On Friday the big banks that received government bailout money (and are still receiving huge amounts indirectly through the Fed’s low interest rate policies) were granted the right to pay out $22 billion of their profits to investors in the form of dividends and stock buybacks. The main beneficiaries will be hedge funds that have gambled big on big bank stock. Top managers of the banks will also make millions personally, having received a large chunk of their annual compensation in the form of bank stock.
What makes this money-for-the-monied seem appropriate to the Fed, which approved the billions in dividends and stock buybacks, is the enormous profits these banks have made in the last year. But huge profits doing what, you might ask?
Not from lending to business. Public companies have been able to sell their bonds dirt cheap in recent months and didn’t require all that much in bank loans. Small businesses that go to banks for loans these days are still generally getting the old cold shoulder.
A big chunk of big bank profits, in fact, don’t come from traditional business lending at all but from investing in a stock market that has been going up in no small measure because so much money from banks has been flowing into it.
Another big chunk has come from consumers via credit card lending. The economics of such lending is interesting. Banks borrow at the Fed window (or in the open market where money is now very cheap for them because of fed policies) at virtually no interest, then lend this money at average credit card rates of 15 percent, and for many credit card users, a much higher rate.
Borrow for almost nothing. Lend at very high rates, with no fears of usury laws that have largely been abolished in this country. A great business plan — for the planners.
Another major profit center for banks takes the form of fees. There have always been fees for some bank services, of course, but these days their number has proliferated greatly and the income they generate has risen in sync. Here’s just a partial list of the fees and other charges that banks now charge:
Transaction and transfer fees, late fees, overdraft fees, ATM fees, debt card fees, bounced check fees, account maintenance fees, card replacement fees, check book reconciliation fees, early account closing fees, cash advance fees, safe deposit box (plus forced entry and lost key replacement) fees, garnishment fees, returned deposit fees, stop payment fees PLUS charges for cashiers checks, deposit envelopes, money orders, coin machine usage, deposit bags, etc. etc. etc…
So basically here’s the deal we got for bailing out the banks. We have provided them with money to gamble in stock markets. Given them the wherewithal to funnel hefty sums to professional market players like hedge fund managers and the banks’ own top mangers. Gifted them with mounds of money virtually interest-free that they then loan out to consumers at rates that were long considered usurious, on top of which they can pile on fees and other charges with abandon. And in return, as folks at the Fed, in Congress and the Administration like to remind us endlessly, “we saved the banking system.”
What a deal! Your government in action.
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