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April 13th, 2009

Probe: Bailed-Out Banks Raising Fees

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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)

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2 Responses to “Probe: Bailed-Out Banks Raising Fees”

  1. Chris Says: April 13th, 2009 at 4:44 pm

    The FDIC has raised its premiums it charges banks for taking over failed institutions and insuring deposits. Banks could be passing these increases on to their customers.

    Congress had blocked FDIC from collecting these premiums during the boom times over the last ten years. Now FDIC is predicting a shortfall because of the increasing number of failing banks. FDIC is asking for billions in taxpayer funding to make up any future deficits.

    People are hopping mad at the bonuses paid to financial company executives, but out anger should be directed at Congress, the Treasury Secretary (present and past), the SEC, and any other federal agency with oversight and regulatory powers.

  2. Tim Manni Says: April 14th, 2009 at 11:56 am

    Chris,

    Thanks for commenting. I wonder if these increases also have something to do with the pending credit card legislation that lawmakers are trying to bump up from July 2010, to January…Maybe the credit card companies are employing these increases while they still can.

    Thanks again,
    Tim

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Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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