Backing Up Banks … in Afghanistan

September 2, 2010

The phrase “You break it, you own it” takes on new meaning with the following reported suggestion from the brother of Afghanistan’s president:

As depositors thronged branches of Afghanistan’s biggest bank, Mahmoud Karzai, the brother of the Afghan president and a major shareholder in the beleaguered Kabul Bank, called Thursday for intervention by the United States to head off a financial meltdown. “America should do something,” he said in a telephone interview, suggesting that the Treasury Department guarantee the funds of Kabul Bank’s clients, who number about 1 million and have more than $1 billion on deposit with the bank.

Perhaps he got the idea that the U.S. government could back up these funds from the behavior of the Federal Deposit Insurance Corporation in our country — not to mention the bank bailouts from our own ‘financial meltdown.’ The problem is that we may actually end up doing this. One result of our continued military operation in that country is that we are now vested in seeing it remain stable … even if that means bailing its banks out.

Problems with Subsidized Loan Modifications

June 24, 2010

This report from ProPublica notes the problems with the Obama administration’s subsidized loan modification program for struggling homeowners. The main problem seems to be poor service:

Since the beginning of the program, we’ve reported on problems homeowners have encountered with their servicer – lost documents, delays, and costly errors. Although Treasury Secretary Tim Geithner sharply criticized servicers for these problems earlier this year, so far it’s been all bark and no bite from the administration. The Treasury has yet to penalize any servicer for breaking the program’s rules.

[picapp align=”left” wrap=”true” link=”term=loan+modification&iid=7360948″ src=”″ width=”234″ height=”147″ /]Lost in this is the fact that there is no incentive for the financial institutions to cater to those receiving loan modifications. The treasury is the one footing the bill (to the tune of $75 billion in taxpayer money), meaning it’s a third payer. When costs are shifted to third parties the incentive for the companies to cater to the needs of the lenders is diminished. After all, the homeowners aren’t the ones paying the subsidy, the government is. And, the government doesn’t appear to be interested in ensuring the money is spent wisely.

Notably, the report mentions that many have turned to private modification programs after being dropped from the program. Maybe they’ll get better service.

Regulating Something They Don’t Understand

May 22, 2010

Want more proof that those creating the regulations whereby the rest of us must live often are guilty of having no idea about the areas in which they are regulating? Note the following from this report from the Washington Post:

Quite a few of the Senate’s aging members appear to have little if any contact with the decades-old technology of cash machines.

Sen. Ben Nelson (D), for example, told the Omaha World-Herald this week that he has never once used an ATM card, relying on human bank tellers instead. His Nebraska colleague, Sen. Mike Johanns (R), has used his ATM card less than five times. And Sen. Charles E. Grassley (R-Iowa), the ranking member on the Senate banking committee, said he has a credit card but doesn’t use it for cash.

And then there is this revelation from Sen. Nelson:

Read the rest of this entry »

Debit Price Controls

May 17, 2010

Further exercising its tendency to impose arbitrary price controls, the U.S. Senate voted last week to give the Federal Reserve more power to regulate the fees banks charge businesses for debt-card swipes. To the shock of some lawmakers, “the fees imposed on debits are higher than the actual cost of processing those transactions.”

Photo by Dave Einsel/Getty ImagesIn business, charging more for a service than it actually costs is called making a profit — which, at least up until recently, was the whole idea behind businesses. But that’s not OK with pandering politicians all-to-eager to stick it to those “evil” banks.

The economic reality of this decision to control the price of debit-card fees will invariably lead to where most price controls lead: to less availability of the service. This decreased availability would come from the diminished financial incentive for banks to provide the service to businesses.

In addition, the intention of the bill is also reportedly to incentivize businesses to require certain amounts to be spent by customers before allowing them to pay via debit card. The inconvenience to customers of such an idea is obvious. If only the realities of economics were more obvious to politicians.

No More Bank Bailouts?

May 9, 2010

A bit of good news coming out of the financial reform efforts in the U.S. Senate: An amendment preventing any future bailouts of financial institutions was adopted 96-1. In addition, the so-called “bailout” slush fund of $50 billion to wind down failed banks was dropped 93-5.

The process is certainly not over, so these changes may not stick. But, as a break from the cynical points often made on this blog, I thought I’d share some evidence of hope. Time will tell.

Bailed-out Banks Reduced Lending, Gave Raises

April 22, 2010

Want another example of the unintended consequences of government policies? Here’s this revelation from a USA Today/American University study:

Banks that received federal assistance during the financial crisis reduced lending more aggressively and gave bigger pay raises to employees than institutions that didn’t get aid, a USA TODAY/American University review found.

Here’s a graphic from the USA Today story displaying the lending gap:

What’s particular disturbing about all of this is that one of the major intended purposes of the bailouts was to increase lending on the part of banks — however dubious that intention might have been. Leave it to a government program to result in the exact opposite of its intentions.

Returning and Respending the Money

February 6, 2010

A seldom publicized fact about the TARP legislation is that funds returned/recovered by the program are supposed to go toward reducing the federal debt. That seemingly (read: thankfully) would prevent one of President Obama’s State of the Union proposals to give $30 billion already paid back to the program to “community” banks to lend to “small” businesses (both adjectives in quotes to, of course, be defined by the government).

PolitiFact reported on this issue when fact-checking a statement by Sen. Judd Gregg (R-NH). Notably, it mentions how Congress could get around the law’s requirement in the following passage:

But we also talked with budget experts who said that Congress could get around those rules in a number of ways. For example, Congress could rescind the TARP money and then, in a separate action, use it to pay other expenses, said Brian Riedl, lead budget analyst for the conservative Heritage Foundation.

Spending more money on such ideas is only aided by the fact that the House of Representatives recently raised the official federal debt ceiling. Only the sky is the limit these days.

TARP Still Causing Trouble

February 3, 2010

The special inspector general for the Troubled Asset Relief Program (TARP) has just recently released a quarterly report on the bank bailout program’s progress (or lack thereof). The report’s conclusions are similar to those from a previous report.

Among the findings were the following:

  • “To the extent that huge, interconnected, ‘too big to fail’ institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.” 
  •  “To the extent that institutions were previously incentivized to take reckless risks through through a ‘heads, I win; tails, the Government will bail me out’ mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases are posting multi-billion-dollar losses) are exiting TARP programs.”
  • “To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.”
  • “To the extent that the crisis was fueled by a ‘bubble’ in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.”

In short, the government should have never gotten itself involved in “rescuing” the economy from what many in charge were predicting would have been “worse than the Great Depression.” Government’s “solutions” to our problems (read: meddling) tend to only create new problems.