I have had more than a few readers ask me to explain why getting a loan is so tough in this environment. With rates at historic lows for the time being, and seemingly the worst of the financial crisis behind us, there seems to be a widening disconnect between banks and the consumers they are supposed to serve. For my own part, I can certainly validate that in my 23 years of lending, I have never seen anything more dysfunctional than this. I started in the S&L crisis of the late 1980s, so lending was very conservative then, too. But that point in history looks like a period of great romance by comparison.
Part of the issue is, no doubt, due to the depth of this financial collapse compared to the S&L crisis. However, there is a fundamental structural difference in banking that I believe is the culprit behind the current insanity. And that structural difference is compliments of our old friend the Gramm-Leach-Bliley Act of 1999 (GLB). For those of you who follow my column, you’ve already heard the sordid tale of how this law was written and paid for by Citi Group and Travelers, as a function of making their merger in 1998 legal. You also will remember that, by repealing the Glass-Steagall Act of 1932, GLB allowed banks to conglomerate with insurance companies, hedge funds, and investment banks all under one roof. Never mind that these sorts of conglomerations were exactly what led to the first Great Depression, and the subsequent passage of Glass Steagall in the first place. The part of this new equation that is the source of the current breakdown in lending is something called “proprietary trading.”
You see, before GLB was passed, commercial banks that held consumer deposits in checking and savings accounts, etc. had very little choice in what ways they could make money. So for the most part, banks made loans to people like you and me, at a rate higher than they paid out. That was simple and worked for everyone involved, but I guess it just wasn’t sexy enough. However, with the removal of Glass Steagall prohibitions against just such behavior, banks now are able to play the stock markets with our deposits in hopes of getting bigger returns. As I write, the four largest banks, Wells Fargo, Chase, Citi, and Bank of America control 40 percent (or more) of the deposit base in the U.S. and about 60 percent of all mortgages originated. Yet every one of these institutions has its own trading desk, hedge fund, and private equity firm under its roof. So is it any wonder then that, despite the obvious demand, lending to small businesses was down $100 billion in the last half of 2009, or that mortgage lending to consumers was off an estimated 17 percent the first quarter of 2010? How much fun is it to make boring consumer loans at low rates, when you can engage in statistical or derivative arbitrage?
Enter our would-be hero Paul Volcker and the “Volcker Rule.” You may remember his name, as he was the Federal Reserve chairman appointed by Jimmy Carter at the very end of his administration. He was hired to clean up the economic mess Carter’s prior appointees had made, which had resulted in mortgage rates in excess of 15 percent, among other things. While I would rather we just reinstate Glass-Steagall altogether, the Volcker Rule would get most of the work done. Under his proposal, banks that continue to engage in this kind of speculative activity would lose their government backing. In essence, the FDIC would withdraw their insurance for consumer deposits at those institutions. Given the role this speculation played in causing our current recession, you would think this would fly through the legislative process, right? Well, not so much. These same large institutions are spreading a lot of “free speech” around currently, and their teams of lobbyists look like the Publisher’s House Sweepstakes vans as they line up with oversize checks for every senator and congressman they can find.
My advice for you then is simple. Write or call our representatives and let them know how much you like banks playing roulette with your hard-earned savings! In the meantime, while the process is arduous, it does still work. If you have a fixed rate over 5.75 percent, you should be refinancing to a lower rate and/or a shorter term. Once these rates are gone, it will be years before we see them again—maybe decades.
