Thursday, April 23, 2009

When Will the Chicken Cross the Road

Ken Lewis, CEO of Bank of America recently made the following statements, “Credit is bad and we believe credit is going to get worse before it will eventually stabilize and improve. Even our internal economists are a little at odds as to the timing with some seeing recovery earlier (than year end). We believe unemployment levels wont peak until next year at somewhere in the high single digits.” Given these statements it’s no wonder banks are being accused of not lending. Maybe it is time that the banks tried leveling with us. Given today’s economic climate most loans appear to be bad business.

All of the major banks, JP Morgan (JPM), Wells Fargo Corp. (WFC) and Citigroup Inc. (C) are guilty of doing it, they are not loaning the TARP funds they have received. Instead, they are using the funds to make their banks balance sheets stronger. Critics believe that the banks should be loaning this money in order to stimulate the economy. These loans are supposed to lead to investment, increase business, jobs and overall stimulus of the economy, but the money must be lent for this to happen. The banking community insists they are lending while the consumer wholeheartedly disagrees.

This morning Donald Trump appeared on CNBC. As usual he was selling something. In this case, it was a book. He lamented that the banks are not lending. He was quick to point out that contrary to what the bank spokespeople and CEO’s were saying on CNBC and to reporters, they are not lending. He further protested that a bank loan, a home loan or a new credit card are next to impossible to obtain for almost all consumers. The position that he took was accurate. The unfortunate fact is banks are keeping the money because the real issue, according to banks, is that we are not worthy of the loan.

From home loans, to car loans and everything in between, we are defaulting. Student loan defaults are at an all time high. Small Business Loans (SBA) are at an all time high. Home foreclosures are at an all time high. As rational individuals, we must see the banks point of view. If you put money in your bank and returned to find it no longer there, would you deposit again? We doubt it. The banks feel the same way. Each time they lend, they lose, so why lend again? You know what, they have a point.

The issue here is that the banks make money from lending and the consumer needs the loan. Neither is getting what it needs right now. This has created a vicious cycle that the Fed did not intend. Why did the chicken cross the road? In this case, all the banks know, is there cant be a default if there is no loan. And the consumer knows, without the loan they are immobile. We feel, given the tarp funds, the banks need to make the first step.

So, I guess the real question is, “when will the chicken cross the road?”

Article Written by: Steven Gray

The Table is Set for Credit Card Relief

Our nations banks have come under increasing pressure and scrutiny over raising their credit-card rates in recent weeks. Consumer groups are particularly critical of those that raised rates on most existing cardholders while the banks received federal bailout funds. Banks maintain credit-market conditions and changes in borrowers' credit scores necessitated the increases. This week, President Obama stood up and promised the public that he would personally be meeting with the heads of all of the major credit card companies to discuss the increased rate issue.

Sunday, on Meet The Press, White House economic advisor Larry Summers had this to say, “the President is going to be very focused, in the very near term, on a whole set of issues having to do with credit-card abuses. He said abuses included charging consumers "extraordinarily high rates that they wouldn't have paid if they knew what they were getting themselves into." Mr. Summers is meeting with credit company CEO’s today along with President Obama.

Today’s meeting comes as issuers have aggressively raised borrowers' credit card rates to as high as 30%. This week, the House Financial Services Committee approved legislation to crack down on issuers' ability to raise interest rates on existing credit card debt. This new bill hopes to clamp down on how credit card issuers do business. These proposals along with recent restrictions imposed by the Federal Reserve, mark the most significant efforts toward reforming predatory industry practices that have been in place for decades.

The situation is further frustrated because the credit card companies have been receiving TARP money. Consumers feel this money should be utilized on their behalf. Lower rates and easier access to credit are what the consumer requires. Unfortunately, the banks and card companies disagree on this point. Carol Kaplan of the American Bankers Association feels, as for the bailout money, the TARP funds “provide a foundation” for companies to bolster their balance sheets, and aren’t meant to go toward things like helping credit-card customers directly.

The consumer and big business are often on different sides of the table. It is a rare occasion that finds them seated side by side. Currently, the table is set and we eagerly await the outcome. President Obama and today’s discussion will go a long way towards settling these issues. The President and Larry Summers seem to be on the right side of the table, ours, so lets applaud the administration for being there at all, but reserve our judgment until after we see what they are serving- and who picks up the check.