With all the talk of reform, it was beginning to feel like the days of risky and exploitative financial products were over. That was short-lived!
Banks, including Bank of America, JP Morgan Chase and Citigroup have initiated “newfangled corporate credit lines tied to complicated and volatile derivates” while Wells Fargo is “offering payday-loan programs aimed at cash-strapped consumers,” Business Week reports.
Corporate-credit is still tight, and borrowers are being shuttled toward credit default swap-linked credit lines, which cost much more than credit lines commonly extended in the past. Think of these things like adjustable rate mortgages on steroids. Instead of waiting for Libor rates to rise before kicking up the interest rate on a loan, now banks will jack up the rates when CDS spreads widen.
It’s not just a problem for the riskiest borrowers. Almost $40 billion of the CDS-linked loans have been extended this year, Business Week says, representing approximately 70% – up from about 14% in 2008 – of the total credit lines extended to borrowers in “fairly good standing.” FedEx, for instance, could find itself paying anywhere from $1.9 to $3.6 million per month for the new type of credit line. On its previous credit line it would have paid JPMorgan about $540,000.
And it is not just complicated, derivative-style lending that is all the rage. The decidedly low-brow pay day lending, with interest rates as high as 400%, is being pushed by lenders including Wells Fargo, Fifth Third and U.S. Bancorp. Long the target of consumer protection advocates and the subject of capped interest rates in 15 states, pay day loans are a surprising choice of a way for reputable banks to increase profits.
While nothing about these practices are groundbreaking, it is a reminder that banks are in the business of making money, and they are always going to find ways to do it. They’ll leave the consumer advocacy to someone else.
Read the entire aritlce here.
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