Wednesday Morning News of Note

Some things you should be reading on this Wednesday, the first full day of Fall:

1. You may have heard recently that the U.S. commander in Afghanistan, Stanley McChrystal, issued a dire report indicating that the security situation in Afghanistan is certain to deteriorate without the infusion of thousands more U.S. and NATO troops. The report makes clear how much the situation in Afghanistan has deteriorated already (conditions which have prompted McChrystal to consolidate American forces in more populous areas) and that, combined with the sagging legitimacy of the Karzai government in the wake of fraudulent elections, apparently has the Obama administration considering a widespread shift in strategy:

Mr. Obama met in the Situation Room with his top advisers on Sept. 13 to begin chewing over the problem, said officials involved in the debate. Among those on hand were Mr. Biden; Defense Secretary Robert M. Gates; Secretary of State Hillary Rodham Clinton; James L. Jones, the national security adviser; and Adm. Mike Mullen, the chairman of the Joint Chiefs of Staff.

They reached no consensus, so three or four more such meetings are being scheduled. “There are a lot of competing views,” said one official who, like others in this article, requested anonymity to discuss internal administration deliberations.

Among the alternatives being presented to Mr. Obama is Mr. Biden’s suggestion to revamp the strategy altogether. Instead of increasing troops, officials said, Mr. Biden proposed scaling back the overall American military presence. Rather than trying to protect the Afghan population from the Taliban, American forces would concentrate on strikes against Qaeda cells, primarily in Pakistan, using special forces, Predator missile attacks and other surgical tactics.

The Americans would accelerate training of Afghan forces and provide support as they took the lead against the Taliban. But the emphasis would shift to Pakistan. Mr. Biden has often said that the United States spends something like $30 in Afghanistan for every $1 in Pakistan, even though in his view the main threat to American national security interests is in Pakistan.

Of course we've been wondering since earlier this year if a shift in Afghanistan is warranted, though liberals remain divided on the issue (the opinion of conservatives is typical, thoughtless and so pointless to examine.) Is such a shift around the corner? We'll see.

2. The Obama administration is considering limiting use of the State Secrets privilege:

The new policy, which could be announced as early as Wednesday, would require approval by Attorney General Eric H. Holder Jr. if military or espionage agencies wanted to assert the privilege to withhold classified evidence sought in court or to ask a judge to dismiss a lawsuit at its onset.

“The department is adopting these policies and procedures to strengthen public confidence that the U.S. government will invoke the privilege in court only when genuine and significant harm to national defense or foreign relations is at stake and only to the extent necessary to safeguard those interests,” says a draft of a memorandum from Mr. Holder laying out the policy and obtained by The New York Times.

[...]

Leading Democratic lawmakers in both the House and the Senate have filed bills that would restrict how the privilege could be used. The Obama administration has not taken a position on those bills, but the new policy, which is intended to rein in use of the privilege by erecting greater internal checks and balances against abuse, could blunt momentum in Congress to pass legislation.

The bills would encourage courts to find a way for lawsuits to continue, even if particular documents or information must be withheld. They would also require judges to take a more searching look at executive branch claims that certain evidence cannot be used in court because its disclosure would result in a “significant harm” to national security.

That requirement would be tougher than the current legal standard, which comes from a 1953 Supreme Court decision approving the withholding of information whenever there is “reasonable danger” of exposing information that should not be divulged for national security reasons.

The real problem of course is that since that 1953 decision, courts have held that it's the government, not a federal judge, who decides whether there exists a "reasonable danger" of exposing delicate national security information. This new policy doesn't change that, so I'm not entirely sure how useful it will be. Glenn Greenwald has hammered the Obama administration on this and other national security policies; I expect him to have quite a bit to say about this announcement.

3. And look who's coming around now:

Bank of America and JPMorgan Chase, two of the nation’s biggest banks, announced plans on Tuesday to drastically overhaul their debit card programs by lowering or eliminating fees, changing the way they credit transactions and allowing customers to opt out of overdraft protection.

The moves come as lawmakers and regulators in Washington push proposals to reform what critics say are excessive charges of which consumers are unaware. The penalties, known as overdraft fees, bring the banking industry tens of billions of dollars in revenue annually.

Bank of America said it would allow current customers to turn off the ability to spend when their account hits zero, starting Oct. 19. Next June, the bank plans to limit the number of times each year that current customers can overdraw their accounts when using a debit card at a store. It will let new customers choose whether they want overdraft protection when they are opening their account.

Chase plans to eliminate by the first quarter of next year a common industry practice that enraged many consumers. Instead of lumping a day’s worth of debit card and A.T.M. transactions together and then processing the highest amounts first — a practice that has caused large numbers of consumers to overdraw more quickly and pay more fees — it will credit the transactions chronologically. Chase also plans to allow customers to opt out of overdraft coverage.

I'm sure this has absolutely nothing to do with the extremely bad press these banks have gotten as of late, or the fact that Congress is chomping at the bit to regulate them. In all seriousness though, I'm sure lobbyists for the banks are right now pointing out to members of Congress how legislation is now completely unnecessary because the Banks are taking steps to regulate themselves. To which I say, screw that, pass the legislation.

Usury

This is not really a new story, given that banks have been charging usurious overdraft fees for the better part of a decade now, but I suppose the climate has changed in the wake of the credit crisis, collapsing banks, and regulatory reform:

When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.

So he was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.

Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge.

If you've paid one of these fees one time, you've probably paid them multiple times; according to the article, the FDIC found that ninety-three percent of fees come from a mere fourteen percent of bank customers, many of whom are low income. This makes sense of course; the less money you have in your account, the more likely you are to brush up against your account balance and get some fees sent your way. You can probably imagine why banks are so eager to charge these fees. According to the article, they rake in about $27 billion in profits a year charging fees upwards of $30 every time a bank customer overdraws their account, even for transactions of less than a dollar. Of course, banks defend this conduct as something that customers want:

Bankers say they are merely charging a fee for a convenience that protects consumers from embarrassment, like having a debit card rejected on a dinner date. Ultimately, they add, consumers have responsibility for their own finances.

“Everyone should know how much they have in their account and manage their funds well to avoid those fees,” said Scott Talbott, chief lobbyist at the Financial Services Roundtable, an advocacy group for large financial institutions.

Banks are so confident that you will want this service that some-like Bank of America-won't even let you opt out of it without forcing you to squabble with customer service.

When the brother, who has a mental illness that she says requires her to assist with his finances, started falling behind on rent, Ms. Holton-Hodson found he had racked up more than $300 in debit card overdraft fees in three months, including a $35 one for exceeding his balance by 79 cents.

Ms. Holton-Hodson said she spent two years asking bank employees if her brother could get a card that would not allow him to spend more than he had. Though Bank of America does not typically allow customers to opt out of overdraft protection, it finally granted an exemption.

“I’ve been angered and outraged for many years,” she said. “When there is no money in his account, he shouldn’t be able to pay.”

Anne Pace, a spokeswoman for Bank of America, said the case was “complicated issue without any simple solutions,” but declined to elaborate, citing privacy concerns. She added the bank allowed customers to opt out of overdraft services on a “case-by-case basis.”

And of course, the banks fought regulation that would require them to get your permission to sign you up for these programs, or disclose what the program actually costs you (the equivalent of an annual interest rate in the thousands.)

Banks will also do you the favor of structuring your debit transactions so that the largest are taken out of your account first. This means of course that a relatively large transaction can drain your account, leaving you subject to a fee for every little transaction that follows. They defend that practice as well:

Mr. Talbott, of the Financial Services Roundtable, said some banks reordered purchases based on surveys showing that consumers want their most vital bills, like rent and car payments, which tend to be for larger amounts, paid before items like a $3 coffee.

Right. Except, as we've already established, they will generally let all of these transactions go through. So why do they need to be in any particular order at all? Unless that is, the bank makes more money by gaming the system against you.

And they warn of doom and gloom in the event of any reforms:

Michael Moebs, an economist who advises banks and credit unions, said Ms. Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45 percent of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

“Will they be able to replace it with another fee?” Mr. Moebs said. “Not immediately and not soon enough.”

To which any sane person would say, if a bank can only make money by charging usurious fees in an underhanded manner, then perhaps we do not need as many banks.

What banks do is actually worse than this article makes it appear. If your account is overdrawn by even a tiny amount, you can quickly find yourself owing hundreds in overdraft fees. Now of course you can refuse to pay them...if you don't mind closing your account, cancelling your direct deposit and automatic bill pay, and then either taking your money elsewhere to open a new account or paying smaller fees to have your checks cashed by a check-cashing service, and then being harangued by debt collectors for the money you owe to the bank in fees. So your money is essentially held hostage by the bank. And unless you move to a credit union or community bank that doesn't regard their customers as prey, you will simply encounter the same treatment.

Banks don't provide this "service" to you because they don't want you to be embarrassed at the checkout lane. The institute it, whether you want it or not, because it's billions in free and easy money that most people are going to pay, whether they want to or not. They can get away with it because they've lobbied the Federal Reserve and Congress to stay away from the issue, and because consumers mostly don't have a choice but to accept such fees or hunt down the minority of banks and credit unions that don't charge them. Fortunately there are members of Congress who are taking action on this issue, though you can expect a hell of a fight from the banking industry on it (twenty-seven billion dollars is a lot of free money.)

(Also, see Fred Clark for more on this issue.)

"Direct Deposit Advance"

So this unnamed bank will "lend" you your own money, at a 120% APR? (via Boing Boing):

This time, the nice lady at the counter asked me if I needed immediate access to the deposit?
Huh? Said I. Looking at the payeee - "I think the check will clear..."

Oh, it is not that, said she, it is just that some people need immediate access to their deposits, like same day, or tomorrow, and if you did we can expedite it.

Oh, that's nice, thought I, and said "no thanks, got enough balance to cover any outstanding transactions thanks, but been there..."

so, I wandered off, and suddenly though - well was prompted by my better half to think - "expedited? at what price?"


So, I checked online - there is nothing about expedited access to deposits, rather a guarantee that deposits before 4pm are available same day... or next day.
Unless: several reasons, none of which apply to me, nor, I sincerely hope, the payee.

But, there is "direct deposit advance".
Interesting:

"The Finance Charge is a one-time transaction charge and is not dependent upon the length of time the advance is outstanding. The Finance Charge is $2.00 for every $20 that is advanced, which equates to an Annual Percentage Rate (APR) of 120%."

In short, when you deposit a check that for whatever reason the bank elects not to immediately post to your account, they will "advance" you funds at flat fee that is the equivalent of 120% APR. As this blogger points out, most banks offer overdraft protection, which already permits you to take an "advance" of a sort against your account (while incurring fees that also equate with an exorbitant APR.) And of course, the only reason you might need and advance is if the bank itself places a hold on your check so that funds don't appear in your account until after a certain period of time. But either way, this amounts to a bank in effect loaning you your own money, and I'm of the opinion that it ought to be completely illegal.

As For Those Bank Bailouts

I think it's safe to say that everyone is wondering exactly when the hundreds billions that we have given to the banks on Wall Street, and the hundreds of billions more that the Obama administration is proposing to give them, is going to turn these banks around and restore the greatly damaged market for credit in the U.S. Chairmen of the Fed Ben Bernanke defended the administration's present plan, but the Paul Krugman joins the critics that are out in force:

Ben Bernanke’s testimony over the past two days gives us our best clue yet about where the administration and the Fed are going with bank rescue. And the answer seems to be … nowhere.

Simon Johnson and James Kwak read it the same way I do:

This is another sign of the serious brainpower that has been expended on finding ways to avoid or minimise government ownership of banks, and to avoid the slightest possibility of offending shareholders – shareholders whose shares have positive value primarily because of the expectation of a further government bail-out.

And The Economist’s Free Exchange puts it bluntly:

At this stage, I joked, I’d be just as happy with them just saying, “We have a strategy, we will continue to inject capital to prop up zombie banks indefinitely. That’s pretty much the whole plan and we’re counting on it bringing the financial sector back to life someday, somehow”. Is it just me or is that pretty much what Ben Bernanke said yesterday?

No, it’s not just you.

I’d add a political-economy point. Here’s Noam Scheiber, in the new TNR economics blog:

Yesterday afternoon I spoke to a senior Democratic aide in the Senate who repeatedly emphasized that, the way things stand now, it would be almost impossible to get another cent for the banks. Congress has “bailout fatigue,” the aide said.

Indeed. As long as capital injections are seen as a way to bail out the people who got us into this mess (which they are as long as the banks haven’t been put into receivership), the political system won’t, repeat, won’t be willing to come up with enough money to make the system healthy again. At most we’ll get a slow intravenous drip that’s enough to keep the banks shambling along.

Is nationalization inevitable? Nate Silver makes a plausible argument that there are many good reasons not to rush this approach, but if it's political pressure that Obama is waiting for, I'd say the tide is turning that way.

Union Membership Up

After decades of decline, Union membership is slowly crawling back upwards:

The percentage of American workers belonging to a union jumped in 2008, the first statistically significant increase in the 25 years that the figure has been reported, reversing a long decline in union membership.

In 2008, union members represented 12.4 percent of employed workers, up from 12.1 percent a year earlier, according to a report from the Bureau of Labor Statistics issued yesterday. Union membership had been falling since the 1950s, when members constituted as much as a third of the U.S. workforce.

"We saw what looked like a bottoming out last year, and this suggests that we might have turned the corner," said John Schmitt, senior economist at the Center for Economic and Policy Research.

Naturally, major U.S. businesses are already plotting on how to put a damper on this trend (via Boing Boing):

Three days after receiving $25 billion in federal bailout funds, Bank of America Corp. hosted a conference call with conservative activists and business officials to organize opposition to the U.S. labor community's top legislative priority.

Participants on the October 17 call -- including at least one representative from another bailout recipient, AIG -- were urged to persuade their clients to send "large contributions" to groups working against the Employee Free Choice Act (EFCA), as well as to vulnerable Senate Republicans, who could help block passage of the bill.

Bernie Marcus, the charismatic co-founder of Home Depot, led the call along with Rick Berman, an aggressive EFCA opponent and founder of the Center for Union Facts. Over the course of an hour, the two framed the legislation as an existential threat to American capitalism, or worse.

"This is the demise of a civilization," said Marcus. "This is how a civilization disappears. I am sitting here as an elder statesman and I'm watching this happen and I don't believe it."

So if you follow that, financial institutions screw up in a colossal manner, dragging the nation's economy down with them, then workers who are losing their jobs by the tens of thousands race to join unions to protect themselves from the screwups of others, and this is how "civilization disappears." Imagine if you can what Mr. Marcus would have thought of the French Revolution, when people were really mad.

If you can stomach it, the audio is here (also via Boing Boing.)

Bailed-out Banks Using Offshore Tax Shelters

Get out your pitchforks.

Update on financial crisis

This article points out that not even the giants are immune from the troubles affecting the market right now.

To the surprise of executives within those firms, and their rivals, the stocks of these powerful companies were drawn into the crisis of investor confidence on Wednesday. Morgan Stanley, whose stock fell almost 25 percent, was considering a merger with Wachovia or another bank to help shore up its finances. Goldman Sachs’s stock fell almost 14 percent, and it had to rebuff rumors that it was seeking a capital infusion.

Investor confidence has gotten so bad that people are having doubts about some of the most secure investment banks on the market. It's not even warranted! This just goes to show that the stock market has a built in problem in being so dependent on investor confidence. Doubting investors can drag down prices even when business performance should indicate otherwise.

You want the advice of somebody with no investmenst, no experience in the stock market, and no financial education whatsoever? Buy or mine gold. It's the only thing that gains value no matter what occurs. Or better yet, pay off all your debts and put real cash into the economy.