Banks: Too Big to Fail Again …

It reads like a 29,000 page conspiracy theorist novel and it took two years and the Freedom of Information Act to discover that the Federal Reserve, led by Ben Bernanke, secretly loaned the big banks more than $1.2 trillion in bail-out money on December 5, 2008.  This secret lending ballooned to as much as $7.7 trillion by March 2009.  The banks quietly accepted the loans while at the same time assuring their shareholders and customers that they were in fine financial condition.  They then used these near-zero interest loans to produce an estimated $13 billion of income.  Note that all of these funds were in addition to the much publicized $700 billion in ‘Troubled Asset Relief Program’ or TARP funds granted by Congress in 2008.  In fact, the Federal Reserve did not disclose to Congress that these loans took place.

Bloomberg LP, the parent of Bloomberg News had to file a lawsuit against the Federal Reserve and the Clearing House Association to force the disclosures.  Bloomberg won its case but the Fed and Clearing House Association appealed the decision all the way to the US Supreme Court, who refused to hear the case.  I’m certain that you’ve never heard of the Clearing House Association but it’s comprised of some of the largest banks in the world including Bank of America, Wells Fargo, JP Morgan Chase, Citigroup, Bank of New York Mellon and US Bancorp.  Many of these banks were the significant beneficiaries of the Fed secret loans that they did not want disclosed to the American public.

What did the big banks do with this money and the revenue it generated?  Well, not a lot of lending for one thing.  A few CEO’s heads rolled as they were fired but exited with multimillion dollar severance packages while their replacements stepped into their shoes and began to reap multimillion dollar incentive packages.  Apparently, the incentive rewards aren’t tied to performance since banks have been among the worst performing sector over the past few years.  Worse, as Congress stepped in with proposed legislation to limit the size and restrict the activities of the big banks that caused the crisis, the banks increased their lobbying expenditures by an estimated 33%… a total of $29 billion.  This taxpayer money was well-spent as the legislation was defeated allowing the banks to grow even bigger and to continue much of the same activities that lead to the crisis in the first place. In fact, total assets held by the six largest banks have increased by 39%…definitely too big to fail.

In essence, the Fed positioned itself as judge, jury and executioner as it decided which banks got loans and which banks were allowed to fail…a number that exceeds 200 since the 2008 crisis began.

These loan activities crossed two administrations.  If Congress didn’t know about the secret loans, did Presidents Bush and Obama?  I can draw only two conclusions.  Both Presidents Bush and Obama knew of the details of the loans and determined that Congress was on a ‘need to know’ basis or they didn’t know…neither assumption is reassuring.

Least you consider this article nothing more than an opinion piece; these secret activities have real implications for investors.  Consider Bank of America shareholders who on November 26, 2008 when the stock price was $14.93 per share,  received written communication from then CEO Kenneth Lewis that stated BOA was “one of the strongest and most stable major banks in the world.”  What he failed to mention was that BOA owed the central bank $86 billion.  Today, the stock is trading at $5.20 per share.

As investors, our job is difficult enough as we sift through mounds of accurate data to make investment decisions.  To the extent that we lose confidence in the data produced directly from the corporations we research, it makes our job much more difficult. Situations like this make it easy to understand why Occupy Wall Street protesters are angry and Tea Party members are advocating for less government.

In summary, America’s largest banks remain too big to fail and are essentially continuing to operate much as they were before the crisis.  My prediction is that before this decade has ended, we’ll face another banking crisis.  The questions are, “what’s our government going to do the next time…and will they tell us or keep it a secret?”

My source for this article was “Secret Fed Loans Gave Banks $13 Billion Undisclosed to Congress” by Bloomberg News.  To read the entire article, visit the Business Section ofwww.NewsTimes.com.

If you’d like to have your financial question answered in The Birmingham News, email me atstewart@GetRichOnPurpose.com and place Bhm News in the subject line.

Stewart H. Welch, III, CFP, AEP, is the founder of THE WELCH GROUP, LLC, which specializes in providing fee-only investment management and financial advice to families throughout the United States. Mr. Welch has been recognized by Money, Worth, Mutual Funds Magazine and Medical Economics as one of the top financial advisors in the country. He is the co-author of The Complete Idiot’s Guide to Getting Rich (Alpha Books) and J.K. Lasser’s New Rules for Estate and Tax Planning (John Wiley & Sons, Inc.). Visit his Web Sitewww.stewartwelch.com. Consult your financial advisor before acting on this advice.

10 Tips for Traveling Abroad

I was recently visiting with a client who’s heading for a European dream vacation in a couple of weeks. It got me thinking about how to make certain the dream doesn’t turn into a nightmare. Here are my top 10 tips for a great trip overseas:

Leave your itinerary and copies of your passport with a trusted friend or family member. Be sure this is someone you can easily reach in case of an emergency. Likewise, make sure a neighbor knows how to reach you in case something arises at home that needs your attention.
Double check your passport. Make sure that you have signed your passport and that it has not expired. Complete the emergency information section of your passport. Keep a copy of your passport with you. If it were lost or stolen while on your trip this will help expedite getting a replacement.
Check your overseas medical coverage. Call your insurance company and ask if you’re covered while overseas. Does coverage include emergency medical evacuation? If not, consider supplemental coverage such as offered through www.medjetassist.com.
Carry multiple credit cards. Often, you’ll get the best currency exchange rate by using your credit card. You’ll find some establishments will accept one credit card but not another. Be sure to visit your bank before you leave to make sure your bank debit card is overseas ATM ready. Since ATMs access your checking account, make sure you have plenty of cash in your account or have an arrangement to have funds transferred at your request.
Let Big Brother help. Keep this number handy: 202 501-4444. It’s the number for the Office of Overseas Citizen Services in the State Department’s Bureau of Consular Affairs and is your best first stop in case of an emergency. There’s also the Smart Traveler’s Enrollment Program where you can privately post your itinerary on line (https://travelregistration.state.gov ) which allows the State Department to contact you if there is a family emergency at home or crisis where you are traveling. They’ll also provide you with real-time travel advisories.
Carry extra prescription medicines with you. If you’re on prescription medications, keep an extra supply on your person in case you get stranded or get separated from your luggage.
Leave the jewels at home. When traveling in a foreign country, it’s hard to not look like a tourist. Don’t add to your risk by wearing expensive jewelry or carrying lots of cash. I have a friend who was attacked in broad daylight in London because he wore a Rolex watch. Fortunately, all he lost was his watch!
Check your cell phone plan. Most cell services offer a short-term international plan that will significantly reduce your cell charges when you use your phone abroad. My wife and I signed up for a plan on a recent trip to Italy but the cell company didn’t ‘turn it on’. Within a few days our bill was over $700! We fixed it, but it was a hassle.
Familiarize yourself with the local laws and conditions. While in a foreign country, you’re subject to their laws which can be quite different from ours. Did you know that in some countries it’s illegal to chew gum? Visit http://travel.state.gov for country specific information.
Takes lots of photos and have FUN! Bon Voyage!