FedUpUSA

Archive for November 30th, 2009

My take is this. Remember that the Fed is not the government, they are a group of private banking individuals who have stolen the very right to mint money in the United States. Therefore replacing Bernanke with yet another central banker puppet will have NO meaningful effect on the long term health of our economy. The right answer? The Fed needs to come down entirely, interest rates need to be set by the free market, and new methods need to be developed to control the quantity of money.

By Liz Pulliam Weston

Credit card issuers have become a pack of dangerous dogs. Somebody needs to yank their collective leash.

Yet Congress has blown a chance to do just that.

The House recently passed a bill that would have moved up the implementation of the credit card reform act from Feb. 22, 2010, to Dec. 1, 2009. But Senate opponents have blocked a similar bill, S. 1833.

Thank you, lawmakers. Now we’re in for three more months of card issuers‘ foul play.

Lenders actually started jacking up rates, lowering credit limits and closing accounts well before Congress passed the Credit Card Accountability, Responsibility and Disclosure Act, or Credit CARD Act, in May. Soaring default rates and frozen credit markets led issuers to start pulling in their horns in early 2008, as I wrote in “The credit card party is officially over.”

But the law’s passage has touched off a frenzy of issuer retaliation. Angry at lawmakers, lenders decided to take it out on their customers, regardless of those customers’ credit scores or payment histories.

Issuers seem oblivious to the fact that jacking up rates to 20% or even 30% is often a pointlessly counterproductive move, because savvy consumers with good credit can simply take their business elsewhere (check here for better offers), while others will be forced into default.

Banks no longer even pretend

The one silver lining is that the public is finally seeing how devious and untrustworthy credit card lenders truly are. When issuers limited themselves to beating up on folks with bad credit, it was too easy for the rest of us to dismiss their foul tactics as business as usual. Now that the schoolyard bullies are going after everyone, the need for putting restraints on the industry is ever more obvious.

Although virtually every issuer has participated in the madness, a few have managed to distinguish themselves and deserve to be called out. For example:

After promising to stop raising interest rates in advance of the Credit CARD Act’s implementation, Bank of America announced it would start slapping annual fees on accounts — a direct contradiction of its Oct. 5 pledge to stop “re-pricing” customer accounts.

Citibank has been raising rates, then promising to rebate a portion of the interest paid to customers who charge a certain amount every month. In other words, the lender will give customers a small kickback as long as they keep digging a bigger debt hole for themselves.

HSBC apparently lowered at least one customer’s credit limit simply because he lives in California. (I know some people are mindlessly biased against Californians, but this is ridiculous.)

We’ve heard a lot of bloviating about how lenders are just trying to protect their business models now that some of their most lucrative practices have been or are about to be banned. Practices such as:

Moving around due dates to generate late fees and penalty rates, giving insufficient notice when changing rates or terms and unilaterally imposing changes without giving customers a chance to opt out (all illegal as of Aug. 20).

Raising rates on existing balances, unfairly applying payments to lower-rate balances first to keep customers in debt longer, approving over-limit transactions to generate fees without customer consent, employing the horror known as double-cycle billing and charging outrageous fees on subprime cards (scheduled to be illegal as of Feb. 22).

Lenders are forced to screw over their customers, the argument goes, in order to stay in business.

Threats, cheating and lies are not good business

I have the same feeling about this idiotic line of reasoning that I had when the telemarketers cried foul about the federal Do Not Call list.

And that is: Tough toenails.

Video: Credit cards problems Congress didn’t fix

There’s nothing in the Constitution that says we have to guarantee obscene profits for businesses that chose to mislead, gouge and annoy their customers. If you get money by abusing other people, the money was never yours to begin with. If you can’t conduct your business fairly, then maybe you shouldn’t be in business at all.

I have perfect confidence that at least some issuers eventually will get it right. They will finally realize that the glory days of record profits are over and aren’t coming back. They’ll figure out that driving away customers isn’t a good idea. They’ll find a way to make reasonable profits while abiding by the new laws.

In the meantime, they all deserve a rolled-up newspaper across the nose.

Consumers Union is leading a last-ditch effort to get the Senate to act. If you want to help put the pressure on, click here to send a message to your senators.

Liz Pulliam Weston is the Web’s most-read personal-finance writer. She is the author of several books, most recently “Your Credit Score: Your Money & What’s at Stake.” Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board and helps middle-class families cope at Building a Brighter Future.

by Marla Singer and Geoffrey Batt

Buried in the depths of page 26 of the Office of the Special Inspector General for the Troubled Asset Relief Program’s (SIGTARP’s) November 17, 2009 report “Factors Affecting Efforts to Limit Payments to AIG Counterparties” hidden in footnotes 33 and 34 is something of a mystery.  It might be the beginning of an interconnected financial chain involving Dubai, the Federal Reserve, AIG, Basel I, Eastern Europe and even Switzerland and which, even if it doesn’t worry you, probably should.  Or it might be nothing at all.

Consider first “footnote 33,” that reads as follows:

The first Basel Accord, known as Basel I, was issued in 1988; it focused on the capital adequacy of financial institutions. The capital adequacy risk—the risk that a financial institution will be hurt by an unexpected loss—categorizes the assets of financial institution into five risk categories (0 percent, 10 percent, 20 percent, 50 percent, and 100 percent). Banks that operate internationally are required to have a risk weight of 8 percent or less….

The original paragraph that references the footnote reads thus:

As of September 30, 2009, AIG had $172 billion in exposure to swaps in its foreign regulatory capital portfolio.  The portfolio contains swaps purchased by financial institutions, principally in Europe, to provide regulatory capital relief under Basel I. [note 33]  AIGFP’s COO informed SIGTARP in July 2009 that they expect that most of these swaps will be terminated by the end of the first quarter 2010 as most financial institutions complete their transition to Basel II.  Currently, financial institutions are required to hold a certain level of capital against their assets, and one way for a financial institution to reduce the amount of capital is to purchase swap protection on its assets.  However, new requirements decrease the level of capital required for such assets and, in most cases, there will be limited capital benefit to holding on to the existing swaps. Nonetheless, AIG warned in a June 29, 2009, SEC filing that if credit markets deteriorate, the company may recognize unrealized losses in AIGFP’s regulatory capital credit default swap portfolio. [note 34]  AIG could continue to be at risk if the swaps in its regulatory capital portfolio are not terminated by the end of first quarter 2010 as expected. (Emphasis added).

Taken together we read the thrust of this section to mean that a number of European banks, seeking to limit their regulatory capital requirements under Basel I (read: seeking to increase their leverage) bought swap protection on their assets from AIG.  These obligations still sit with AIG and, in the event credit markets sink materially, AIG is likely to take losses on these instruments.  Not just that but:

According to an AIG SEC filing, an ongoing concern for AIGFP is whether it will have to post more collateral if credit markets continue to deteriorate.  The amount of future collateral postings is partly a function of AIG’s credit ratings, which may be affected by any further decline in AIG’s financial condition. (Emphasis added).

Simply put, AIG might also have to post more collateral.  Moreover, though AIG initially expected most of these swaps to “be terminated by the end of the first quarter 2010 as most financial institutions complete their transition to Basel II,” we see from footnote 34 that:

Subsequent to the June filing, European regulators adjusted the implementation timing of Basel II, potentially affecting the holders of AIGFP’s regulatory capital swaps to hold beyond previously anticipated termination dates.

In other words, AIG is still on the hook- and hadn’t planned to be.

This raises a number of questions:

1. If the European banks that bought swap protection from AIG are still relying on this protection to meet their capital requirements, and AIG might be unable to make good on the agreements, are these banks actually out of Basel I compliance as we type this?
2. Are the banks still able to use swap protection to reduce their collateral requirements because of the implicit or explicit backing of AIG by the Federal Reserve?
3. If this situation existed in September-November 2008, as it certainly appears to have, how exactly can the Federal Reserve claim in good faith that it lacked the leverage to negotiate with these banks from a position of strength?  (One assumes that many of the same names collecting payment from AIG were also AIG swap protection buyers of the sort mentioned in the SIGTARP report).  Failure to back up an insolvent AIG would have resulted in near-immediate Basel I non-compliance as the protection offered by these swaps, and on which these banks depended for their reduced capital requirements, evaporated- a near death sentence.
4. Or had these banks somehow, and in the middle of the credit crisis, managed to boost their capital to levels that made the swaps unimportant?
5. If so, why keep them on the books now, instead of unwinding them?
6. Since it doesn’t seem likely that a teetering AIG could make good on these agreements without substantial assistance is the Fed is currently the ultimate backstop for AIG?
7. Does this mean that the Fed is effectively underwriting these swap agreements?
8. Will the Fed post collateral if deteriorating credit conditions at AIG (today’s -$11 billion news suddenly seems especially daunting if the potential insurance shortfall has an effect on credit ratings) or general credit market issues require it?  Or are we missing something significant?  By September 30, 2008 AIG had already posted $974 million in collateral for its “Foreign Regulatory Capital” portfolio.
9. What if European banks are hit with more losses from, oh, we don’t know, say… Dubai?  Deleveraging, risk reduction and credit tightening would have an effect on LIBOR, the Eurobond market and, of course, Eastern Europe.  Might not that sort of contagion easily spread to, say, Switzerland, which enjoyed the other side of the carry trade for years by lending Swiss Franc like mad to any Eastern European mortgage borrower who could sign documents?
10. Could it be that the Fed, once again, might have to bail out the world?

Or maybe we are just missing something obvious.

Ben Bernanke’s confirmation hearing before the Senate Banking Committee for his reappointment as Fed chairman is scheduled for this Thursday.

When CEOs preside over disasters, they are fired. Captains go down with their ships.

And Bernanke needs to be replaced.

He was a major architect of the policies that created the crisis.

He ignored signs of the severity of the developing crisis and failed to prepare for obvious dangers, like the collapse of an investment bank.

He has turned the Fed into an off-balance sheet funding vehicle of the Treasury to circumvent constitutionally-mandated budgetary procedures.

He has fought all efforts to examine the central bank’s conduct in the rescue operation.

Before, during, and after the crisis, he has put the interests of banks ahead of those of ordinary citizens.

He needs to go. Tell your Senator that this vote matters to you and he needs to vote no on Bernanke. Enlist the support of like-minded colleagues and friends to deliver the same message. Keep it simple and to the point. Bernanke has failed at his job. The US public deserves and needs better.

Please sign http://StopBailoutBen.com/

Be certain to concentrate your calls and e-mail messages on the members of the Senate Banking Committee, who are:

Christopher J. Dodd Chairman (D-CT)

Tim Johnson (D-SD)

Jack Reed (D-RI)

Charles E. Schumer (D-NY)

Evan Bayh (D-IN)

Robert Menendez (D-NJ)

Daniel K. Akaka (D-HI)

Sherrod Brown (D-OH)

Jon Tester (D-MT)

Herb Kohl (D-WI)

Mark Warner (D-VA)

Jeff Merkley (D-OR)

Michael Bennet (D-CO)

Richard C. Shelby Ranking Member (R-AL)

Robert F. Bennett (R-UT)

Jim Bunning (R-KY)

Mike Crapo (R-ID)

Bob Corker (R-TN)

Jim DeMint (R-SC)

David Vitter (R-LA)

Mike Johanns (R-NE)

Kay Bailey Hutchison (R-TX)

Judd Gregg (R-NH)

The answer is, obviously, the latter: Dubai has a serious solvency problem, as can be seen from the see-through buildings dotting its shore and spiking its skies.