A power has risen up in the government greater than the people themselves, consisting of many and various and powerful interests . . . and held together by the cohesive power of the vast surplus in the banks.
— John Calhoun, May 27, 1836 Speech
The purpose of this column is to try to help Morgan Chase credit card holders understand the reasons for the recent correspondence from that institution advising them of the increases in interest rates being imposed on them when they use their cards for cash advances as defined in the agreements they signed when obtaining the cards.
The notice that was sent out by the bank to many, if not all, its credit card holders, informs them that pursuant to the agreement they signed when they applied for their credit cards, the annual percentage rate they were being charged for things identified as cash advances that include, among other things, wire transfers, purchase of travelers checks, foreign currency, and similar transactions, will incur a new annual percentage rate that is approximately 5% higher than the old rate. Whereas the old rate was calculated by adding only 15.99% to the prime rate as published in the Wall Street Journal, the new rate will be calculated by adding 21.74% to the prime rate.
A number of you has inquired whether increasing the interest rate is an attempt by the bank to compensate for the fines and penalties the bank has regularly been paying for its assorted misdeeds since 2009. During that period Morgan Chase has paid $38 billion in penalties and fines as a result of 22 settlements it entered into with bank regulators.
Readers may wonder why a bank that has paid such enormous sums of money in fines and penalties is still in business. The reason it is still in business is that the fines it has paid since 2009 are, in the bank’s overall scheme of things, a mere pittance. In July 2015, for example, Morgan Chase paid $136 million to settle claims that it illegally used robo-signing of documents without verifying what was being signed and for providing inaccurate information to buyers of accounts it was selling. Notwithstanding the penalty paid in 2015, Morgan Chase had net income of $5.4 billion that year, an increase of 10% from 2014, and net revenue of $23.7 billion, an increase of 1% from 2014. (Some readers may also wonder why such enormous fines and penalties have not resulted in anyone at the bank going to jail. The answer is that often the matters settled are not criminal in nature though they might seem so to victims of the bank’s behavior. And even when criminal, corporations, although persons for purposes of sophisticated United States Supreme Court analysis, understood by only the authors of the Court’s opinion, are not persons when it comes to going to jail.
As the foregoing shows, the penalties and fines imposed on the bank for its misconduct do not explain the need for the rise in interest rates since the bank continued to be hugely profitable, those fines and penalties notwithstanding. Hence, the only other obvious explanation for the correspondence from the bank announcing the increase in interest rates, would be that the bank is taking steps to increase the bank’s income in order to help pay for Jamie Dimon’s salary. Mr. Dimon is president and CEO of Morgan Chase, dual roles he has held since 2006, and retained following a stockholders’ effort to force him to relinquish one of those roles in 2013. Followers of Mr. Dimon’s salary will recall that in 2007 his annual compensation was $30 million, in 2009 it was $15.2 million and in 2010 and 2011 it had risen to $23 million. In 2012 the board of the bank reduced his compensation to $11.5 million, believing he was partially responsible for the trading debacle known as the London Whale case. That one-year salary reduction was believed by the board to be adequate punishment, and in 2013 and 2014 his compensation was increased to $20 million and in 2015 to $27.5 million. Since his increased salary was announced in January 2016, it is unlikely that the July notice of increased interest rates on cash advances made using credit cards was needed to help pay for Jamie Dimon’s increased salary.
Since neither poor earnings by the bank nor a need to find the money with which to pay Mr. Dimon his $27.5 million annual compensation explains why the interest rate on credit card cash advances has increased, there has to be some other explanation and, in fact, there is. Morgan Chase raised the interest rate on those credit cards because it could.