The Winners of the Financial Meltdown Sweepstakes

It was last September when the financial markets imploded, Lehman failed, and Bear Stearns was bought out. But now with the smoke and rubble beginning to clear, a winner has begun to emerge from the economic mire. Standing tall and hardly fazed, the nation’s biggest banks are now larger than before. More amazing, they’re on the cusp of even further growth.

A year ago the head of the Federal Reserve told members of Congress that if they failed to quickly pass a stimulus package the entire economy would collapse within days. Presto, $700 billion was instantly set aside to save the financial sector.

The good news? The stimulus package seems to be working, at least if we define “working” as something other than a massive and immediate depression. The bad news? Unemployment is growing, personal income is down and foreclosure numbers are soaring.

The Winners
There was a lot of shock and no shortage of awe when the Washington Post reported that the major banks have now emerged from the financial meltdown “with strengthened market positions, giving them even greater control over consumer lending and more potential to profit.”
 
JPMorgan Chase, said the Post, “now holds more than $1 of every $10 on deposit in this country. So does Bank of America, scarred by its acquisition of Merrill Lynch and partly government owned as a result of the crisis, as does Wells Fargo, the biggest West Coast bank. Those three banks, plus government-rescued and -owned Citigroup, now issue one of every two mortgages and about two of every three credit cards, federal data show.” (See: Banks ‘Too Big to Fail’ Have Grown Even Bigger, August 28, 2009)

By other measures the nation’s top banks are simply enormous. For instance, the banking system includes 7,037 commercial banks with total assets of $12 trillion. More than one-third of all bank assets — nearly $4.3 trillion — are held by three banks: JPMorgan Chase, Bank of America and Citibank.
 
In the mortgage arena, MortgageDaily.com reports that the five largest residential mortgage originators are Wells Fargo, Bank of America, JPMorgan Chase, Citigroup and SunTrust Bank. The five largest mortgage servicers are Bank of America, Wells Fargo, JPMorgan Chase, Citigroup and ResCap.

Here’s another example of bank concentration:

  • A total of 1,063 insured U.S. commercial banks held derivatives at the end of the first quarter, according to the Treasury Department.
  • “The five banks with the most derivatives activity hold 96 percent of all derivatives,” says the Treasury, “while the largest 25 banks account for nearly 100 percent of all contracts.” Who are these five banks? Why they would be JPMorgan Chase, Goldman Sachs, Bank of America, Citibank, and HSBC.

During the past year the federal government shoveled out nearly $200 billion to re-capitalize 600 larger banks. That cash is enough to generate an additional $2 trillion in lending power, lending that can produce enormous amounts of interest and fees. Seen the other way, most banks didn’t get a dime from Uncle Sam and have been excluded from financial recovery efforts.

“There have been worries about huge financial companies that are too big to fail,” notes Jim Saccacio, Chairman and CEO at RealtyTrac.com, the country’s largest source of foreclosure listings and data. “In fact, the very companies that were widely regarded as too big to fail are now even bigger. At the same time, economic problems remain acute. For instance, there were 266,000 foreclosure notices in September 2008, a figure which reached almost 360,000 this August. The good news of economic recovery is not being equally shared and that’s an economic, political and moral concern.”
 
The Competition
As big banks have been growing, competitors are increasingly under fire.

  • Fannie Mae and Freddie Mac were nationalized by the government in 2008. There’s now a movement to dissolve these two companies, meaning that the secondary market would be left entirely in the hands of the private sector.  
  • More than 80 small commercial banks have been shut down by the FDIC so far in 2009 while another 400 are at risk. Fewer banks mean fewer branches, fewer ATM options, fewer mortgage sources and less competition.
  • There’s a strong effort underway to close down the FHA, the largest “public option” available to mortgage borrowers since the 1930s. What’s so objectionable about the FHA? Among other things, the FHA program prohibits prepayment penalties, no-doc loan applications, option ARMs and interest-only mortgages — standards which visibly contrast with many private-sector mortgage products. Without FHA financing borrowers would have fewer choices, thus making them almost totally dependent on private-sector mortgage offerings. To make their case, critics harp on FHA delinquency and reserve levels, but make no mention of the billions of dollars given to the Treasury from FHA program profits or the reality that the FHA foreclosure rate is actually below the rate for prime loans.  
  • Legislators in Washington have been unable to pass legislation creating a Consumer Financial Protection Agency. This agency would be required to “promote transparency, simplicity, fairness, accountability, and access in the market for consumer financial products or services.” 
  • Payday lenders with triple-digit fees and rates are under attack in many states. Who is taking over the business? “Banks,” says the Minneapolis Star-Tribune, “are in a strong position to steal a big chunk of the $35 billion-a-year payday lending market — with its estimated $7.3 billion in fees from borrowers, say industry analysts.” (See: Biggest banks stepping in to payday arena, Sept. 9, 2009)
  • Depositor-owned credit unions are a threat to commercial banks because they have lower rates and cheaper fees. To deal with this “problem,” the federal government encourages credit unions to become commercial banks. How? Under pressure from bank lobbyists, says the Washington Post, “Congress made conversion much easier with a bill passed in 1998, which, among other provisions, eliminated the authority of the National Credit Union Administration, the federal regulator, to block conversions. The measure also eased the threshold for approval of a conversion from a majority of a credit union’s members to a majority of those who vote.” (See: Banks Look to Make Converts Of Credit Unions, February 11, 2006)  

Shifts
In effect a new financial system is being created. It’s not a “monopoly” because there’s more than one source of consumer lending. Instead, the new system is a becoming an “oligopoly,” something akin to OPEC. In the same way that there are few oil exporters, there are fewer and fewer suppliers of mortgages, credit cards and such. A declining number of firms effectively control the marketplace, firms where executive bonuses are not associated with lower mortgage rates, cheaper overdraft charges, minimal credit card interest levels or smaller ATM fees.

How could the lending system change with fewer players? A few tweaks could vastly increase lender profits. The easiest step would be to make fixed-rate mortgages more difficult to obtain by raising qualification standards. Such a change would quietly shift the risk of inflation and future rate increases from lenders to borrowers.

Already, of course, fixed rate loans typically have tougher qualification standards, generally ratios of 28/36 versus 33/38 for ARMs. The front measure compares housing costs to gross monthly income while the back ratio compares housing costs plus recurring monthly debts against gross monthly income. Given the growing number of prime foreclosures, some could argue that a conservative  ratio of 26/34 would now be more appropriate for fixed-rate borrowers.
 
Protecting Your Interests
In the same way that it makes sense to reduce energy usage, it also makes sense to adopt prudent financial practices to defend your interests and assure marketplace diversity.

What are those practices?

First, get fixed-rate mortgages. With rates now hovering around 5 percent it’s difficult to imagine them going much lower, thus an adjustable-rate mortgage has a lot of up-side risk and very little room to decline. However, if rates drop significantly, borrowers with fixed-rate loans can get a “no cash at closing” mortgage refinance to lock in new and lower rates.

Second, pay off credit card balances. Even with new consumer protections, rates for many cardholders remain well above 20 percent, a cost that cannot be justified.

Third, get an automatic line of credit for your checking account or use a system which automatically takes money from a savings account to cover any checking shortfalls. This will generally eliminate overdraft fees for debit cards.

Fourth, look for alternatives. You’re likely to find any number of community banks as well as savings and loan associations near you. These small firms offer all the services available from larger banks in the sense of checking accounts, ATMs, safety deposit boxes, IRAs, insured CDs, etc. Other financial options include mutual savings banks (located mostly in the northeast) and credit unions — both of which are owned by their members, not outside shareholders. In effect, with member-owned financial firms the interests of owners and borrowers are aligned and not opposed.
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Peter G. Miller is syndicated in more than 100 newspapers and operates the consumer real estate site, OurBroker.com.

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