What were they thinking?
Last week, the Los Angeles Times, my local newspaper, reported that a Wells Fargo bank senior vice president had spent the Summer living in a super luxury foreclosed home in the exclusive Malibu Colony.
The Times story identified the senior vice president as Cheronda Guyton whose job it was to manage the disposition of foreclosed Wells Fargo Bank property in Southern California. As you might expect, Ms Guyton has been unavailable for comment.
Wells Fargo Bank has promised a vigorous investigation. The Times reported that it was well established bank policy that employees could not use foreclosed property for their own use. Additionally, the bank policy prohibits conduct that will create a conflict of interest.
The Times story valued the home at about USD$12 million and quoted local real estate agents who stated it was available for rent for $60,000 a month. It does have direct access to the beach and the property includes an ownership interest in sixty feet of sandy beach; how much beach depends on where the high tide line.
For those of you who are unfamiliar with Southern California real estate, Malibu is a section of the coast that is usually populated by entertainment industry celebrities and executives. The Malibu Colony is a more exclusive section of Malibu and is surrounded by a wall and has limited gated access; you need a pass to get in, even if you own property there.
Malibu is our version of the Hamptons I guess only without the New Yorkers.
Wells Fargo acquired the property as a debt settlement with one of the Madoff victims. This much is clear cut and agreed upon. I recall the transaction between the borrower and Wells Fargo as being stated to have occurred in March.
Here is where things start to get murky.
The Times reported that Wells Fargo had agreed to delay the marketing and sale of the property for several months. The newspaper stated over the weekend that Wells Fargo was getting ready to sell the property
Why?
Delaying the sale of property seems to be on the less than bright side of things. It is a prime beachfront property. Fall and the coming Winter are just not good times to show a beach front property especially if a storm is eating away at the beach. Spring time would be an excellent time to advertise the property for sale.
With a probable $12 million price tag, it doesn’t seem like the property is going to attract the average Joe and Jane. Properties in the Malibu Colony go on sale all of the time; agents know how to properly market the property to obtain maximum value.
Banks do not want to be in the property management business; it is expensive and generates no direct income. Maintaining property costs money for things like electricity, water, gas, insurance, property taxes, gardening, security, and the list goes on.
Our local television stations, apparently hot for an interesting weekend story, jumped on the newspaper report. The local television news reports featured quotes about large, lavish, and loud weekend parties at the house with one party having the guests arriving on a yacht and then being ferried to the house in the yacht’s dingy.
Wells Fargo Bank is in a major public relations disaster. While one of its employees was partying at a foreclosed luxury home in the Malibu Colony, the bank was evicting hundreds of low and moderate income renters in the San Fernando Valley so the bank could quickly sell the foreclosed properties.
If the bank wanted to quickly sell rental properties in the San Fernando Valley, why wouldn’t it want to do the same for a luxury home in the Malibu Colony?
This story is being to smell like a week old fish that has been baking on the Malibu pier.
It seems to me that Wells Fargo is going to have heads roll and one or more soon to be former employees who will be branded or identified as rogue employees who will be terminated.
As Dr. Phil might say, “What were you thinkin’?”
I would love to be an electronic listening device on the wall when the bank employee explains his or her rationale for their conduct in the face of clearly stated bank policy.
After reflecting, I like Forrest Gump’s line better; “stupid is as stupid does.”
Be well and stay happy.
Monday, September 14, 2009
Worse than I thought
Worse than I thought
I mentioned last week that I thought FDIC deposit insurance premiums would have to go up in the future to cover all of the losses the fund has incurred and will incur in the future as the financial system and its mess sorts itself out in the coming years. I think I understated the scope of the problem.
It was worst than I thought it was.
The Associated Press reported last week that the deposit insurance fund account balance was down to about USD$10.4 billion at the end of June. The FDIC is forecasting continuing costs of up to an additional USD$70 billion through 2013 resulting from the failures of the nation’s banks.
Last Friday’s three closures are estimated to cost the FDIC an additional $2 billion.
You don’t need Wall Street quant to tell you that this is not good. I can do the math in my head and see this is one of “woe shit” epiphany moments.
On the not so dull an bleak side of the picture, the FDIC does have a very large line of credit at the US Treasury and the Federal Reserve will not allow the FDIC to fail.
My small change in my local regional bank is safe unless the Government falls. I don’t think that will happen.
For those of you who might be conspiracy theorists, rent the film, SEVEN DAYS IN MAY, and then buy gold before you dive into your survival bunker somewhere in southern Utah or western Colorado.
Be well and stay happy.
I mentioned last week that I thought FDIC deposit insurance premiums would have to go up in the future to cover all of the losses the fund has incurred and will incur in the future as the financial system and its mess sorts itself out in the coming years. I think I understated the scope of the problem.
It was worst than I thought it was.
The Associated Press reported last week that the deposit insurance fund account balance was down to about USD$10.4 billion at the end of June. The FDIC is forecasting continuing costs of up to an additional USD$70 billion through 2013 resulting from the failures of the nation’s banks.
Last Friday’s three closures are estimated to cost the FDIC an additional $2 billion.
You don’t need Wall Street quant to tell you that this is not good. I can do the math in my head and see this is one of “woe shit” epiphany moments.
On the not so dull an bleak side of the picture, the FDIC does have a very large line of credit at the US Treasury and the Federal Reserve will not allow the FDIC to fail.
My small change in my local regional bank is safe unless the Government falls. I don’t think that will happen.
For those of you who might be conspiracy theorists, rent the film, SEVEN DAYS IN MAY, and then buy gold before you dive into your survival bunker somewhere in southern Utah or western Colorado.
Be well and stay happy.
Friday, September 11, 2009
416 and Rising
416 and Rising
The Federal Deposit Insurance Corporation recently released the aggregate number of troubled banks. The new total is 416, the highest level in 15 years.
Not very comforting news.
The problem is growing instead of shrinking. Last week, the regulators closed five banks. These closures are likely to cost the FDIC’s deposit insurance fund just under USD$400 million. There will be more closures this weekend I think.
The costs to the FDIC insurance fund should concern you. The fund, by law, has to maintain certain capital levels. Banks provide all of the money in the insurance fund. The money the banks pay in comes from their profits.
If any insurance company has a bad string of losses or if you have a couple of automobile accidents, the premiums will go up to cover the losses. The policyholders will pay the increased premiums.
The FDIC will increase its premiums, if you will, that banks have to pay. Unlike consumers who can shop around for the best deal on insurance or decide to have the minimum coverage, banks have no choice. They have to have FDIC insurance to stay in business.
Period, end of discussion, send your check to the FDIC on time.
Banks then will pass this added cost of doing business on to you and me, gentle readers, in the form of higher interest rates and higher fees and elimination of free and low costs services and reduced rates on deposits.
If I were a betting man, I would bet that probably close to 400 of those troubled institutions will fail. Failure is defined as ceasing to be an independent financial institution. This possible number of failures doesn’t include other banks that haven’t reached the troubled banks list yet.
How long could a regime of higher interest and fees last?
It all depends on how long the FDIC decides to take to rebuild the insurance fund capital base. My guess is that it might last as long as five years. But, after five years, customers will be so used to the higher rates and fees there will be no incentive to reduce them.
I think I’ll stop for now. I don’t want to scare you that much; it is still too soon for Halloween.
Be well and stay happy.
The Federal Deposit Insurance Corporation recently released the aggregate number of troubled banks. The new total is 416, the highest level in 15 years.
Not very comforting news.
The problem is growing instead of shrinking. Last week, the regulators closed five banks. These closures are likely to cost the FDIC’s deposit insurance fund just under USD$400 million. There will be more closures this weekend I think.
The costs to the FDIC insurance fund should concern you. The fund, by law, has to maintain certain capital levels. Banks provide all of the money in the insurance fund. The money the banks pay in comes from their profits.
If any insurance company has a bad string of losses or if you have a couple of automobile accidents, the premiums will go up to cover the losses. The policyholders will pay the increased premiums.
The FDIC will increase its premiums, if you will, that banks have to pay. Unlike consumers who can shop around for the best deal on insurance or decide to have the minimum coverage, banks have no choice. They have to have FDIC insurance to stay in business.
Period, end of discussion, send your check to the FDIC on time.
Banks then will pass this added cost of doing business on to you and me, gentle readers, in the form of higher interest rates and higher fees and elimination of free and low costs services and reduced rates on deposits.
If I were a betting man, I would bet that probably close to 400 of those troubled institutions will fail. Failure is defined as ceasing to be an independent financial institution. This possible number of failures doesn’t include other banks that haven’t reached the troubled banks list yet.
How long could a regime of higher interest and fees last?
It all depends on how long the FDIC decides to take to rebuild the insurance fund capital base. My guess is that it might last as long as five years. But, after five years, customers will be so used to the higher rates and fees there will be no incentive to reduce them.
I think I’ll stop for now. I don’t want to scare you that much; it is still too soon for Halloween.
Be well and stay happy.
Where would I bank?
Where would I bank if I were a small business owner?
If I were a small business owner, I would certainly consider my local community bank but only after checking its financial condition. But, a community bank probably would not be my first choice.
I would go to a local credit union. Many credit unions now offer a full range of small business banking services like credit card merchant accounts, remote deposit capture, term loans, and lines of credit in addition to a full set of consumer banking products and services.
Full and fair disclosure: I have a checking account and line of credit with a local regional bank. I have three credit union accounts and one credit card account. My primary financial institution is a credit union.
Here’s why I like using a credit union.
First, my credit union deposits are insured by an agency of the federal government to USD$250,000, just like banks. My credit union is examined annually by federal examiners, just like banks. My credit union has its financial statements audited by an independent certified public accounting firm, just like banks.
My credit union is a member of a credit union shared branch cooperative that allows me to transact business at any one of over 2,500 credit union branches across the country. I have to drive by four shared branch offices, where I could conduct the transaction, when I visit my credit union’s office. My credit union is a member a free, no fee ATM network that has over 26,000 machines worldwide.
I don’t think banks can offer all of these services.
For those of you who have seen your interest rates rise on a credit card or loan from a bank, this next difference might make you blink.
Federal credit unions, they have the word “federal” in their name, have a maximum interest rate on any loan or credit account of only 18.0% APR. It is set by the federal agency that regulates them and has been at this limit for maybe 25 years or more.
No 9.0% interest today and 29.9% tomorrow with a federal credit union. Federal credit unions can increase interest rates; just not to such onerous levels as some banks have done recently.
I can’t speak about state chartered credit unions because each state has its own laws. In California, for example, there is no limit on much interest a credit union may charge.
Credit unions are nonprofit financial institutions. They are owned by the depositors, no out of state shareholders or Wall Street investors to answer to. To date, there has never been a hostile takeover of one credit union by another credit union.
Credit union typically charge less interest on loans and pay higher on deposits. Although with interest rates on deposits as low as they are now, the deposit interest difference may not be all that significant.
Not all credit unions offer business services. The larger credit unions that have a community charter usually offer some range of business services. A community charter means anyone who lives, works, goes to school, or worships in a specific geographic area may join the credit union.
In my case, I am eligible to join three, very large, community based credit unions. These credit unions have offices within less than five miles of my home and they some form of business services. These credit unions all have assets over USD$1 billion which puts them in the category of a regional bank.
One of the nice things about a credit union is that its decisions makers are usually local as well. That may be nice when you have a problem and you do not have the time to deal with an automated phone center.
Just think how convenient it would be, you could speak with the President and Chief Executive Officer or other decision maker about your problem instead of being ignored. You may not receive the answer you want but at least you will have had a prompt face-to-face hearing by a live person.
Finding a credit union is fairly easy. You can do it from the comfort of your home. This is a low tech solution. Open the local Yellow Pages to credit unions; this will give you a list of credit unions in your immediate area. Then, you can go to the Internet and search the list for a credit union that offers the business services you need and want.
I do not want to paint a picture that shows credit unions are near perfect and that banks are not small business friendly. There are probably many fine community banks out there that out small business friendly; I may not have met them yet.
Some credit unions, like banks, are suffering with the current financial crisis. For the most part, credit unions were not involved with sub-prime mortgages and they are not involved with commercial real estate which will be the next big financial mess for banks.
All federal and most state licensed credit unions have to post their financial condition in their offices or make it available to the public on a monthly basis. Take a look at the information; it can be very informative.
Here are some simple calculations that will give you an idea of how healthy the credit union may be. Divide total reserves by total assets; if the number is 7% or greater, this is a good indication of financial health. Divide delinquent loans by total loans, if the number is less than 2%, this is a good indication also.
Good luck on your search and analysis.
Be well and stay happy.
If I were a small business owner, I would certainly consider my local community bank but only after checking its financial condition. But, a community bank probably would not be my first choice.
I would go to a local credit union. Many credit unions now offer a full range of small business banking services like credit card merchant accounts, remote deposit capture, term loans, and lines of credit in addition to a full set of consumer banking products and services.
Full and fair disclosure: I have a checking account and line of credit with a local regional bank. I have three credit union accounts and one credit card account. My primary financial institution is a credit union.
Here’s why I like using a credit union.
First, my credit union deposits are insured by an agency of the federal government to USD$250,000, just like banks. My credit union is examined annually by federal examiners, just like banks. My credit union has its financial statements audited by an independent certified public accounting firm, just like banks.
My credit union is a member of a credit union shared branch cooperative that allows me to transact business at any one of over 2,500 credit union branches across the country. I have to drive by four shared branch offices, where I could conduct the transaction, when I visit my credit union’s office. My credit union is a member a free, no fee ATM network that has over 26,000 machines worldwide.
I don’t think banks can offer all of these services.
For those of you who have seen your interest rates rise on a credit card or loan from a bank, this next difference might make you blink.
Federal credit unions, they have the word “federal” in their name, have a maximum interest rate on any loan or credit account of only 18.0% APR. It is set by the federal agency that regulates them and has been at this limit for maybe 25 years or more.
No 9.0% interest today and 29.9% tomorrow with a federal credit union. Federal credit unions can increase interest rates; just not to such onerous levels as some banks have done recently.
I can’t speak about state chartered credit unions because each state has its own laws. In California, for example, there is no limit on much interest a credit union may charge.
Credit unions are nonprofit financial institutions. They are owned by the depositors, no out of state shareholders or Wall Street investors to answer to. To date, there has never been a hostile takeover of one credit union by another credit union.
Credit union typically charge less interest on loans and pay higher on deposits. Although with interest rates on deposits as low as they are now, the deposit interest difference may not be all that significant.
Not all credit unions offer business services. The larger credit unions that have a community charter usually offer some range of business services. A community charter means anyone who lives, works, goes to school, or worships in a specific geographic area may join the credit union.
In my case, I am eligible to join three, very large, community based credit unions. These credit unions have offices within less than five miles of my home and they some form of business services. These credit unions all have assets over USD$1 billion which puts them in the category of a regional bank.
One of the nice things about a credit union is that its decisions makers are usually local as well. That may be nice when you have a problem and you do not have the time to deal with an automated phone center.
Just think how convenient it would be, you could speak with the President and Chief Executive Officer or other decision maker about your problem instead of being ignored. You may not receive the answer you want but at least you will have had a prompt face-to-face hearing by a live person.
Finding a credit union is fairly easy. You can do it from the comfort of your home. This is a low tech solution. Open the local Yellow Pages to credit unions; this will give you a list of credit unions in your immediate area. Then, you can go to the Internet and search the list for a credit union that offers the business services you need and want.
I do not want to paint a picture that shows credit unions are near perfect and that banks are not small business friendly. There are probably many fine community banks out there that out small business friendly; I may not have met them yet.
Some credit unions, like banks, are suffering with the current financial crisis. For the most part, credit unions were not involved with sub-prime mortgages and they are not involved with commercial real estate which will be the next big financial mess for banks.
All federal and most state licensed credit unions have to post their financial condition in their offices or make it available to the public on a monthly basis. Take a look at the information; it can be very informative.
Here are some simple calculations that will give you an idea of how healthy the credit union may be. Divide total reserves by total assets; if the number is 7% or greater, this is a good indication of financial health. Divide delinquent loans by total loans, if the number is less than 2%, this is a good indication also.
Good luck on your search and analysis.
Be well and stay happy.
Saturday, August 29, 2009
Too Big to Fail Made Easy
Too Big to Fail Made Easy
The best and simplest explanation of the concept of a bank or savings and loan being too big to fail that I have found comes from the Federal Reserve Bank of Cleveland. It can be found on the Economix blog at [ http://economix.blogs.nytimes.com/2009/08/20/defining-too-big-to-fail/?dbk ].
Yes, I know that I should learn to embed links in my blog. I’m not the most technically astute individual and I am waiting for my son to show me how to do this. This is one of things children are supposed to do; help their technologically backward parents.
Be well and stay happy.
The best and simplest explanation of the concept of a bank or savings and loan being too big to fail that I have found comes from the Federal Reserve Bank of Cleveland. It can be found on the Economix blog at [ http://economix.blogs.nytimes.com/2009/08/20/defining-too-big-to-fail/?dbk ].
Yes, I know that I should learn to embed links in my blog. I’m not the most technically astute individual and I am waiting for my son to show me how to do this. This is one of things children are supposed to do; help their technologically backward parents.
Be well and stay happy.
Closing Banks
Closing Banks
The FDIC is closing banks at a faster rate than in a very long time. Georgia probably has seen more banks close at any time since Billy Sherman took his walk from Atlanta to Savannah in 1864.
The FDIC’s list of problem or troubled institutions is now at 305. At least, it was at 305 when the list came out earlier this month but that was for the period ending March 31st. The total number of institutions on the list could have dropped 301 with last Friday’s closings or it could have gone higher as well.
Should this matter to me if I have less than the deposit insurance limit on deposit in a bank?
Simple answer is yes.
As banks close, consumer and business choices for financial institution service providers decline. Economics will tell you that users of a particular service benefit when there is vigorous competition.
After a closure and sale, the initial condition is relatively unchanged. The new, acquiring bank needs tellers and new accounts staffers to handle the routine transactions. It is simpler to use the staff on site than to go out and recruit a completely new staff.
Decision makers, like managers and loan officers, will be among the first to leave, usually within the week after the closure. They stay around long enough to complete a turnover process so some new decision maker. The new decision maker doesn’t know you, doesn’t know about your business, doesn’t know about plans, and doesn’t know about the local community, in many cases, will be responsible for you and your account.
This change affects the business customer more than anyone else.
This process is occasionally referred to relationship rebuilding.
It can be a long and painful process.
The new bank may suspend or curtail any borrowing arrangement you have. Alternatively, it may not renew the borrowing arrangement on the same terms as before, remember, it doesn’t know you. The new bank may require considerably more documentation and paperwork than before.
For many consumers, these may not be significant burdens. Consumers can always change institutions since most banks tend to avoid dealing with consumers or use a non-personal delivery method. Consumers have become accustomed to indifferent service. Most consumers have very little, if any, loyalty to any one bank or savings and loan.
Yes, I know changing automatic deposits and billings can be a problem. Changing these transactions is like going on a walk and have a small pebble fall into your shoe. You can either stop for a few minutes and remove the pebble or continue to endure the discomfort as you walk with the pebble in your shoe.
Most consumers will sit down and take the pebble out so they have less discomfort in their lives.
Remember the FDIC list of problem banks?
This is a list of banks that are more likely than not to either close or be merged with another, larger institution in the near future.
Even so, one should not be alarmed unless you live in a small town with only one bank. Setting that issue aside for a moment, one has to remember that there are about 8,200 federally insured banks and savings and loans in the country as of March 31st. That means you still may have a choice.
I’ll have some ideas and thoughts on what a small business person might want to do to insulate him or herself from potential trouble in a couple of days.
Be well and stay happy.
The FDIC is closing banks at a faster rate than in a very long time. Georgia probably has seen more banks close at any time since Billy Sherman took his walk from Atlanta to Savannah in 1864.
The FDIC’s list of problem or troubled institutions is now at 305. At least, it was at 305 when the list came out earlier this month but that was for the period ending March 31st. The total number of institutions on the list could have dropped 301 with last Friday’s closings or it could have gone higher as well.
Should this matter to me if I have less than the deposit insurance limit on deposit in a bank?
Simple answer is yes.
As banks close, consumer and business choices for financial institution service providers decline. Economics will tell you that users of a particular service benefit when there is vigorous competition.
After a closure and sale, the initial condition is relatively unchanged. The new, acquiring bank needs tellers and new accounts staffers to handle the routine transactions. It is simpler to use the staff on site than to go out and recruit a completely new staff.
Decision makers, like managers and loan officers, will be among the first to leave, usually within the week after the closure. They stay around long enough to complete a turnover process so some new decision maker. The new decision maker doesn’t know you, doesn’t know about your business, doesn’t know about plans, and doesn’t know about the local community, in many cases, will be responsible for you and your account.
This change affects the business customer more than anyone else.
This process is occasionally referred to relationship rebuilding.
It can be a long and painful process.
The new bank may suspend or curtail any borrowing arrangement you have. Alternatively, it may not renew the borrowing arrangement on the same terms as before, remember, it doesn’t know you. The new bank may require considerably more documentation and paperwork than before.
For many consumers, these may not be significant burdens. Consumers can always change institutions since most banks tend to avoid dealing with consumers or use a non-personal delivery method. Consumers have become accustomed to indifferent service. Most consumers have very little, if any, loyalty to any one bank or savings and loan.
Yes, I know changing automatic deposits and billings can be a problem. Changing these transactions is like going on a walk and have a small pebble fall into your shoe. You can either stop for a few minutes and remove the pebble or continue to endure the discomfort as you walk with the pebble in your shoe.
Most consumers will sit down and take the pebble out so they have less discomfort in their lives.
Remember the FDIC list of problem banks?
This is a list of banks that are more likely than not to either close or be merged with another, larger institution in the near future.
Even so, one should not be alarmed unless you live in a small town with only one bank. Setting that issue aside for a moment, one has to remember that there are about 8,200 federally insured banks and savings and loans in the country as of March 31st. That means you still may have a choice.
I’ll have some ideas and thoughts on what a small business person might want to do to insulate him or herself from potential trouble in a couple of days.
Be well and stay happy.
Sunday, August 9, 2009
Closing Consumer Credit Card Limits
Closing Consumer Credit Card Limits
This is a concept that fascinates me. Some banks are closing credit card limits for seemingly no apparent reason other than they want to do so before the federal laws change next year. It looks like a last ditch attempt to do things that the legislation will prohibit.
Full and fair disclosure: I had two credit card accounts that had their limits reduced by JPMorgan Chase Bank from USD$15,000 to USD$500. It is true that I had not used the credit cards in years. Like many older Americans, I liked to carry them for sentimental reasons. The old Chase Manhattan Bank helped my parents get inheritance money out of Great Britain in 1940 at the start of World War II.
A small limit like that is not going too much for me if I want to make a purchase of any consequence. I could purchase a bunch of DVDs or even some Blu-Ray DVDs at DVDPlanet.com. $500 would about cover dinner for my son and me and maybe our friends who are female at Morton’s the Steakhouse.
My point is this; how likely am I to do any business with JPMorgan Chase Bank in the foreseeable future?
I think the chances are very slim to less than zero that I will.
I wonder how other Americans like me were treated to, for all intents, the closure of their credit card accounts. I would be willing to bet that a great number of them will never do business with the bank or financial institution that unilaterally reduced their credit limits without reasonable cause.
Most of them are or were profitable customers.
I have very good credit and have had very good credit for years. I am customer that I loved to have when I managed a credit card portfolio. I carried a balance from time to time but not an excessive balance. I paid more than the minimum payment each month and I made sure the payments were timely.
In other words, I was a very profitable customer.
Profits, as you know, are important for any business and banks are no different. Profits help build capital in a financial institution. Consumers tend to be among the more profitable business segments that a bank has. They are not usually sensitive to interest rate changes.
I don’t think there have been any bank fail because their consumer loan business was crummy. I could be wrong because so many banks have failed and will fail in the coming months. The most recent bank failures in Southern California were attributed to failed loans in the commercial real estate market.
I read in the New York Times Deal Book this past week the Federal Reserve reported a USD$10 billion drop I consumer credit outstanding. This was the fifth consecutive month for a decline in outstanding consumer credit.
Fascinating actually.
I think one could reasonably conclude that American consumers were truly cutting back on the use of credit. If this happens, as the New York Times pointed, the current recession will last longer because consumer spending is roughly 70% of Gross Domestic Product.
I have been cutting back on my credit balances and I have put off expensive purchases that no longer seem to make any sense to me. For example, I thought about getting in on the cash for clunkers program but decided to keep my clunker because it is paid for and I have only driven it for less than 90,000 in fourteen years. Having money in the credit union or the bank is a very nice feeling for me.
With American consumers cutting back on their use of credit, this will reduce bank earnings. Less debt means less interest paid to the banks.
Banks and other financial institutions have competed very strongly with each other for commercial real estate loans in the last five or six years. Competition is very good for borrowers because they are able to borrow at a lower cost. Thin margins, caused by very competitively priced commercial real estate loans, meant there was not much money going into the institution’s profits.
I will admit there is some logic to the banks’ actions. Decreasing the amount of available credit reduces the banks’ contingent liability to fund these future advances. This helps to improve their balance sheets, something the regulators have been pushing at for some time now.
Be well and stay happy.
This is a concept that fascinates me. Some banks are closing credit card limits for seemingly no apparent reason other than they want to do so before the federal laws change next year. It looks like a last ditch attempt to do things that the legislation will prohibit.
Full and fair disclosure: I had two credit card accounts that had their limits reduced by JPMorgan Chase Bank from USD$15,000 to USD$500. It is true that I had not used the credit cards in years. Like many older Americans, I liked to carry them for sentimental reasons. The old Chase Manhattan Bank helped my parents get inheritance money out of Great Britain in 1940 at the start of World War II.
A small limit like that is not going too much for me if I want to make a purchase of any consequence. I could purchase a bunch of DVDs or even some Blu-Ray DVDs at DVDPlanet.com. $500 would about cover dinner for my son and me and maybe our friends who are female at Morton’s the Steakhouse.
My point is this; how likely am I to do any business with JPMorgan Chase Bank in the foreseeable future?
I think the chances are very slim to less than zero that I will.
I wonder how other Americans like me were treated to, for all intents, the closure of their credit card accounts. I would be willing to bet that a great number of them will never do business with the bank or financial institution that unilaterally reduced their credit limits without reasonable cause.
Most of them are or were profitable customers.
I have very good credit and have had very good credit for years. I am customer that I loved to have when I managed a credit card portfolio. I carried a balance from time to time but not an excessive balance. I paid more than the minimum payment each month and I made sure the payments were timely.
In other words, I was a very profitable customer.
Profits, as you know, are important for any business and banks are no different. Profits help build capital in a financial institution. Consumers tend to be among the more profitable business segments that a bank has. They are not usually sensitive to interest rate changes.
I don’t think there have been any bank fail because their consumer loan business was crummy. I could be wrong because so many banks have failed and will fail in the coming months. The most recent bank failures in Southern California were attributed to failed loans in the commercial real estate market.
I read in the New York Times Deal Book this past week the Federal Reserve reported a USD$10 billion drop I consumer credit outstanding. This was the fifth consecutive month for a decline in outstanding consumer credit.
Fascinating actually.
I think one could reasonably conclude that American consumers were truly cutting back on the use of credit. If this happens, as the New York Times pointed, the current recession will last longer because consumer spending is roughly 70% of Gross Domestic Product.
I have been cutting back on my credit balances and I have put off expensive purchases that no longer seem to make any sense to me. For example, I thought about getting in on the cash for clunkers program but decided to keep my clunker because it is paid for and I have only driven it for less than 90,000 in fourteen years. Having money in the credit union or the bank is a very nice feeling for me.
With American consumers cutting back on their use of credit, this will reduce bank earnings. Less debt means less interest paid to the banks.
Banks and other financial institutions have competed very strongly with each other for commercial real estate loans in the last five or six years. Competition is very good for borrowers because they are able to borrow at a lower cost. Thin margins, caused by very competitively priced commercial real estate loans, meant there was not much money going into the institution’s profits.
I will admit there is some logic to the banks’ actions. Decreasing the amount of available credit reduces the banks’ contingent liability to fund these future advances. This helps to improve their balance sheets, something the regulators have been pushing at for some time now.
Be well and stay happy.
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