Posted by Unknown | Posted in | Posted on 2:33 PM
Another one bites the dust. This weekend as Hurricane Ike submerged southern US States and the Midwest, two financial giants also found themselves drowning. Lehman Brothers Global Investment Bank has begun proceedings to file for Chapter 11 Bankruptcy. Perennial Wall Street powerhouse Merril Lynch has been bought out by Bank of America for a mere $29 per share or around $40 billion. Earlier this year we saw the fall of Bear Stearns, which was bought by J.P. Morgan Chase. Speculation abounds around the potential sales of Wachovia, Wells-Fargo and American Express. Is the collapse of these financial giants signalling an economic doomsday for the USA?
While I am quite sure that many Wall Street execs are losing sleep and hair over the economic turbulence, one industry that is suprisingly stable is the Credit Union. Because of the "Credit Crunch" one would be led to believe that the Credit Union (CU's from henceforth) would be suffering at this time. Not so. Being that CU's are not-for-profit organizations that do not play into the same financial charades as corporate banks, their approach to customers is more fiduciary and there for less risky. While banks will angle to get a customer into any kind of loan possible in order to increase their P&L, CU's are much more likely to give a more straight forward discussion and deal as it relates to lending. Even though the CU may have less atm's and branches, the low overhead allows them to give you higher rates and less fees. This is especially important when you consider the fact that the average American pays around $200 a year in "courtesy" overdraft fees. Most credit union patrons do not experience this, because many CU's offer an opt-out provision for the "courtesy" overdraft program. The not for profit status makes a world of difference. There are far fewer money grubbing shareholders, so the CU can put its focus on pleasing the consumer instead.
As a former employee of a major banking institution, I am very aware of how banks prey on consumers. We were consistently encouraged to sell credit cards to customers whether or not the could afford them or needed them. The maximum amount a customer could have was 5 cards. We were encouraged to get them to the max. Aside from the obvious moral issues with this approach, there is the economic issue. If you give a person more credit than they can pay back, no only do you sabotage that person's finances, but your institution's as well. This is what caused the credit collapse. For years banks have preyed upon the least wealthy their patrons. The more money you make, the more credit you can AFFORD and the lower your rate. The less money you make, the more credit you NEED and the higher your rate. What follows is simple. Mass credit default caused by a banking system who sold too much credit at a disproportionately high rate to people who couldn't afford it.
How do we fix it? Simple, revamp our crediting system. Credit Unions have shown that it can be profitable to to treat people correctly. So here's a 4 step solution to fixing our credit crisis.
1) Get rid of FairIsaac. Every credit score in America is determined by one corporation: FairIsaac. The Algorithm used to determine whether or not you are deserving of credit is a secret more closely kept than The Colonels 11 Herbs and spices. But what is not a secret is this. The Algorithm is designed to keep the credit scores of the wealthy high, and the credit scores of the poor low. It is a social control device that has helped crush many dreams, deprive families and keep middle to lower class right where they are. By abolishing their system of assesment and replacing it with a new one that EQUALLY takes into account payments and missed payments, chargeoffs and fulfillment of debt, and opening and closure of credit lines, Americans will have a FAIR opportunity to utilize the credit products available. Even more important, financial institutions will have a better way of assessing potential customers and will be able accurately discern who and who is not "credit worthy."
2) Impose Specific Federal Restrictions on High Interest Credit Products. The federal government is responsible for the general well being of America. The cancerous policy of raising rates due to income has been eating away at our financial body for too long. I agree that institutions should be compensated for the risk they incur from crediting. I disagree that a person should be punished for not being wealthy. 2.5% over the prime rate is more than enough for any loan. There must be an adjustable ceiling that cannot be surpassed. This is especially neccessary in the realm of Payday Loan institutions, where the interest can literally be as high as 600%.
3) Make the Courtesy Overdraft Opt-Out policy a law. Forcing a person to take a 45-300% loan is not a courtesy. That is exactly what happens when you overdraft. Many CU's and smaller community banks have already adopted the Opt-Out Policy. What resulted was higher balance growth and greater client retention. Seeing how this has played out on the smaller scale, one can logically assume that would occur exponentially on the larger corporate scale.
4) Mandate Financial Education in All State and/or Federally Funded Elementary and Secondary Schools. If a school recieves government funding, then that school should be required to teach finances to all students. A lack of financial education has caused many consumers to fail economically. There is no reason why an 18 year old should not be able to discern credit from debit or understand the difference between stocks and bonds. Financially educating the masses is key to salvaging our economy.
If these 4 things were to occur today, within 20 years, we would be in the midst of an economic boon. Banks would be able to find more credit worthy customers because of the accuracy of open-market credit scoring. Customers would be able to pay less fees and more bills, increasing economic stabilization across the board. Most importantly, consumers will be far more saavy than they currently are, leading them to make better decisions and be more financially responsible. Things have to change. We are watching our economy crumble right before our eyes. Being third world is only two worlds away.
While I am quite sure that many Wall Street execs are losing sleep and hair over the economic turbulence, one industry that is suprisingly stable is the Credit Union. Because of the "Credit Crunch" one would be led to believe that the Credit Union (CU's from henceforth) would be suffering at this time. Not so. Being that CU's are not-for-profit organizations that do not play into the same financial charades as corporate banks, their approach to customers is more fiduciary and there for less risky. While banks will angle to get a customer into any kind of loan possible in order to increase their P&L, CU's are much more likely to give a more straight forward discussion and deal as it relates to lending. Even though the CU may have less atm's and branches, the low overhead allows them to give you higher rates and less fees. This is especially important when you consider the fact that the average American pays around $200 a year in "courtesy" overdraft fees. Most credit union patrons do not experience this, because many CU's offer an opt-out provision for the "courtesy" overdraft program. The not for profit status makes a world of difference. There are far fewer money grubbing shareholders, so the CU can put its focus on pleasing the consumer instead.
As a former employee of a major banking institution, I am very aware of how banks prey on consumers. We were consistently encouraged to sell credit cards to customers whether or not the could afford them or needed them. The maximum amount a customer could have was 5 cards. We were encouraged to get them to the max. Aside from the obvious moral issues with this approach, there is the economic issue. If you give a person more credit than they can pay back, no only do you sabotage that person's finances, but your institution's as well. This is what caused the credit collapse. For years banks have preyed upon the least wealthy their patrons. The more money you make, the more credit you can AFFORD and the lower your rate. The less money you make, the more credit you NEED and the higher your rate. What follows is simple. Mass credit default caused by a banking system who sold too much credit at a disproportionately high rate to people who couldn't afford it.
How do we fix it? Simple, revamp our crediting system. Credit Unions have shown that it can be profitable to to treat people correctly. So here's a 4 step solution to fixing our credit crisis.
1) Get rid of FairIsaac. Every credit score in America is determined by one corporation: FairIsaac. The Algorithm used to determine whether or not you are deserving of credit is a secret more closely kept than The Colonels 11 Herbs and spices. But what is not a secret is this. The Algorithm is designed to keep the credit scores of the wealthy high, and the credit scores of the poor low. It is a social control device that has helped crush many dreams, deprive families and keep middle to lower class right where they are. By abolishing their system of assesment and replacing it with a new one that EQUALLY takes into account payments and missed payments, chargeoffs and fulfillment of debt, and opening and closure of credit lines, Americans will have a FAIR opportunity to utilize the credit products available. Even more important, financial institutions will have a better way of assessing potential customers and will be able accurately discern who and who is not "credit worthy."
2) Impose Specific Federal Restrictions on High Interest Credit Products. The federal government is responsible for the general well being of America. The cancerous policy of raising rates due to income has been eating away at our financial body for too long. I agree that institutions should be compensated for the risk they incur from crediting. I disagree that a person should be punished for not being wealthy. 2.5% over the prime rate is more than enough for any loan. There must be an adjustable ceiling that cannot be surpassed. This is especially neccessary in the realm of Payday Loan institutions, where the interest can literally be as high as 600%.
3) Make the Courtesy Overdraft Opt-Out policy a law. Forcing a person to take a 45-300% loan is not a courtesy. That is exactly what happens when you overdraft. Many CU's and smaller community banks have already adopted the Opt-Out Policy. What resulted was higher balance growth and greater client retention. Seeing how this has played out on the smaller scale, one can logically assume that would occur exponentially on the larger corporate scale.
4) Mandate Financial Education in All State and/or Federally Funded Elementary and Secondary Schools. If a school recieves government funding, then that school should be required to teach finances to all students. A lack of financial education has caused many consumers to fail economically. There is no reason why an 18 year old should not be able to discern credit from debit or understand the difference between stocks and bonds. Financially educating the masses is key to salvaging our economy.
If these 4 things were to occur today, within 20 years, we would be in the midst of an economic boon. Banks would be able to find more credit worthy customers because of the accuracy of open-market credit scoring. Customers would be able to pay less fees and more bills, increasing economic stabilization across the board. Most importantly, consumers will be far more saavy than they currently are, leading them to make better decisions and be more financially responsible. Things have to change. We are watching our economy crumble right before our eyes. Being third world is only two worlds away.
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