Bankrupt ranting
Nov. 16th, 2002 05:43 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png){kind=small}
rowynOn the bankruptcy reform bill recently passed by the House, which is intended to make it harder for people to file for bankruptcy, and generally require them to pay more if they do:
"It is supported and being pressed forward by a coalition of banks and credit-card companies and other business interests who want to profit exorbitantly at the expense of families and small businesses at a time of crisis," said Rep. Jerrold Nadler (D., N.Y.).
Now, this just annoys me. As it happens, I don't favor the form of bankruptcy reform described in this bill. My opinion on bankruptcy (I've said this before, I'm sure, but what the heck) is as follows:
--On one hand, you have the morons in the banking industry who cannot figure out that giving a $10,000 unsecured credit cards to people who have never made $10,000 in a single year in their whole life is a bad risk.
--On the other, you have the fools who can't figure out that if they spend $10,000 of someone else's money, that means they have to pay it back at some point. Usually with lots of interest.
I am not, as you can probably tell, overflowing with sympathy for either of these camps. In some meanspirited way, I feel they deserve each other. They were made for each other. Let them claw one another's throats out: maybe they'll learn something from the experience. Like that bit of wisdom even Polonius managed to hang onto: "Neither a borrower nor a lender be." At least not if you have not the least clue about what the heck you're getting into.
Despite working for a bank, and personally observing the charm, intelligence, and wit possessed by the average deadbeat, in the current climate, I feel just a smidge more sympathy for the consumer than for the banks. Banks have underwriters whose job it is to keep the institution informed with tidbits like "Lending to people who have a long history of no income and not repaying their debts is extremely risky." While consumers in some cases are lucky if they've been taught that 20% of $100 is more than 10% of $100. Consumers can claim ignorance; banks ought to know better.
But this particular statement by Rep. Nadler annoyed the heck out of me. If I lend you $100.00, and you then lose your job and I only end up getting $50.00 back from you before I give up trying to collect, I have not 'profited exorbitantly' at your expense in this crisis. Banks trying to collect on soured debts during the current economic downturn are not doing so in order to "profit exorbitantly": they are trying to lose less money. Find a better straw man, Mr. Nadler.
[Telnar pointed out that banks may profit exorbitantly prior to a case reaching bankruptcy, by charging 20% interest and high fees on debts that they knew were high risk. But even if the bank has collected interest-only at that kind rate for two years, the bank will still take a loss on the loan if they have to write off more than 40% of it. And unsecured debt, which is pretty much the only kind that ranks that level of interest, almost always involves a much bigger write-off than that if it goes to collections, never mind bankruptcy. In order to profit exorbitantly from a customer, the bank really needs that custome to continue to willingly make payments for many years.]
"It is supported and being pressed forward by a coalition of banks and credit-card companies and other business interests who want to profit exorbitantly at the expense of families and small businesses at a time of crisis," said Rep. Jerrold Nadler (D., N.Y.).
Now, this just annoys me. As it happens, I don't favor the form of bankruptcy reform described in this bill. My opinion on bankruptcy (I've said this before, I'm sure, but what the heck) is as follows:
--On one hand, you have the morons in the banking industry who cannot figure out that giving a $10,000 unsecured credit cards to people who have never made $10,000 in a single year in their whole life is a bad risk.
--On the other, you have the fools who can't figure out that if they spend $10,000 of someone else's money, that means they have to pay it back at some point. Usually with lots of interest.
I am not, as you can probably tell, overflowing with sympathy for either of these camps. In some meanspirited way, I feel they deserve each other. They were made for each other. Let them claw one another's throats out: maybe they'll learn something from the experience. Like that bit of wisdom even Polonius managed to hang onto: "Neither a borrower nor a lender be." At least not if you have not the least clue about what the heck you're getting into.
Despite working for a bank, and personally observing the charm, intelligence, and wit possessed by the average deadbeat, in the current climate, I feel just a smidge more sympathy for the consumer than for the banks. Banks have underwriters whose job it is to keep the institution informed with tidbits like "Lending to people who have a long history of no income and not repaying their debts is extremely risky." While consumers in some cases are lucky if they've been taught that 20% of $100 is more than 10% of $100. Consumers can claim ignorance; banks ought to know better.
But this particular statement by Rep. Nadler annoyed the heck out of me. If I lend you $100.00, and you then lose your job and I only end up getting $50.00 back from you before I give up trying to collect, I have not 'profited exorbitantly' at your expense in this crisis. Banks trying to collect on soured debts during the current economic downturn are not doing so in order to "profit exorbitantly": they are trying to lose less money. Find a better straw man, Mr. Nadler.
[Telnar pointed out that banks may profit exorbitantly prior to a case reaching bankruptcy, by charging 20% interest and high fees on debts that they knew were high risk. But even if the bank has collected interest-only at that kind rate for two years, the bank will still take a loss on the loan if they have to write off more than 40% of it. And unsecured debt, which is pretty much the only kind that ranks that level of interest, almost always involves a much bigger write-off than that if it goes to collections, never mind bankruptcy. In order to profit exorbitantly from a customer, the bank really needs that custome to continue to willingly make payments for many years.]
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no subject
Date: 2002-11-18 05:57 am (UTC)My whole take on the bill was roughly, "Hmm, banks and credit card companies want to change the bankrupcy laws in their favour. Big institutions that should know better want more power over the idiots they use. Oh yeh, that'll be a great law."
no subject
Date: 2002-11-18 04:26 pm (UTC)banks are required to keep in cash a certain percentage of their deposits, so your deposit to a bank is "secured" by a certain amount of actual cash. (I think it's around 10%.) Banks cannot lend out money that does not exist, because, in the vast majority of cases, the money leaves the bank which lent it. Example:
You buy a car and get a loan from Toddler Bank for $10,000 to cover it. Toddler Bank cuts a check to the dealership, and the dealership turns around and deposits the money to their account at Congolomerate Bank. Conglomerate sends the check to Toddler to be cashed, and Toddler transfers the money to Conglomerate. I hope you can see that an actual $10,000 has left Toddler and gone somewhere else.
Armies of auditors from state and federal agencies, as well as internal and external auditors employed by the bank itself on behalf of shareholders, prowl the corridors of banks to ensure that banks do not lend out money they don't have. A bank's investments (which include loans, but can also include bonds and other securities as warranted) cannot exceed its deposits (which include not only checking, savings, and other deposit accounts, but also loans from other banking institutions and the Federal Reserve.) At the end of the day, someone at every bank determines how much money they have, and if the bank has lent out more than they have in deposits, then they borrow overnight (usually from the Fed) to cover it. If they have more money in deposits than in loans, then they'll invest the remainder, again in some overnight account.
Or, put another way: That $10,000.00 comes from somewhere. If the bank didn't lend it to you, they'd've put it in some other investment. Banks cannot lend out any amount of money they want. Otherwise, they'd just invent imaginary trillions, buy treasury bonds, and not need to be in banking anymore. :)