Wednesday, September 23, 2009

What would Grandfather do today?

Cheat Sheet - The Daily Beast: "Looks like Bank of America will have to find a new way to scrape together a profit: Getting ahead of credit-card reform in the U.S. Congress, the bank joined J.P. Morgan in overhauling overdraft fees and practices that have been criticized by consumer-protection agencies. Reversing course, Bank of America said it will cap the fees on customers who overdraw their accounts, and it will not charge any fee on overdrafts of less than $10 in one day. It will limit to four the maximum number of fees per day, from a pervious cap of 10. The bank will also allow customers to opt out of overdraft protection, meaning that they’ll be turned away at the register rather than given a negative balance and a fee."
Over the past year witnessing the financial crisis, I have thought a lot about manufacturing, corporations, and banks.  My grandfather, who immigrated to South Jersey around World War II was the stimulus of my thoughts.  He came here like a lot of other people with nothing.  He was a janitor in a public high school probably for over 30 years earning not much more than minimum wage.  He busted his back to provide for his family.
He also believed in the stock market.  His guru was Warren Buffett.  He often talked about the shares he owned in Buffett's company -  Bershire Hathaway, and how proud he was to own them.  For those who don't know, Bershire Hathaway shares A were worth at the time about $60,000 each, and shares B worth about $5,000.  Grandfather saved little by little and bought shares of many companies.  Before his death, grandfather had, through ownership of stocks, properties, and interest earning cash held in banks, had amassed over a million dollars of wealth. 
The stock companies that grandfather invested in all had one thing in common, they made something or they sold something of value.  One smarter than me could access value to the assets, inventory, and future sales and predict future value of the corporations.
During the 90's I noticed grandfather investing more in banks.  It was clear to him that bank stocks were on the rise and a place to put your money.  At first I didn't think too much about it, but later I thought, what do banks make?  What do they sell?  What dollar amount could one put on their inventory?  Not much, I thought.  Fast forward 15 years and you see that banks were overvalued.  Because of changes in the laws passed by democrats and republicans alike, banks were allowed to buy, sell, rebundle, and trade huge portfolios of real estate.  Now I understood what grandfather was thinking.   How could you not invest in these huge corporations?
But today, I think my original thoughts about banks were correct.  A bank is where you put your money to save.  They pay you interest on that savings.  They also loan money for people to buy property and cars, and for businesses to expand, make payroll, etc.  Banks get cheap money from the fed, lend it out, and make money by charging a higher interest rate than they paid the fed.  The idea also works for banks and their credit card departments.
Somewhere along the way banks were allowed to become vultures and parasites that preyed on individuals and small businesses that depended upon them for their future. Today banks stand in front of the vault between you and your money with their grubby, dirty fingers outstretched for you to pay the toll.  Want a credit card so you can exist on the grid in today's society?  That will be 30% interest please.  Do you want a checking account with us so that you can pay your credit card bills on time?  That will be $20.00 per month if your balance falls below $500.00.  Did you bounce that check because when you went to the bank to make the deposit on Friday (payday)  you arrived at 6:01, and they were closed; don't worry just pay us $35.00 and we'll forget about it for now.  Oh, by the way, the interest we now pay you on your savings account is 1.5%.
There's more.  Banks don't really make all their profits by strangling the consumer like a loan shark.  Some banks make money from the buying and selling of credit default swaps, whatever the fuck they are.  Theorhetically they are supposed to provide the bank with enough capital to satisfy FDIC requirements so that if there is ever a run on the money, well we all know how that played out. 
To be fair, I know some local bankers who don't operate like this.  They are fair minded, community based people who care about their neighbors.  But these small local banks are not the ones I'm talking about.  I'm talking about the ones deemed "too big to fail."  Citibank, Bank of America, Capitol One, AIG.  Oh wait, AIG is not a bank, they are an insurance company.  Why do we treat them like one then?  Anyway, AIG is too big a corporation to fail and too big a corporation to  talk about in a post about banks.
To conclude the story, "What would grandfather do today?"  He would probably still have been invested in banks and would have lost a bunch of money like many others.
The moral?  Grandfather was wrong about his belief that the big bank corporations were worth the billions and billions of dollars worth of value that people put on them. They don't make anything.  They don't sell anything.

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