As the first step in fighting the recession, the federal government lent banks $565 billion last fall. The Obama administration is now considering converting those loans into common stock. Banks want this debt conversion to take place as it will take debt off their balance sheets and convert it into equity, making them more solvent. The bailout loans were originally made to help banks deal with bad loans and stem the foreclosure bleeding.
The initial bank bailout has not been working. The Bush administration instituted the program virtually overnight, and did not require that banks do anything in return for the governments largesse.
The foreclosure bleeding is now turning into a hemorrhage. Home foreclosures are 46% higher than a year ago. Foreclosure filings, default notices, auction sale notices and bank repossessions were reported on 341,180 properties in March, 17% above Februarys total, according to RealtyTrac reports.
Not only are banks dumping on their worst customers by raising fees, they are also raising rates and fees on their best customers, tripling many interest rates on lines of credit and raising other fees.
In order to agree to swapping debt for stock, the US government should insist upon:
1. A moratorium on foreclosures for at-least six months;
2. A freeze on interest rates charged on credit cards and other loans; and,
3. A reduction of bank charges for late fees, overdraft charges and other fees that banks charge.
When negotiating a deal with the banks, all cards should be on the table. Banks do not have the right to dictate the terms of their own bailouts. Even if a bank does not have a bailout deal, the US Congress can impose a moratorium on foreclosures by passing a law, using its power to regulate interstate commerce and establish bankruptcy rules. However, the 19 largest banks in the United States all received bailout cash.
Banks are now seeking to strengthen their financial condition by worsening the finances of their borrowers. This will not bring us out of the recession. By reducing bank interest charges consumers will have more money to spend, which will increase economic activity. Banks are borrowing from the Federal Reserve Bank at less than one percent. They should not be allowed to raise 7% loans to 20% when the federal government is bailing them out.
The federal government has allowed banks to charge whatever they want for late fees, overdraft charges and other bank fees. U.S. banks collected more than $1.97 billion in fees for non-sufficient fund charges in 2006, according to a study released by the Federal Deposit Insurance Corp. Banks earned nearly two billion dollars in NSF-related fees in 2006, 74% of the $2.66 billion in service charges on deposit accounts reported by these banks. These NSF charges represented about 6% of the total net profit earned by the banks.
The average overdraft fee is now $27. If the feds require banks to roll NSF charges back to $5, banks will suffer an income loss of less than 5%, a price banks should be willing to pay to ensure their own survival.
Joel Joseph is chairman of the Made in the USA Foundation, a non-profit organization dedicated to promoting American-made products. Email firstname.lastname@example.org.
From The Progressive Populist, June 1, 2009
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