Feeling sorry for the banks? Don't.

A number of the nation’s banks are on the verge on bankruptcy if indeed they are not already there. Fear not, they’ll survive on a combination of foreign investment and your tax dollars spent to bail them out.

Why would a foreign investor be interested in our banks? US Banks can print money from the fees they charge their customers, many of whom can ill afford it. They do so with a smile and a promise of “no fee checking.” Banks are in trouble not because of an economic downturn so much as they pushed the envelope in their lending strategies. They were so enamored by their returns on sub-prime high risk loans that they couldn’t help themselves.

To set the stage let me first tell you that the number of Americans with bad credit depends on what socioeconomic group you belong to. The average number of people with bad credit drifts between 50 and 66% + during good years. A 2000 study by Freddie Mac found striking race-credit correlations: percent of group whose credit record is:

Racial Group
African Americans: "bad” 48% "indeterminate” 16% “good” 36%
Hispanics: "bad” 34% "indeterminate” 15% “good” 51%
Whites: "bad” 27% "indeterminate” 12% “good” 61%

These "bad credit" numbers trend higher during times of economic uncertainty and recession. Either way we're talking about the majority of American consumers.

Banks and lending institutions instead of helping people with bad credit with lower interest rates – instead set them up to fail. The sub-prime crisis is caused not by an unwillingness to repay a loan but by the inability to pay based upon the excessively high interest rates and fees. The same monthly loan repayment for a prime customer is over double for the sub-prime customer. Double. For the same loan.

The banks caused this problem themselves. The argument banks use is this: people with poor credit cost more to manage, have a high rate of loan failure and therefore carry more risk and therefore the loans should cost more.

However there is no cure to the bad credit issue in these high interest loans just a deliberate exacerbation of the problem starting from the moment the borrower signs for the loan. Low down payment? Higher signing and closing fees. High interest rates, sometimes in excess of twice the going rate. Late payment? Add 10%. It’s like for the consumer like pushing a large boulder up a steep hill. And when they falter the banks cut with a sharp knife.

Loan rates should be the same for everyone good credit and bad. The same rules apply to everyone in the event of default because the truth is that it doesn’t cost more to lend to poor credit applicants; the banks just see the opportunity to make more money.

How about other sources of bank income?

Banks in the US collected $17.5 billion in overdraft fees in 2006. These fees are a major source of income for the banks. These fees are wrong both in concept and application.

Banks charge an average of $32 per overdraft item – anything that overdraws the customers account. These, in reality, are forced short term loans payable within 30 days. The actually cost of an overdraft to the bank is between $2.80 and $5 on a bad day.

Consider this: The minimum wage in the US is $5.80. To pay for an overdraft or a returned check costs a worker on minimum wage over 6 hours of labor.

“If the consumer managed their money properly these fees wouldn’t apply,” is a typical response from a bank when the subject is brought up. Real life doesn’t conform to ideals. Banks know that, otherwise they wouldn’t have set up the overdraft trap that generates nearly $20 billion a year in near pure profit. When it comes down to it the only difference between a loan shark and a bank is that the bank has an office and tends not to break your bones if you don’t repay them. They do, however, ban you from opening an account in any other bank for five years if the amount remains unpaid in addition to banning you from reopening an account in their banks again in your lifetime. Ever.

Just a month ago consumers in the UK sued and won a suit against Barclays Bank for the excessive costs that they were charged for overdraft fees. Barclays settled – despite pressure from other banks not to do so - because of three distinct issues.

One, the consumers are morally correct and the public was on their side. As bank customers they deserve better.
Second is the issue of cartels and price fixing. Both are punishable in the U.S. by Federal Regulations. How come no banks charge $8 an item for an overdraft? Name one that breaks away from the $29.5 to $32.50 pack. I can’t either.
Finally is the issue of repayments and punitive judgments. Should a consumer group win a case against the banks for overcharging and cartel price fixing, the banks may be forced to repay every single incident of overcharging going back five years – about a $100 billion. Plus the jury awarded punitive charges which could amount to many times that. Oh, plus interest.