Here's what the rules would enforce:

- Cards can't expire for at least 5 years from date of purchase.
- Monthly fees can't be applied until the card has been inactive for one year.
- Only one fee can be charged per month.

Feel free to submit comments on the proposed rules. You have to wait until they've been published in the Federal Register, the daily government paper that that prints everything going on in the government. The Federal Reserve doesn't have a date for when that happens, only that it will be soon. Once they're published, you have 30 days to submit feedback.

DATES: Comments must be received on or before [TBD].

ADDRESSES: You may submit comments, identified by Docket No. R-1377, by any of the following methods:

Agency Web Site: http://www.federalreserve.gov. Follow the instructions for submitting comments at http://www.federalreserve.gov/generalinfo/foia/ProposedRegs.cfm.

Federal eRulemaking Portal: http://www.regulations.gov. Follow the instructions for submitting comments.

E-mail: regs.comments@federalreserve.gov. Include the docket number in the
subject line of the message.

FAX: (202) 452-3819 or (202) 452-3102

Mail: Jennifer J. Johnson, Secretary, Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, DC 20551

If you want to be the first to know when the proposed rules will be published (or more realistically, if you want to be one of the only people to know), you can subscribe to a daily email that lists what's in the Federal Register that day. Visit the Government Printing Office's LISTSERV and click the "Online mailing list archives" link, then on the next screen click the third link, "FEDREGTOC-L - Federal Register Table of Contents."

"Federal Reserve proposes rules to restrict fees and expiration dates on gift cards" [Federal Reserve]
"Fed proposes new rules to protect users from fees" [Los Angeles Times]
(Photo: Mr. Thomas)

Here's the full press release from the Fed:

The Federal Reserve Board on Thursday announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

Before opting in, the consumer must be provided a notice that explains the financial institution's overdraft services, including the fees associated with the service, and the consumer's choices. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act.

"The final overdraft rules represent an important step forward in consumer protection," said Federal Reserve Chairman Ben S. Bernanke. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

The Board's consumer testing shows that most consumers prefer not to be enrolled in overdraft services for ATM and one-time debit card transactions unless they affirmatively consent, or opt in. At the same time, testing shows that most consumers want overdraft services to cover important bills, such as checks they use to pay rent, utilities, and telephone bills.

To ensure that consumers have a meaningful choice, the final rules prohibit financial institutions from discriminating against consumers who do not opt in. The final rules require institutions to provide consumers who do not opt in with the same account terms, conditions, and features (including pricing) that they provide to consumers who do opt in. For consumers who do not opt in, the institution would be prohibited from charging overdraft fees for any overdrafts it pays on ATM and one-time debit card transactions.

"Overdraft fees can be costly," said Governor Elizabeth A. Duke, the chair of the Board's Committee on Consumer and Community Affairs. "Our rule will help consumers better understand the terms and conditions of overdraft services and will give them an opportunity to avoid fees when these services do not meet their needs."

The Fed says that most consumers want overdraft protection on checks and regular electronic bill payments, so those types of payments are excluded form the new opt-in rule.

Federal Reserve announces final rules prohibiting institutions from charging fees for overdrafts on ATM and one-time debit card transactions [Federal Reserve]
(Photo:Johnny Vulkan)

Bloomberg requested the names of the companies in a Freedom of Information Act request, which the Fed denied. So Bloomberg took the Fed to court and won, Reuters reports:

"The board essentially speculates on how a borrower might enter a downward spiral of financial instability if its participation in the Federal Reserve lending programs were to be disclosed," she wrote. "Conjecture, without evidence of imminent harm, simply fails to meet the board's burden."

Monday's ruling comes as lawmakers and investors demand greater disclosure in how the government manages a series of programs designed to lift the economy out of its deepest recession in decades.

No word on when exactly the Fed will have to cough up the company names, but by all means, let the imminent competitive harm begin as soon as possible!

Federal Reserve loses suit demanding transparency [Reuters via Yahoo! News]
(Photo:Andrew Mason)
(Thanks, The Fed!)

The average fee for a bounced check is now $28.95, the average ATM surcharge is $1.97, and the average overdraft charge is $27.50. Equals $38.5 billion, please!

While the Federal Reserve mulls regulation of these mousetrap fees, it's good to know most of these charges can be avoided very easily with a little foresight. Read the fine print, learn what charges your bank can levy, and compare accounts and fees on a site like bankrate.com. Then join your bank's text message alert program and check your balance online every morning. Oh, and walk to your own bank's ATM instead of using that dodgy one in the deli.

The Bite of Bank Fees [Washington Post]
(Photo: f650biker)

With some help from NBC "investigators", Stephanie was able to get some of her money back. But, regardless, these types of "gift" credit card are notoriously fishy. A Vanilla Visa gift card like the one Stephanie used charges an activation fee of around $5, plus a $2.50 monthly service fee if the card is not used within seven months. Not exactly better than plain old cash. And even if you're searching for a quick "no-hassle" credit card in order to make purchases online, many retailers don't honor them anyway.

The current credit card reform bill in the Senate has a provision aimed at curbing some of the worst gift card practices. Find out more about it here.

12 On Your Side Alert: Gift Cards [NBC]
(Photo: Rob Lee)

The trouble with Paulson came in December, when Merrill Lynch's projected fourth quarter losses began to skyrocket. Lewis met with Secretary Paulson, Federal Reserve Chairman Ben Bernanke, Bank of America's CFO, and other officials to discuss whether or not Bank of America could invoke an escape clause in their contract that protected them from a material adverse event. (This is called the "MAC" clause.)

From Mr. Cuomo's letter:

Bank of America's attempt to exit the merger came to a halt on December 21, 2008. That day, Lewis informed Secretary Paulson that Bank of America still wanted to exit the merger agreement. According to Lewis, Secretary Paulson then advised Lewis that, if Bank of America invoked the MAC, its management and Board would be replaced:

[W]e wanted to follow up and he said, 'I'm going to be very blunt, we're very supportive on Bank of America and we want to be of help, but' —as I recall him saying "the government," but that mayor may not be the case -"does not feel it's in your best interest for you to call a MAC, and that we feel so strongly," —I can't recall if he said "we would remove the board and management if you called it" or if he said "we would do it if you intended to." I don't remember which one it was, before or after, and I said, "Hank, let's deescalate this for a while. Let me talk to our board." And the board's reaction was of"That threat, okay, do it. That would be systemic risk."

Lewis advised the board of the threats made by the Treasury and they agreed to go ahead with the merger in order to avoid any systemic threat to the financial system. The letter goes on to say that while Paulson corroborates Lewis' story, he claims to have made the threat at the request of Fed Chairman Ben Bernanke.

Further, Lewis also claims that he didn't disclose this information to shareholders at the request of Paulson and Bernanke... a charge that Bernanke apparently denies.

You can read Cuomo's letter and examine the documents he's provided to the Senate:

Cuomo's Letter (PDF)

Exhibit A: IN RE: EXECUTIVE COMPENSATION INVESTIGATION BANK OF AMERICA -MERRILL LYNCH (PDF)

Exhibit B: MINUTES OF SPECIAL MEETING OF BOARD OF DIRECTORS OF BANK OF AMERICA CORPORATION December22,200 (PDF)

Exhibit C: MINUTES OF SPECIAL Meeting OF Board OF Of DIRECTORS OF BANK OF AMERICA CORPORATION December 30. 2008 (PDF)

Exhibit D: Email To Ken Lewis (PDF)

PREVIOUSLY: Tell The Feds You Want A Choice On Overdraft Fees

From the WaPo:

Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill that was scheduled to address the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials say the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers.

The government at present has the authority to seize only banks.

This would essentially cast the Treasury Department as a new "systemic risk regulator" with the power to deal with companies who, while they are not necessarily banks, are nevertheless "too big to fail." It was generally thought that the Federal Reserve would eventually take up this role.

The second part of the plan would give new "tools" to the Treasury that it could use to prevent the collapse of a company, including guaranteeing losses, buying assets or taking a partial ownership stake:

Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit.

The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan.

What do you think?

Geithner to Ask Congress for Broad Power to Seize Firms [WaPo]

From the Wall Street Journal:

Travis Jackson walks through his modest ranch house, admiring the kitchen's built-in spice rack and the red-oak floors. He draws back the curtains, and sunlight illuminates the pride on his face.

The young banker just bought Federal Reserve Chairman Ben Bernanke's childhood home at a foreclosure sale.

"This is where it all happened," marvels Mr. Jackson, a 27-year-old loan officer at First Citizens Bancorp, which is down the street from the old Bernanke place. "Kind of a surreal feeling, isn't it?"

Bernanke refused to comment on theWall Street Journal's story, but he told 60 Minutes that he was sorry to hear about the home's sale:

"When you first heard that your childhood home had gone into foreclosure, what did you think?" Pelley asked.

"Well, I was sorry to hear it. But, you know, in a way, I wasn't surprised. Dillon has taken, you know, a pretty big hit in the economic downturn. Unemployment rate's about 14 percent. And there have been a good number of foreclosures and plant closings and those things I think about that," Bernanke said.

Now other details of Bernanke's South Carolina youth are emerging. It's sort of cute, actually. Did you know he was in the marching band and spent summers waiting tables at South of the Border?

As for the people who lost the house, it seems they were given a 10.1% fixed rate mortgage back in 2006.

Landmark Mortgage, a Dillon finance company, gave the couple a 10.1%, 30-year fixed-rate mortgage, well above the rate for a prime loan. Their payments on the $123,000 mortgage came to $1,088 a month, including principal and interest. Landmark transferred the couple's loan to Option One Mortgage Corp., then a unit of H&R Block Inc., which packaged it with other mortgages into an $818 million security.

Fed Chief's Boyhood Home Is Sold After Foreclosure [WSJ]
Ben Bernanke's Greatest Challenge [CBS]
(Rebecca Ducker for The Wall Street Journal)

The Center for Responsible Lending says:

Banks should simply not be allowed to enroll their customers-without their permission-in systems that approve overdrafts without warning, and that artificially increase the number of $35 fees the banks' can charge for a shortfall. This practice is out of control. It is costing working people big chunks of their hard-earned income.

The "gotcha" practices that banks are using to inflate overdraft fees are not acceptable.

If you'd like to tell the Fed what you think of the proposal, you can email your public comments to regs.comments@federalreserve.gov include in the subject "Docket No. R-1343." You can also use this form, provided by the Center for Responsible Lending. Remember that your comments will be public.

No Gotcha Fees [Center for Responsible Lending via CL&P Blog]

(Photo: Ryan McFarland, Kevin Dean)

Why 'bad banks' might be a good thing [Marketplace]

From CNNMoney:

...Bernanke cautioned that the plan is "unlikely to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system."

Bernanke suggested that more banks and financial firms are likely to need additional capital injections from the government, and that further guarantees of their debt could be necessary, in return for the federal government receiving further equity in the firms.

The Fed chairman also said that "removing troubled assets from institutions' balance sheets, as was initially proposed for the U.S. financial rescue plan," might also be needed to supplement any further investments in banks.

He also added that he didn't think that the financial meltdown necessarily showed that there was insufficient regulation.

"What we've learned in this case is not necessarily that we need a lot more regulation," he said in response to a question following his speech. "We need to think what went wrong...We need to think very hard about how to fix it."

He concluded that while better regulation is necessary and will have to be addressed soon, it is not the most pressing need at this moment.

"It's good advice in general if there's a fire burning, you try to put it out first, and then think about the fire code," he said.

Bernanke: More bank bailouts needed [CNNMoney]
(Photo:frankieleon)

First, a brief monetary policy overview. When the fed lowers the target federal funds rate, the rate banks charge each other for overnight lending, they don't just change a number on a board somewhere. They actually pump more money into the system so demand, and interest rates, for overnight lending goes down to hit their target. This worked in the past because cheaper money means more investments... but it hasn't been working lately (the actual federal funds rate has been under 0.20% since early December according to the NY Fed). The scary part of their announcement this week wasn't the range target of 0.00 - 0.25%, it was the part about how they'd be using "quantitative easing" to try to stimulate the economy. Quantitative easing is fancy Fed-speak for "they're going to run the printing presses at the Mint 24/7 and start force feeding dollar bills into our hunger striking economy." This means interest rates across the board will fall dramatically, as you may have read with mortgage rates.

If you're a saver, this sucks because you'll be earning less on your savings. Right now the best thing to do is to start locking in rates in certificates of deposit (CD). A CD is a product you can get at any bank, is FDIC insured, and returns a fixed rate over the term of the CD. With a CD, your principal is protected. I maintain a frequently updated list of the best CD rates of terms no greater than 18 months that currently has rates as high as 4.00% APY.

I would warn against getting a CD that is too long term (like five or ten years) because when the economy recovers, the Fed will have to deal with inflation. Whenever you start printing money, which we have been doing for the last few months, inflation is always a problem and when we have high inflation, your locked in CD will do more harm than good.

I recommend that you check with all the banks you already have accounts with first, because rates have already begun to fall so you'll want to act quickly. Like right now. Go!

Jim writes about personal finance at Blueprint for Financial Prosperity.

(Photo: mundane_joy)

The reaction on Wall Street was jubilant.

From Bloomberg:

“The Fed is sending a message that it will print money to an unlimited extent until it starts to see the economy expanding,” William Poole, former president of the St. Louis Fed and now a senior fellow at the Cato Institute in Washington, said in an interview with Bloomberg Television.

The Fed Goes To Zero [WSJ]
Fed Cuts Rate to as Low as Zero, Will Use All Tools (Update2) [Bloomberg]
(Photo: Spirit365 )

The Federal Reserve will provide the money used to purchase the assets. The Fed says (PDF) that the loans in the asset backed securities must be "auto loans, student loans, credit card loans, or small business loans guaranteed by the U.S. Small Business Administration," though the program may be expanded to include "commercial mortgage-backed securities, non-Agency residential mortgage backed securities, or other asset classes."

The New York Times explains:

The new fund would, in effect, close the circle in the chaotic evolution of the Treasury rescue effort, officially known as the Troubled Asset Relief Program, or TARP. Under the new version, the government would once again plan to buy assets, including some troubled ones. The Fed would provide most of the money and buy comparatively healthy debt, like bundles of car loans, that private investors have stopped buying in recent weeks.

The Fed further announced that it would purchase up to $100 billion dollars of mortgage-backed securities backed by GSEs (Fannie and Freddie, etc.) The Wall Street Journal says that the stock market is pleased as can be about this new development. Stocks are up again this morning after soaring 12% in two days — the largest jump in stock prices since the crash of 1987.

The Dow Jones Industrial Average was recently up 62 points, or 0.7%, trading at 8505.11. The blue-chip measure is off to a promising start as it attempts to extend a two-day winning streak in which it has soared 12%, the biggest gain since the two days following the 1987 market crash.

U.S. Unveils $800 Billion Credit Program [NYT]
Term Asset-Backed Securities Loan Facility (TALF) Terms and Conditions1 (PDF) [Federal Reserve]
Stocks Continue Rise as Fed Unveils New Program [WSJ]
(Photo: afagen )

...warehouse receipts for actual gold and silver. Needless to say, the Federal Reserve isn't too happy about these types of things and the FBI raided the Liberty Dollar warehouses and offices in '07 and seized and froze just about everything they had. No one involved has been charged with an actual crime. The DOJ has issued a statement saying that the use of Liberty Dollars is a Federal crime.

In 2003, Libertarian writer Vin Suprynowicz called the Liberty Dollar a multi-level marketing system. After the raids, von NotHaus quit the Liberty Dollar business and founded the "Free Marijuana Church" in Hawaii.

Triple Canopy interviews the people and players behind the Liberty Dollar , and if you read it you'll learn some things about what it means to be money that you never knew before.

Bullion With A Mission [Triple Canopy] (click the + sign on the landing page to move forward in the story) (Photo: Julia Sherman)

From the Wall Street Journal:

While retailers, car companies and others hit by the slowdown in consumer spending haven't gotten the government money, financial firms of all kinds are getting federal bailouts.

It isn't clear if the application under the Troubled Asset Relief Program came before or after the credit- and charge-card giant got Federal Reserve approval Monday to become a bank-holding company.

Amex's shares are down 57% this year as even affluent consumers keep their plastic in their wallets. The WSJ says that it is unclear how Amex would use the money — and that it's clear that $3.5 billion won't help with the consumer spending slump.

Notoriously slime-filled credit card issuer Capital One has already received approval for $3.5 billion in bailout cash.

AmEx Said to Request $3.5 Billion in U.S. Aid [WSJ] (Thanks, Jameson!)
American Express Wins Fed Approval to Become Bank (Update1) [Bloomberg]

From Bloomberg:

"Yes, I found a flaw,'' Greenspan said in response to grilling from the House Committee on Oversight and Government Reform. ``That is precisely the reason I was shocked because I'd been going for 40 years or more with very considerable evidence that it was working exceptionally well.''
...
The admission that free markets have their faults was a shift for the former Fed chairman who declared in a May 2005 speech that ``private regulation generally has proved far better at constraining excessive risk-taking than has government regulation.''

Today Committee Chairman Henry Waxman, a California Democrat, said Greenspan had ``the authority to prevent irresponsible lending practices that led to the subprime mortgage crisis.''

``You were advised to do so by many others,'' he told Greenspan. ``And now our whole economy is paying the price.''

Waxman and other lawmakers repeatedly interrupted Greenspan as he answered their questions, in contrast to deference to his testimony while he was Fed chairman.

Greenspan then claimed that the Fed had no idea how large the subprime mortgage market had become until late 2005, says Bloomberg.

Greenspan Concedes to `Flaw' in His Market Ideology (Update2) [Bloomberg]

Here's what Bernanke had to say:

As I discussed earlier, the extraordinary tightening in credit conditions has played a central role in the slowdown thus far and could be an important factor delaying the recovery. If the Congress proceeds with a fiscal package, it should consider including measures to help improve access to credit by consumers, homebuyers, businesses, and other borrowers. Such actions might be particularly effective at promoting economic growth and job creation.

The AP says that House Speaker Nancy Pelosi announced that Congress was considering an economic recovery bill as large as $150 billion, but that economists have said that the package would have to be twice that size.

The AP says:

Bernanke’s nod for another round of stimulus comes after a flurry of drastic actions by the Federal Reserve and the Bush administration has yet to unlock lending and calm financial markets.

Banks fear lending money to each other and to their customers, creating the worst financial crisis since the Great Depression. Businesses are reluctant to hire and boost capital investments. Consumers have hunkered down. All the economy’s problems are feeding off each other, creating a vicious cycle that Washington policymakers are finding difficult to break.

Bernanke: Fresh stimulus worth considering [MSNBC]
Economic outlook and financial markets [FED]

Your 401k Should Stop Free Falling

The bill was heralded as a way to calm the markets following the 778-point mini-crash the day after the original bill failed. That plan hasn't exactly worked. But! If the bill does eventually succeed in stabilizing the markets, everyone with a 401k, IRA, mutual fund, or plain old stocks will directly benefit.

New And Improved FDIC Insurance Limits

The FDIC has upped its insurance limits from $100,000 to $250,000. A couple can now stash half a million dollars in the bank, fully insured by the federal government. The new limits even apply to credit unions.

Technically, the FDIC insurance limits are only extended through 2009 to prevent banks from contributing added billions to the insurance fund that they need in their coffers. Congress will almost definitely make the increase permanent next year, giving banks plenty of time to save up cash to contribute to the reserve fund.

AMT Extension

The dreaded AMT—the parallel tax system designed to snag at least a few tax dollars from the wealthiest Americans—will no longer impact almost 20 million Americans. Couples are now exempt up to $69,950 (an extra $3,700!), while singles are exempt up to $44,350 (an $1,850 increase!) The benefit fades out at $150,000 and $112,500, respectively.

A true fix would have involved indexing the AMT for inflation. Maybe next time.

Other Tax Credits

These apply to smaller subsets, possibly you!

• $8 billion in tax breaks for victims of natural disasters;
• $5 billion for college tuition deductions;
• $400 million to help teachers buy their own school supplies;
• $3 billion in deductions for residents who pay state and local taxes in states that don't have an income tax.

The bailout essentially doubles as an energy policy expanding and extending for eight years several energy credits that were set to expire.

• Homeowners can now claim a 30% tax credit for putting solar panels on their roofs without any limit;
• The same 30% credit applies to wind turbines and geothermal heat pumps;
• A one-year extension of breaks for energy efficient home improvements;
• Plus, the first 250,000 buyers of plug-in electric vehicles are eligible for a $7,500 tax credit.

The energy portions of the bill also throw a lot of money at companies looking to invest in clean, renewable energy, but this is about you, not them.

The bill almost failed again in the House because members of both parties wanted to pay for the tax breaks upfront. The Senate, however, only offset the energy portions of the bill. Remember to one day thank your grandkids for the tax breaks.

Mental Parity

Health insurers are now required to treat mental health issues the same as they would any physical illness. It also prevents health insurers from making their mental health benefits any more restrictive than other covered illness.

Most importantly, without mental parity, we wouldn't have a bailout bill at all. The Senate couldn't introduce a new bailout bill from scratch, so they cut and paste the bailout bill into the relatively uncontroversial mental parity bill. Creative, isn't it?

Homeowners

This is a housing bill, after all. The heart of the bill is the Troubled Asset Relief Program, or TARP. A team of mortgage specialists—possibly the people who got us into this mess but can now benefit from hindsight—will scoop up questionable mortgages held by banks. Toss out the skunk and the room won't stink anymore, right? Presumably, the theory goes, this will allow everybody to calm down and get back to business as usual. Banks will once again lend to businesses so they can meet payroll, consumers will be able to borrow money for cars, homes, and school.

Beyond buying up securitized mortgage, the government may also buy whole mortgages on a case-by-case basis. Even if the government doesn't own your home, the Treasury and other federal agencies have been empowered to modify loans to minimize foreclosures.

Many House members wanted to empower bankruptcy judges to rewrite predatory mortgages altogether, a proposal that was rejected by the Senate.

Homeowners who are able to reduce their mortgages won't owe tax on the difference, as they normally would. And if you're a renter living in foreclosed home, you can stay, so long as you stick to the terms of your lease.

If you are at risk of foreclosure, the Department of Housing and Urban Development has several tips for staying out of foreclosure:

1. Don't ignore the problem!
2. Immediately call your lender and try to work out a solution.
3. Open mail from your lender because it may contain useful information to help avoid foreclosure.
4. Start reading up on your rights and foreclosure laws.
5. You have options to help avoid foreclosure. Study them.
6. Call (800) 569-4287 to find a HUD-approved housing counselor.
7. Spend more on your mortgage, less on everything else.
8. Sell-off assets that you don't need, like that spare car or jewelry.
9. Don't pay anyone to help you avoid foreclosure. They are scammers.
10. Watch out for anyone promising to save your home if you sign a document. You are signing away your house to scammers.

We've written many posts expanding on these topics, including:
4 Things To Try Before Foreclosure
Consumers Are "Unaware" That Lenders Can Help Them Avoid Foreclosure
Lenders Freeze Mortgages Rates For Some
What To Do When Rental Gets Foreclosed?
Mother Saves Family From WaMu Foreclosure With Consumerist's Executive Contact Info
Halt Foreclosure Proceedings By Challenging Your Bank's Claim To Your House
New Ruling Means Banks Could Have Tough Time Foreclosing
32 More Foreclosures Dismissed For Lack Of Documentation
Freddie Mac: Don't Let Fraudsters Steal Your Home
Watch Out For Equity Stripping Scams
How To Save Your Home from Foreclosure
Beware The "Fannie Mae" Prize Draw Scam

HUD also has a new program that can help people transition from predatory mortgages to FHA-insured 30-year fixed mortgages. You qualify if:

• Your troubled home is your primary residence and you don't own a summer home.
• Your mortgage was born before 2008, and you have made at least six payments.
• You need help paying your existing mortgage.
• As of March 2008, the mortgage costs more than 31% of your gross monthly income.
• You haven't been convicted of fraud in the past 10 years or lied on your mortgage application.

Yes, This Affects You

There's been a lot written about the bailout and whether it will work. One article in particular from the New York Times captured poignantly the potential price of apathy and inaction:

In 1929, Meyer Mishkin owned a shop in New York that sold silk shirts to workingmen. When the stock market crashed that October, he turned to his son, then a student at City College, and offered a version of this sentiment: It serves those rich scoundrels right.

A year later, as Wall Street’s problems were starting to spill into the broader economy, Mr. Mishkin’s store went out of business. He no longer had enough customers. His son had to go to work to support the family, and Mr. Mishkin never held a steady job again.

Frederic Mishkin — Meyer’s grandson and, until he stepped down a month ago, an ally of Ben Bernanke’s on the Federal Reserve Board — told me this story the other day, and its moral is obvious enough. Many people in Washington fear that the country is starting to spiral into a terrible downturn. And to their horror, they see the public, and many members of Congress, turning into modern-day Meyer Mishkins, more interested in punishing Wall Street than saving the economy.

Let's hope this thing works.

Lesson From a Crisis: When Trust Vanishes, Worry [The New York Times]
Rescue Sweetened With Tax Incentives [The Washington Post]
Bailout Brings With It Diverse Perks [The New York Times]
Details about the Bailout Plan [Daily Kos]
Tips for Avoiding Foreclosure [HUD]
Hope For Homeowners [HUD]

(Photo: Getty)

The firms requested the change themselves, even as Congress and the Bush administration rushed to pass a $700 billion rescue of financial firms. It was a blunt acknowledgment that their model of finance and investing had become too risky and that they needed the cushion of bank deposits that had kept big commercial banks like Bank of America and JPMorgan Chase relatively safe amid the recent turmoil.

It also is a turning point for the high-rolling culture of Wall Street, with its seven-figure bonuses and lavish perks for even midlevel executives. It effectively returns Wall Street to the way it was structured before Congress passed a law during the Great Depression separating investment banking from commercial banking, known as the Glass-Steagall Act.

Former FDIC chairman William Isaac told Bloomberg:

"The decision marks the end of Wall Street as we have known it. It's too bad.''

Shift for Goldman and Morgan Marks the End of an Era [NYT]
Goldman, Morgan Stanley Bring Down Curtain on an Era (Update3) [Bloomberg]
(AP Photo/Mark Lennihan)

From A.I.G. and credit default swaps to why Bear Stearns got a bailout but Lehman Brothers did not, this Q&A sheds some much appreciated light on the most nagging puzzles presented to us in the past week.

Here's a taste:

The Fannie and Freddie situation was a result of their unique roles in the economy. They had been set up to support the housing market. They helped guarantee mortgages (provided they met certain standards), and were able to fund these guarantees by issuing their own debt, which was in turn tacitly backed by the government. The government guarantees allowed Fannie and Freddie to take on far more debt than a normal company. In principle, they were also supposed to use the government guarantee to reduce the mortgage cost to the homeowners, but the Fed and others have argued that this hardly occurred. Instead, they appear to have used the funding advantage to rack up huge profits and squeeze the private sector out of the “conforming” mortgage market. Regardless, many firms and foreign governments considered the debt of Fannie and Freddie as a substitute for U.S. Treasury securities and snapped it up eagerly.

Fannie and Freddie were weakly supervised and strayed from the core mission. They began using their subsidized financing to buy mortgage-backed securities which were backed by pools of mortgages that did not meet their usual standards. Over the last year, it became clear that their thin capital was not enough to cover the losses on these subprime mortgages. The massive amount of diffusely held debt would have caused collapses everywhere if it was defaulted upon; so the Treasury announced that it would explicitly guarantee the debt.

But once the debt was guaranteed to be secure (and the government would wipe out shareholders if it carried through with the guarantee), no self-interested investor was willing to supply more equity to help buffer the losses. Hence, the Treasury ended up taking them over.

Diamond and Kashyap on the Recent Financial Upheavals [Freakonomics]
(Photo: shadowmancer76 )

Each spot features precocious little urchins discussing topics like "risk management" (ha!) and their parent's perceived personal finance failures until eventually the name of AIG is invoked as a salve to soothe their worried minds. Each commercial ends with AIG's tagline "The strength to be there." We saw these running as recently as Sunday, two days before you, the taxpayer, bailed the company out with 85 billion of your dollars.

Enjoy.

From BusinessWeek:

Many consumers say it's about time. The rules were proposed just as the U.S. economy started to tank, when many card holders were falling further behind on their payments at the same time home equity lines of credit were drying up and jobs were disappearing. Regulatory agencies came under fire to act, and Senator Carl Levin (D-Mich.) held hearings this spring to examine card company billing practices.

The proposed regulations generated more than 56,000 comments from individuals, banks, credit unions, and industry associations. That's a record number of submissions, says the Fed, beating the previous record of 45,000 submissions for a proposal that would have let financial firms assume the role of real estate brokers.

BusinessWeek says that since 1996 our nation's credit card debt has doubled to almost $1 trillion dollars. And unpaid credit card bills are growing fast as the economy sours. For their part, the credit card companies are trying to stop the bleeding by raising interest rates on otherwise "good" customers. And those customers have had enough.

Here's how the Federal Reserve describes the proposed reforms:

• Banks would be prohibited from increasing the rate on a pre-existing credit card balance (except under limited circumstances) and must allow the consumer to pay off that balance over a reasonable period of time.
• Banks would be prohibited from applying payments in excess of the minimum in a manner that maximizes interest charges.
• Banks would be required to give consumers the full benefit of discounted promotional rates on credit cards by applying payments in excess of the minimum to any higher-rate balances first, and by providing a grace period for purchases where the consumer is otherwise eligible.
• Banks would be prohibited from imposing interest charges using the "two-cycle" method, which computes interest on balances on days in billing cycles preceding the most recent billing cycle.
• Banks would be required to provide consumers a reasonable amount of time to make payments.

If you'd like to add your comment to the proposal, click here, then scroll down to "Proposals for Comment."

Federal Reserve Proposal Press Release [Federal Reserve]
Credit Card Rage [Business Week]

Series: BORROW, Total Borrowings of Depository Institutions from the Federal Reserve [Federal Reserve Bank of St. Louis via Digg]

From the NYT:

Mr. Bernanke was especially pessimistic about any easing of energy prices, dismissing suggestions that they were being driven by speculation in futures markets. Instead, he said high energy costs reflected the markets’ recognition that demand was outstripping supplies.

“Over the past several years, the world economy has expanded at its fastest pace in decades, leading to substantial increases in the demand for oil,” Mr. Bernanke said. “On the supply side, despite sharp increases in prices, the production of oil has risen only slightly in the past few years.”

Before Mr. Bernanke’s remarks, the Labor Department reported that wholesale prices rose 1.8 percent in June, making for the fastest 12-month inflation rate in more than a quarter century.

Economy Will Stay Sluggish, Bernanke Tells Congress [NYT]
(AP Photo/Susan Walsh)

From the NYT:

An official said the Fed’s decision to permit the companies to borrow from its so-called discount window was approved at the request of the Treasury, but that it was temporary and would probably end once Congress approved Treasury’s plan. Some officials briefed on the plan said Congress could be asked to extend the total line of credit to the institutions to $300 billion.

The actions, which taken together could provide an overwhelming surge of capital to the companies, were the second time in four months that the housing crisis had prompted the government to scramble over a weekend to rescue a major financial institution. Last March, the Treasury Department engineered the sale of Bear Stearns to prevent it from going into bankruptcy and cause a shock to the financial system.

Paulson, who has spent the last week assuring everyone that Freddie and Fannie are "adequately capitalized," had this to say:

“The president has asked me to work with Congress to act on this plan immediately,” the Treasury secretary, Henry M. Paulson Jr., said Sunday on the steps of the Treasury building. “Fannie Mae and Freddie Mac play a central role in our housing finance system and must continue to do so in their current form as shareholder-owned companies. Their support for the housing market is particularly important as we work through the current housing correction.”

Treasury Acts to Shore Up Fannie Mae and Freddie Mac [NYT]

As you might expect, this didn't exactly instill confidence in the GSEs (Government Sponsored Enterprises). Their stocks are down, way down, and people are staring to wonder what will happen if they fail?

Unfortunately there's no good answer, all we seem to know is that it would be really, really, really bad if the government was forced to step in and bail out the GSEs, but it would probably be worse if they just let them fail.

From Fortune:

"If Fannie or Freddie failed, it would be far worse than the fall of [investment bank] Bear Stearns," says Sean Egan, head of credit ratings firm Egan Jones. "It could throw the economy into depression or something close to it."

In case you're wondering what Freddie and Frannie do — Fortune explains: they "help the mortgage market function by purchasing pools of loans and packaging them into securities. If one or both couldn't function, the result would be chaos."

Meanwhile,Treasury Secretary Hank Paulson maintains that Freddie and Frannie are going to be fine:

"Fannie Mae and Freddie Mac are also working through this challenging period," Paulson said. "Their regulator has made clear that they are adequately capitalized."

As of this post, Freddie and Frannie have lost about 43 percent and 25 percent of their value (respectively) since Monday.

Fannie and Freddie Stocks Continue Their Slide [Washington Post]
Lehman Shares Sink as Fannie, Freddie Plunge Further [Bloomberg]
The Fannie and Freddie doomsday scenario [Fortune](Thanks, Chris!)

From the Proposed Rules:

Among other things, the proposal would require institutions to provide consumers the ability to opt out of their institutions’ payment of overdrafts. The Board is proposing to amend Regulation DD to ensure that consumers receive effective disclosures about their right to opt out of overdraft services, by setting forth certain content, format and timing requirements for the notice.

The Center For Responsible Lending argues (emphasis ours):

Given the low likelihood that people will unsubscribe, the default policy should place consumers in the arrangement that provides them with the greatest benefit, which is clearly not one that costs Americans more in fees than the amount of the loans themselves. In fact, with debit overdrafts, the cost averages twice the amount of the transaction, while the cost of being denied is zero. If consumers were warned they would be charged a $34 fee for buying a $2 donut, they might instead choose to hand the clerk a $5 bill – or skip the donut. The proposed rule would only be justified if consumers preferred to be enrolled in these overdraft programs and received real benefits from them. But evidence overwhelmingly shows that consumers don’t want overdraft loans and don’t benefit from them; thus, they should not be strapped with the burden of escaping this expensive trap.

The Federal Reserve has asked that consumers who are affected by overdraft programs submit their opinion of the proposed rules. If you're interested in this issue, you can give the proposed rules a read (PDF) and then submit your comments to the Federal Reserve via email. To do so, place "Docket No. R-1315" in the subject of your email, and send it to: regs.comments@federalreserve.gov

If you'd like more information from the Center For Responsible Lending, you can get it here: "Support Opt-In Requirement for Overdraft Fees" (PDF)

Proposed Rules, Truth in Savings (PDF)
(Photo: Morton Fox )

...may include some good ideas, but it is largely a re-hashed, unsubstantiated industry wish-list that seeks to eliminate state enforcement authority over insurance, securities and other financial products, without even guaranteeing strong consumer protection at the federal level.

This plan would consolidate a large number of regulators into roughly three big new agencies.

Bank supervision, now divided among five federal agencies, would be led by a Prudential Financial Regulator, which could send examiners into any bank or depository institution that is protected by either federal deposit insurance or other federal backstops. It would eliminate the distinction between "banks" and "thrift institutions," which are already indistinguishable to most consumers, and shut down the Office of Thrift Supervision.

Any effort to merge the Commodity Futures Trading Commission with the S.E.C. is likely to provoke battles.

Yet another proposal would, for the first time, create a national regulator for insurance companies, an industry that state governments now oversee.

Administration officials argue that a national system would eliminate the inefficiencies of having 50 different state regulators, who have jealously guarded their powers and are likely to fight any federal encroachment.

The federal insurance proposal is a huge giveaway for the insurance industry. Insurers would be able to evade strong consumer protections at the state level by opting-in to what would be comparably lax regulation from the Treasury Department. If approved, it is not unreasonable to expect higher rates and fewer protections.

The new Prudential Financial Regulator, which would gobble up the five regulators that currently oversee banks and creditors, could severely harm consumers. We don't yet know who would steer the massive new regulator, or whether they would emulate the destructive model of the Office of the Comptroller of the Currency, which preempts state authority and then sits idly by as consumers are financially raped.

So what is the media focusing on?

Paulson couldn't just ignore the subprime meltdown, so he is proposing a Mortgage Origination Commission, which would set baseline qualifications for mortgage brokers and chastise states for failing to adequately regulate the industry.

The plan also calls for broad new authorities for the Fed to oversee the market, "in effect allowing it to send SWAT teams into any corner of the industry or any institution that might pose a risk to the overall system." The proposal would standardize emergency borrowing from the Fed's discount window. In exchange for allowing non-bank failures to sally up to the window and beg for cash, the Fed will claim the ability to thumb through their books and balance sheets "in order to protect the Federal Reserve (and thereby the taxpayer)."

It is doubtful the plan will become law this year, but is an important vehicle for framing the coming debate over regulatory authority. Congress is going to put its prints all over the plan before it passes. The devil is in the details and Congress must ensure that any new regulatory environment isn't hostile to strong consumer protections.

After all, even the Treasury Secretary acknowledges that his proposal may not be enough to prevent the next subprime meltdown: "At a fundamental level, the root causes of market instability are difficult to predict, and past history may be a poor predictor of future episodes of instability."

Treasury Dept. Plan Would Give Fed Wide New Power [NYT]
Treasury's Summary of Regulatory Proposal [NYT]

The Fed says:

Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters.

Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters, reflecting a projected leveling-out of energy and other commodity prices and an easing of pressures on resource utilization. Still, uncertainty about the inflation outlook has increased. It will be necessary to continue to monitor inflation developments carefully.

While the cut was larger than the Fed's normal quarter-point moves, investors were initially disappointed that the central bank did not cut rates by a full percentage point.

The Dow Jones industrial average fell 100 points within two minutes of the Fed's mid-afternoon announcement but it then resumed climbing and was up nearly 200 points within the first half-hour after the announcement.

Fed Cuts Rates by 3/4 Percentage Point [Portfolio]
Fed Cuts by Three-Quarter Point, Suggests More Reductions Likely [Wall Street Journal]
Federal Open Market Committee Statement [FED]

House Financial Services Committee chairman Barney Frank (D-MA): "We now have confirmation of two facts we have known for some time: one, the Federal Reserve System is not a strong advocate for consumers, and two, there is no Santa Claus. People who are surprised by the one are presumably surprised by the other."

Center For Responsible Lending: "riddled with loopholes"

Center for Economic Policy Research: "Why couldn't Greenspan have done this seven years ago?"

David Wyss, chief economist at Standard & Poor's: "We always lock the barn door after the horse has gone.'' Fed officials are hoping to "restore confidence in this category'' of mortgages so lenders "will start making these loans again."

Senate Banking Committee Chairman Christopher Dodd (D-CT): "a clear signal that legislation is necessary to help protect homeowners from abusive and predatory lending practices."

(Photo: Getty)

In general, those with loans get relief, those with savings get less.

Savings Accounts
Most banks take their lead from the Fed and are already starting to cut rates. High interest savings accounts closely follow the Fed; CDs and money market accounts have been reluctant to cut rates to stay competitive: "Savers are benefiting from the shaky credit markets, even as the Fed cuts rates. That's because banks are still looking to CDs and money-market accounts as a way to bring in funds, according to [Greg McBride.]"

Credit Cards
Variable rate interest cards are tied to the prime rate, which is in turn pegged to the Fed funds rate. Even though rates have dipped slightly, do not carry a balance on your credit card. Pay it off every single month, without fail.

Home Equity Loans/Lines of Credit
Home Equity Loans: No savings for you. Home equity loans usually come with fixed rates, and are not affected by rate shifts. Future borrowers may see a slight rate reduction as local banks respond to local conditions.

Home Equity Lines of Credit: So-called HELOCs are tied to the prime rate. Enjoy your savings.

Mortgages
Fixed-rate mortgages are tied to the 10-year Treasury note, not the Fed funds rate. These mortgages shift in response to long-term trends, not short-term rate adjustments.

Regular ARMs that reset annually are usually tied to the 1-year Treasury note, and may see some relief: "A borrower with a 5/1 ARM who five years ago started with a 5.3% loan, for example, will likely see a reset to 6.75% this year. Before the Fed's moves in September and today, that adjustment might have been to 7.5% or more."

Option ARMs are the sticklers responsible for the subprime meltdown. They are tied to the LIBOR, the London Interbank Offered Rate, upon which the Fed has no direct impact.

Assessing the Impact of the Rate Cut on Consumers [SmartMoney]
(Photo: Elsie esq.)

"Banks usually are really fast to cut rates and slow to raise," he said.

Some experts are advising people to lock in longer-term certificates of deposit soon, at least with a portion of their savings, in case rates begin to slide.

"Locking in a CD is particularly attractive now," said Greg McBride, senior analyst at Bankrate.com in North Palm Beach, Fla. "The yields haven't yet reflected the idea of a Fed rate cut."

Savers would be wise to lock in high CD rates [Chicago Tribune]
(Photo: corrieb)

Still, trade groups representing mortgage lenders said the guidelines come with a downside: They will reduce the availability of credit for borrowers. The groups urged Congress not to pass legislation that would put similar standards into law.

Tougher standards urged in borrowing [AZ Central]
(Photo: irina slutsky)

"We strongly agree that improved disclosures empower consumers to make better choices in our competitive marketplace," said Edward Yingling, head of the American Bankers Association, a lobbying group that represents the biggest credit-card issuers.

We have an easy solution: the Fed should adopt the proposed regulation and Congress should pass Senator Levin's legislation. See, wasn't that easy? — CAREY GREENBERG-BERGER

Fed Plans to Revise Credit Card Rules [Washington Post]
Board issues proposed amendments to Regulation Z [Federal Reserve Board]
Electronic Comment Form - proposed amendments to Regulation Z
S. 1395 [THOMAS]
Write Your Senator

After posting on The Consumerist, BC's wife reminds him that the tour operator only handed them back *two* of the three counterfeit $100s. The other Franklin was outside at the time, in a bag, in a Land Rover.

In the original comment, Papadopoulos said that having worked as a WaMu teller and ATM custodian, the ATMs are sometimes loaded with cash from the street.

Kustoo, also a former WaMu employee, agrees. After all, he got slipped fake $100s from WaMu. He says, "The truth is that unless you notice that the money is fake before you actually leave the bank, no bank is going to take responsibility."

BC writes, "I totally trusted the safari company... they were awesome, and it was just before the prime season, so it was a deeply discounted safari too. I mean, even if he had actually been who robbed me, it still would have been cheap."

He adds, "I'll go back to Africa, but I'll never step in a WaMu again."

Previously: "WaMu Gives Out Counterfeits, Doesn't Care"