MoneyRates Blog

In one of the more interesting bank stories of the new century, investment bank Goldman Sachs and renowned investor Warren Buffett want to buy $3 billion worth of federal tax credits from Fannie Mae, the government-owned mortgage finance company.

Government regulators are unsure of the fairness of such a deal because the tax credits would reduce the federal income taxes owed by Goldman Sachs and Warren Buffett.

Fannie Mae, however, could use the $3 billion. It is estimated that the government has put more than $100 billion into Fannie Mae with no end in sight as to a return to profitability.

What’s more, Fannie Mae cannot use the tax credits because the company already has so many losses that it owes no federal income tax this year, and will likely not owe any federal income tax for many years to come.

Fannie Mae’s continuing and widescale purchasing of mortgages from banks has helped to keep mortgage interest rates low, so it is difficult for even the most hardcore libertarian to long for the company’s total demise.

The tax credits in questions were originally put into law under President Ronald Reagan, in 1986, as part of an affordable housing program.

It’s not surprising that former Fed Chairman Paul Volcker has voiced the opinion that banking reform must include the break-up of large institutions, including the separation of commercial and investment banking operations. However, having John S. Reed’s voice join the same chorus is really reason for pause.

Paul Volcker’s regime as Fed Chairman was strikingly different from that of his successor, Alan Greenspan. Volcker did not consider himself the cheerleader-in-chief for the growth economy, and his greatest achievement was in helping to finally choke off the inflation trend which had snowballed in the 1960s and 1970s. Volcker was willing to fight inflation even at the expense of some short-term economic growth, and it paid off in the long run. Given this conservative approach, his view in favor of unhooking conservative and risky lines of bank business is perfectly in character.

Reed, on the other hand, is one of the founding fathers of the modern mega-bank, having merged his Citicorp with Travelers to form Citigroup. Now, however, Reed has stated that some separation between commercial and investment banking activities would make sense.

Will reform get there, or will it continue to nibble around the edges? Ultimately, what legislators don’t accomplish with reform, bank customers can achieve by voting with their feet.

Customers will continue to shop for the best bank rates on CDs, savings, and money market accounts. They will also take reputation into consideration when choosing a bank, and right now, that favors smaller, less-complex institutions. A MoneyRates.com poll a few  months back showed that bank customers preferred local community banks and credit unions by an overwhelming 4-to-1 margin over large national and international banks. If the business of banking customers follows this preference, it may largely achieve the separation of business that reformers want.

Like cockroaches scattering when you turn on the lights, reverse mortgage scammers are running scared.

This migration is partly due to laws and lawmakers intent on preventing reverse mortgage scams, and perhaps more largely based on the ready availability of honest, comprehensive reverse mortgage information on the Internet.

Reverse Mortgage Protective Measures

The most popular form of reverse mortgage is called a Home Equity Conversion Mortgage, or HECM. This loan is sponsored by the federal government and is one of the most heavily regulated mortgages ever created. For the casual loan shark, it’s not even worth the paperwork to try to perpetrate an HECM scam.

Meanwhile, state attorney generals stand ready to guard elderly citizens from the predations of unscrupulous lenders. For a state attorney general, nailing a reverse mortgage scammer is the best PR in the world.

Information Shines a Light

AARP has a whole section on its Web site about reverse mortgages. Many other sites offer information about reverse mortgages. Moreover, seniors are required to sit down with a housing counselor before accepting a reverse mortgage.

Scammers are discovering that there are quicker, easier ways to make a dishonest buck than selling reverse mortgages.

It was more tricks than treats for the stock market as the month of October wound down, but if bank depositors think the stock market’s woes don’t concern them, they may also be in for an unpleasant surprise.

The Dow Jones Industrial Average had four days with losses of a hundred points or more in the last six trading days of October. Explanations vary, including concern that the economic recovery cannot be sustained without further government stimulus, unease that there may be another shoe to drop in the banking crisis, and simply that the stock market had risen too far too fast and was due for a fall.

How does this concern bank depositors, with their nice, safe CDs, savings accounts, and money market accounts?

The issue is that when the stock market is shaky, there is a flight to quality — investors pile into conservative, interest-bearing securities. That drives the prices of those securities up — and their yields down. If this is more than a case of temporary jitters for the stock market, that can affect interest rates generally, including bank rates.

For example, after reaching its highest point in two months, the yield on ten-year Treasury bonds fell off sharply during the stock market’s recent struggles. Again, if this is just a passing nervous spell for the stock market, the impact shouldn’t filter through to bank rates. However, if we see a sustained slide in stocks, it will be just one more factor keeping bank rates at their current anemic levels.

Treasury Secretary Timothy Geithner testified before Congress this morning on the topic of new bank regulations being discussed by the Democrat-controlled Congress, led by Barney Frank of Massachussetts.

Conservative investors who are seeking to protect retirement savings are understandably interested in the outcomes of these discussions. When you have spent your life saving money in savings accounts, CDs, and money market accounts, you want that money respected and protected.

To the extent that new bank laws achieve that end, conservative investors seeking to protect retirement savings can see the point of all this.

However, it is quite unclear whether or not–and, perhaps more importantly, how exactly–the new bank regulations being proposed by Congressman Frank, et. al will protect your hard-earned savings.

The latest proposal seems to focus rather too broadly on the needs of the “financial system” overall.

But the “financial system” is merely a collection of individuals who need to know that their money is safe when they put it in a conservative location such as a savings account, CD, or money market account.

Focusing on the needs of the “end user” (the bank customer) is why the FDIC is so incredibly popular, relative to other government institutions. By protecting the above accounts up to $250,000 per depositor per account, the FDIC directly and simply addresses the saver’s need for safety.

How will the new regulations protect your money?

That’s the question Congress should be asking.

And the answer shouldn’t be 1,000 pages long.