Bailouts/Non-Bailouts

As the fallout continues from the abrupt collapse of the Silicon Valley Bank and the closure of Signature Bank, the federal government’s response to those developments raises some serious questions.

Over the weekend, the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation announced that all of the depositors in SVB and Signature Bank will be repaid in full, even if they kept more than the $250,000 federal deposit insurance limit in their bank accounts. In addition, the Fed announced that it would offer banks loans against the face value of their Treasury bills and notes and other holdings, even if inflation has eroded the actual worth of those investments.

The government contends that these actions don’t represent a “bailout,” technically, because the banks have been closed and those who owned stock in the banks will lose the value of those investments–but the actions sure smell like a bailout to many people. Some will praise the government for acting swiftly to avoid a potential panic and runs on other banks, but others will wonder about where we now draw the line on the full faith and credit of the U.S. government being employed in the wake of a bank collapse and whether the government’s action was motivated, even in part, by the fact that powerful people in California and elsewhere apparently had relationships with the banks.

President Biden, quoted in the Times article linked above, made an important point when he said that investors in the two banks “knowingly took a risk, and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.” That is unquestionably true, but those who kept more than $250,000 in the banks also took a risk, because $250,000 is the limit for federal deposit insurance. Why should those people and entities be protected against what was a known, avoidable risk? And if the U.S. government is making every depositor whole, what is the point of having an announced limit for federal deposit insurance? Does this mean that, from now on, every depositor will be protected in full, irrespective of how much they have in their accounts? If not, what’s the distinction? And doesn’t this decision encourage risky practices by depositors and banks?

Left unsaid at this point is how the federal government is going to pay for acting as a backstop–again–for troubled banks. Banks have to be permitted to fail, and depositors have to understand that there is risk in going over announced deposit insurance limits. Otherwise, there is no point to having announced limits, and we are left in the untenable position of the federal government insuring every dollar deposited in a bank.

The Pulverizing Power Of Panic

Yesterday a bank failed. Silicon Valley Bank, one of the most prominent lenders to the tech industry and the 16th largest bank in the country, was shut down by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Company took over operations as the bank’s receiver. The collapse of SVB is the second largest bank failure in U.S. history.

Bank failures are never pretty. They often recall Ernest Hemingway’s famous observation that there are two ways to go bankrupt: “gradually, and then suddenly.” Banks operate on a foundation of trust in their stability and integrity, and when that foundation is undercut, failure can occur with breathtaking speed. That appears to be what happened with SVB.

As an interesting CNBC article recounts, SVB’s downfall took less than two days. On Wednesday, the bank advised investors that it needed to raise $2.5 billion. At that point, the bank was apparently still reasonably well capitalized; at the end of December, it reported $209 billion in assets and $175 billion in deposits. But underlying issues with the American economy had caused some start-up depositors to withdraw their assets to stay afloat, the bank found itself short of funds and was forced to sell the bonds it had available for sale at a loss, and when it announced it needed to raise additional funds the blood was in the water. The bank’s stock price plummeted, the tech investment community spread the word that deposits should be removed from the bank, and customers withdrew an astonishing $42 billion in less than 48 hours, leaving the bank with a negative cash balance of $958 million. With the bank insolvent and unable to find a buyer, regulators stepped in.

The CNBC article quotes one fintech investor as saying that the failure of SVB was “a hysteria-induced bank run” caused by venture capital firms. That’s often what happens–and the sad thing is that the people who panic, withdraw their funds, and precipitate bank failures usually end up safe, whereas the people who leave their money in the bank and trust that all is well often end up sorry. In the case of SVB, the people who kept their deposits in the bank will now have to deal with the FDIC, which insures deposits up to $250,000 per depositor. If you’re someone who had more than $250,000 on deposit at SVB, you might well find yourself out of luck.

For all of our thin veneer of civilization and sophistication, people are still prone to panic–especially panic about money. Let’s all hope that the failure of SVB, coming on the heels of cryptocurrency collapses and other recent negative financial developments, doesn’t provoke a stampede.

Condemned To Repetition

George Santayana famously observed:  “Those who cannot remember the past are condemned to repeat it.”

I thought of old George when I read this article reporting that some banks, amazingly, have decided to once again offer zero down payment subprime mortgages.  Apparently it’s only taken ten years for banks to forget the lessons they purportedly learned during the last subprime mortgage lending bubble, when the collapse of countless numbers of bad loans brought the economy to the brink of total disaster.

According to the article quoted above; “Borrowers can have low credit scores, but have to go through an education session about the program and submit all necessary documents, from income statements to phone bills. Then they go through counseling to understand their monthly budget and ensure they can afford the mortgage payment. The loans are 15- or 30-year fixed with interest rates below market, about 4.5 percent.”  In addition to the “education session” and documentation and counseling requirements, recipients of the loans have to live in the houses with the mortgages.

The lending agencies think that residency requirement will keep out the investors looking to flip houses, which is one of the conditions that contributed to the prior housing bubble and subprime mortgage debacle.  Another purported protection against disaster is that the housing market is strong, there’s a shortage of homes for sale at entry-level prices, and therefore homeowners who can’t make their payments supposedly will be able to sell their houses and repay their mortgage loans.  And proponents of the lending program say it helps poor people and working families to buy houses and build personal wealth.

I’m all for people becoming homeowners if that’s their dream, but if banks think that things like education sessions and counseling are going to allow them to avoid problems when the economy turns — as it inevitably will — they are dreaming.  It’s not hard to forecast that some aggressive loan officers will push the rules, some house-flippers will figure out a way to take advantage of the programs, some bad apples will take out the mortgages and then abandon the houses when times get tough, and then we may well be back in the same perilous situation that existed in 2007 and 2008.

I hope not everyone has forgotten what happened to bring on the Great Recession.  And I hope some political leader makes it clear that banks are welcome to follow whatever practices they think are appropriate for their businesses, but this time, if it all goes to hell, taxpayers won’t be bailing them out — again.

A Good Neighbor In Telephone Hell

This morning when I walked to work in a torrential downpour I found a person’s debit card on the street.  Wanting to be a good neighbor, I picked it up rather than leave it for a potential fraudster to find, and abuse.

The card was issued by one of the Big Banks.  There was a phone number on the back of the card, as well as a stern, all-capital-letters notice advising me that the card was the property of the Big Bank.  So, I called the telephone number to let the Big Bank know that I had found its card in the rainwater sluicing down Third Street.

But when I called the Big Bank’s phone number, no one answered.  Instead, I was routed immediately into telephone hell — one of those seemingly impenetrable automatic phone thickets, where a computer voice gives you a range of “press one, press two options,” and those options in turn lead to new levels of “press one, press two” options.  After going several levels deep, and retracing my steps to try different routes, without finding any options that dealt with reporting a lost card — or that allowed me to press for a real person to talk to — I gave up in frustration.  I figure I’ll just stop by the branch of the Big Bank when it’s open on Monday and, assuming that Big Bank employs actual human beings, give the card that I found to somebody who can figure out what to do with it.

I’ve been blessedly sheltered.  In our family, Kish is the poor soul who makes the calls to the automatic phone lines and suffers the frustration that inevitably results.  I’ve got a new, even greater appreciation for her willingness to handle that thankless task and an even deeper gratitude that, thanks to her, I’ve dodged that particular bullet.

But I do find myself wondering — is putting people who just want to do the right thing into computerized telephone hell really how American businesses conduct their affairs these days?  It makes me think that maybe we should attach a few conditions the next time Big Bank comes to us taxpayers for a bailout — like, say, giving people the option of talking to an actual, human customer service representative.

Here We Go Again

You’d think that, after the crash of the housing market, the failure of banks, the stock market plunge, and the Great Recession of 2008-2009 that still is affecting the economy in many parts of the country, modern Americans would have learned a painful but lasting lesson about taking on too much debt.

It looks like you’d be wrong.

The Federal Reserve Bank of New York report on household debt says that Americans are collectively approaching the record level of debt that we had accumulated in 2008, and probably will break through that record this year.  According to the report, by the end of 2016 our collective household debt, which includes everything from mortgages to credit cards to student loans to car loans, had risen to $12.58 trillion, which is just below the 2008 record of $12.68 trillion.  Even worse, last year our debt load increased by a whopping $460 billion, which is the largest increase in a decade.  Mortgage loan balances are now $8.48 trillion, which accounts for about 67 percent of the total debt load.  And the total amount of debt increased in every category being measured.

The experts say there’s reason to think that 2017 is different, because there are fewer delinquencies being reported now — about half as many as was the case in 2008 — and fewer consumer bankruptcies, too.  Who knows?  Maybe the banks that are extending all of that credit are a lot more judicious in their loan decisions than they were in 2006, 2007, and 2008, and maybe Americans have become much more capable of juggling enormous amounts of personal debt.

And maybe we’ll all live happily ever after in the Land of Narn.

It’s a good illustration of how people have changed.  Anyone who lived through the Great Depression was permanently scarred by the experience; they became forever frugal, suspicious of any kind of debt, and relentlessly focused on building up their savings and paying off that mortgage so they and their friends could hold a “burn the mortgage” party.  The lessons they learned during the Great Depression were still motivating their decisions decades later.

The “Great Recession” clearly hasn’t had the same kind of lasting impact.  It seems that modern Americans just never learn.

Living On The Card

The Wall Street Journal reports that, sometime this year, the collective credit card balances for Americans will hit $1 trillion.  That’s just shy of the all-time record — $1.02 trillion — that was reached in July 2008.

We all remember what happened after July 2008, don’t we?  Subprime mortgage defaults soared, the housing market crashed, Wall Street firms toppled, and the American economy stood on the brink on catastrophe.  Credit card debt wasn’t a primary cause of the Great Recession, but in those tough times many American families recognized that owing too much money wasn’t particularly prudent and they needed to change their ways.

Over the next few years, our collective credit card balances declined steadily, and then stayed flat for a while.  Lately, however, they’ve been moving up again, and the trend lines are unmistakable — people are using their credit cards more and are carrying larger balances on them.  Auto loan balances, too, are at record levels.  The WSJ reports that much of the growth in collective credit card balances has come because banks have been reaching out and marketing their cards to subprime borrowers.  (There’s that troubling subprime word again.)

Any financial advisor will tell you that racking up substantial, long-term credit card debt isn’t a good practice, and that people would do better to set budgets, establish personal savings to provide a cushion against unexpected costs, and live within their means rather than borrowing for nonessentials.  Americans aren’t very good at that, however, and they’ve got short memories.  When you combine the mounting credit card debt with the declining savings rate in America, and then you read stories about how almost two-thirds of American families couldn’t handle an unexpected $500 car bill or a $1,000 hospital bill, it makes you wonder whether we’re on the brink of another big economic problem.

Why are Americans like the grasshopper in the tale of the ant and the grasshopper?  One of my retired friends who enjoys light reading about behavioral economics says that discipline views it as a combination of a desire for immediate gratification and a kind of paralysis in the face of potential financial problems.  He notes that even when Americans take courses on basic personal financial concepts and thoughtful planning, the lessons just don’t sink in, and the old bad habits remain.

At some point, however, the piper needs to be paid.  People who live from hand to mouth, with maxed-out credit cards that require large monthly payments,  might avoid complete disaster and make it to retirement, but with it’s not going to be the retirement of their dreams.  Without any personal savings, and with only Social Security to fall back on, they’re looking at “golden years” that are distinctly grim.  There’s a reason the grasshopper in the tale usually ends up in a threadbare coat, begging for a handout.

Pumping Up A New Housing Bubble

The Washington Post carried a story a few days ago with a surprising headline:  “Obama administration pushes banks to make home loans to people with weaker credit.”

Wait, what is this — 1997?

The story details the Obama Administration’s concern that while the housing market is getting stronger, not everyone is benefiting.  That’s because banks are leery about making home loans to new borrowers and people whose credit scores are iffy.  As a result, the Administration is trying to encourage banks to make more loans using programs funded by taxpayers that insure banks against loan defaults, including programs of the Federal Housing Administration.  The Obama Administration wants lenders to use more “subjective judgment” in making loans and wants to make it easier for homeowners whose houses are underwater to refinance their loans.

The article further notes that, since the Great Recession hit in 2008, the government has been insuring between 80 and 90 percent of new home loans.  One of the principal federal agencies involved is the FHA, which allows borrowers with credit scores as low at 500 or down payments as little as 3.5 percent to get home loans.  Banks aren’t going down to that low end of the scale, however.  The average credit score on FHA loans now is 700, because banks are worried that if their loan portfolios are hit with defaults they’ll be held responsible — so they’re playing it safe.  From 2007 to 2012, banks rejected loans for 90 percent of applicants with scores between 680 and 620.

It’s amazing that, so soon after an economy-shaking recession that was largely caused by a massive housing bubble and ridiculous lending practices, regulators would be urging banks to loosen up their loan portfolios, make “subjective” decisions, and rely on the good ol’ taxpayer to insure them against risky lending practices.  It appears that banks have tried to learn their lesson and not repeat the practices that made The Big Short such a wild romp.  Don’t we want banks to be prudent?  And why should the federal government be insuring such a large percentage of new home loans, anyway?  If so many loans are being made to people with strong credit scores and meaningful down payments, why should taxpayers be standing behind 80 to 90 percent of those loans?  Don’t we want banks to make their own credit decisions and take their own risks?

Oh, and one other thing:  the article talks about how owning a home helps build a family’s wealth, and notes that without looser loan standards many young people will be forced to rent rather than buy.  This seems like ’90s-era thinking to me.  The reality now is that many young people don’t want to be tied down to an immobile asset that consumes a huge chunk of their monthly paycheck and won’t be paid off for 30 years.  They like renting because it gives them flexibility and the chance to pursue those good-paying jobs that are so hard to come by and might just be in another city or another state.  With some people saying the economy is teetering on the brink of another recession, can you blame them?

Helping Out Hollywood, NASCAR, And Anyone Else Who Can Afford To Hire High-Powered Lobbyists

We’re starting to learn more about what was in the “fiscal cliff” measure that the President supported and Congress cravenly passed at the eleventh hour.  Of course, the information shows that the legislation is loaded with targeted provisions, tax breaks, and loopholes for special interests — just as any rational person predicted.

For example, the bill included a film production tax credit for Hollywood that allows deduction of millions of dollars in production costs if a TV or movie production occurs in an “economically disadvantaged area” — whatever that is defined to mean.  Supporters say the tax credit helps to keep productions from going overseas and “helps get investors who would like to have a significant impact in their taxes reduced.”  Sure, sounds good!  Let’s make sure that Hollywood fat cats get a bit fatter, so producers, directors, and actors can continue to make sober public service announcements that lecture us not to engage in the crazed gun violence that every Hollywood production seems to glorify.  And I’m sure we can all be confident that the millions of dollars that the Hollywood moguls and “stars” have contributed to political campaigns had nothing to do with Congress’ reasoned judgment to extend this tax break.

In the bill there’s also a tax break for NASCAR, to allow accelerated (no pun intended) depreciation for anyone who builds a racetrack.  Apparently all of the races on TV and gear that you see people wearing are misleading and, in reality, NASCAR is struggling and needs all the help it can get.  Perhaps the tax break recognizes that high gasoline prices have hit the owners of those powerful, gas-guzzling cars even harder than they hit the rest of us.

As the Washington Post reports, the fiscal cliff legislation also includes tax breaks, tax credits, and subsidies for banks and multinational corporations, Manhattan apartment developers and railroads, and even manufacturers of plug-in two-wheeled electric scooters.

With our current system, it’s all about who you know, who you can afford to hire to lobby for your cause, and whether they have the access and power to make sure that, when the last-minute deal goes down and an emergency bill is passed that the vast majority of members of Congress haven’t even read, your pet provision is included.

It’s a great system, if you are one of the people who can afford to play the game.  If you’re one of the rest of us, who can’t afford a gold-plated lobbyist to represent your interests, you’re left defenseless.  Of course, average citizens are supposed to have representatives in Washington, D.C.  They are called Senators and Representatives, but who can count on them to protect our interests?  Most of them didn’t even read the entire bill that they voted on.

A Man Armed With A Plunger Is Capable Of Just About Anything

From New York City comes the story of a 49-year-old man who tried, unsuccessfully, to rob a bank armed only with a toilet plunger.

The man entered the bank and threatened a teller with the plunger.  The teller apparently wasn’t all that threatened, the man fled, and was apprehended after a chase.  He was disarmed and then charged with attempted third-degree robbery.

This incident should come as no surprise.  Any guy who has been forced by grim circumstances to use a toilet plunger, thrusting away and staring down, looking for signs and swirling sounds of progress in completing his disgusting chore, is inevitably on the edge of reason.

And if the would-be bank robber had been engaged in repeated plunging exercises, thinking to himself as he did so that in his youth he never pictured himself as a 49-year-old engaged in such appalling pursuits, he might easily have fallen into the abyss.  In such desperate straits, it might have seemed that the only way out of his plunger hell was to rush to the nearest bank, brandishing his plunger, and demand enough money to avoid having to ever plunge again.

We should all show a little sympathy for the Plunger Robber.  There, but for the grace of a clogged toilet, could go you or I.

Those Greedy, Evil Bankers

I see that President Obama has joined Senator Dick Durbin of Illinois and others in slamming bankers.  Some of the outcry is the result of frustration, because banks have reacted to the Dodd-Frank legislation passed recently by imposing fees on people who use their debit cards to make purchases, some is due to the fact that banks were part of the 2008 financial meltdown, and some is caused by the belief that banks are not lending as much as they should.

We should all be on guard, however, when politicians try to blame one industry for our woes.  It’s like the sleight of hand used by magicians who want to distract our attention so we don’t see how the trick works.  Politicians want us to blame banks so we don’t blame politicians or hold them accountable for the dreadful job they’ve done.  And banks are a convenient, time-honored scapegoat.  In fact, America has a long history of bank-hating, from the battle between Andrew Jackson and the Bank of the United States to the campaigns against J.P. Morgan and Wall Street “gamblers” during the 20th century.

Should we really castigate banks for charging for their services?  Debit cards clearly involve costs for administration, data security, accounting for charges, and sending out bills, and someone has to pay them.  When Congress enacted legislation that made it tough for banks to have retailers pay the costs, the banks inevitably turned to another source — the consumer who uses the card to by something in the first place.  In a capitalist society, are banks simply supposed to eat the costs and thereby become less solvent?  Is it really so unfair to make those who use the debit card service to pay for it?

No one has figured out how to practice capitalism without banks and without allowing businesses to charge what the market will bear for their products and services.  Ask President Obama — according to the Amazon website, his two books, Dreams from My Father and The Audacity of Hope, carry retail price tags of $25.95 and $25.00, respectively.  The President isn’t giving away his work product for free and banks shouldn’t have to, either.

Wall Street, Main Street, and 401(k) Plans

In the wake of the Massachusetts special election loss, President Obama has struck a more populist tune.  He and his supporters have been talking about “getting our money back” from “fat-cat bankers” on Wall Street who took TARP money.  Siding with “Main Street” rather than “Wall Street” is a time-honored theme in American politics.

I wonder whether the “Wall Street vs. Main Street” pitch still has resonance, however.  The reality is that many working Americans have 401(k) plans or some other form of retirement savings or pension plan that is invested in stocks and bonds.  According to the Investment Company Institute website, in 2008 49.8 million Americans had 401(k) plans that held an estimated $2.4 trillion in assets.  In short, lots of American families are invested with Wall Street.  They watch the Dow and the S&P 500 and hope that their 401(k) plans will appreciate in value and allow them to retire earlier and wealthier.

As a result, in the 1930s or 1950s there may have been a bright-line distinction between “Main Street” and “Wall Street,” but that bright-line exists no longer.  People may be upset by the size of the bonuses paid by banks that took TARP money, but I think many Americans not only aren’t reflexively opposed to Wall Street bankers, they hope that those investment bankers do their jobs well and create wealth that their 401(k) plans will share in.

If I am right in that perception, then politicians who want to rip into Wall Street should proceed with extreme caution.  In the last few days, the stock market has fallen at the same time President Obama has attacked Wall Street bankers and Senators have declared they won’t vote for a second term for Federal Reserve Chairman Ben Bernanke.  It may be coincidence, but it may cause many Americans to wonder why the President and the Senate seem to be playing politics with their retirement funds.

Bank Failures And A Salutary Example Of Federal Regulation

Yesterday the FDIC announced the failure of three more banks, bringing the total number of bank failures this year to 123.  The 123 failures this year compare to 25 failures last year and three failures in 2007; there have been more bank failures this year than in any year since 1992.  The cost to the FDIC fund for the failures this year has exceeded $28 billion, and is one of the reasons the FDIC is looking to banks to prepay fees to help cover bank failure costs over the next few years.

The FDIC website has lots of information about the bank failures, including a list of all the institutions that failed this year and a guide for depositors who wake up to find that their bank has failed.  If you review the list of bank failures, you will note that they occur in week-long intervals.  That is because the FDIC typically announces bank failures on a Friday, after determining whether a healthy bank will assume some or all of the assets and liabilities of the failed institution.  The weekend then allows the FDIC to sort things out, so that commerce can proceed and accurate information can be made available to all affected parties the following Monday.  This weekend no doubt will see hectic activity at the offices of all three failed banks.

Conservatives often complain about government regulation, but I think the FDIC, its role, and the calming effect of federal insurance of bank deposits should be regarded as an inspired example of the salutary role federal regulations can play under the right circumstances.  Messy bank failures are, for the most part, handled quickly and discreetly.  As the story about funding linked above indicates, the regulated banks that benefit from the FDIC’s guarantees pay fees to defray the costs of the regulatory regime to the government.  And, the reality of federal support and insurance has had a calming influence on depositors that has avoided the panicky runs on banks that were seen during the Great Depression (and memorably depicted in It’s A Wonderful Life).  Without such insurance and depositor confidence, how would consumers react to alarming news stories about a dramatic spike in bank failures throughout the nation?

Of course, the fact that banks are failing says something negative about our economy, but it mostly says something negative about the bankers who ran the banks.  The traditional stereotype of the conservative, cautious, boring banker has long since been overtaken by extraordinarily aggressive practices by banks in their residential and commercial lending areas, in their issuance of credit cards and other forms of consumer credit, and in their general business operations, growth plans, and mergers.

Grampa Neal, who epitomized the traditional conservative model of a hard-headed banker who wanted collateral and protection before he made a loan, would no doubt cringe in horror at the lax practices of modern banks.  If the current crisis causes banks to return, even slightly, to more conservative lending practices that reject hyper-risky loans, that would be a good thing.