Your Friendly Banker

Now is the month of Maying,
When merry banks are playing. . . .
-- An old English Ballett (slightly distorted)

The pandemic was not the same as 2008 as far as the banks were concerned. The banks remember 2008 because that was the year that the federal government and taxpayers came to their rescue when it seemed many of them would fail because of the 2007 bank liquidity crisis.

Thanks to the Troubled Asset Relief Act (TARP), eight banks survived because the federal government made investments in those banks that were to be repaid to the government in future years. As recent events have shown, the banks were outraged when the shoe was, as it were, on the other foot.

In March 2021, Congress enacted the $1.9 trillion stimulus package designed to help those who had been adversely affected by the pandemic. That was similar to how TARP had helped banks and certain other industries that suffered during the crisis of 2008. A part of the 2021 stimulus package included a $4 billion debt relief package. The $4 billion debt relief was intended to be given to black and other minority farmers who, in addition to the effects of the pandemic, have suffered for years as a result of discriminatory lending practices by the banks in their dealings with the minority communities. According to a report in the New York Times, the number of Black-owned farms in the country has gone from approximately one million in the 1920s to fewer than 40,000 today. The decrease is attributable in part to onerous loan terms imposed by lenders on the minority community and the resulting high foreclosure rates.

The money in the stimulus package that is to be given farmers was to enable them to pay off mortgages held by banks or other investors sooner than they otherwise would have. Given the history of the banks with the minority community and their high foreclosure rates, it surprises the non-banker to learn that the very same banks whose practices adversely affected the minority communities in the past and who benefited from TARP, would be the banks opposed to the debt relief program. The banks' opposition to the proposed debt relief is based in part on the fact that banks make money on interest they earn when money is loaned to borrowers. They are upset because if the loans are paid off early, they, or individuals to whom they sold loans, will receive less in interest payments than they expected at the time the loans were made.

In explaining how adversely affected they and their investors will be when the loans are paid off early, they did not address the bad effects of their earlier discriminatory practices. Instead, they explained that when a loan is paid off early as a result of the debt relief program, they, or people who had purchased the loans, received less interest than they anticipated and, accordingly, an early pay off results in less profit than anticipated. This remains true even though under the debt relief program, banks receive 120% of the outstanding loan amount to compensate them for additional taxes and fees they incur as a result of the early payoff.

The perceived adverse effect on the lost profits resulting from early pay offs and loss of expected income, may help explain the banks' treatment of those who withdrew more money from their checking accounts than they had placed in them during the pandemic. In those cases, the banks compensated themselves not by lamenting a loss of earnings, as they did with the loan forgiveness program, but by exacting high penalties on those making withdrawals in excess of what they have in their accounts.

The banks' practices with respect to overdrafts were disclosed in hearings before the Senate Banking Committee that took place at the end of May. The chief executive officers of six of the biggest banks in the country appeared before the committee in what became a somewhat contentious hearing.

During the hearing Senator Elizabeth Warren observed that JPMorgan Chase, one of the beneficiaries of TARP 13 years earlier, continued to charge overdraft fees to its customers who overdrew their accounts as a result of the pandemic. She observed that in 2020 the bank earned almost $1.5 billion in overdraft fees. In response Jamie Dimon, the chief executive of the bank said the banks waived fees for depositors who requested them. Apparently the owners of accounts that incurred $1.5 billion in overdraft fees were at fault for not having requested waivers of the overdraft fees.

According to Senator Warren, the four banks that were represented at the hearing collectively made $4 billion in overdraft fees during the pandemic. During that same period they enjoyed record profits. In the first quarter of 2021, all previous profit records for banks were shattered. They made $76.8 billion in that quarter.

Here is what we have learned from the foregoing. Bankers have short memories. The pandemic did not affect everyone equally.