Thursday, January 17, 2008

Banking Fallout: Fewer Loans, Higher Fees

After completing a routine business transaction, the Citigroup telemarketer asked if I'd like to pay a small fee to learn my credit rating. I politely said no and then suggested that my credit score was probably better than Citi's--which just took an $18 billion write-down, slashed its dividend and is laying off thousands of employees.
Ahh, the irony.
There's little doubt that this is a critical year for the nation's top banks and investment houses. Until--and unless--they turn their fortunes and profits around, the U.S. economy will tumble, despite the federal government's efforts to sidestep recession.
How will these lenders climb out of this growing hole they dug for themselves? Here's a few possibilities:
Recapitalize. We already know that Citigroup and Merrill Lynch are traveling to the four corners of the globe in search of investors, who will pump money into their barren coffers. The New York Times reports these institutions are looking for investors in Asia and the Middle East. Already, Prince Alwaleed bin Talal of Saudi Arabia is a major Citi shareholder and is plowing even more money into the sagging banking giant, as are investors from Singapore and Kuwait. Merrill is reportedly getting cash from the Middle East.
Let's not kid ourselves. For decades, foreign investors have been buying into major U.S. financial institutions.
This time, they may be throwing good money after bad. Or they could end up with some real bargains. Either way, crucial U.S. assets will end up in the hands of overseas buyers.
Is that a good thing right now? I'll get back to you on that one.
Sick cat mergers. Expect to see some big names gobbled up in major mergers, which will be quickly approved by a nervous federal government. Among those U.S. lenders likely to do the buying: JP Morgan Chase, Bank of America (which is already buying mortgage lender Countrywide Financial) and some better-capitalized regional banks. Meanwhile, some storied investment banking names could be swallowed up, including Bear Stearns (which has already talked about a link-up with Fortress Investments).
Yes, banks have been merging for years as have investment houses. The current financial travesty, however, will only accelerate that trend. The upshot: At the end of this mess, we'll have fewer banks and only a handful of national banking and investment powerhouses.
Limiting lending.Want a loan? Ha, ha ha ha. During this crisis, banks will be holding on tight to their cash. As a result, they're less willing and able to provide affordable business loans, lines of credit, home equity notes and mortgages to even above-average risks. With everyone screaming about the excesses of the sub prime lending and mortgage market, a borrower will be lucky to get an reasonable bank auto loan even with a sizable down payment. You've heard the phrase: Cash is King? That applies here.
Fee frenzy. How in the world will the banks make their money? Answer: Charging poor suckers like us more for basic services.
An example: JP Morgan Chase just raised its non-customer ATM fees to $3 per transaction (from $2). It's no mere coincidence this increase came as the New York-based bank, with a large Chicago-area presence, reported a 34 percent earnings slide for the last quarter. Get ready for higher fees on debit cards, checking accounts, money transfers and other transactions. My advice: Keep a close watch on your bank and 401K statements for fee surprises. By the way, as these players merge--expect transaction fees to go up, not down.
Federal Case. Yes, the federal government and Federal Reserve will find a way to inject some financial stimulus. Who knows if it will be enough to stave off recession? It may be too late for that anyway.
Meanwhile, the economy will become the top issue of the presidential campaign, barring any major terrorist event or worsening of the War in Iraq.
When it comes to the banking business, no one needs to buy a credit report to know the score: The country's top lenders are in deep trouble and fighting to survive.

(Photo courtesy of Fruitful Studios on


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