Tuesday, July 03, 2012

Will the US Economy Be In Free-fall by Autumn?

Greece and the EU have monopolized headlines recently in the mainstream media. Meanwhile, according to the Global Europe Anticipation Bulletin, another financial crisis is brewing that will make 2008 "seem like a small summer storm."

An IMF working paper, entitled, Systemic Banking Crisis Database: An update  by Luc Laeven and Fabián Valencia shows that most banking crises start in September.

Five of the biggest banks in the United States are crafting living wills in case they fail, as part of government-mandated contingency planning that could push them to untangle their complex operations.

At the same time, banks continue to get backdoor bailouts. 
Below are six ways the big banks rake in cash every day from services that are supposed to help working Americans.

1. Big Contracts for Food Stamps

Suzanne Merkelson at Republic Reports points out that Supplemental Nutrition Assistance Program (SNAP) benefits—the program formerly known as food stamps, which provides food aid to families—increased to $72 billion last year (from $30 billion in 2007).

And as the lousy economy keeps people relying on benefits to feed their families, big banks keep benefiting from the program too. A new paper [PDF] from Michele Simon finds that SNAP “represents the largest, most overlooked corporate subsidy in the farm bill.” Merkelson writes:

While SNAP is a federal program, USDA and the states work together to administer the program. States contract with banks, who authorize payments (Electronic Bank Transfers or EBTs) from the Federal Reserve to retailers. J.P. Morgan Chase has contracts in half the states “indicating a lack of competition and significant market power,” according to Simon. How much are these deals worth? In New York, one seven-year deal originally gave the bank $112 million for its services, but was recently amended to add another $14.3 million.

JP Morgan spends a bunch of money lobbying the Department of Agriculture on this program, making sure they get what they want—a big paycheck from state taxpayers.

And the best part? When you have a problem with your JP Morgan SNAP benefits card? You call a JP Morgan call center for help—and that call center just might be in India.

So to recap: big bank makes money off a program that helps people who are unemployed—and creates jobs in India with that money, rather than creating them here in the US.

2. Making Money Off the Unemployed

The banks get paid directly by the state to handle the SNAP program, but that's far from the only program designed to help the victims of the lousy economy that has turned into a cash cow for the banks that created the crisis in the first place.

Unemployment benefits in 41 states are provided through Wall Street giants like Bank of America, Wells Fargo, and JP Morgan Chase. In South Carolina, for instance, customers get a prepaid debit card from Bank of America to access their unemployment benefits—which is, of course, fee-free at a Bank of America ATM. But for rural South Carolinians, the nearest Bank of America ATM might be 50 miles away. Shawana Busby, a South Carolina user of the program, tells the Huffington Post that she's probably spent $350 in fees to access her benefits—which are $264 a week. Another user of the cards, Sandra Gortman, tells the Huffington Post that she was pressured to adopt the prepaid card, and then when she used it to put gas in her car, the gas station put a hold on her card for $75, which didn't come off for three days. When she called to check on the hold, she was charged a customer service fee. (The bank has now eliminated such fees.)

The bank also collects a 3-cent fee from the state each time it “facilitates” a transfer on a prepaid card. It also gets those fees for direct-depositing unemployment benefits into someone's bank account.

3. Sweet Campus Deals to Prey on Students While Distributing Federal Student Aid Money

A recent report from USPIRG, “The Campus Debit Card Trap,” dug into the deals that universities, both public and private, make with banks to produce student ID cards and more significantly, actually handle and disburse student financial aid. In other words, young people who've already signed up for a lifetime of student debt are being preyed on further by banks that can charge them fees just to access their money. (And, remember, those same big banks are already making big bucks on student aid.)

USPIRG found that 32 of the 50 largest public 4-year universities and 26 of the largest 50 community colleges—the schools in part supported by taxpayers—had deals with banks to provide debit or prepaid cards for students. The campuses often get money from the banks for the privilege of access to students, and the banks then make their money back in fees—and possibly other ways, too. Mela Heestand, writing for AlterNet about the protests at the University of California Davis that drove US Bank to close its campus bank branch, pointed out that “university contracts with banks encourage tuition hikes, because banks stand to profit directly from rising tuition, while the administration comes to rely on funding from bank contracts.” US Bank has agreements at 52 campuses around the country.

(After the protests that shuttered the US Bank branch, twelve activists were arrested and face up to 11 years in prison and $1 million in fines.)

Students are the ones bearing the costs of access to money they're already paying interest on, and USPIRG points out that the fees are “steep and frequent,” including per-swipe fees, inactivity fees (yes, you read that right), overdraft fees and fees to reload their prepaid cards. And financial aid that is paid to students through a debit card is subject, just like any other card, to ATM fees if students use an ATM not owned by the bank that currently has their money. The Department of Education has rules on this practice, banning banks from charging fees if they provide “convenient” ATMs for the students' use, but their definition of “convenient” is vague—leaving students at the mercy of a single ATM on campus, which produces long lines and leaves no alternative if it breaks or runs out of cash.

4. Cashing in on Tax Returns

It's not only your unemployment, financial aid, or SNAP benefits that the big banks control these days—they also might come between you and your tax return.

Once again, South Carolina takes the lead, claiming to save the taxpayer money by cutting a deal with Bank of America, this time to send out tax returns in the form of—you guessed it—prepaid debit cards from Bank of America. And just like with unemployment benefits and financial aid (or your regular, consumer bank card), the bank is making its money collecting fees from people trying to access their own money.

“They’re not even nickel and diming people, they’re five-dollaring and 10-dollaring people,” Sue Berkowitz, Director of the Appleseed Legal Justice Center, says.

Oh, and the bank got this deal through a no-bid contract—the Department of Revenue calls them “the best fit” for the program. The program isn't mandatory but, the Palmetto Public Record notes, it's opt-out, not opt-in. Which means that unless you request otherwise, your money will be given to you through Bank of America—which in addition to sticking you with ATM fees and other charges, is going to make interest on your money while it's sitting in their account.

5. Refinancing Homes Means Big Bucks for Banks

Getting the big banks to refinance mortgages and help people facing foreclosure stay in their homes has been a huge fight, with activists around the country putting their bodies on the line, physically occupying homes to keep residents in them.

Now the program that's supposed to help those struggling homeowners looks instead to be a big fat handout to the same banks that were preying on borrowers to begin with. According to the Wall Street Journal, banks that service mortgages could make as much as $12 billion by refinancing under the newest version of the Home Affordable Refinance Program (HARP 2.0). And the borrowers? Oh, they'll save money, too—somewhere around $2.5 billion, maybe $5 billion tops.

The program is supposed to let underwater borrowers who've made all their payments in good faith refinance their mortgages at current market value. But, Bonnie Kavoussi at the Huffington Post notes, instead those banks are able to charge steep fees and above-market interest rates.

Shaun Donovan, the current Secretary of Housing and Urban Development calls it “a monopoly on refinancing,” saying at a Senate hearing, "Whoever holds their current loan, whoever is the servicer, they can charge [borrowers]—and we're seeing this—very high fees."

6. Profiting Off The Very Idea of Another Big Bailout

In case all this profit enabled by the government wasn't enough for you, perhaps the most disturbing recent bank-related news is a report by the “wild socialists” at Bloomberg that, “JPMorgan receives a government subsidy worth about $14 billion a year, according to research published by the International Monetary Fund and our own analysis of bank balance sheets.”

They explain:

In recent decades, governments and central banks around the world have developed a consistent pattern of behavior when trouble strikes banks that are large or interconnected enough to threaten the broader economy: They step in to ensure that all the bank’s creditors, not just depositors, are paid in full. Although typically necessary to prevent permanent economic damage, such bailouts encourage a reckless confidence among creditors. They assume the government will always make them whole, so they become willing to lend at lower rates, particularly to systemically important banks.

In other words, because we bailed them out once, the expectation that we'll do it again is actually making the banks money. Other lenders are willing to lend money to the “systemically important banks” (read: banks that got bailed out by the US government because they were “too big to fail”) at lower interest rates because they presume that they'll always get their money back since the government will make sure the banks don't go belly up. So the biggest banks are paying less in interest than medium-size and small banks--and that adds up to billions.

So they're profiting just from being too big to fail. And each time there's a crisis, the expectation of government support actually grows—as of 2009, Bloomberg notes, they're saving about 0.8 percent every time they borrow. The total benefit to the big banks just of the expectation that there will be another bailout? About $76 billion a year—which Bloomberg points out is equal to their total profit from the past twelve months, and is more than the federal government spends each year on education.

Brad Sherman, a Representative from California, asked Jamie Dimon this week, before Congress, “[H]ow can medium size banks compete against you when your cost of capital is reduced by 80 basis points, 0.8 percent, because of a belief that if they go under we'll let 'em go under, but if you go under we'll bail out your creditors?”

Dimon, of course, claimed that it wasn't true, and that he borrowed in the marketplace, “with the smartest people in the world.” But it looks like the smartest people in the world are getting a whole lot of help—and making a whole lot of money—off of college students and taxpayers, off the working poor and unemployed in the U.S.

Household debt has soared far above wages for decades.  In fact, 30 million workers made below $10,000 per year in 2010.Suffice to say, far too many are in crisis already. In other words, the big crisis is here. It just hasn't hit those we call upper middle class yet.


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