Reserve.”

We agree to the principal of tougher standards for larger institutions, but we should be weary of allowing any financial institution to grow to such a size that they would threaten the entire system by their failure.  Institutions of this size are unmanageable (Citibank and Bank of America are great examples in proving the point).  They are unmanageable for the executives and definetely unmanageable for the regulators. Their value to the market place is questionable given how difficult they are to run and is disproportionate to the damage they can cause through failure, as we all learned recently. So what are the market benefits of allowing an institution to become so big that if the regulators do not do their job it can bring down the entire economy?

Analysis: Financial Experts on TV

by Brian Johnson on March 25, 2009

Just because they’re on television doesn’t mean that they’re experts. Watching this video from Fox News Cavuto On Business, August 18th, 2007, we have five experts talking about the economy: Ben Stein, Tracy Burns, Charles Payne, Stuart Varney, and Peter Schiff.

[video http://www.europac.net/media/Schiff-Fox-8-18-07_lg.wmv nolink]

Unlimited FDIC Insurance

by Brian Johnson on March 24, 2009

FDIC UnlimitedLet’s face it: one of the things that we’ve learned from the current economic crisis is that the U.S. government isn’t going to allow any significant number of depositors to lose their money when a bank fails (which we completely agree it is the right and smart thing to do).  If this is the practice, then, wouldn’t it be better to make this the official policy?

If the government is already unofficially insuring savings accounts, regardless of size, they would do well to turn this practice into public policy, and let Americans and the rest of the world know that, no matter the size of their savings account, their money will be safe in a U.S. bank. 

AIG Needs to Go into Prepackaged Bankruptcy

by Odysseas Papadimitriou on March 22, 2009

AIG BankruptAs an insolvent company of this size, the government really has only two options for dealing with AIG.  They can either keep pumping money in, allowing AIG to fulfill all of its obligations (i.e. what the government is currently doing), or take AIG through a prepackaged bankruptcy to remove AIG’s Credit Default Swap (CDS) obligations. AIG has huge CDS obligations as a result of their greed in exploring the regulatory loophole that was created from CDS scandal.

By AIG not paying off its CDS obligations, there will be ripple effects throughout the banking/insurance industry.  However, we believe that dealing with these individual crises on a case-by-case basis, will be a much more efficient use of tax payer’s money. The President needs to work towards the best solution for taxpayers’ money. Clean house Mr. President! 

Unemployed Get Forced to Pay Debit Card Fees

by Brian Johnson on March 21, 2009

feesAccording to a recent CNN story, state unemployment agencies are making benefits available either immediately through a debit card or after a ten day waiting period through check. These agencies have loaded their debit cards with numerous little fees designed to nickel and dime anyone getting unemployment payments through this method.

If state unemployment agencies offered an immediate turnaround for providing the unemployment benefits regardless of whether the recipient chose the debit card option or the check option, there would be no problem.  Given that these benefits are going out to people who are unemployed, in many of these cases, the choice of waiting 10 days to get a check is really no choice at all.  Bills need to be paid, and food must be bought.  Having already waited for unemployment, once they get their benefits, they need them immediately.

Piggybacking Must Come to an End

by Odysseas Papadimitriou on March 17, 2009

Piggybacking Must Come to an EndThe current recession has brought to the spotlight the dire consequences of piggybacking by the U.S. Congress. Piggybacking is the term used to describe the process of grouping unpopular legislation together with the popular so that the unpopular legislation passes into law.  The legislation attached to one another needn’t concern the same subject.  Piggybacking is very dangerous because it further impedes the ability of congress to vote in a responsible and well informed manner.

There is no greater example of the danger of piggybacking from the passing of The Commodity Futures Modernization Act which, after 91 years, legalized CDS. This irresponsible piece of legislation is currently costing hundreds of billions of dollars of tax payer’s money thru all the bailouts.

Politicians Keep Quiet About The CDS Scandal

by Odysseas Papadimitriou on March 16, 2009

Politicians Keep Quiet About The CDS ScandalCredit Default Swaps (CDS) are one of the primary reasons for the crash of the American financial system.  Given their impact, one would expect to see a political backlash against the practice through the various media outlets that report on Washington’s finger pointing, but the backlash hasn’t happened.  What reprimands have been handed out have been quietly conducted so that the average taxpayer, now suffering in a broken economy, hasn’t heard about the CDS scandal or its implications.  Politicians don’t want taxpayers thinking about Credit Default Swaps because congress is responsible for making them legal after 91 years of their being a felony offense.  It is not incidental that Warren Buffett famously described CDS and other derivatives that are bought speculatively as “financial weapons of mass destruction.”

Though there are a number of different varieties of Credit Default Swaps, and all are fairly complex, the easiest way to think about them is that they are like betting without any assurance that either party has the money to cover their bet. The impact of a Credit Default Swap (or a bet) can be collectively illustrated by this simple example: imagine some Company A makes a $1 million bet with Company B that “John Smith” will default on his $200,000 mortgage.  When the mortgage is defaulted, Company B owes Company A $1 million.  The financial problem, ignoring for a moment the Credit Default Swap, is that the bank holding John’s mortgage is $200,000 out of pocket. The CDS compounds the problem because, not only is the bank out $200,000 but Company B is also out another $1 million. In the end, the $200K mortgage had a $1.2 million impact. If Company B had money on the side specifically to cover the bet, then this financial crisis would simply be Company B’s to handle, but our elected representatives did not bother to ensure that these companies had the money to cover their bets.

Less Rewarding Credit Card Rewards

by Brian Johnson on March 10, 2009

wb_rewardsRewards programs have been used to lure in customers, but with the credit card crisis, the value of those rewards is being altered.  According to a letter that Citibank sent out to its customers, as of March 1, 2009, “ThankYou Network may be revised in a manner that may affect your ability to use the ThankYou Points you have already accumulated.” More specifically, “20,000 Thank You points used to get you a $250 gift card and now they only get you a $200 gift card” says Heather Stockburger, a Citibank credit card customer. This backpedaling and manipulation of the value of reward reinforces what Card Hub (owned by the same company as this blog) has been saying for some time:  cards with cash-back programs are better than mileage or points rewards cards because they give you what you earn as you go and do not store up your earnings in points systems that can be changed by the card issuer.

Citibank is not alone in altering their points system.  Reports from multiple sources now suggest that the rewards point systems are changing on cards issued by Chase, Discover, and American Express.  With these companies altering their points and miles rewards, membership is becoming significantly less rewarding. 

Troubling: Some of Chase's Recent Change in Terms

by Odysseas Papadimitriou on December 12, 2008

terms-conditionsRecently a customer of Chase wrote to me with concerns about what is happening on his credit card.  He had transferred a balance to a Chase credit card with a rate that was fixed for the life of the loan.  Recently, however, Chase started charging him a mandatory monthly “Account Services” fee.

After reading this letter, I am disturbed by the fact that people are now being assessed an additional monthly fee by Chase even though they were originally promised an unchanging rate contingent upon their behavior as a responsible borrower.

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