Probe: Bailed-Out Banks Raising Fees
by Tim Manni
In response to overwhelming customer complaints, a Congressional committee has launched a probe in order to examine the lending practices at the banks which have received TARP funds:
Elizabeth Warren, chairwoman of the Congressional Oversight Panel, the body named by Congress to oversee the federal bailout, said the panel is working on a report examining instances of potentially inappropriate lending by banks that got taxpayer capital. “The people who are subsidizing the activities of the banks through their tax dollars are the same people who are furnishing the high profits through consumer lending,” Ms. Warren said in an interview. “In a sense, we’re asking taxpayers to pay twice.”
Contrary to the intentions of the TARP, the report claims federally-supported institutions have increased the fees and rates they charge to their customers since first receiving the cash.
For example:
…Bank of America Corp. told some customers that interest rates on their credit cards will nearly double to about 14%. The Charlotte, N.C., bank, which got $45 billion in capital from the U.S. government, also is imposing fees of least $10 on a wide range of credit-card transactions.
Citigroup Inc., another recipient of government cash, is trying to entice customers to borrow at high rates. “You could get $5,000 today,” Citigroup’s consumer-finance unit wrote in fliers mailed to customers. The ads don’t disclose that the loans often carry annual interest rates of 30%.
The banks in question have defended their current business models saying they are merely a necessary course of action during trying economic times:
Banks say that raising fees and rates, even on low-risk customers, is a legitimate way to recoup some of the costs of the bad loans still on their books. They also say taxpayers have a financial interest in seeing the industry quickly return to profitability.
“It’s a fair argument,” said HSH Vice President Keith Gumbinger. “It’s certainly not invalid.”
The original nine institutions which received TARP funds were given so without stringent rules or regulations on how to spend the money (other than limits on executive pay), only given the implicit urge to lend.
“Where do we go from here?” asks Gumbinger. “How do we solve this problem?” Gumbinger explains that there could be two very different solutions — either nationalization in order to control future increases, or simply continue to allow current market conditions to dictate borrowing costs.
Despite popular opinion, these increases could actually work out to be a positive thing which entices price competition between the private entities. While price increases are certainly never welcomed with open arms, they do allow disgruntled customers to switch to a more accommodating service. Yet, if nationalization were to occur, it could mean defeat for both the banks and their customers searching for the most competitive offers.
“Once the government is your competitor, you will lose,” said Gumbinger.
Readers: In your opinion, are these increases a natural course of action for banks, or just another greedy stroke of the pen?
(hat tip: Seeking Alpha)
