A Solution to California's Financial Disaster

California is facing a financial disaster and I have a solution.

My plan will help California generate approximately $2 Billion of additional income, and that will recur annually. It will also help every other state and our federal government as well. My plan is focused on California, but the implications are broad.

Not only is this plan quite simple to integrate, but it costs nothing. Taxpayers will not pay a dime to implement my plan. In addition, the plan does not call for budget cuts, although those are probably necessary too. Instead, this uncomplicated measure will repatriate billions of dollars to the California economy every year all by itself.

Until now, the basis for my plan has been shunned. It has been discounted as a consumer-based issue, and its ability to produce income for the state has been completely overlooked. This is my effort to open everyone's eyes.

The plan that I am proposing will cause a significant debate, but it must be heard.

Follow through will improve the foreclosure rate and ease the rate of credit card defaults. It will put more money in the hands of consumers so they can buy goods and services at small businesses and other retail outlets, and this plan will provide the state and federal governments with billions of dollars of additional revenues every year as well. In every regard, this plan will help our economy substantially. It attacks the root of the problem, the consumer, and gives him more money to work with. That, in turn, helps small businesses and governments by generating taxable incomes.

The argument against my proposal comes from major financial institutions. The banks are the ones who will pay for this. Everyone knows that banks are engaged in predatory banking activities on a regular basis. However, few people care to do anything about it. Years ago Barney Frank made an attempt to reconcile this problem, but the lobbyists of big banks shot his proposal down. I hope we won't be blind this time.

Now, with our backs against the wall, maybe somebody will finally listen. Admittedly, my frustration mounts because it takes utter disaster for anyone to open their eyes. Why do we need a crisis to make things right? Unfortunately, that is what we are faced with now. From the Madoff scandal all the way to this issue in California, regulators and policymakers have dropped the ball for years.

We need to put a stop to that right now, and my plan is a great way to start.

This is a predatory banking issue. Every year banks steal billions of dollars from US consumers by manipulating the order in which transactions are made. At first glance this doesn't seem like a big deal. However, my calculations estimate that Wells Fargo (WFC) alone makes an extra $4 billion a year from this predatory banking practice. When the other major banks are added into the equation, my estimates suggest that between $40 and $50 billion a year are taken out of the hands of US consumers. This an annual steal.

When this happens, consumers, who are the driving force of our economy, are affected. They cannot spend money on goods and services at local merchants, some cannot pay all of their bills, and eventually everyone suffers. Small businesses suffer immediately because their income streams decline, but so do banks and credit card companies. Any company which is counting on consumers to spend money has a vested interest in this issue. Interestingly, if this practice did not occur, default rates on mortgages and credit card bills may ease as well.

But more important to the immediate concern in California, if that money remained with the consumer and then was spent on goods and services within our economy, state, local, and federal governments would reap the reward as well. First, sales tax revenues would increase proportionally. Then income tax revenues would do the same. I can only estimate, but measure that against $50 Billion, portion out California's share, and an increase of approximately $10 Billion would be added to the income stream for the state.

When the dust settles, if this simple accounting policy was disallowed and if banks had to reconcile accounts based on the order in which transactions were made, consumers would have between $40 and $50 billion a year in excess monies to spend on goods and services. Sales tax revenues would increase proportionally every year as well. Finally, income tax revenues would do the same, every single year.

This is not a one time stimulus package; this is a constant and flow of money and it costs nothing. This is exactly what the Government is looking for.

Unfortunately, most of our policymakers don't ever notice this problem. Although the revenues from these transactions are huge, they are not included as line items on income statements for most of the banks. Instead, these are considered 'other revenues' by Wells Fargo for example. Although the revenues are approximately $6 billion, Wells Fargo does not include them as a line item because, if they did, maybe someone in our political arena would take notice.

Although I am a proponent of proactive trading strategies and I am a believer that a Greater Depression inevitably lies ahead, I am also an advocate of fair business practice. The predatory banking procedures that all major financial institutions incorporate must be stopped immediately. Clearly, they are hiding it for a reason. If these practices are disallowed, our economy would improve.

The reason no one notices the impact of these discretionary manipulations, and the reason no one would say anything about it even if they did, is that these predatory banking procedures are based on overdraft fees. No one wants to admit that they incurred an overdraft fee. If any of us do, we instead choose to just take our lumps and move on. In addition, anyone who does incur an overdraft fee is considered to be financially irresponsible anyway, so no one wants to admit that they made a mistake. Therefore the overall perception is that people who incur overdraft fees should pay the price.

I agree 100%. For every single overdraft fee, account holders should pay the price. However, due to this predatory banking practice, instead of paying once they pay four or five times for the same overdraft fee. Herein lies the problem. Banks force this by reordering transactions at their discretion. Banks purposefully re-order the transactions from highest to lowest dollar amount on every account. The transactions are changed from chronological order to descending order every day. The banks don't have to do this, but they are allowed to use discretion by the current law when accounting for transactions. In effect, the current law allows banks to decide when to use chronological accounting, when to use ascending accounting methods, or in almost all cases, when a descending order is best. Obviously to me, banks choose the descending order every time because they make more money from their account holders.

Here's an example. If six transactions were made one day and at the end of the day a large transaction was made which caused the account to go over, an account holder reasonably should pay for that overdraft fee. The prior five transactions were valid, and the last one should incur a charge, reasonably. But this isn't how it works.

Instead, because the banks purposefully change the order of these transactions, the largest transaction actually comes first, not last. Obviously banks do this at the end of the day. During the day the proper order is shown on our online statements, but at the end of the day that order is changed. In our example, after that reconciliation, the bank considers the first transaction of the day to be the one which put the account over. From there every other transaction which took place throughout the course of that day is reconciled to have been an overdraft too. But that wasn't true. In fact, if the last charge of the day was the charge that put the account over, then every other charge made prior to that one was in good standing. However, the current law, which has almost surely been influenced by the lobbying power of large financial institutions, allows the bank to charge six overdraft fees instead of just one. By changing the order of the transactions, banks are allowed to earn 400 - 500% more than they should on average.

This happens every day. In fact, Wells Fargo processes an estimated 500,000 overdraft fees every day. Most of those are due to manipulation. The accounting policy that the banks are allowed to use today allows them to make this change and it allows them to steal billions of dollars from the US economy every year. This burdens everyone, from the consumer, to small businesses, and now we can all see that it is hurting the state economy too. No one seemed to care about the little guy before, but maybe they will now. For every dollar removed from the state, sales taxes are lost, and income taxes are lost. Given the crisis in the state of California, maybe our policymakers will stop paying attention to lobbyist, and start focusing on fair laws.

I realize the argument against my proposal already. It's pretty simple. The argument is, the account shouldn't go over in the first place; they deserve to be punished. But what is that argument really saying? Does that mean that the banks are allowed to manipulate the order of the transactions to increase their revenues at the expense of their account holders? Does that mean that people should be punished 4-5 times for the same mistake? Or does that attitude simply express intolerance for financial indiscipline? If it is the latter, maybe the impact on small businesses should be considered, or the state economy.

This seemingly little issue has sweeping implications if it is considered carefully. Most of the time, those people who argue against my policy are small business owners too, who don't yet realize the impact this practice has on their own income streams.

My argument is not to allow accounts to go over without punishing them. They all should be punished. However, the banks are not punishing accounts appropriately. The current assessment of overdraft fees is costing the US government, state governments, and local governments billions of dollars. If banks were forced to stop doing this, and if they were instructed to account for transactions in chronological order, the current strain on our economy would ease considerably. Consumers would have more money, small businesses would have more money, mortgage defaults would wane, credit card companies would have improved payment streams, and the state and local governments would have billions of dollars that otherwise would have been taken out of the system.

A proposal to change this law was shot down years ago in the US Congress. Now, it needs to be addresses on a state level. Starting in California, and then in every other state, this law should change. New Mexico already has taken action. It's time for the rest of us to open our eyes as well.

Please call your congressman, please call your state and local policymakers, and please call on President Barack Obama to make this change permanent when he comes into office. Banks should be forced to reconcile transactions in the order in which they are received, not in an order designed to make them more money. We are now in the electronic era, everything is digital, banks know when transactions occur, and they have a record of the time each transaction was made. Still, they choose to reorder them because they make more money because of it. They consciously choose, and are allowed to steal billions of dollars from US Consumers every year. This has to stop. Our backs are against the wall, and this is no longer just a consumer issue.

It's time to lay down the law. Policymakers and regulators need to step up to the plate and change these bad policies. I'm sure this isn't the only one, but this is a big one. It is easy to fix, taxpayers won't pay anything to make it happen, and everyone wins.

In my estimation, California alone would repatriate about $2 billion in to the state economy every year. Between now and 2010, that could cut the $15 billion cash requirement by 30%.

It's not everything, but it is a start, so let's get started.

Comments

[bonderman:]

If Wells makes a profit in California, one would assume they pay a tax to California. Rebalance your economic model and write a (much shorter) update.

2008 Dec 22 01:17 PM

[secmaven:]

I spotted that scam on my overdraft statement that had two charges rather than one because of the reversal. I complained and the bank, BAC, took one of the charges off.

2008 Dec 22 01:53 PM

[pragmatico:]

Most useless idea ever.

Stop trying to tell the banks how to do business--if you relaly want to be revolutionary, tell people instead to master basic math and to not write checks on money they don't have.

Oh and the budget crisis? until we cut state spending and eliminate useless programs and especially the BUREAUCRACY that comes with each one, it will never be done. Again--be a revolutionary and grapple with that.

2008 Dec 22 07:19 PM