Top Finance Blog

Man, when it’s time to pile on…

On Thursday the Attorney General of New York, Andrew Cuomo, who might be running for governor of the state later in the year, charged former CEO Ken Lewis with fraud as it regards Bank of America’s purchase of Merrill Lynch at a time when the banking industry was in trouble, and B of A was near the top of that list.

In essence, the lawsuit believes that B of A made the purchase at that time because they knew the government might be able to bail them out of any financial difficulties, in essence using the government’s money to help them fund the purchase so they could then pay out big bonuses to former Merrill Lynch employees. It also claims figures were fudged that didn’t show in full just how bad a footing Merrill Lynch had financially, and some other improprieties.

This is something different for the Attorney General, who usually goes after corporations for bad behavior committed in New York, where Bank of America’s offices are located. This is a civil lawsuit, which means that Lewis won’t have the benefit of corporate lawyers, ergo unlimited funds, to help his case.

This blog wasn’t up when all of that was going on, but I had wondered at the time what B of A could be thinking in absorbing Merrill Lynch when everyone knew they were in trouble themselves. The idea of adding someone else who’d in financial trouble just didn’t make much sense, and pretty quickly after it was all done, Lewis resigned. It all looked suspect, but legal at the time.

Of course, Bank of America doesn’t totally get off the hook here. While the present CEO has no liabilities thrown upon him, they will have to pay $150 million to their shareholders because of the previous false information, along with some other changes as it regards shareholders and their rights as voting members. Supposedly, they had initially told the shareholders that no bonuses would be paid out to Merrill employees.

The big banks just keep digging bigger and bigger holes for themselves. Is it any wonder that we’re leery of them?

State Farm Insurance, the biggest homeowner insurance carrier in the state of Florida, announced that they were canceling the homeowners insurance of around 125,000 residents because they see those homes at the greatest risk of serious damage if another big hurricane comes through those areas.

Last year, State Farm had petitioned the state to increase rates for some of its customers by 47% to help boost themselves against major losses caused by having to pay out for damages to homes caused by major hurricanes in 2004 and 2005. The amount paid out from just two specific hurricanes cost the company more than $29 billion, which they’re still trying to recover from. They’re not alone when it comes to losses, as the Office of Insurance Regulation projected that 102 of the 200 largest Florida carriers were running net underwriting losses.

State Farm stated that it was losing more than $20 million a month, which is why they’d asked for the rate increase. They ended up being allowed to raise rates 14.8% and were given permission to drop those policies that were most vulnerable. They had been considering leaving the Florida market altogether if they hadn’t been granted some kind of relief.

It’s hard to be mad at State Farm in this instance. It’s acknowledged that many homes haven’t been built as sturdily as they should have, with crooked contractors and the like, and we all know the damage that hurricanes can do to properties that are built well. It seems to show that the price of living in “paradise” can sometimes be quite high. Still, it’s another blow to the housing market in Florida, which has suffered already through high foreclosure rates and the closing of many banks due to bad loans.

What’s the fallout of paying off TARP money when you’re really not ready? Citigroup ended up losing $7.6 billion in the 4th quarter of 2009, and Bank of America ended up reporting a loss of around $5.2 billion for the same time period.

They stated that their loss was due to having to pay back the federal government, but that’s a minimal reason. The biggest problems they had was collecting on credit cards and bad mortgage deals, having to hire a CEO, paying out lots of bonuses, and I hate to say it this way, but basically being stupid. Once again, like Citigroup, there really wasn’t a need to have to pay off this loan so early, even though they were having problems finding someone to take over their CEO position at the amount they were allowed to offer per the government’s restrictions.

Here’s the other side of this issue. They’re reporting that $4 billion of their loss was paying back the government, who they owed $45 billion, but a big part of their loss, which they say helps to show improvement, was charging off what they considered as uncollectible debts owed them by others. What most people don’t know is that when banks write off debt, they get paid by insurance companies for a percentage of that write off. Then they get sneaky and sell that uncollectible debt to someone else, collection agencies, who then come after you and try to collect more money than you actually have to pay them. Check out the link here on knowing your charge off amounts.

So, this means B of A made money by writing off money they couldn’t collect; isn’t that a shame? I guess didn’t think it was worth it to help any of those people who have mortgage problems because of some of their sneaky underhanded deals in some states to refinance their mortgages so they had a chance to stay in their homes; shame. And even with this loss, they’re still slated to pay $4 billion in bonuses, which comes to around $400,000 per eligible employee; man, I knew I went into the wrong profession years ago.

Oh well; maybe raising those checking fees will help them make a profit this year.

CNN Money came out with a list of their top 10 predicted foreclosure hot spots for 2010. Let’s take a quick look at the cities:

The strange and scary thing about this list is that only three of the cities above have high unemployment rates, those being Boise at 10.1%, Portland at 10.8%, and Myrtle Beach at 13.3%. Sioux Falls is only at 4.9%, though that’s up from 2.9% at the beginning of 2009, and Provo is sitting at 5.5%. Even Honolulu is only at 5.9%.

What the figures are based on is a comparison to older data which shows an increase of around 100% or more for each of these areas. They’re not looking at the areas that have been slashed and burned and continue to be, such as Las Vegas, which still leads the nation in foreclosures. Instead, they’re looking at data which suggests that across the United States the default rate on mortgages is steadily increasing, no matter the factors, and therefore these cities that actually have had low numbers in foreclosures, for the most part, might start experiencing some of the same types of problems that larger cities have been dealing with.

Bad housing deals all around, it seems; and the banking industry doesn’t believe it needs an overhaul.

Last June, I wrote a post asking if we really needed credit cards, and came to the conclusion that yes, we did. At least one credit card, since there are many entities that will require proof that it’s you via a credit card, or won’t hold something for you unless you give them a credit card number of some kind.

Since we’re past the first question, then it makes sense to look at what you might want in a credit card. Here are some suggestions for what to look for that will serve your needs and also help you stay safe.

1. There’s a difference between credit cards, debit cards, and charge cards. Credit cards are what you use to help yourself borrow money from another entity, which you’ll pay back in small monthly installments. Debit cards are tied in to your bank account. Even if they have a credit logo on them, you’re actually spending your own money. Charge cards are cards that allow you to make purchases without initially spending your own money, but you have to pay off that entire amount when the bill is due. That’s what American Express is.

2. Credit limit is more important than interest rate. You won’t hear that too often, but it really is. For instance, having an interest rate of 30% annually means very little if your credit card limit is only $500. That’s only a hit of $2.50 for every $100 you owe. But if your limit is $10,000 and you have $9,000 sitting out there, that’s going to be a killer long term.

My suggestion is to keep your credit limit as low as possible to protect yourself. The truth is that if you have a card with a high limit, your mind says “heck, that only costs $400, and I have way more than enough credit to buy it.” That’s how people get into trouble. If you did that once a month but only paid the minimum, you’ll be in financial difficulties really quickly. Try to have only enough credit limit to reach 10% of your gross income. So if you make $30,000 a year, that’s $3,000 overall. If something goes wrong, as in you lose your job, it’ll be much easier to handle payments on lower balances for awhile.

3. Now we look at interest rates, and once again, not only the lowest interest rate. You want to make sure you have a fixed interest rate rather than a variable rate. Variable means it can be really low at one point and suddenly skyrocket the next. This doesn’t mean your interest rate can never be jacked up, as we’ve seen often over the past few months, but it does mean you’ll know what your rate is from month to month unless there’s a unique event. To me, it’s far better having an interest rate of 14% if it’s fixed than having a variable rate that might be 7.9% one month, then a few months later could be around 20%.

4. Big bank vs small bank credit cards. Personally, I’d rather go for smaller bank credit cards, because more of them are stable as opposed to bigger banks (though you really have to be paying attention to your local news as it pertains to local bank issues) and if you have difficulties, they’re more willing to work with you and not put as much pressure on you to come through for them. The big boys don’t care about you because they don’t know you; local banks know you better.

I hadn’t talked about it before, but I guess it’s time to bring it up. On Friday, 5 banks were closed, following the closure of another bank on Thursday, bringing the total to 15 banks in the month of January. At this pace, it will easily beat last year’s number of bank closings, which was 140. Based on predictions, however, even the average per month so far could be crushed as it’s expected that as many as 400 or 500 banks could be closed. That certainly puts a damper on things, as my post last year on the predicted 416 banks in trouble did.

The biggest bank taken over this week was First Regional Bank, with nearly $2.2 billion in assets and $1.9 billion in deposits in California. It’s the biggest bank closure so far this year.

One startling thing to follow is that three banks closed so far this year are in Washington state, which only had 3 closings total last year. The last bank that had closed there was on September 11th. Studies say foreclosures are slowly increasing in the state, yet it remains one of the low areas for foreclosures in the country, so the bank closings don’t make a lot of sense unless they’re tied in to the predicted commercial real estate crisis.

Anyway, this seems to only be the beginning of what could prove to be a scary year for banks across the country. At least no one is predicting that the record of 534 banks closed, which happened in 1989, is coming.

At least not yet.

In another anomaly that just freezes my mind, WalMart has decided to close their Sam’s Club outlets across the country, which is going to eliminate nearly 11,000 jobs. At the same time that’s happening, their stock price actually went up .2%.

If you believe WalMart, they’re not actually shedding jobs, at least not all of them. Supposedly, what they’re doing is bringing on another company to handle some of their product demonstrations in their warehouses, a company named Shopper Events. That company has stated that they will hire most of the people were being laid off, or at least that all those people can apply for the jobs because they may need most of them to fill a role. For some reason it just doesn’t seem viable, but I guess we’ll have to see as time goes on if that actually happens. Walmart also stated that most of the jobs being cut are part time.

I have to admit that I am not a Sam’s Club member, preferring instead to go to BJ’s Warehouse. I did belong to the club for one year, and only went the one time. I can’t exactly say why I wouldn’t go back, and my wife has tried to tell me that her friends tell her they have some products that we might like that are different, but I just wasn’t in the mood.

Sam’s Club has always been one of the lower performing divisions of WalMart. They’ve tried hard to compete against BJ’s in the northeast and Costco’s out west, without much success. Strangely enough, Costco’s stock price also went up after this news, while BJ’s price went down. Some analysts said that it was a good move for WalMart to take on, which probably explains why their price went up.

They will also be cutting positions geared towards offering businesses discounted rates to join Sam’s Club. I’m not sure what that means except maybe they’ve made a determination that business memberships just aren’t profitable, even if they offer the possibility of having more members. That doesn’t sound like the best business move in my mind, but if it works out for them fine.