The Republic of T.

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Robbed By The Banks

Was there once a time when people robbed banks, instead of banks robbing people? Okay, maybe not, but it sounds like that’s what Chase Bank did to Trina Lee — a nurse in Arizona who was laid-off two years ago, then had medical problems that keep her from working full-time, and thus keeps a sharp eye on her bank account when it gets too close to $0.

Like a lot of people do occasionally, especially in this economy, Lee could see the bottom of her bank account rushing at her the way the ground rushes at some who just jumped (or got pushed) out of a plane. Like a lot of us, she cut it close in terms of how much long she had before her financial parachute kicked in or she hit the ground. And like a lot of us, she thought that she had just enough to avoid the latter.

Things have been tight for the Arizona-based nursing assistant since she got laid off two years ago and suffered some medical problems that have kept her from working full-time.

As a result, she’s become meticulous about watching her bank balance, which is often uncomfortably close to zero.

Earlier this month, she was feeling temporarily flush because she has prepaid most of her bills and figured the rest of her December income from child support and a part-time job could be spent on Christmas gifts.

So she splurged on a $65 meal with her mom and brother, knowing that it was possible that this one meal could overdraft her checking account.

Debit card transactions like this one require a signature and usually take a couple of days to clear, so Lee monitored every purchase after that, copying her daily bank account activity into a computer file each night to make sure she wasn’t stepping over the line.

But then Chase tied a few bricks to that parachute.

Before crediting her account for the child support payment, Chase bank not only put through the dinner charge, it also “reordered” every one of her pending transactions, turning one potential overdraft into four.

The mounting overdraft charges of $35 each then triggered two additional overdraft charges for small debit transactions that Lee did that day, before she’d realized that her account had gone into the red.

In total, Chase levied $210 in overdraft charges — $175 more than Lee imagined was possible.

“I accept responsibility for one overdraft,” said Lee, a 29-year-old mother of two. “But they created the rest of these. It’s really frustrating.”

Bank spokesman Greg Hassell said Chase would not reverse these charges because “Ms. Lee intentionally overdrafted her account, knowing she had insufficient funds for all her purchases.”

Let me get this straight. Lee had one transaction that would overdraw her account before her child support payment hit. Like many of us whose paychecks are directly deposited, it’s a transaction that happens on a regular schedule — in this case, monthly. Lee, then, knew about when the deposit would hit, and that she might have a couple of days before the dinner charge hit her account, otherwise she’d have an overdraft charge, and Chase would make $35.

I’m no banking expert, but my guess is that if Lee knew she had a deposit coming around the same time every month, then surely Chase must have known that too. A quick look at her record would have shown that. And certainly anyone who looked at her account long enough to see the pending transactions that would have hit after the deposit, would have seen that. If that’s what they were looking for. Instead, someone at Chase saw an opportunity to make more by creating four overdrafts Lee wouldn’t have had if Chase had left things alone.

It’s not just company policy at Chase, but common practice at many banks.

To boost revenue, many banks have jacked up fees and reworked policies to maximize the potential for overdrafts, putting even the most diligent account holders at risk, says Jean Ann Fox, director of financial services for the Consumer Federation of America. “You can get in the hole for hundreds of dollars before you even know it,” she warns.

Indeed, financial institutions collected more than $17.5 billion in overdraft fees last year, reports the Center for Responsible Lending, a nonprofit policy group.

At the heart of the revenue stream: so-called courtesy overdraft policies, which allow banks to pay charges that would otherwise bounce. Instead of incurring an insufficient funds fee, account holders must pay an overdraft fee and reimburse the bank for the borrowed funds. Even worse: Most banks use software to single out and pay overdrawn funds without regard to the account holder’s ability to pay back the overdraft and its associated fees. “It’s the only form of credit that can be involuntarily imposed on you,” says Chi Chi Wu, staff attorney at the National Consumer Law Center. “They’ve laid this tripwire, and there’s no point to it except to generate fees.”

…2) Reordered Debits and Deposits Banks often change the order in which debits and deposits clear your account, making it tough to determine whether you’re close to overdrawing. Bank of America, Chase, Citibank, PNC and Wachovia pay daily transactions in order from highest to lowest, according to a 2008 Consumer Federation of America survey.SunTrust, U.S. Bank and Washington Mutual use any processing order they choose.

Banks justify the practice as a way to ensure the most important debits get processed first (say, so a mortgage payment doesn’t bounce). But according to Sharon Reuss, spokeswoman for the Center for Responsible Lending, it’s really a way to maximize overdrafts. Say you start the day with $100 in your account. You buy a latte ($5), fill up on gas ($50), buy groceries ($35), swing by the drugstore ($8) and then the dry cleaner’s ($25). Processed chronologically, only the last transaction triggers an overdraft. Reordered from high to low, however, three purchases do.

And a profitable one at that.

Banks in the United States are poised to make $38.5 billion in customer overdraft fees this year, the Financial Times said, citing research by Moebs Services.

A large portion of the revenue is likely to come from the most financially stretched consumers, according to the paper.

It said the research showed that many banks have increased charges on overdrafts and credit cards in order to boost profits.

The median bank overdraft fee rose this year by one dollar to $26, the paper said, citing the Moebs data.

“Banks are returning to a fee-driven model and overdraft fees are the mother lode,” Mike Moebs, the company’s founder was quoted by the paper as saying.

Tell me again why we bailed these people out? I know, I know. The financial equivalent of apocalypse. I don’t know what kind of disaster, if any, would have occurred if any of these institutions had been allowed to fail. But seriously, after our government essentially gave them a blank check, they’re creating overdrafts for us?

And before I get comments about fiscal responsibility, etc., I get it. People shouldn’t overdraw their accounts. But it’s not like Lee, or thousands like her, ran hither and yon, bouncing and kiting checks willy nilly. Like a lot of people, she’s in a tight spot financially, and she’s usually very careful. (Again, anyone at Chase who looked at her record might have seen evidence of that, if they were looking for it.) She splurged and risked one overdraft … until Chase decided to juggle her transactions.

Quoth the Chase representative in the article, “Ms. Lee intentionally overdrafted her account, knowing she had insufficient funds for all her purchases.”

Please. This, from an institution that played a central role in the worst of subprime lending practices.

  • JPMorgan Chase had a hand in the worst of the subprime lending excesses, providing financing to the nation’s two largest subprime lenders, Countrywide and Ameriquest. This financing provided the companies with the capital they needed to originate subprime mortgages. JPMorgan Chase also owned a major subprime lender, Chase Home Finance, and has acquired two banks with large subprime operations: Washington Mutual (which owned #5 Long Beach Mortgage Co.) and Bear Stearns (which owned #17 Encore Credit Corp.). Together, these five firms issued over $295.3 billion in subprime loans from 2005-2007.
  • WaMu was a leader in subprime loans and pay-option adjustable rate mortgages (“option-ARMs”), which can actually grow the principal of the loan even as homeowners continue to make monthly payments. Even as the initial signs of a housing downturn became clear, WaMu kept making these risky loans well into 2007. At the end of 2007, over 56% of WaMu’s loan portfolio consisted of subprime loans, option-ARMs, and home equity loans.
  • Even after the crisis, JPMorgan Chase is up its old tricks, repackaging mortgage-backed securities that have been stuck on their books since the housing bubble burst and selling them as a new product. Known as “re-remics”, they simply pull out the worst of the bonds to boost the credit rating without addressing the quality of the underlying mortgages or the faulty structure of the product.

In that sense, they were like many other bailed-out banks with “self-inflicted wounds” when their subprime house of cards collapsed.

The major banks now collecting federal bailout money were not unwitting victims of the mortgage meltdown but instead were directly linked to the root cause of the problem: a subprime lending machine concentrated in Southern California, a new study asserts.

The banks were “enablers that bankrolled the type of lending threatening the international financial system,” according to the study being released today by the Center for Public Integrity, a Washington-based watchdog group.

The center collected data on the top two dozen subprime lenders in an effort to paint a comprehensive picture of how each major player was linked to the banking system.

“What happened to our largest financial institutions was very much a self-inflicted wound,” said the center’s executive director, Bill Buzenberg. “These banks owned many of the subprime lenders and financed their lending in order to get bundles of mortgage-backed securities that they could sell, reaping enormous profits.”

The report noted that investment banks Lehman Bros., Merrill Lynch, J.P. Morgan and Citigroup “both owned and financed subprime lenders,” and that others, including Goldman Sachs & Co. and Swiss bank Credit Suisse First Boston, were major financial backers of subprime lenders.

And they ended up in the hole because of it.

This, from an institution very near the top of Treasury’s bailout list. (Recipient of the fifth largest amount doled out.) Not only did JP Morgan Chase need taxpayers to kick in $29 million to cover Bear Stearns’ “insufficient funds” (in the form of subprime mortgages) so facilitate Chase’s acquisition of Stearns. Essentially, when JP Morgan Chase bought Bear Stearns, it risked getting stuck with Stearn’s bad debt (for lack of a better term) from its subprime shenanigans — which Chase helped to finance in the first place.

This, from an institution that, despite all the above has spent $6,336,000 on lobbying in 2008, fighting regulations to protect consumers and the economy from another crash like the one they and other financial firms helped bring about. And of course to oppose bills like the Overdraft Protection Act of 2009 (HR 3904) and the Fair Overdraft Coverage Act (S. 1799), both of which are lanquising in committees right now.

This, from an institution that despite receiving bailout money, continues handing out billions in bonuses to executives and employees, including $8.693 billion while earning only $5.6 billion after receiving TARP money from the government. In October, Chase reported that it had set aside another $7.3 billion for bonuses in the third quarter, bringing the total for the first nine months of the year to $21 billion — 23% more than last year.

And before I get comments about how people like Lee should live up to their obligations, remember that $25 billion Chase got from Treasury? It was intended, though apparently never specified, to be increase lending and aid troubled assets related to residential mortgages. But that wasn’t what Chase execs had planned, according to comments overheard on a conference call, just days after Chase agreed to take TARP money.

…In point of fact, the dirty little secret of the banking industry is that it has no intention of using the money to make new loans. But this executive was the first insider who’s been indiscreet enough to say it within earshot of a journalist.

(He didn’t mean to, of course, but I obtained the call-in number and listened to a recording.)

“Twenty-five billion dollars is obviously going to help the folks who are struggling more than Chase,” he began. “What we do think it will help us do is perhaps be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling. And I would not assume that we are done on the acquisition side just because of the Washington Mutual and Bear Stearns mergers. I think there are going to be some great opportunities for us to grow in this environment, and I think we have an opportunity to use that $25 billion in that way and obviously depending on whether recession turns into depression or what happens in the future, you know, we have that as a backstop.”

Read that answer as many times as you want – you are not going to find a single word in there about making loans to help the American economy. On the contrary: at another point in the conference call, the same executive (who I’m not naming because he didn’t know I would be listening in) explained that “loan dollars are down significantly.” He added, “We would think that loan volume will continue to go down as we continue to tighten credit to fully reflect the high cost of pricing on the loan side.” In other words JPMorgan has no intention of turning on the lending spigot.

“Let me tell you about the very rich. They are different from you and me,” begins F.Scott Fitzgerald’s short story, “The Rich Boy.” It may be more true today than when he wrote it. And certainly more true than ever between you and your bank. They will demand that you make good on your overdrafts — both your own and the ones they create for you when it suits them. And then they will demand that you, as a taxpayer, cover theirs.

Worst of all, we’re still waiting for financial reform, including the overdraft legislation above. Come to think of it, we’re waiting on major jobs legislation, real foreclosure relief, and a host of other things that might help the “real economy.”

We’ve bailed out Chase and firms like them, despite their finacial wreklessness, and they’ve gone from “too big to fail” to bigger than ever, and they know it.

Over the weekend, President Obama summoned the nation’s biggest bankers to Washington, but some of the biggest recipients of taxpayers’ money, including Citigroup and Goldman Sachs, didn’t bother making the extra effort to get there ahead of time to avoid the predictable winter weather that grounded their flights.

Mr. Obama was right when he said the banks owe “an extraordinary commitment” to taxpayers, and he got some promises to lend more. But that would have been more convincing if the administration had held the banks’ feet to the fire in the first place and had not agreed so quickly to freeing them from the bailout restraints. The truth is that the taxpayers are still very much on the hook for a banking system that is shaping up to be much riskier than the one that led to disaster.

Big bank profits, for instance, still come mostly courtesy of taxpayers. Their trading earnings are financed by more than a trillion dollars’ worth of cheap loans from the Federal Reserve, for which some of their most noxious assets are collateral. They benefit from immense federal loan guarantees, but they are not lending much. Lending to business, notably, is very tight.

To tell the truth, I don’t begrudge Trina Lee the $65 holiday meal with her mom and her brother nearly as much as I begrudge Chase et al their bailout and bounus billions.

Given all the above, why are we still bailing out institutions like Chase? And why are still not bailing out people like Trina Lee? Why are we, and Lee, still basically being robbed by banks?


  1. I have been saying for years that ours is not a democracy but a plutocracy. No one seems ready to accept the statement.

  2. Hey Terrance…

    The banks say that MC/Visa payments that are “pending” for a couple or three days, not actually hitting the account, are unavoidable. If you get a prepaid Visa account, though, for which payments are processed through the same system, the process is locked down. Any purchase which would create a negative balance is declined when the charge is attempted.

    And, guess what the prepaid card issuers’ motivation is for making sure overdrafts don’t happen? The cards aren’t technically issued by banks, and while some of their features resemble checking accounts, banking regs require that the prepaids not pretend to be checking accounts. One of the ways that is accomplished is by never going negative and guaranteeing that overdraft charges cannot occur.

    So, once the Visa/MC folks would lose their own money if an account went negative, they have the means in place to ensure it never happens. (The prepaid cards make their money by charging outrageous fees in other areas, like the $5 transaction fee to add cash to the account.)

    And, you’re on track in wondering whether banks have a clue that a direct deposit is pending. ACH deposits (payroll direct deposit, bill-paying services) happen via a 2-to-3 business-day process. If you get paid by direct deposit on Friday morning, it’s because your employer set the transaction up during business hours on Wednesday, approximately like this:

    Wed 1pm: Employer tells its bank (XYZbank) that John Doe, account #1234 at bank ABCbank, is to be paid $456.00 on Friday.

    Wed overnight: XYZbank feeds a transaction into the ACH system promising to put $456 into the system for account #1234 at ABCbank. It’s not a tentative commitment; the failure rate on these transactions is exceedingly low because XYZbank’s participation in the ACH system is dependent on it being reliable player.

    Wed overnight: ABCbank receives the notice of the deposit destined for account #1234. Its obligation is to confirm that #1234 is a valid, open account, and if not, issue a reject notice during or before the Thursday overnight processing.

    Friday: Regs are tighter for payroll direct deposits — the funds must be credited and available in John Doe’s account at the open of business. For other direct deposits, the funds must be available to John by early afternoon.

    But, again, this is a highly regulated, low-error process. If XYZbank is handling payroll direct deposits for an insolvent employer, it’s not the employer who will take the hit, it’s the bank.

    So, let’s re-frame this thought:

    “I’m no banking expert, but my guess is that if Lee knew she had a deposit coming around the same time every month, then surely Chase must have known that too. A quick look at her record would have shown that. And certainly anyone who looked at her account long enough to see the pending transactions that would have hit after the deposit, would have seen that.”

    This way:

    Chase received a notice that a Lee had a deposit coming 24-48 hours prior, including the amount. It wasn’t coming via a check that might bounce, it was arriving thanks to a taxpayer-supported federal banking system guaranteeing that there was little reason to question the funds were real.

    Cynically, Chase seems to be hiding behind regulations borne of low-tech banking from the past. They are not specifically required to credit Lee’s child support deposit to her account until later in the day, never mind that it is essentially guaranteed, so they drop it to the bottom of the pile, and process the charges against her account first.