Tuesday, April 28, 2009

The Banks; the Contradiction

Have you been paying attention lately to the headlines? Yeah, you see all these things in the print and on the internet. But, have you put all these things into context and make them make sense? So, I ask again, have you really been paying attention.

The Government wants the Banking Industry to get more capital but to reduce their capital by forgiving (writing off) loans to GM and Chrysler. The Government is critical of the fees that the Banks charge to consumers. The Government wants the Banks to make more loans. Now, have you been paying attention?

Lets work through this a little.

First of all a couple of facts. Our banking industry is assessed by the government as needing more capital. Secondly, the banks thus need to make more money as one of the ways to generate more capital (earned capital). Banks do make money from loans (the Government says make more loans; quit hoarding money)via interest and fees and they make money from consumer fees like overdraft fees. The Banks also need to obtain capital from other providers such as stockholders, private investors, and others. Next, the Banks hold hundreds of billions in loans to GM and Chrysler.

So, with that as a backdrop what is the U. S. Government (let’s call it Gov) saying about the Banks? Are you ready for this? Can you deal with these contradictions?

Gov wants the Banks to have more capital. Gov wants the Banks to not charge so much for overdraft fees and thus earn less money. Gov wants the Banks to forgive some of their loans to GM and Chrysler since GM and Chrysler can’t pay back the loans. The Banks would get equity for their loans. When the Banks forgive debt and get equity, they have to write off the amount of the loans thus reducing their capital position. With respect making more loans, if the economy is in recession and borrowers aren't earning money and cannot pay loans back, then tell me again why the Banks should make more loans to more borrowers?

What? Huh? Gov says get more capital but reduce capital by forgiving loans! Gov says get more capital and earn more money but reduce overdraft and other consumer fees!
Gov says attract more capital from outside sources of money but how can this be done when the Banks are writing off loans and reducing their source of income via fees, thus reducing profitability? Gov says make more loans but be sure they are good ones.

What is going on here? Does this make any sense? Has Gov gone bonkers?

Yes, GM and Chrysler have too much debt and cannot pay it back. Yes, the Banks did loan it to them; no one made them. Yes, Banks do charge fees to consumers but people shouldn’t overdraw their accounts anyway. Yes, Banks do need more capital since they have paper losses on these loans and they might as well write them off and get something for them, such as equity in GM and Chrysler. Yes, the Banks did get money from Gov and were told to make loans; but only good ones.

So, the bottom line is that Gov is right. They are not crazy. However, they could make this a little more clear to people. They could explain their actions more clearly to the lay person who doesn’t have the knowledge of high finance.

Really this is low finance! When you have bad loans, you have to write them off. Then you need more capital to replace that which you just lost. It all makes perfect sense. The only things that don’t fit are Gov being critical of Bank fees and being critical of Banks not making enough loans; Banks are just doing what they need to do to make more money i.e. capital; charge fees and make loans to entities that can pay them back. That is capitalism at its best.

We are still a capitalistic society; aren’t we?

Friday, April 10, 2009


As my buddies and I were walking down the golf course the other day, we got onto the subject of Michael Vick. In case you have been in a coma for the last few years, Vick is the former Virginia Tech quarterback who was drafted and starred (some would say) for the Atlanta Falcons pro football team.

He is also the person who bankrolled his buddies in a dog fighting operation. Needless to say they were caught and after several denials etc, they “fessed up” to the crimes.

Future and current politicians take note: it is always easier and better in the long run to confess to something than to deny, deny, deny, and then ultimately have to confess anyway! The Richard Nixons, Bill Clintons and Rod Blagojevichs (I never could have spelled this without spellcheck) of the world can attest to this strategy!

Anyway, back to Michael. It is also a lesson to be learned to associate yourself with people who won’t get you in trouble! However, in this case, we really don’t know which came first the chicken or the egg; I mean, who got who into the dog fighting business: Michael or his buddies? I won’t speculate on that.

What I do want to talk about is the future. In a recent ruling before the bankruptcy judge in his case, Vick’s bankruptcy plan was rejected. His plan was simple; he was going to back to pro football and earn money so he could repay his creditors and make restitution for his crimes.

The judge rejected the plan and sent him back to prison. He is scheduled to get out in July of this year, with possible early release. One of the reasons given by the court for rejecting his plan was that it was not known if Vick would be allowed to play pro football.

Well, if you and I went into bankruptcy and owed millions, we couldn’t just say “approve our plan to play professional golf, basketball, football or baseball and we can pay back the money”. Why? Because we aren’t good enough to do that is why! We might be able to get a tryout if you stretch this some, but good enough to play? Forget it!

However, in Vick’s case, he might still be good enough to play pro football. But, Roger Goodell, the NFL commissioner, refuses to say, even now, if Vick will be allowed to try out or be given another shot.

Why is this? He won’t say. Just that he hasn’t made up his mind. What is he waiting for? How long does it take to make up your mind? Is he afraid of the PETA lobby?

I love pets and dogs just as much as they do but we are humans beings with the ability to think, reason, and forgive. When should lobbying groups determine the future of a human being? Why should these groups want to continue to punish someone who has been punished and wants to make restitution? Why can’t they forgive? I am not saying they should forget but at least forgive and let this man live his life and try to pay back his debts in the manner that he has been trained to do.

Vick is serving and presumably will finish out his time. In the eyes of the court, he will have done his duty and paid his price and is released back into society. My bet is that he won’t ever harm a dog again; which is the purpose of serving time for the crime he committed.

Isn’t this America? Where we forgive people who have paid the price and done their time? Ok, let’s even bring the church into this discussion. The Bible says to forgive people for their sins. Does he deserve a second chance?

What if this was you or I? Would we want a second chance to be productive in our society? You bet we would!

So, Roger Goodell, get off your butt and make a decision. Give Michael Vick the chance to play pro football again. It is still not a given that he can get drafted or chosen and further that he can actually play, given his age. But let that be up to him.