After the scandals regarding wrongdoings in the oversight of many foreclosures, Citigroup is the first bank in attempting to come clean by reviewing about 14,000 foreclosure cases for potential errors. Harold Lewis, a managing director of the bank's CitiMortgage unit is expected to say that Citi is “reviewing about 10,000 foreclosure documents to ensure they are correct. Another 4,000 are being reviewed because they may not have been signed with a notary public present, as required by state law” (WSJ).
However, Citigroup continues to argue that it has a good foreclosures documentation process. It explains that the error in the foreclosures were due to the fact that “the affidavits now reviewed were done before the bank took steps to strengthen procedures and added staff to ensure foreclosures were being processed correctly” (WSJ). Citigoup assures its investors that this mistakes made were an exception to the rule and that its foreclosure documentation process is sound and there aren’t systemic issues.
Citigroup is just the first one in a long list of bank which will try to regain their credibility. “Several major lenders, including Bank of America Corp., Wells Fargo & Co., Ally Financial Inc.'s GMAC Mortgage and J.P. Morgan Chase & Co., have been reviewing thousands of foreclosure cases amid revelations they filed large numbers of foreclosure documents without properly reviewing their contents” (WSJ).
If the banks succeed in regaining the public confidence and trust it would be reasonable to expect a faster recovery on the consumer banking industry and vise versa.
sources:http://online.wsj.com/article/SB10001424052748703688704575621120748504644.html?mod=WSJ_Banking_leftHeadlines
Thursday, November 18, 2010
Wednesday, November 17, 2010
Where to Find Free Checking Now
Free checking is when you as the consumer pay a small fee and in return the bank gives you certain ways to save. These savings include no low balance fees, no charge for ACH and Direct Deposit transactions, unlimited check writing, and free ATM/or Debit cards. Looking back now, people are realizing that the fees for free checking outweighed the actual savings. If people had invested in a savings account as opposed to a free checking account they would have yielded much more interest/ savings. So if by chance people are still looking to open free checking accounts, this article says that the best place to invest would be in your credit union. The article says that banks are only in the business to make a profit for their owners/ shareholders. Credit unions on the other hand have the main priority of returning low interest loans and high interest deposit accounts.
Could these credit unions be a threat to commercial banks? Credit unions are much smaller then big banks so they offer a more personal banking experience. At the same time however because of their size you are much less likely to find an ATM which could lead to additional costs for having to use other banks ATM. Banks must recognize that they might not be a dominant force in the consumer banking industry anymore. They must adapt to the methods that credit unions are using to gain business and incorporate them.
http://www.bargaineering.com/articles/find-free-checking.html
Could these credit unions be a threat to commercial banks? Credit unions are much smaller then big banks so they offer a more personal banking experience. At the same time however because of their size you are much less likely to find an ATM which could lead to additional costs for having to use other banks ATM. Banks must recognize that they might not be a dominant force in the consumer banking industry anymore. They must adapt to the methods that credit unions are using to gain business and incorporate them.
http://www.bargaineering.com/articles/find-free-checking.html
Fed Looks to Issue Another Round of Stress Tests
The Federal Reserve announced that it plans to once again analyze the top nineteen U.S. banks in attempts to gauge the healthiness and capacity of the banking system. The banks will be required to "submit capital plans by early next year showing their ability to withstand losses under a set of conditions, including 'adverse' economic conditions and continuing realestate-related woes." The banks were evaluated under a similar stress test in 2009 during the peak of the financial crisis.
The Fed's efforts are part of a greater initiative to enhance government oversight within the industry. The Fed will not only be checking up on the the bank's capacity to handle a crisis but more importantly ensuring that banks have tightened their lending standards on commercial and consumer loans. If banks are up to par, the Fed has set up requirements that will allow banks to raise dividends or buy back stock. But banks will only be given the go ahead if they "have the capital cushions in place to withstand losses over the next two years and demonstrate an ability to satisfy new, tougher, global capital requirements."
Hopefully, additional government oversight within the industry will provide more of a safety net for banks and their consumers. As banks become more stable, hopefully consumer confidence with in the industry will grow. Interestingly enough, the article points out that while "J.P Morgan, Wells Fargo, PNC Financial Services, and U.S. Bancorp are expected to be amount the first to be allowed to raise dividends," Bank of America and Citigroup apparently have "more hurdles" ahead. This further warrants our Wells Fargo investment recommendation. However, I have to wonder why the Fed believes BofA and Citi will not be up to par.
Source: http://online.wsj.com/article/SB10001424052748704648604575620732161392908.html?mod=WSJ_Banking_leftHeadlines
The Fed's efforts are part of a greater initiative to enhance government oversight within the industry. The Fed will not only be checking up on the the bank's capacity to handle a crisis but more importantly ensuring that banks have tightened their lending standards on commercial and consumer loans. If banks are up to par, the Fed has set up requirements that will allow banks to raise dividends or buy back stock. But banks will only be given the go ahead if they "have the capital cushions in place to withstand losses over the next two years and demonstrate an ability to satisfy new, tougher, global capital requirements."
Hopefully, additional government oversight within the industry will provide more of a safety net for banks and their consumers. As banks become more stable, hopefully consumer confidence with in the industry will grow. Interestingly enough, the article points out that while "J.P Morgan, Wells Fargo, PNC Financial Services, and U.S. Bancorp are expected to be amount the first to be allowed to raise dividends," Bank of America and Citigroup apparently have "more hurdles" ahead. This further warrants our Wells Fargo investment recommendation. However, I have to wonder why the Fed believes BofA and Citi will not be up to par.
Source: http://online.wsj.com/article/SB10001424052748704648604575620732161392908.html?mod=WSJ_Banking_leftHeadlines
Monday, November 15, 2010
Signs of Recovery for Credit Card Issuers in the Consumer Banking Industry
A report released on November 15th stated that most U.S. credit issuers saw a decline in delinquency rates between September and October (see article). Capital One Financial Corp. experienced the largest drop in delinquency rates out of the major U.S. credit issuers with a decline of 1.12% between September and October (see article). This news comes on the heels of a report issued by the Federal Reserve which stated that credit lines decreased by over $8 billion (see article). While the delinquency rates did not shrink for all banks, this report is still positive news for credit card issuers in the consumer banking industry.
This report is a sign that the credit card issuers could see an increase in revenue as the economy turns around. When the economy crashed, many cardholders were unable to pay off their balances which led to an increase in delinquencies, or late payments. Late payments are problematic for credit issuers because they are forced to cover the accounts with capital (see article). Falling delinquency rates mean that consumers are paying off their overdue balances, so credit card issuers don't have to worry as much about covering potential losses with capital. Now that the economy is recovering, cardholders are able to pay off their balances and spend more. An increase in spending on credit cards boosts the revenue of credit card issuers (see article). If this proves to be a long-term trend, credit card issuers could be on track for future profits in the long-run.
As for the consumer banking industry as a whole, this report indicates that the consumer banking industry appears to be recovering from the financial crisis. If the recovery continues, banks will begin to see long-term, stable growth which will propel the industry back to its former prominence.
-Justin Schaffer
http://online.wsj.com/article/SB10001424052748703670004575616751808746156.html
This report is a sign that the credit card issuers could see an increase in revenue as the economy turns around. When the economy crashed, many cardholders were unable to pay off their balances which led to an increase in delinquencies, or late payments. Late payments are problematic for credit issuers because they are forced to cover the accounts with capital (see article). Falling delinquency rates mean that consumers are paying off their overdue balances, so credit card issuers don't have to worry as much about covering potential losses with capital. Now that the economy is recovering, cardholders are able to pay off their balances and spend more. An increase in spending on credit cards boosts the revenue of credit card issuers (see article). If this proves to be a long-term trend, credit card issuers could be on track for future profits in the long-run.
As for the consumer banking industry as a whole, this report indicates that the consumer banking industry appears to be recovering from the financial crisis. If the recovery continues, banks will begin to see long-term, stable growth which will propel the industry back to its former prominence.
-Justin Schaffer
http://online.wsj.com/article/SB10001424052748703670004575616751808746156.html
Wednesday, November 10, 2010
Credit card interest rates hit another record high
The national average interest rate on new credit cards reached 14.78 percent. This record level interest rate is coincided by the national average credit card APR being at peak levels. The APR is comprised of about 100 of the most popular credit cards in the country, including cards from dozens of leading U.S. issuers. But these high APRs are not a new phenomenon for consumers. In fact, in the third quarter a survey shows that more executives actually increase their APRs then decrease them. However, Chase defied these increasing APRs by lowering the bottom end of the APR range on its Freedom card to 11.99%. Chase is not the only sign of there being hope for credit card consumers though. The Federal Reserve recently multiple senior loan officers for major banks. They found that more than 12 percent of lenders reported easing their credit card approval standards in the third quarter of 2010. This is a sign of what is to come for the credit card industry.
Even though credit rates are at record highs, borrowers will soon have an easier time getting a new credit card. But until these interest rates decrease they will continue to have a real impact on cardholder’s economic situations. Consumers can have as many credit cards as they want but with the interest rate increasing it will take them even longer to pay off the debt which will leave them in debt for years to come.
Source:
http://www.creditcards.com/credit-card-news/interest-rate-report-101110-1276.php
Even though credit rates are at record highs, borrowers will soon have an easier time getting a new credit card. But until these interest rates decrease they will continue to have a real impact on cardholder’s economic situations. Consumers can have as many credit cards as they want but with the interest rate increasing it will take them even longer to pay off the debt which will leave them in debt for years to come.
Source:
http://www.creditcards.com/credit-card-news/interest-rate-report-101110-1276.php
The Consumer Protection Act
As a response to the 2008 – 2009 recession the Federal Government enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. This act gives unprecedented power of the economy to the federal government. Milton Friedman must have been turning in his grave right about the time these passed thru congress. “The worst element of this system is that the extraordinary power given to regulators--and particularly the Federal Reserve--is likely to change the nature of the U.S. financial system” reads the Wall Street Journal. This will probably destroy the free market as we know it by creating a situation where banks must collude with the government to operate. The Journal continues “Where financial firms once focused on beating their competitors, they will now focus on currying favor with their regulator, which will have the power to control their every move. What may ultimately emerge is a partnership between the largest financial firms and the Federal Reserve”.
Key points in this Outlook:
•The Dodd-Frank Act gives the Federal Reserve, under light supervision by a council of regulators, unprecedented control over the largest firms in the U.S. financial system.
•The result may be a public-private partnership, in which the Fed protects the largest firms from excessive competition and failure and they in turn follow the government's directions.
•In the interest of protecting consumers, the act sacrifices the basic protections built into the U.S. Constitution, creating an agency--the Consumer Financial Protection Bureau--that is answerable to no one.
•Ultimately, the act's effort to suppress risk taking will result in a decline in U.S. competitiveness, innovation, and economic growth.
This means more oversight over the economy and less risky investments for the banks. Loans, credit and mortgages will be less accessible as a result and this will lower the revenue that companies collect. In the short run this policy seems bad for business. It remains to be seen if it prevents future recessions.
Key points in this Outlook:
•The Dodd-Frank Act gives the Federal Reserve, under light supervision by a council of regulators, unprecedented control over the largest firms in the U.S. financial system.
•The result may be a public-private partnership, in which the Fed protects the largest firms from excessive competition and failure and they in turn follow the government's directions.
•In the interest of protecting consumers, the act sacrifices the basic protections built into the U.S. Constitution, creating an agency--the Consumer Financial Protection Bureau--that is answerable to no one.
•Ultimately, the act's effort to suppress risk taking will result in a decline in U.S. competitiveness, innovation, and economic growth.
This means more oversight over the economy and less risky investments for the banks. Loans, credit and mortgages will be less accessible as a result and this will lower the revenue that companies collect. In the short run this policy seems bad for business. It remains to be seen if it prevents future recessions.
Regulations on College Campus Credit-Card Recruitment Leave Banks With Few, Profitable Options
Under new credit regulations, banks are no longer allowed to issue credit cards to anyone under the age of twenty-one unless the applicant has a co-signer or proof that they can independently afford the card. This specifically undermines strategies that consumer banks long capitalized on on college campuses. Before such regulations, college campuses signed contracts with banks, allowing banks to market their credit cards to students on campus. Students were offered pizza, t-shirts, etc. in hopes that they would fill out a card application. Credit-cards were often given to students without checking income sources. Estimates suggest that in 2008, eighty-four percent of undergraduates had at least one credit card with averaging balances toping $3,100.
The article outlines that such regulations will pose a giant, strategical problem for banks across the board (especially Bank of America). Bank of America had contracts with over 906 college institutions and paid them over $62 million dollars for access to their student market. The bank opened more than 38,000 accounts per year, amounting to "roughly $1,600 paid for each new student account." JP Morgan Chase will also be widely affected. The bank paid over $13.9 million in contracts with college institutions to open 529 accounts, translating into $26,000 per student !!!!
These statistics and regulations indicate a couple things. First, college student credit card accounts represented a huge, profitable market for banks. Second, banks are willing to invest a ton in undergraduate students, knowing that they could be potential, long-term clients. And third, these regulations will severely hinder credit card interest profits that banks were making off of these students. But then again, there's always debit.
http://www.americanbankingnews.com/2010/10/28/new-credit-card-strategy-needed-for-bank-of-america-nyse-bac-jpmorgan-chase-nyse-jpm-and-others/
Sunday, November 7, 2010
Foreclosures Continue to Drain the Consumer Banking Industry
Poor mortgage oversight continues to haunt the consumer banking industry. A recent article from The Wall Street Journal highlighted the consumer banking industry's struggles in trying to sort out the massive amount of home foreclosures. The high volume of foreclosures has caused members of the consumer banking industry to shift much of their focus to their home mortgage branches. The home mortgage branch represents one of the most profitable services provided by consumer banks. The focus on mortgages may allow banks to keep up with the high volume of foreclosures, but it is also drawing attention away from the other services provided by banks (Reilly, 2010). This is making the business of home mortgages less efficient and less profitable (Reilly, 2010).
As far as trends in the industry go, the future does not look any brighter for the consumer banking industry. All home mortgage providers in the United States were given a negative future outlook by one rating association (Reilly, 2010). This is clearly an indicator that the consumer banking industry still has a large task on its hands as it tries to sort through all of the issues surrounding foreclosures. This is bad news for the industry as it tries to recover from the financial crisis. In order to become more profitable, banks are going to have to sort out the problems with foreclosures and make this a profitable service once again.
This article mirrors what I found out during my informational interview. I interviewed a man from Wells Fargo's Home Mortgage Branch. He told me that he has noticed that his local branch at Wells Fargo has had to shift much of its focus to the Home Mortgage Branch of the business. This just serves as further proof that the effect of the foreclosures is being felt even at some of the most basic levels of the consumer banking industry.
-Justin Schaffer
http://online.wsj.com/article/SB10001424052748704405704575596531820563978.html
As far as trends in the industry go, the future does not look any brighter for the consumer banking industry. All home mortgage providers in the United States were given a negative future outlook by one rating association (Reilly, 2010). This is clearly an indicator that the consumer banking industry still has a large task on its hands as it tries to sort through all of the issues surrounding foreclosures. This is bad news for the industry as it tries to recover from the financial crisis. In order to become more profitable, banks are going to have to sort out the problems with foreclosures and make this a profitable service once again.
This article mirrors what I found out during my informational interview. I interviewed a man from Wells Fargo's Home Mortgage Branch. He told me that he has noticed that his local branch at Wells Fargo has had to shift much of its focus to the Home Mortgage Branch of the business. This just serves as further proof that the effect of the foreclosures is being felt even at some of the most basic levels of the consumer banking industry.
-Justin Schaffer
http://online.wsj.com/article/SB10001424052748704405704575596531820563978.html
Wednesday, November 3, 2010
Bank of America’s Not-So-Monumental, New Consumer Banking Strategy
Mounting government regulations and expected revenue loss has lead Bank of America to announce its launch of a new consumer banking strategy. The strategy is geared at bringing consumers “a better banking experience” through “focusing on a on a relationship enhancement strategy designed to incent customers to bring more business” and making “pricing more upfront and transparent.”
The strategy outlines vague innovations and measures that the banks intends to capitalize on over the next few months. eBanking in particular seems to be the first of many innovations we can expect as Bank of America begins to implement its new strategy. Bank of America hopes that the rewards and better pricing it offers through eBanking will attract more business. The bank also writes that intends on offering customers more choices on how to pay for banking services and “reward them for using certain products or bringing more balances.” The bank concludes its statement, writing that it will also look into developing new products that will target the needs of specific consumer groups.
Though the statement represents an effort to prioritize the consumer banking industry, it is clear that Bank of America really doesn’t have any monumental change or innovation in mind for how will proceed with its consumer banking operations. The statement is vague and indicative of two major problems facing the industry: innovation and differentiation. It seems as though the banks are fresh out of ideas now that lucrative late fee and interest rate policies have been ousted. Bank of America in particular certainly seems to be lacking when in comes to bringing new ideas to the table.
http://bucks.blogs.nytimes.com/2010/10/21/what-will-bank-of-america-do-to-its-checking-accounts/?scp=4&sq=%22Bank%20of%20America&st=cse
Citigroup posts gains for the past three quarters?
Ever since the beginning of the recession in 2008, Citigroup stood as a symbol of all that was wrong in the financial system. However this past quarter Citigroup posted a $2.2 billion quarterly gain, which marks the third consecutive quarter where Citigroup has had a gain. Citigroup has been taking technical steps that have allowed it to start its reemergence from its previous state of dismay.
Recently Citigroup as well as its rivals (Bank of America, GMAC, etc.) have been plagued by a problem called Robo-Signing. Robo-Signing is when there is a flood of paperwork from foreclosures which is caused when representatives sign off on foreclosures without verifying the information in the documents. Citigroup though is hoping to have avoided this documentation problem. According to Citigroup executives, the banks consumer banking division anticipated these mounting foreclosures close to 18 months ago. By anticipating these foreclosures Citigroup was able to its loan-servicing practices by bolstering employee training and tightening documentation practices. By doing this Citigroup has sidestepped an unnecessary setback which gives them a competitive advantage over other consumer banks. The bank has decided it does not need to set aside cash to cover Robo-Signing problems though. It has however raised its reserves to handle other potential mortgage problems that might force it to repurchase some loans. Citigroup’s mortgage servicing portfolio is a $500 billion, and over the past 3 quarters it has added about $322 million to cover the potential costs of faulty mortgages it will repurchase from Fannie Mae, Freddie Mac and other private insurers. The bank still has the problem though of finding a buyer for CitiFinancial, its large consumer lending franchise that serves lower-income customers, as well as a big portfolio of subprime credit card loans.
Citigroup is now on the path of emerging as one of the top consumer banks in America. By taking the steps it has taken, they are now in a place where they can compete with other banks. But Citigroup isn’t the only bank that is on an upswing. JPMorgan Chase, whose mortgage servicing portfolio is nearly twice Citi’s size, set aside about $1 billion last week, bringing its total to about $3 billion. This is a sign that consumer banking industry is finally starting to stabilize after several years of decline.
-http://www.nytimes.com/2010/10/19/business/19citi.html?scp=7&sq=consumer%20banking&st=cse
Recently Citigroup as well as its rivals (Bank of America, GMAC, etc.) have been plagued by a problem called Robo-Signing. Robo-Signing is when there is a flood of paperwork from foreclosures which is caused when representatives sign off on foreclosures without verifying the information in the documents. Citigroup though is hoping to have avoided this documentation problem. According to Citigroup executives, the banks consumer banking division anticipated these mounting foreclosures close to 18 months ago. By anticipating these foreclosures Citigroup was able to its loan-servicing practices by bolstering employee training and tightening documentation practices. By doing this Citigroup has sidestepped an unnecessary setback which gives them a competitive advantage over other consumer banks. The bank has decided it does not need to set aside cash to cover Robo-Signing problems though. It has however raised its reserves to handle other potential mortgage problems that might force it to repurchase some loans. Citigroup’s mortgage servicing portfolio is a $500 billion, and over the past 3 quarters it has added about $322 million to cover the potential costs of faulty mortgages it will repurchase from Fannie Mae, Freddie Mac and other private insurers. The bank still has the problem though of finding a buyer for CitiFinancial, its large consumer lending franchise that serves lower-income customers, as well as a big portfolio of subprime credit card loans.
Citigroup is now on the path of emerging as one of the top consumer banks in America. By taking the steps it has taken, they are now in a place where they can compete with other banks. But Citigroup isn’t the only bank that is on an upswing. JPMorgan Chase, whose mortgage servicing portfolio is nearly twice Citi’s size, set aside about $1 billion last week, bringing its total to about $3 billion. This is a sign that consumer banking industry is finally starting to stabilize after several years of decline.
-http://www.nytimes.com/2010/10/19/business/19citi.html?scp=7&sq=consumer%20banking&st=cse
Tuesday, November 2, 2010
A Merger Deal Gone Bad
As Bank of America continues to struggle with the high number of foreclosures, there is talk that the bank could push Countrywide into bankruptcy. Amidst the height of the financial crisis in 2008, Countrywide, a company that specialized in home mortgages, was going under because of the high amount of foreclosures. Bank of America merged with the company to try and relieve some of the problems the company had to deal with. Since the merger two years ago, the Countrywide unit has caused nothing but trouble for Bank of America. One analyst says that Countrywide units account for 86% of Bank of America's overdue mortgage loans (see article). There are rumors that Bank of America is considering dropping Countrywide and pushing it into bankruptcy rather than resolve its issues.
If Bank of America does push Countrywide into bankruptcy, this event could have enormous repercussions in the consumer banking industry. Bank of America has come under fire in the media recently because of its struggle to sort out its home mortgage issues. Since Countrywide accounts for most of Bank of America's foreclosures, dropping the company would alleviate a great deal of Bank of America's worries. This could end up making the company stronger in the end. On the other hand, pushing Countrywide to bankruptcy could have negative repercussions in the rest of the system. This news is clearly an example of some of the negative effects of a merger. While some companies merge to make a single stronger firm, Countrywide's weakness clearly has poisoned Bank of America.
Regarding an investment recommendation, this news serves as further evidence of why the investment recommendation should not support Bank of America. The bank has already come under fire for other issues, and these rumors add to the growing list of reasons why investing in this bank would not be a good idea.
-Justin Schaffer
Wednesday, October 27, 2010
Bank of America Finds Foreclosure Document Errors
A couple of months ago, it at discovered that “many banks used "robo-signers" to approve large numbers of foreclosure documents without reading them closely” (WSJ). Two of such banks are Bank of America and Wells Fargo & Co. Which are currently been scrutinized by the federal government regarding their handling of foreclosures. The problem here is that banks were evading their responsibility of overseeing the transactions of the foreclosures. It became more profitable to make a thousand foreclosures wrong than a few right.
The worst thing is that both banks were shameless about the matter and did not take responsibility for their actions. “Bank of America in several recent public comments about the foreclosure issue did not acknowledge even minor errors” (WSJ). “Wells Fargo & Co. Chief Executive John Stumpf on Oct. 20 said: "I don't know how other companies do it, but in our company the affidavit signer and the reviewer are the same team member."” (WSJ). It is not but recently, and only under the scrutiny of the government, that both corporations have either admitted wrong doings or have gotten caught on the act. The Wall Street Journal reads: “Bank of America Corp. for the first time acknowledged finding some mistakes in foreclosure files as it begins to resubmit documents in 102,000 cases” (WSJ). The article continues “Days later a deposition emerged from a bankruptcy case indicating that Wells Fargo had in fact used a robo-signer who didn't verify documents she approved” (WSJ). This keeping in mind that this are the nation's largest mortgage lenders.
Within the mistakes found on the contracts range the following errors:
• address missing one of five digits
• misspellings of borrowers' names
• transposition of a first and last name
• missing signature
So what does this mean, which is the bottom line? Two things. First, Bank of America and Wells Fargo, which are big players on the consumer banking industry, have lost their credibility as overseers of foreclosures. And second,both corporations will probably have a harder time dealing with great volume of foreclosures because of the government oversight. Both things will affect both corporations’ bottom lines negatively in the short and long run.
Source:
http://online.wsj.com/article/SB10001424052702303864404575572662815011760.html#articleTabs%3Darticle
The worst thing is that both banks were shameless about the matter and did not take responsibility for their actions. “Bank of America in several recent public comments about the foreclosure issue did not acknowledge even minor errors” (WSJ). “Wells Fargo & Co. Chief Executive John Stumpf on Oct. 20 said: "I don't know how other companies do it, but in our company the affidavit signer and the reviewer are the same team member."” (WSJ). It is not but recently, and only under the scrutiny of the government, that both corporations have either admitted wrong doings or have gotten caught on the act. The Wall Street Journal reads: “Bank of America Corp. for the first time acknowledged finding some mistakes in foreclosure files as it begins to resubmit documents in 102,000 cases” (WSJ). The article continues “Days later a deposition emerged from a bankruptcy case indicating that Wells Fargo had in fact used a robo-signer who didn't verify documents she approved” (WSJ). This keeping in mind that this are the nation's largest mortgage lenders.
Within the mistakes found on the contracts range the following errors:
• address missing one of five digits
• misspellings of borrowers' names
• transposition of a first and last name
• missing signature
So what does this mean, which is the bottom line? Two things. First, Bank of America and Wells Fargo, which are big players on the consumer banking industry, have lost their credibility as overseers of foreclosures. And second,both corporations will probably have a harder time dealing with great volume of foreclosures because of the government oversight. Both things will affect both corporations’ bottom lines negatively in the short and long run.
Source:
http://online.wsj.com/article/SB10001424052702303864404575572662815011760.html#articleTabs%3Darticle
Wells Fargo Emerges as an Industry Leader
Results from the 3rd quarter show that Wells Fargo has emerged as one of the most profitable members of the consumer banking industry. Wells Fargo & Co., the 4th largest bank by assets, had a profitable quarter as it lent $150 million more than it did in the 2nd quarter. This increase in lending led to more than $2 billion of profit for the bank. One of the key factors that stimulated Wells Fargo's 3rd quarter growth was low mortgage rates originating from government stimulus programs. The government's attempts to stimulate the economy led to an increase in demand for new mortgages, which boosted Wells Fargo's profits.
This news is important for the consumer banking industry on two levels. First, Wells Fargo's higher profits indicate a larger trend of increasing demand for new mortgages. This is important because it shows that consumers have confidence in applying for new mortgages. Consumer confidence is important as the economy continues to recover from the global recession. Hopefully higher consumer confidence will continue to stimulate growth in the consumer banking industry and benefit the economy as a whole.
Wells Fargo's increasing profits also display the government's role in changing the landscape of the consumer banking industry. Government programs to "entice home buyers" are important factors that contribute to the increase in consumer demand. This shows that the government has an important role in affecting the consumer banking industry and its profits. By stimulating profit, the government offset some of its regulations limiting overdraft fees. Either way, Wells Fargo's earnings show that the government plays an important role in shaping the landscape of the consumer banking industry.
-Justin Schaffer
Source: WSJ http://online.wsj.com/article/SB10001424052702304741404575563881198351028.html
Source: WSJ http://online.wsj.com/article/SB10001424052702304741404575563881198351028.html
Bank of America's New Consumer Bank Strategy
Bank of America announced that it would begin testing new banking offerings in select markets in December as part of its “new consumer bank strategy”. These new offers are so that the bank may figure out new sources of revenue. The New consumer banking strategy will focus on a relationship enhancement strategy which will hopefully have consumers bring more business to the bank as well as make pricing more upfront and transparent.
Previously Bank of America had depended on penalty fees which now this new strategy is trying to make up for. This is an attempt to move Bank of America away from this dependence on penalty fees, and move towards making Bank of America a premier banking experience which will result in additional revenue.
In August Bank of America began offering one of its first consumer solutions, eBanking. This allows for customers that use online banking and ATMs to get better pricing. In December the bank will continue this new idea of providing customers choices on how to pay for banking services and reward them for using certain products. Additional testing will begin next year with new products in the payment area that would meet the evolving needs of specific customers.
Anne Pace, a spokesperson for Bank of America, thinks that consumers “will choose to pay through their behaviors — either banking through self-service channels or by their frequency of payment activity through a debit card or credit card. Some will choose to bring us more of their business through higher balances, their mortgage, etc. Others will simply choose to pay a monthly maintenance fee”. People with a cynical view on this new strategy believe that these rewards will simply be no fees but nothing more than that.
I believe that Bank of America’s strategy will work. Bank of America is enticing people with rewards which will lead to more people bringing their business to Bank of America which will increase their revenue. Bank of America has to make sure that these rewards aren’t as simple as cynical people think they will be or else there will be no incentive for people to bring their business to Bank of America.
http://bucks.blogs.nytimes.com/2010/10/21/what-will-bank-of-america-do-to-its-checking-accounts/?scp=7&sq=consumer%20banking&st=cse
Previously Bank of America had depended on penalty fees which now this new strategy is trying to make up for. This is an attempt to move Bank of America away from this dependence on penalty fees, and move towards making Bank of America a premier banking experience which will result in additional revenue.
In August Bank of America began offering one of its first consumer solutions, eBanking. This allows for customers that use online banking and ATMs to get better pricing. In December the bank will continue this new idea of providing customers choices on how to pay for banking services and reward them for using certain products. Additional testing will begin next year with new products in the payment area that would meet the evolving needs of specific customers.
Anne Pace, a spokesperson for Bank of America, thinks that consumers “will choose to pay through their behaviors — either banking through self-service channels or by their frequency of payment activity through a debit card or credit card. Some will choose to bring us more of their business through higher balances, their mortgage, etc. Others will simply choose to pay a monthly maintenance fee”. People with a cynical view on this new strategy believe that these rewards will simply be no fees but nothing more than that.
I believe that Bank of America’s strategy will work. Bank of America is enticing people with rewards which will lead to more people bringing their business to Bank of America which will increase their revenue. Bank of America has to make sure that these rewards aren’t as simple as cynical people think they will be or else there will be no incentive for people to bring their business to Bank of America.
http://bucks.blogs.nytimes.com/2010/10/21/what-will-bank-of-america-do-to-its-checking-accounts/?scp=7&sq=consumer%20banking&st=cse
Bank of America
Bank of America has gone from being a regional institution to the nation's largest consumer banking franchise. In 2003 it merged with FleetBoston Financial which gave it the most branches, customers and checking accounts of any United States bank. In 2005 its merger with MBNA made Bank of America the biggest credit card issuer. After a failed merger with Merrill Lynch and the acquisition of the very troubled Countrywide Financial during the financial crisis, it lost its place on top to J.P. Morgan Chase and Goldman Sachs. Not to mention Kenneth D. Lewis the former chief executive losing his job.
It seemed that Bank of American couldn’t do anything right until April 2010 when the new chief executive reported a first quarter profit of 3.2 billion. What had been thought to be a failed merger with Merrill Lynch was actually the main cause for this first quarter profit. However by the third quarter the bank reported a $7.3 billion loss due to a $3.1 billion profit set and a write down of $10.4 billion in the value of its credit card unit. On June 7, 2010 countrywide agreed to pay $108 million in settlements for federal charges that the company overcharged customers.
The article states that “Bank of America was slower than all other big financial institutions besides Citigroup to repay its federal bailout money -- $45 billion, $20 billion of which had come as emergency aid after the Merrill losses were revealed”. With Bank of America constantly having to make up for its acquisitions of Merrill Lynch and Countrywide it is no wonder they were the slowest to repay their bailout money. But even though bank of American reported losses in the third quarter, its first quarter profits had come mainly from Merrill Lynch. This is a sign that Merrill Lynch is becoming less of a burden on Bank of American and more of the source of profit they hoped it would be when they acquired it. As for countrywide, with a settlement finally being reached, hopefully Bank of America will be able to turn a profit on countrywide just as it has done with Merrill Lynch.
http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html?scp=3&sq=consumer%20banking&st=cse
It seemed that Bank of American couldn’t do anything right until April 2010 when the new chief executive reported a first quarter profit of 3.2 billion. What had been thought to be a failed merger with Merrill Lynch was actually the main cause for this first quarter profit. However by the third quarter the bank reported a $7.3 billion loss due to a $3.1 billion profit set and a write down of $10.4 billion in the value of its credit card unit. On June 7, 2010 countrywide agreed to pay $108 million in settlements for federal charges that the company overcharged customers.
The article states that “Bank of America was slower than all other big financial institutions besides Citigroup to repay its federal bailout money -- $45 billion, $20 billion of which had come as emergency aid after the Merrill losses were revealed”. With Bank of America constantly having to make up for its acquisitions of Merrill Lynch and Countrywide it is no wonder they were the slowest to repay their bailout money. But even though bank of American reported losses in the third quarter, its first quarter profits had come mainly from Merrill Lynch. This is a sign that Merrill Lynch is becoming less of a burden on Bank of American and more of the source of profit they hoped it would be when they acquired it. As for countrywide, with a settlement finally being reached, hopefully Bank of America will be able to turn a profit on countrywide just as it has done with Merrill Lynch.
http://topics.nytimes.com/top/news/business/companies/bank_of_america_corporation/index.html?scp=3&sq=consumer%20banking&st=cse
Tuesday, October 26, 2010
Fed Looking to Tighten Credit Card Regulations… Sound Familiar?
In order to block practices that banks have used to circumvent new credit card laws, the Federal Reserve recently announced plans to amend the credit card regulations it established back in May of 2009. The Wallstreet Journal sites two examples of banks, Citibank and First Premier Bank, that have creatively skirted the regulations.
Citibank recently launched a new promotional program that raised some customers’ interest rates as high as 29.9%. The bank then turned around and “offered a rebate on up to 70% of finance charges if they were paid on time.” In some cases, the rebate brought the borrower’s interest costs to the same cost it would have been prior to the rate increase. Further, the bank’s policy on the promotional program allowed it to revoke rebates at any time. In doing so, the bank was technically breeching rules that disallowed banks from raising rates on existing balances and the 45-day notice for changing terms. The amendments the Fed looks to impose will prohibit this type of promotional program. The fed stated that, "Promotional programs that waive interest charges for a specified period of time are subject to the same protections as promotional programs that apply a reduced rate for a specified period."
First Premier Bank also tried to circumvent new credit card regulations by offering a card with a $300 limit, $75 annual fee, and a $95 processing fee to be paid before the card is activated. Technically, the bank is in violation of the fed’s law that limits fees to no more than 25% of the card’s credit line in the first year. The bank claimed that “the 25% limit only applied to fees charged after an account was opened.” The fed’s amendment will clearly indicate that the 25% restriction also encompasses fees that the consumer is required to pay before the credit card is used.
I think that these are two of many practices that the fed will call into question when it reevaluates its credit laws. Hopefully, the amendments made will give consumers a break and disallow banks from instituting high fees to make up for lost profits.
Thursday, October 14, 2010
First Credit and Now Debit: Bank Sues Fed Over Forthcoming Debit Card Transaction Fees
Last week, I discussed how credit giants Visa and MasterCard caved into the demands of the U.S. Department of Justice, forcing them to nix policies that disallowed merchants from offering discounts to customers who paid using credit-cards with lower processing fees. A similar story can now be said for new laws imposed on under the Dodd-Frank financial-overhaul bill; but this time, the banks are being targeted for their hefty debit-card processing fees.
Under the new set of regulations, banks with assets of over $10 billion will be required to dramatically lower their debit-card processing fees. The regulation is, once again, aimed at helping merchants who have long complained that the fees are unreasonable and too high. U.S. banks acquire an estimate $20 million a year from these debit-card fees and typically charge merchants anywhere from .75% to 1.25% on each transaction.
TCF Financial Corp., one of the nation's biggest issuers of debit-cards, has filed a lawsuit against the Fed., claiming that the new law unfairly targets big financial institutions and disallows the company it's constitutional right to "recover its costs and a reasonable return on its invested capital." Clearly, this regulation will hurt the consumer banking industry across the board -- even smaller financial institutions who will need to compete against the lower processing fees of the larger financial institutions. It will be interesting to see if TCF can win the lawsuit. If not, banks may force consumers to make up for lost processing fee profits (i.e. requiring consumers to pay a certain monthly fee).
Under the new set of regulations, banks with assets of over $10 billion will be required to dramatically lower their debit-card processing fees. The regulation is, once again, aimed at helping merchants who have long complained that the fees are unreasonable and too high. U.S. banks acquire an estimate $20 million a year from these debit-card fees and typically charge merchants anywhere from .75% to 1.25% on each transaction.
TCF Financial Corp., one of the nation's biggest issuers of debit-cards, has filed a lawsuit against the Fed., claiming that the new law unfairly targets big financial institutions and disallows the company it's constitutional right to "recover its costs and a reasonable return on its invested capital." Clearly, this regulation will hurt the consumer banking industry across the board -- even smaller financial institutions who will need to compete against the lower processing fees of the larger financial institutions. It will be interesting to see if TCF can win the lawsuit. If not, banks may force consumers to make up for lost processing fee profits (i.e. requiring consumers to pay a certain monthly fee).
Wednesday, October 13, 2010
Wal-Mart and Green Dot will change the consumer banking industry
Wal-Mart is attempting to sell prepaid debit card thru Green Dot. “Green Dot is the largest provider of prepaid debit cards, which are sold as an alternative to checking accounts” (WSJ). The service provided by green Dot parallels that of prepaid phone cards. The “consumers can cash checks and have funds loaded on the card, set up direct deposit, pay bills and more” (WSJ). This untapped market of prepaid debit cards is booming and here are the key things to keep in mind.
Pros
• Low-income consumers which are underserved by traditional banks and increasingly unable to get credit cards are the main market of this new product.
• “Industry forecaster Mercator Advisory Group expects funds "loaded" onto such cards to grow more than 60% annually through 2013” (WSJ).
• Barriers to enter the market are low because “prepaid debit cards requires little capital investment” (WSJ).
Cons
• It is expensive to reload the prepaid debit cards
• Visa and MasterCard may enter the market very easily
• “50% of the company's "active" cards were thrown away”(WSJ)
• “Green Dot can add customers faster than it loses them”(WSJ)
• “Green Dot's stock price may be inflated by the scarcity of available shares”(WSJ)
The bottom line is that the consumer banking industry may lose costumer to this new way of doing business. I individuals do not need to spend 10 – 20 minutes opening an account to have a debit card they probably won’t. This means fewer costumers which translates into less revenue for the banks. Banks must be quick if they want to keep their competitive edge and chances are they will enter this new market soon.
source:
http://online.wsj.com/article/SB10001424052748703794104575546361605817130.html
Pros
• Low-income consumers which are underserved by traditional banks and increasingly unable to get credit cards are the main market of this new product.
• “Industry forecaster Mercator Advisory Group expects funds "loaded" onto such cards to grow more than 60% annually through 2013” (WSJ).
• Barriers to enter the market are low because “prepaid debit cards requires little capital investment” (WSJ).
Cons
• It is expensive to reload the prepaid debit cards
• Visa and MasterCard may enter the market very easily
• “50% of the company's "active" cards were thrown away”(WSJ)
• “Green Dot can add customers faster than it loses them”(WSJ)
• “Green Dot's stock price may be inflated by the scarcity of available shares”(WSJ)
The bottom line is that the consumer banking industry may lose costumer to this new way of doing business. I individuals do not need to spend 10 – 20 minutes opening an account to have a debit card they probably won’t. This means fewer costumers which translates into less revenue for the banks. Banks must be quick if they want to keep their competitive edge and chances are they will enter this new market soon.
source:
http://online.wsj.com/article/SB10001424052748703794104575546361605817130.html
Bank Losses Lead to Drop in Credit Card Debt
Since 2009, there has been a drop in credit card debt in the United States which can widely be credited to newly wary consumers. It is believed though that a significant portion of the decline can be contributed to the financial institutions writing off billions of dollars in credit card debt as losses. By using debit card and staying away from exceeding new credit limits the consumers are voluntarily reducing their balances. Kenneth J. Clayton, senior vice president for the American Bankers Association for card policy, said the impact of tighter credit “It has a braking effect on the economy, and the key thing is to get to the right balance,” he said. “We are in a process right now of finding that balance”.
The Federal Reserve put out a report stating that mortgages, credit card accounts and nonrevolving accounts like auto loans were approximately $13.9 trillion last week. This is a $200 billion decrease from last year’s report. Bank of America said in April that consumer loans were down $37 billion from a year earlier, with $34 billion of that reduction the result of charge-offs. Economists agree that one of the main reasons for these reductions is a shift from credit cards to debit cards. This shift began before the recession and increased with it. It is believed that purchases of debit cards will exceed purchases of credit cards in 2014. That is partly because more cardholders will fall by the wayside as issuers raise prices for outstanding balances in response to the Card Act. The card act was intended to protect consumers from unfair credit card billing practices.
This article is interesting in that it shows how the consumer finance industry is on a decline. The article says that “Between the recession-related psychology of not wanting to spend, out of fear of what the future might bring, you have the reality of people who simply don’t have a credit card anymore”. Is it possible that the credit card aspect of consumer banking could go completely extinct?
-http://www.nytimes.com/2010/09/25/business/25credit.html?_r=1&scp=5&sq=credit%20cards&st=cse
The Federal Reserve put out a report stating that mortgages, credit card accounts and nonrevolving accounts like auto loans were approximately $13.9 trillion last week. This is a $200 billion decrease from last year’s report. Bank of America said in April that consumer loans were down $37 billion from a year earlier, with $34 billion of that reduction the result of charge-offs. Economists agree that one of the main reasons for these reductions is a shift from credit cards to debit cards. This shift began before the recession and increased with it. It is believed that purchases of debit cards will exceed purchases of credit cards in 2014. That is partly because more cardholders will fall by the wayside as issuers raise prices for outstanding balances in response to the Card Act. The card act was intended to protect consumers from unfair credit card billing practices.
This article is interesting in that it shows how the consumer finance industry is on a decline. The article says that “Between the recession-related psychology of not wanting to spend, out of fear of what the future might bring, you have the reality of people who simply don’t have a credit card anymore”. Is it possible that the credit card aspect of consumer banking could go completely extinct?
-http://www.nytimes.com/2010/09/25/business/25credit.html?_r=1&scp=5&sq=credit%20cards&st=cse
Sunday, October 10, 2010
More Trouble in the Housing Market: Bank of America Shuts Down Foreclosures
Bank of America recently announced that it will shut down its foreclosure operations temporarily. Government-run mortgage firm Freddie Mac has put a lot of pressure on Bank of America recently, and has expressed concerns about the foreclosure procedures at Bank of America. The firm is worried that the bank is not carefully examining all of the foreclosures it is handling. The pressure has led to Bank of America's decision to temporarily halt its foreclosure deals while it evaluates its paperwork procedures.
This announcement comes as bad news to the consumer banking industry as a whole. Banks have had a lot of foreclosures to deal with amidst the economic recovery. This event will slow the foreclosure process and potentially damage the housing market's recovery. On the other hand, while Bank of America has halted its operations, Wells Fargo said it will continue to plow ahead. This is a positive development for the industry, because it means that some foreclosures will continue to go through as the housing market mess gets sorted out.
This event could prove to be very advantageous for consumers. People who are 90 days past due or in foreclosure could get some extra time while Bank of America tries to evaluate its internal processes. Hopefully consumers can use this time to their advantage and save enough money to pay off their overdue balances. This also gives people who have already defaulted on their mortgages a break while the bank sorts out their financial fate.
-Justin Schaffer
Source: WSJ: http://online.wsj.com/article/SB10001424052748704657304575539963605720860.html
This announcement comes as bad news to the consumer banking industry as a whole. Banks have had a lot of foreclosures to deal with amidst the economic recovery. This event will slow the foreclosure process and potentially damage the housing market's recovery. On the other hand, while Bank of America has halted its operations, Wells Fargo said it will continue to plow ahead. This is a positive development for the industry, because it means that some foreclosures will continue to go through as the housing market mess gets sorted out.
This event could prove to be very advantageous for consumers. People who are 90 days past due or in foreclosure could get some extra time while Bank of America tries to evaluate its internal processes. Hopefully consumers can use this time to their advantage and save enough money to pay off their overdue balances. This also gives people who have already defaulted on their mortgages a break while the bank sorts out their financial fate.
-Justin Schaffer
Source: WSJ: http://online.wsj.com/article/SB10001424052748704657304575539963605720860.html
Wednesday, October 6, 2010
Banks Pile Into Safer Bets
Due to the recession, banks are being forced to “raise their capital cushion against risky assets”(WSJ). These tighter requirements are lowering the exposure and risk the U.S. banks have on the market. However, this is also diminishes the returns that risky investments give. The implementation of such policy has clearly two sides to it.
On the pros:
• Banks will probably tone down their risk-taking and shift to more staid strategies
• This may lead to less risk for the financial system overall.
On the cons:
• This will decrease short term profits
• Stock trading has decreased as investors have become more insecure about the market and skeptical about government regulation.
• “banks are losing traders and business to nonbanks such as private-equity firms or hedge funds.” (WSJ)
The bottom line being that sacrifices must be made in the short run in order to have a more stable market on the future. Huw van Steenis, a bank analyst at Morgan Stanley in London, said it best when he stated that “the obligation to hold more capital means that return on equity will go down"(WSJ). This is a fact, and the market is already responding and adapting this new trends. We can expect a decrease on the returns commercial banks give to their costumers on their investment portfolios but increase on the confidence on the market in months to come.
Refrences:
http://online.wsj.com/article/SB10001424052748703466104575530273745563564.html
On the pros:
• Banks will probably tone down their risk-taking and shift to more staid strategies
• This may lead to less risk for the financial system overall.
On the cons:
• This will decrease short term profits
• Stock trading has decreased as investors have become more insecure about the market and skeptical about government regulation.
• “banks are losing traders and business to nonbanks such as private-equity firms or hedge funds.” (WSJ)
The bottom line being that sacrifices must be made in the short run in order to have a more stable market on the future. Huw van Steenis, a bank analyst at Morgan Stanley in London, said it best when he stated that “the obligation to hold more capital means that return on equity will go down"(WSJ). This is a fact, and the market is already responding and adapting this new trends. We can expect a decrease on the returns commercial banks give to their costumers on their investment portfolios but increase on the confidence on the market in months to come.
Refrences:
http://online.wsj.com/article/SB10001424052748703466104575530273745563564.html
Citigroup sells credit card loans to GE Capital
Just a few weeks after selling the student lending business at a $500 million loss, Citigroup agreed to sell about $1.6 billion of private-label credit card loans to GE Capital. This sale is coming from Citigroup attempting to move away from small businesses so that it may focus on its core consumer banking operations. Citigroup also claimed that the sale was not material to its earnings but would reduce the bank’s overall assets by $1.6 billion. By the end of 2010, Citigroup plans on selling half of the troubled assets it deemed nonessential. Citigroup was one of the top recipients of federal bailout aid, and as such has decided to restructure operations as so that it may recover from this credit crisis. The credit card portfolio services more than 40 million customers and consists of about $50 billion in managed assets. These assets include cards for retailers such as Home Depot Inc. and Macy's. Citigroup Inc. will service the portfolio until the first quarter
This “shedding” of credit card loans is a sign that Citigroup is trying to improve their current state after being bailed out. Are they doing it the right way though? Their last attempt left them with a 500million dollar loss. I think if Citigroup is looking to get out of their predicament they need to step back and re-access where they stand and what they need to do to improve.
http://online.wsj.com/article/AP08898d6555ce4945b0079a6df1ecf0bc.html?KEYWORDS=consumer+banking
This “shedding” of credit card loans is a sign that Citigroup is trying to improve their current state after being bailed out. Are they doing it the right way though? Their last attempt left them with a 500million dollar loss. I think if Citigroup is looking to get out of their predicament they need to step back and re-access where they stand and what they need to do to improve.
http://online.wsj.com/article/AP08898d6555ce4945b0079a6df1ecf0bc.html?KEYWORDS=consumer+banking
Tuesday, October 5, 2010
Bank of America's Move Puts Pressure on the Wholesale Mortgage Lending Industry
On Tuesday, the mortgage lending business took another hit. Bank of America announced that it will no longer do business with mortgage brokers. This means that the bank will only participate in mortgage deals directly with consumers. In other words, the bank will only loan money directly to consumers rather than through mortgage brokers. The bank cited a desire to develop the bank's relationship with consumers and focus on the consumer aspect of its business.
This event will likely have an enormous effect on the landscape of the wholesale mortgage lending business. This decision was announced after several reports found that loans originated by brokers are much more risky than loans from consumer banks. Bank of America's withdrawal leaves Wells Fargo as the only remaining major consumer bank to do business with mortgage brokers. From the perspective of the brokers, this deal serves threatens the sustainability of the entire broker system. Brokers will be forced to do business with Wells Fargo, which severely limits their options. This could slash revenue and broker business. Also, Wells Fargo could also decide to drop its business with mortgage brokers, which could kill the industry.
This event is so important to consumers because their mortgage choices will be more limited by Bank of America's withdrawal. With Wells Fargo being the only major bank to buy loans from mortgage brokers, consumers are essentially forced to turn to one of the major consumer banks for mortgage assistance. This limits consumer choices, and could prevent consumers from receiving the best deals. Also, the consolidation of the mortgage lending market means that interest rates could rise for future mortgages. (The decrease in supply of mortgages means the equilibrium interest rate will rise.) While Bank of America claims that the move allows the bank to focus on consumers, in reality, consumers will be limited by lack of choice and lack of product differentiation.
-Justin Schaffer
MasterCard and Visa Slammed With More Credit-Card Regulations
A new agreement reached Monday between the U.S. Department of Justice and credit giants Visa and MasterCard resolved a two-year long antitrust probe concerning card issuers who barred merchants (i.e. retailers, restaurants, etc.) from offering discounts to customers who used credit cards with lower merchant fees. Up until the settlement, merchants could sometimes expect to pay up to 5% on the value of each purchase in credit card processing fees. Cards with rewards such as airline miles typically cost merchants more, and merchants who accept a company’s cards must accept all of them no matter how high the processing fee. The L.A. Times reports that these fees cost merchants an estimated $35 billion annually, a hefty price tag when small businesses, retailers, restaurants, etc. are struggling to stay afloat. The U.S. Justice Department saw these rules as anticompetitive.
American Express chose not to join the settlement with the U.S. Justice Department. According to the Wall Street Journal, American Express typically charges a higher processing fee than rivals MasterCard and Visa. American Express believes that it's policies shouldn't be deemed anti-competitive, given the company's smaller market share. There is a chance that the government could now file a civil suit against the company. (FYI: Visa accounts for 43% of all credit card spending, MasterCard 27%, and American Express 24%... I don't think the company has much of an argument.)
This new regulation on card companies can be tallied right next to the many other federal credit card laws that have hit the industry. Many hope that since the settlement allows merchants to offer lower prices to consumers who use cards with lower processing fees, consumers and businesses alike will save. But it is difficult to assess the impact on the industry. Both the LA Times and Wall Street Journal contend that it will be difficult to sway some card users from using their high-reward cards. Visa and MasterCard have not yet voiced too much concern. It will be interesting to see how much merchants take advantage of the new regulations and if consumers are swayed to use their plain-jane, low processing fee cards over that of their high reward card options.
Sources:
http://www.latimes.com/business/la-fi-1005-credit-cards-20101005,0,1126646.story
http://online.wsj.com/article/SB10001424052748704380504575530512939089380.html
Thursday, September 30, 2010
Banks Keep Failing, No End in Sight
Since September 25, 2008, about 279 banks have collapsed. This is the largest number in 20 years. This is causing “the eliminated jobs, accelerated a drought in lending and left the industry's survivors with more power to squeeze customers” reads the Wall Street Journal. Nobody seems to really know to what extent such bank failures will affect the overall economy on the country. “The Federal Deposit Insurance Corp. already increased its number of problem banks by 6% to 829”(WSJ).
The only hope here appears to be if the Federal Reserve decides to stimulate the economy. Although to this economist argue that will only worsen the condition due to the fact the help usually goes to the big bank which inevitably kills the completion. “Large banks like Countrywide Financial Corp. and Wachovia Corp. were acquired to avert failure while powerful banks including Citigroup Inc. and Bank of America Corp. were propped up by the government” (WSJ).
Here are the pros and cons of the situation,
Pros:
• This could become a healthy cleansing of a sector that grew too fast
Cons:
• A number of U.S. banks could fall to 5,000 over the next decade from the current 7,932
• A weakness in real estate continues to constrain economic growth
• There a many lost jobs
• Failed bank assets are now strewn across the banking system
The bottom line is, the current economic problem is feeding on itself. Companies can´t take loans from banks to acquire assets and reinvest in the bank because the bank reduced amount of assets impairs them from making loans. As Richard Bove, a bank analyst at Rochdale Securities in Lutz, Fla said: "If you reduce the amount of assets at a bank, it means they make fewer loans, and that has a negative impact on the economy" (WSJ). The only two possibilities that I see this ending up are: 1.- The Fed intervenes or 2.- the industry will collapse living only the big players to rip off the benefits of underpriced assets.
References:
http://online.wsj.com/article/SB10001424052748704760704575516272337762044.html
The only hope here appears to be if the Federal Reserve decides to stimulate the economy. Although to this economist argue that will only worsen the condition due to the fact the help usually goes to the big bank which inevitably kills the completion. “Large banks like Countrywide Financial Corp. and Wachovia Corp. were acquired to avert failure while powerful banks including Citigroup Inc. and Bank of America Corp. were propped up by the government” (WSJ).
Here are the pros and cons of the situation,
Pros:
• This could become a healthy cleansing of a sector that grew too fast
Cons:
• A number of U.S. banks could fall to 5,000 over the next decade from the current 7,932
• A weakness in real estate continues to constrain economic growth
• There a many lost jobs
• Failed bank assets are now strewn across the banking system
The bottom line is, the current economic problem is feeding on itself. Companies can´t take loans from banks to acquire assets and reinvest in the bank because the bank reduced amount of assets impairs them from making loans. As Richard Bove, a bank analyst at Rochdale Securities in Lutz, Fla said: "If you reduce the amount of assets at a bank, it means they make fewer loans, and that has a negative impact on the economy" (WSJ). The only two possibilities that I see this ending up are: 1.- The Fed intervenes or 2.- the industry will collapse living only the big players to rip off the benefits of underpriced assets.
References:
http://online.wsj.com/article/SB10001424052748704760704575516272337762044.html
Wednesday, September 29, 2010
A 0% mortgage! is that possible?
Mortgage rates continue to drop closer to 0%. These extremely low rates are coming from the Federal Reserve which is willing to take the necessary steps to keep the economy growing. The idea of “No-interest Mortgages” is still a far off fantasy, but it’s not preposterous to think of the banks offering 2% or 3% rates.
One expert, Mortgage planner Jim Sahnger, doesn’t think it would be possible for the rates to reach 0%. Without funding he believes that it would be unethical to have a 0% rate. He believes "unless there were significant fees on the front to compensate for costs to originate, deliver, default, etc.”. That is not to say that the idea isn’t impossible; even today’s rates being at 4% seemed impossible a couple of years back.
Qualifying for these low interest loans is no small feat though. In a recent study by Zillow Mortgage Marketplace they found that nearly one-third of Americans are unlikely to qualify for a mortgage because their credit scores are too low, and only 47% of Americans qualify for the best rates. "We are in an era of historically low mortgage rates, reaching levels not seen in decades. Coupled with four years of home-value declines, homes are more affordable than we've seen for years," said Stan Humphries, Zillow's chief economist. He further states,"… the irony here is that so many Americans can't qualify for these low rates, or can't qualify for a mortgage at all."
However, the article brings up an interesting point, what if the rates weren’t just for first time homebuyers? What if they were for people refinancing loans as well? They say that in theory it would cause such a surge of mortgages that the banks would be understaffed and would have to hire more employees to help meet the needs of the people. Even if everyone couldn’t qualify for these types of mortgages it would still bring a surge in the market. So many people out there are qualify but are staying out of the market because they are scared. Although 0% loans are still a distant dream, these loans would stimulate the growth of the economy. One way would be an increase in the job market and the second in the consumer banking industry.
http://online.wsj.com/article/SB10001424052748704791004575519913915143970.html?KEYWORDS=personal+loans
One expert, Mortgage planner Jim Sahnger, doesn’t think it would be possible for the rates to reach 0%. Without funding he believes that it would be unethical to have a 0% rate. He believes "unless there were significant fees on the front to compensate for costs to originate, deliver, default, etc.”. That is not to say that the idea isn’t impossible; even today’s rates being at 4% seemed impossible a couple of years back.
Qualifying for these low interest loans is no small feat though. In a recent study by Zillow Mortgage Marketplace they found that nearly one-third of Americans are unlikely to qualify for a mortgage because their credit scores are too low, and only 47% of Americans qualify for the best rates. "We are in an era of historically low mortgage rates, reaching levels not seen in decades. Coupled with four years of home-value declines, homes are more affordable than we've seen for years," said Stan Humphries, Zillow's chief economist. He further states,"… the irony here is that so many Americans can't qualify for these low rates, or can't qualify for a mortgage at all."
However, the article brings up an interesting point, what if the rates weren’t just for first time homebuyers? What if they were for people refinancing loans as well? They say that in theory it would cause such a surge of mortgages that the banks would be understaffed and would have to hire more employees to help meet the needs of the people. Even if everyone couldn’t qualify for these types of mortgages it would still bring a surge in the market. So many people out there are qualify but are staying out of the market because they are scared. Although 0% loans are still a distant dream, these loans would stimulate the growth of the economy. One way would be an increase in the job market and the second in the consumer banking industry.
http://online.wsj.com/article/SB10001424052748704791004575519913915143970.html?KEYWORDS=personal+loans
Monday, September 27, 2010
3rd Quarter Earnings Show a Healing Financial Services Industry
In its release of its 3rd quarter earnings, Discover Financial Services recorded a profit of over $260 million. Along with other members of the consumer banking industry such as American Express Co. and Capital One Financial Corp., Discover attributes its earnings to better credit trends, more consumer spending, and more availability of reserves.
An important indicator for the future of the consumer credit industry is the delinquency rate. A falling delinquency rate means that more card holders are paying off their credit card debts, and fewer are late in submitting their payments. Lower delinquency rates allow financial services companies such as Discover to lower its reserve funds because it feels more confident that card holders will pay back their debt. Fewer reserve funds are a good indicator of industry health. Hopefully, the falling delinquency rate is a sign of future industry health.
Declining delinquency rates also show an important positive trend in the consumer credit market. Since the height of the financial crisis, financial services companies have clamped down on the amount of credit available to consumers. Lower delinquency rates are a clear indicator that the clamp down on credit has effectively reduced the number of risky consumer borrowers. This allows companies such as Discover to generate more profits and it is a good sign for a recovering financial services industry.
The increase in consumer spending on credit cards also is a positive sign for the consumer financial services industry. Consumers have responded to a rebounding economy by increasing their spending which contributes to an increase in profits. While the positive 3rd quarter earnings are clearly a step in the right direction for the consumer financial services industry, more positive data is required to make a firm judgment about the overall trends of the industry.
-Justin Schaffer
Thursday, September 23, 2010
Team Contract Assignment
Please let me know where and when can we all meet to do the H.W.. I do not have you emails.
H.W.:
Team Contract Assignment
BUS 1.0
Objective:
To prepare you for the teamwork required in business school and later in the business world, you have been assigned to work on an industry team for the semester. Together, your team will work to complete the collaborative projects in BUS 1.0 including a team blog, a team paper (draft and final), and a team presentation.
To set your team up for success, you are now tasked with developing a team contract. To complete such a contract requires team members to discuss and negotiate the terms upon which they will work together. This process will help you to clearly establish your mutual expectations, assign roles and responsibilities, and establish the necessary procedures to meet your team goals.
Team Contract Assignment
Your team contract is divided into three major sections:
1. team procedures
2. expectations
3. accountability
By outlining your expectations in your contract, you will be more likely to prevent misunderstandings as you go about your work together. Therefore, in each of the following sections be sure to specify each task, the person(s) responsible, and any negotiated timeframes.
Use the Team Contract template to discuss and finalize your team roles, procedures, and standards. Each question requires a concise 1-2 sentence answer. Complete, sign, and submit one copy of your finalized contract to your section TA by class time on September 30, 2010.
Once you have completed your team contract, you should refer to the document when conflicts arise. Call a team meeting immediately to discuss and resolve the challenges your team is facing; do not delay. Seek guidance from your Professor or TA to resolve any conflicts so that you will have the most positive team experience possible. If some aspect of your team contract needs to be renegotiated, you are welcome to do that. Please submit any changes to your team contract that are made over the course of the semester to your TA. When you evaluate your team at the end of the semester, one of the questions you will respond to will be how well the contract was followed by the team members.
H.W.:
Team Contract Assignment
BUS 1.0
Objective:
To prepare you for the teamwork required in business school and later in the business world, you have been assigned to work on an industry team for the semester. Together, your team will work to complete the collaborative projects in BUS 1.0 including a team blog, a team paper (draft and final), and a team presentation.
To set your team up for success, you are now tasked with developing a team contract. To complete such a contract requires team members to discuss and negotiate the terms upon which they will work together. This process will help you to clearly establish your mutual expectations, assign roles and responsibilities, and establish the necessary procedures to meet your team goals.
Team Contract Assignment
Your team contract is divided into three major sections:
1. team procedures
2. expectations
3. accountability
By outlining your expectations in your contract, you will be more likely to prevent misunderstandings as you go about your work together. Therefore, in each of the following sections be sure to specify each task, the person(s) responsible, and any negotiated timeframes.
Use the Team Contract template to discuss and finalize your team roles, procedures, and standards. Each question requires a concise 1-2 sentence answer. Complete, sign, and submit one copy of your finalized contract to your section TA by class time on September 30, 2010.
Once you have completed your team contract, you should refer to the document when conflicts arise. Call a team meeting immediately to discuss and resolve the challenges your team is facing; do not delay. Seek guidance from your Professor or TA to resolve any conflicts so that you will have the most positive team experience possible. If some aspect of your team contract needs to be renegotiated, you are welcome to do that. Please submit any changes to your team contract that are made over the course of the semester to your TA. When you evaluate your team at the end of the semester, one of the questions you will respond to will be how well the contract was followed by the team members.
Wednesday, September 22, 2010
Prosper.com & Peer-to-Peer Lending
Through the use of the World Wide Web people are able to transfer money from one account to another in a matter of seconds. This concept has already revolutionized the consumer banking industry once and it can do so again. Through a process called peer-to-peer lending, borrowers and lenders can do transactions without the presence of a bank as an intermediary. One new company that is making money with such an idea is called Prosper.com. Prosper.com makes its money by “matching people who need small loans with willing lenders and billing the borrowers.” (WSJ) To me, Prosper.com seems to have a pattern of business that we may play an important role in the future of the consumer banking industry. However there are always two sides to the same coin.
In the pros we have that:
• Peer-to-peer lending is a lower-cost alternatives to credit cards and unsecured bank loans
• It’s a market increasing in size: “About $100 million in new person-to-person loans will be issued this year, and that will increase to as much as $1 billion in new loans in 2010, according to a recent study by Online Banking Report, a research firm.” (WSJ)
• “Prosper now requires that borrowers have minimum credit scores of 520 (there was no minimum previously)” (WSJ)
• “Prosper promises to buy back any loans that are the result of identity theft” (WSJ)
• “lenders are assisted to make better investing decisions.” (WSJ)
• Prosper offers tools that can help users track the moves of other lenders (WSJ)
While in the cons we have:
• The market is small and increasingly completive: “Several firms recently bought a majority stake in CircleLending Inc., which coordinates loans and payment plans between friends and family members”. (WSJ)
• “Some investors are drawn to person-to-person lending because they expect that the loans' performance won't correlate to that of traditional investments” (WSJ) which is just a speculation.
• It is an impersonal business
• There is a high risk of default
The bottom line is that Prosper.com is introducing a new way to make business in the consumer banking industry. This means that the market may expand in the coming years and given that internet is so cheap great competition will emerge. This will probably translate into a better service and more options for the clients. However, not everyone has a computer en even fewer know how to property use this technology properly, so we must watch out for a possible bubble or overpricing of companies with similar business plans as Prosper.com.
Remember not all that glitters is gold.
Source: http://online.wsj.com/article/SB118472295685669845.html
In the pros we have that:
• Peer-to-peer lending is a lower-cost alternatives to credit cards and unsecured bank loans
• It’s a market increasing in size: “About $100 million in new person-to-person loans will be issued this year, and that will increase to as much as $1 billion in new loans in 2010, according to a recent study by Online Banking Report, a research firm.” (WSJ)
• “Prosper now requires that borrowers have minimum credit scores of 520 (there was no minimum previously)” (WSJ)
• “Prosper promises to buy back any loans that are the result of identity theft” (WSJ)
• “lenders are assisted to make better investing decisions.” (WSJ)
• Prosper offers tools that can help users track the moves of other lenders (WSJ)
While in the cons we have:
• The market is small and increasingly completive: “Several firms recently bought a majority stake in CircleLending Inc., which coordinates loans and payment plans between friends and family members”. (WSJ)
• “Some investors are drawn to person-to-person lending because they expect that the loans' performance won't correlate to that of traditional investments” (WSJ) which is just a speculation.
• It is an impersonal business
• There is a high risk of default
The bottom line is that Prosper.com is introducing a new way to make business in the consumer banking industry. This means that the market may expand in the coming years and given that internet is so cheap great competition will emerge. This will probably translate into a better service and more options for the clients. However, not everyone has a computer en even fewer know how to property use this technology properly, so we must watch out for a possible bubble or overpricing of companies with similar business plans as Prosper.com.
Remember not all that glitters is gold.
Source: http://online.wsj.com/article/SB118472295685669845.html
J.P. Morgan chase's impact since the merger with Wasington Mutual
In 2008 a merger took place between J.P Morgan chase and washington mutual. Initially there was a loss in net income from J.P Morgan chase, going from $3.4 Billion in 2007 to $527 million in 2008 after the merger. At the same time though, they gained over 2,000 branches and were able to expand nation wide(washington D.C., Florida, California) reaching 42% of the nations population. Since aquiring washington mutual, J.P. Morgan chase has taken its spot as one of the top banks in the country. Even on september 9, 2010 the stock of the company grew 2.5%. The bank has also reached its full potential in its consumer finance division. On september 5th they announced that they have offered over 900,000 mortgage motifications, and has met with 140,000 people for face-to-face consulting sessions on forclosures.
the combined bank has been a big and strong in a panoply of businesses, and has helped to realign the competitive landscape for banks.
-http://www.emoneydaily.com/weekly-news-roundup-j-p-morgan-chase-co-nysejpm-4/6981988
-http://online.wsj.com/article/SB10001424052748703960004575482170153404954.html?KEYWORDS=jp+morgan+chase+
-http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?releaseid=340523
the combined bank has been a big and strong in a panoply of businesses, and has helped to realign the competitive landscape for banks.
-http://www.emoneydaily.com/weekly-news-roundup-j-p-morgan-chase-co-nysejpm-4/6981988
-http://online.wsj.com/article/SB10001424052748703960004575482170153404954.html?KEYWORDS=jp+morgan+chase+
-http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?releaseid=340523
Bank of America's Move into the Consumer Banking Industry
Bank of America’s acquisition of Fleet Boston and card giant MBNA in 2005 signaled a significant emergence within the consumer banking industry. The New York Times reported in July of 2005 that the move not only won the company a combined 122 million in consumer cardholder accounts but, more importantly, launched Bank of America in front of competitors Citigroup and J.P. Morgan Chase to become the largest credit issuer within the US. With a twenty percent share of the market share, Bank of America replaced the company Audible on the S&P Top of Ten Portfolio, a move that BusinessWeek in a an August 2007 article attributes to Bank of America’s acquisitions and expanded presence within the consumer banking industry.
This is a great example of how a bank was able to capitalize on an acquisition and expand its presence within a market. This is arguably one of the most significant emergences to happen within the consumer banking industry over the past decade. Bank of America's presence within the industry as made them one of the top banks in the country and has helped to make them one of the most profitable companies worldwide. Though they had a large foot in the door prior to the deal, the acquisitions prioritized the consumer banking industry and allowed them to expand into a broader market.
New York Times articles:
BusinessWeek Article:
a
Tuesday, September 21, 2010
Consolidation of the Consumer Banking Industry: The Aftermath of the Wells Fargo and Wachovia Merger
The consumer banking industry has a very different look than it did just three years ago. Since the global financial crisis, the banking industry has seen a reduction in the total number of active banks because of acquisitions, mergers, or failures. One of the biggest changes occurred in October 2008, when consumer banking giant Wells Fargo announced that it had agreed on a deal to acquire Wachovia for $15.1 billion. The deal between Wells Fargo and Wachovia is an example of a market-extension merger. Wells Fargo used to primarily do business west of the Mississippi River. However, the acquisition of Wachovia (which primarily did business in the East) has allowed Wells Fargo to become a national rather than a regional force in the consumer banking industry.
This acquisition has completely changed the landscape of the consumer banking industry. The merge between these major banks exemplifies the overall consolidation of the consumer banking industry. The global financial crisis has been devastating for many smaller banks. Many banks that were struggling to find sources of revenue had to merge in order to stay alive. Wachovia is an example of a bank that was having severe revenue issues, and as a result, it had no choice but to do the deal with Wells Fargo or fail. This deal will continue to have repercussions in the foreseeable future. The consumer banking industry used to consist of many banks that offered financial services to consumers. The failure of many of the smaller banks has essentially left only a few major companies to compete for consumer demand. Companies including Citigroup, Bank of America, Wells Fargo, and JP Morgan Chase dominate the industry because of the acquisition and failure of banks such as Wachovia. The Wells Fargo deal with Wachovia is just one example a major change in the consumer banking industry in the last few years.
-Justin Schaffer
Wednesday, September 15, 2010
Citigroup Hopes to Strengthen Presence Within Retail Banking Industry
Two of Morgan and Stanley's top banking executives, Cecilia Stewart and Will Howle, will join the ranks of Citigroup as the bank seeks to strengthen its retail banking system. Stewart, a veteran of a successful retail-branch development at Wachovia Corp. before serving at Morgan and Stanley, will take over as Citigroup's president of U.S. Consumer and Commercial Banking while Will Howle will serve as her chief operating officer.
This move comes in response to Citigroup's lost grip on the consumer banking industry. The Wall Street Journal writes, "Citibank's branch operations suffered for years, industry consultants say, as a stepchild within a far-flung financial supermarket." Expanding its presence within the retail banking industry is also part of a bigger goal to recover from the meltdown and obtain stability within the market. Citigroup suffered more than $50 billion in loses on risky mortgage assets and other debt.
This is a smart move by Citigroup, given that the retail banking industry generates a steady profit within a lower risk market. However, as Citigroup and other companies look to compensate for lost profits (i.e. increasing interest rates, annual fees, penalties, etc.), ethical questions follow. Is it really ethical for the industry to further tax cash-strapped consumers who have also been severely crippled in the wake of the financial meltdown? Where ought the industry’s priorities fall? With the consumer or indebted corporate bank accounts? This is an interesting and frequent ethical dilemma that goes far beyond issues addressed within mission statements, corporate values, or codes of conduct.
-Molly
WSJ article: http://online.wsj.com/article/SB10001424052748703466704575489760274594260.html
Wells Fargo to Cut 3,800 Jobs, Stop Subprime Loans
Wells Fargo & Co. will shut down a unit that makes what the San Francisco bank calls "non-prime" real estate, eliminating a total of 3,800 jobs and 638 Wells Fargo Financial stores. "Our network of U.S.-based consumer finance stores, which have historically operated as an independent sales channel from our bank operations, have served customers well for more than 100 years," said David Kvamme, president of Wells Fargo Financial, "but the economics of a separate Wells Fargo Financial channel are no longer viable, especially now that our customers have access to the largest banking and mortgage store network in the United States."The company said less than 2% of its real-estate loans were originated in Wells Fargo Financial stores in the first quarter. About 2,800 jobs, 20% of the unit's work force, will be cut in the next 60 days, followed by an additional 1,000 in the next year. Remaining workers will be assigned to other Wells Fargo businesses, according to the company. The move is expected by Wells Fargo to result in restructuring charges of about $185 million on a pretax basis, including severance costs of $137 million, or two cents a share, in the second quarter. The remaining charges will occur in the second half of 2010, primarily in the third quarter. Wells Fargo said cost savings from the restructuring "are expected to offset these charges in the first year and a half."
One of the aims of which is to determine the fundamental purposes of a company. If a company's main purpose is to maximize the returns to its shareholders, then it should be seen as unethical for a company to consider the interests and rights of anyone else. But when the main goal of a company is to maintain employment make a profit and maximize returns to shareholders they can sometimes come into conflict. In this case with Wells Fargo, they are putting off nearly 4,000 employees, decreasing the value of shares, and wasting 100's of millions of dollars restructuring and severance costs. The believe that in the next year and a half that they will offset the balance but is it really worth it? In the economy we are in, ethical risks this huge cannot be taken.
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