Below are news stories from the week that were easy to miss, but may have some lasting impact.
1. How Did You Order Your Overdrafts? If Not Well Done, It May Come With A Side Of Litigation.
Starting in the early part of the last decade some banks began to process daily overdrafts from largest to smallest. It sounds like an inconsequential procedural matter. It is not. In its first year of implementation Union Bank increased overdraft revenues by more than 35%. The reason for this impact is simple: say that an individual charges 10 items in a day and has sufficient funds available until the last item is mistakenly charged. Previously this customer would have been hit with a single overdraft charge. However, by holding the charges and reordering the items, largest to smallest, at the end of the day all 10 items could become overdrafts enabling the bank to charge 10 separate overdraft fees. Voila. A major new revenue source for banks.
Banks employing the high-to-low method did disclose this new ordering system and initial suits were dismissed because of the explicit disclosures. However, there are currently 30 related suits pending before federal court. These cases have been consolidated into a class action alleging that large banks systematically tried to increase overdraft fees and that the practice was hidden from customers.
Internal emails at Union Bank disclosed in recent litigation show that some employees questioned the fairness of the high-to-low practice and as of last year the bank has reversed its stance and now processes overdrafts from smallest to largest.
Union Bank Email Show Overdraft’s Seedy Underbelly (registration required)
2. Interest… We Don’t Need No Stinking Interest
Sometimes children get what they want and then don’t want it anymore. Same with corporate banking customers. For years corporations have been asking to repeal Req Q – the prohibition on banks from paying interest on demand deposits. So when last year’s Dodd-Frank Act included language effectively unwinding the 70-year-old regulation, there was general approval from corporate boardrooms across the country. The problem is with the current level of interest rates themselves. Chase is paying 0.01% on business checking accounts. A few banks, like Capital One, are trying to use the amendment as a marketing tool. Cap One is paying the hefty sum of 1.1% on larger account balances. For the most part the response from the business community is stifling a yawn – but may come to appreciate the rule change when rates rise – someday.
3. Ben Does The Twist
Ben Bernanke and the Fed have done pretty much all they can do when it comes to lowering rates in the short term. Three-month Treasury yields are 0.02%. To encourage more long-term investing the Fed is seeking to lower the already low long-term rates. (30-year Treasuries are yielding just 3.10%.) To that end the Fed executed what is called a “Twist,” selling short-term treasuries and buying long-term bonds in order to “flatten” the yield curve. It appears to have worked: 30-year yields are down 40 basis points on the month. But the question remains: Will this result in more mortgages, more home sales, more new business loans? Or are we just twisting in the wind?
4. Hedge Funds Straddling The “Ethical” Wall
There is a huge market in this country for trading in distressed debt. Hedge funds jumped in and bought the deeply discounted debt of Washington Mutual even as the bank was going under, hoping to make money as the institution was liquidated and the debt, at least partially, repaid. Now, with WaMu in bankruptcy, the hedge funds, as major creditors, have been privy to inside information as debt negotiations have proceeded. However, other parts of the funds have continued to trade the distressed debt in the secondary market. (It is not uncommon for an institution to create “Chinese” or ethical walls to separate insiders from non-insiders.) But certain WaMu shareholders are crying “foul” and allege that insider trading may have taken place.
Earlier this month the Delaware bankruptcy court handling the negotiations took the first steps in allowing equity shareholders to sue certain hedge funds for violations of insider trading rules. While it is still early days, the steps will have hedge funds and other buyers of distressed debt cautious about how they negotiate in post-bankruptcy proceedings. They will certainly be building taller walls.
5. We Have Met The Enemy Hackers ~ And They Are Us
The Hacktivist group known as Anonymous declared September 24th as the “Day of Vengeance.” Fortunately the targets of the vengeance—Wall Street and the NYC Police Department—survived the day with no major disruptions reported. But the group’s threat should have financial institutions thinking carefully about their exposure to this new risk. We tend to think of cyber risk as originating from some darkened room populated by organized crime rings or desperate lone hackers. Are we prepared for risk posed by hundreds of organized, well-intentioned (if deluded) computer savvy activists?
…And an Occupation
My walk home includes a stroll through usually quiet Zuccotti Park in lower Manhattan near Wall Street. The park is entering its second week of “occupation” as hundreds of protestors have found a common bond in protesting the “Vampire Squid” that is Wall Street. The protestors have quite a range of complaints and viewpoints but they do represent the anger that has become endemic against the financial community. I hope the protestors, and my commute, find peace soon.
(Image credit: Lucas Jackson / Reuters)