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Dennis Santiago Headshot

Ordinary People Matter

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"A long, long time ago in a galaxy far, far away," there were two giant empires that possessed vast stores of weaponry enough to wipe out the galaxy. They locked horns so tightly they became trapped in their own deadly embrace and the galaxy seemed doomed to live in fear forever. But then ordinary people doing extraordinary things questioned conventional wisdom and changed the game. And that, as a line from another science fiction series says, was "when the walls fell."

This weekend, the questioning from conventional wisdom begins. Read around and see for yourself. Even as the media acknowledges that people have a legitimate gripe, the reporting is that conventional wisdom says the Move Your Money idea won't make any difference. Individual and business transaction accounts are too small a fraction of the asset and liability base of the big banks. They simply don't matter as much to them. The big banks are far more awash in professional and brokered deposits, as well as foreign money on the liabilities side and risk-bearing investments on the assets side, anyway. Besides, for consumer and business accounts, fee income charged to customers and merchants is where it's at now. And in any case, little banks are captives of the big ones because they are just the correspondent flunkies of the system. The conclusion has to then be that ordinary people are irrelevant in the grand scheme of things and this entire thing is futile.

If you think this is true, think again.

I refer back to the first blog I wrote last week about the most precious commodity in the banking universe: "core deposits." Those lowly savings and checking accounts go by another name. Yup, they are called "transaction accounts." It's these transaction accounts that define how much "Main Street" banking an institution can participate in; what people with too much "edumacation" call an addressable market. If you can't touch that customer because they aren't a customer, that's a bad thing. In business strategic planning it's a boo-boo to do that. You manifest something called diminished market share or -- in the rosy finance parlance of former Chairman Alan Greenspan -- a "retrenchment of previous gains." A rose by any other name is still a rose.

Don't even get me started on this "the larger Wall Street banking activities are so much more economically important than ordinary people" notion. There's no love lost in that world, people. If you think every private and non-profit fund and every sovereign out there isn't thinking the same thing you are about what it might do to end their nightmare of exposure -- wherein their money got turned into complex, opaque and illiquid financial engineering -- ha! If President Obama turned Guantanamo into a holding pen for Wall Street miscreants and emailed a note to every central bank on the planet saying "we're putting an empty coffee can in front of the gate and if there isn't money in the can to run the place we're letting them go," I guarantee there'd be wads of cash in that can every time the sun comes up. The feelings run very deep.

Now let's talk about fees. Fees and penalties are what a bank charges you if you overdraw, are late on a credit card payment and a whole host of other things. If you overdraw and the bank covers it, it just made you an instant loan. If you are late paying on a loan or a credit card, they charge you a fee and these days, also change your interest rate to a seriously painful penalty number. People hate it and think banks are being heartless and greedy. But you know what, the real reason is because they're deathly afraid YOU, the ordinary customer, will default.

Did you know that when a loan, any loan, goes into default, bad things begin to happen for a bank? Eventually some of that bad debt goes into non-accrual; meaning, it stops earning interest because there's no point. The FDIC makes banks take a hard expense and money that would have been profit instead goes into something called a "loss provision." It is money that's gone. It just hasn't made it through the required number of days to "realize" as a loss yet. Teach your ears to be keen and remember that the next time you hear a bank official quoted saying "we are profitable, less provisions."

Read the message between the lines. The threat of onerous fees and penalties is how banks clumsily communicate to you how vitally important it is to them that you pay your interest on time. The reality is that when fee income becomes excessive it's considered a risk indicator about an institution because it means their business model is probably weakening. An over reliance on fee income exposes banks to the threat of a sources of income loss risk if interest rates shift in the wrong direction. These types of fees tend to evaporate in an inflationary environment. Hey, I didn't make that up. That's what it says in the FDIC guidelines on sensitivities to market risks.

And finally, there's that "captive serfs of the landed class" thing about little banks being the flunkies of the big ones. Now there's a cat and mouse game that's been going on since the monkeys came out of the trees. Sorry, I couldn't resist mixing those metaphors, but then again, I'm not sure the opaque shelter of the forest has been completely abandoned yet. The reality is that, like any large ecosystem, big and little banks share a great deal of co-dependence. The big cats constantly try to organize the environment so they can ensure there's enough to keep them alive with some degree of efficiency and the little mice keep trying to redefine the process so they can be the masters of their own destiny. This will go on forever because it's the balance of power that must be maintained in a truly healthy financial system. That corner of the universe is in disarray right now, and people who think otherwise are living on echoes of the past. The world of lending correspondence is not so much a "new lending growth" industry but a "replacing really bad loans with not so bad loans" industry.

And once again, you know who really matters in that one? Yes the lowly individual obligor, and ultimately, his or her minuscule transaction account.

"No one can make you feel inferior without your consent."
-- Eleanor Roosevelt, This Is My Story, 1937