If the government succeeds in its renewed efforts to shore up the U.S. financial sector with hundreds of billions of taxpayer dollars, it may spur a "double whammy" in costs to the consumer -- higher taxes and higher
President Bush and congressional leaders renewed their push for the $700 billion financial bailout bill, which would allow the federal government to purchase troubled assets clogging bank balance sheets and credit markets. Proponents argue that the plan may actually reap a profit, if the Treasury sells assets back to the market at higher prices than it pays. But in the short term, taxpayers are footing the bill.
And while neither presidential contender will commit to a tax hike -- also known as political suicide -- the bill threatens to push the federal deficit up to $1.3 trillion. That much fat cannot be trimmed easily from the budget.
Regardless of whether the bill leads to higher taxes, several factors threaten to hurt consumers, from stringent lending standards to higher costs for basic bank services. Mike Moebs, an economist and CEO of the research firm Moebs Services, goes a step further. Banks will not only restrict access to loans and hold onto their government capital, he says, but also try to soak up more fees on deposits and basic services.
"These banks and credit unions are going to say, 'Well, there was a cost,' and they pass that cost onto the consumer with higher fees, higher rates on loans and minimums on deposits," says Moebs, who collected bank fee data for the Federal Reserve following the savings & loan crisis in the late 1980s.
To keep an eye on the ultimate costs and benefits to the consumer, Congress required the Fed to track those data from 1997 to 2003. During that period, bank fees accelerated at a breakneck pace, Moebs says. For example, the average overdraft fee increased 45% over the period, while inflation grew 12%. Moebs says this "double whammy" in costs to the taxpaying consumer, who both funded the S&L bailout and paid the higher fees, should be avoided in the new plan.
The Fed data also show that, across the board, fees grow along with the size of the institution, meaning that recent consolidation in the banking industry alone could spur higher fees. The banking sector has contracted rapidly and dramatically over the past few weeks, whittling down a dozen major banks to just a handful -- on Wall Street and Main Street alike. The biggest and strongest institutions have rushed in with the government's help to acquire struggling competitors at fire-sale prices.
"Bank fees tend to go up when consolidation occurs," says Ed Mierzwinski, a consumer advocate and director at the U.S. Public Interest Research Group, who notes that the top 10 credit-card issuers hold about 90% of the market. "Fewer banks means fewer choices. Bigger banks have higher power and higher fees."
Some of the country's banking behemoths -- Bank of America (STCOK QUOTE: BAC), JPMorgan Chase (STOCK QUOTE: JPM) and Citigroup (STOCK QUOTE: C) -- have only gotten bigger. BofA has swallowed Countrywide, once the nation's biggest mortgage provider and investment bank Merrill Lynch (Stock QUOTE: MER), while JPMorgan has absorbed Bear Stearns and Washington Mutual, once the country's largest savings and loan. Citi earlier this week agreed to buy Wachovia's (STOCK QUOTE: WB) banking operations.
All the consolidation is a sign of the industry's weakness, not its strength. The deals valued the targets at a combined $58.4 billion: Countrywide at $4.1 billion, or $7.16 a share; Merrill at $50 billion, or $29 a share; Bear at $236 million, or $2 a share; WaMu's deposits and branches at $1.9 billion; and Wachovia's banking operations at $2.16 billion. All of those sums are just fractions of the companies' worth just a year ago, and reflect sharp drops in the financial sector's market value.
With the capital markets in turmoil and financial firms still working to shore up cash, banks have a renewed focus on fees. The strategy is not high-growth, but it provides stability after a financial fallout that stemmed from an overabundance of risk. As a result, says Robert Goldberg, an adjunct professor of finance at Adelphi University, banks won't be eager to lend freely or cheaply any time soon.
"I don't believe you're going to see aggressive loan activity even with this," says Goldberg, referring to the rescue plan. "What the banks are going to do is take this capital and burrow inside and lick their wounds."
But bank fees are a hot-button issue for consumers, and Congress and regulators have responded by cracking down on predatory lending and fees. When the Fed unveiled a set of rules in May, consumers issued 56,000 responses during a public-comments period -- a record for any of the agency's proposals.
The Fed's rules are set to take effect in January, but Congress is pushing forward its own initiatives. Last week, the House widely passed the so-called "Credit Card Bill of Rights," with a vote of 312-112, though the proposal may be stalled in the Senate until the rescue plan is finalized. Even if it does pass the Senate, the Bush administration opposes the bill, so its implementation is unlikely at least until a new president takes office.
U.S. PIRG's Mierzwinski says that another stumbling block to passing consumer-friendly legislation is the powerful lobbying arm of the banking industry. Another bill to tighten the reins on overdraft fees that was introduced last year by Rep. Carolyn Maloney (D., N.Y.) was unable to be brought for a vote because "the industry had a fly-in," he says.
"You ask why we can't move bills and this is the reason," says Mierzwinski. "It wasn't just the 10 big banks, it was the mom-and-pop banks around the country."
For their part, banks say that if the government hinders their ability to charge higher fees for higher-risk customers -- the ones who overdraft accounts, pay bills late, or don't meet minimum balance thresholds -- it will simply place the burden on all customers. And while some practices can be labeled unfair -- and there are cases where consumers are hit with sudden, unexplained interest-rate hikes or lofty fees -- by and large, most of those costs are avoidable.
John Hall, a spokesman for the American Bankers Association, says he doesn't expect bank fees to rise as a result of the current turmoil in the financial industry. Rather, he characterizes it as a case-by-case basis, where consumers with bad fiscal habits get punished, and responsible consumers are rewarded with better rates and free checking.
"There is a small number of people who pay a great many fees, but these fees have been avoidable," says Hall. "We feel that that's fair. People with good personal finance habits pay nothing."