Has Warren Been Bought By Big Banks?

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The Republicans have started work on undoing the damage done to the banking industry by Dodd-Frank. Predictably Democrats like Elizabeth Warren have gone all out in defending this bill. It is one thing to support a bill in its inception without seeing its real world consequences. It is quite another to keep supporting it when the bill is put in practice. At this point we have to ask ourselves. Have Elizabeth Warren and the Democrats been bought by lobbyists from Giant banks?

Dodd- Frank

Dodd Frank has been disastrous for the financial industry. Elizabeth Warren and the Democrats say they support the bill because they feel that banks should be reined in from becoming too big to fail. Four banks went from controlling 11% of the banking industry to controlling nearly half after Dodd-Frank. Giant banks went from controlling 23% of the banking industry to controlling more than 60%.

Dodd-Frank has decimated the small banks that Elizabeth Warren and the Democrats say they want to protect. Since Dodd-Frank 25% of small banks have closed. Bank of America controls more of the banking industry than all small banks COMBINED. Before Dodd-Frank hundreds of new banks were opening up. After Dodd-Frank only 3 new banks opened up. There used to be 14000 banks in America now there just a little more than 6000 and dwindling.

Dodd-Frank has been hugely beneficial for the big banks. It has helped them clear away the competition and grab more of the market. They went from being too big to fail to too giant to fail. If Elizabeth Warren and Democrats were serious about the threat of banks that are too big to fail then they would join President Trump in the Republicans in finding a solution for it. The fact that they insist on supporting a bill that has had the empirical effects Dodd-Frank has had should raise suspicion on their motives. After all what better way to help big banks than by creating a loyal opposition.

Follow The Money

In order to find out who the banking industry has purchased we just have to follow the money. In recent elections Democrats have been raising a lot more money than Republicans. Obama and Clinton both outraised and outspent Romney and Trump in their elections. The difference was glaring in the last election as Clinton spent more than twice President Trump did 1.4 billion to 600 million.

The raw numbers are not enough to go on of course. After all what if all 600 million of President Trumps warchest came from big banks but none of the 1.4 billion of Clinton did? In the last election wall street donated 48.5 million to Clinton and donated 19000 to President Trump. According to opensecrets.org Chase, Citibank, and Bank of America are among the top 10 donors of Clinton. These companies appear nowhere in the top donors of the Trump  campaign.

Given all the money that the big banks are giving to Warren and the Democrats is it any wonder that they are protecting a law that allow giant banks to eliminate their competition?

 

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Dodd-Frank is a Failure

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The other day I wrote an article explaining why we needed to repeal Dodd-Frank and showing why the Financial Choice Act was better. Today I want to focus more on why Dodd-Frank has been such a colossal failure. One of the most exasperating thing about Dodd-Frank is how effectively the democrats and their media allies have brainwashed the public into thinking that Dodd-Frank is effective.

If you support Dodd-Frank there are certain things you likely believe. The financial crash was caused by giant banks controlling too much of the banking industry so that when they took certain risks and failed they risked taking down the entire economy with them. You also believe that giant banks should be given less power and that a healthy banking industry involves more banks, not less, to foster more competition. Of course you also believe that Dodd-Frank has been successful in producing these results.

Here are some facts regarding the banking industry before and after Dodd-Frank. I will leave it to the reader to decide whether or not it has been successful.

  • Before Dodd-Frank there was an average of 170 new banks a year. In the seven years since Dodd-Frank was implemented 3 new banks have opened
  • Before Dodd-Frank 4 banks controlled 13% of the banking industry. After Dodd -Frank these same 4 companies controlled 43%
  • In case you missed the last bullet after Dodd-Frank 4 companies control NEARLY HALF THE BANKING INDUSTRY
  • After Dodd-Frank NEARLY HALF THE BANKING INDUSTRY IS CONTROLLED BY 4 BANKS
  • As of 2015 Bank of America controlled the same percentage of the Banking industry as all small banks combined
  • Since Dodd-Frank 25% of all local banks have closed
  • Of that 25% a quarter have been total failures requiring the FDIC to come in and make sure depositors got their money
  • Before Dodd-Frank 75% of Banks offered free checking. After Dodd-Frank 39% did. This is a direct result of less competition
  • Before Dodd-Frank there were 14000 banks in America. As of 2014 there were 6900. This number is decreasing every year

Were you concerned about banks being too big to fail before? Has Dodd Frank made this better or worse?

The Truth About the Dodd-Frank Repeal

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Republicans in the house have voted to repeal Dodd Frank and replace it with the choice act. As usual they have declined to explain why this is done and have let the Democrats control the airwaves with their message of the Republicans who have been bought by the banks and are going to crash the economy with their greed. One of the most frustrating things about supporting Trump and the Republicans is that they generally do the right thing but cannot seem to explain why they are doing it. This is especially important in a complex issue like this one. By all means the article I am writing should come from the Wall Street Journal, National Review, or even the Trump administration itself. Yet they decline to do so placing the burden of explaining why this must happen on the shoulders of independent bloggers like myself with our vastly more limited reach.

It is very easy to have a knee jerk reaction to this issue but for something this critical it is very important to understand why it is being done.

State of the Banking Industry

In order to understand why this must be done we have to take a look at how the banking industry is doing. After all maybe there is no problem and this is just being done for the sake of corporate greed.

If I were to ask you why you support Dodd-Frank your answer would most likely be to rein in big banks, to break up big banks, or something along the vein of placing less power in the hands of big banks. After all it is because of the irresponsibility of the banks that are deemed too big to fail which caused the financial crash to happen.

How has Dodd-Frank affected these banks? The best data I could get is that in 1995 giant banks controlled 22% of the assets of the banking industry. 13% of which are controlled by 4 companies Citigroup, Chase, Wells Fargo, and  Bank of America. As of 2015 giant banks controlled 63% of the assets of the banking industry and the top 4 banks mentioned control 42%. The giant banks nearly tripled their market share. What about the smaller banks? Since Dodd-Frank started a quarter of local banks have closed. Can you guess how many new banks of any size have opened since Dodd-Frank started? How many new banks we have had in the 7 years since Dodd Frank was signed into law? Take a moment to take a guess before going on. There have been a total of 3 new banks. 3. Before Dodd-Frank you had hundreds opening every year. Now we have 3. In seven years.

If Dodd-Frank was supposed to curb big banks it has failed spectacularly. In fact it has even helped concentrate even more assets into these banks. If you thought they were too big to fail before then they are even more so now. This is a dangerous trend that we have to break and instead of having it slow down it is accelerating. As of right now we have 4 companies who own almost half the banking industry. Repealing and replacing Dodd-Frank into something that helps smaller banks must be done.

The Solution

Republicans have put forth the Financial Choice Act as a solution to the problem. The bill is very long and a copy of it is available in the government website so I will give the barebones summary. In a nutshell the bill says that if a bank of any size were to meet a reserve requirement of 10% then they would be exempt from most of the regulations of Dodd-Frank. Under Dodd-Frank the reserve requirement is 3%. The crucial section here is that it is voluntary. A bank would have to choose to meet the requirements to get out from the regulations of Dodd-Frank but is not forced to. At this point it is important to understand what the reserve requirement is otherwise it will seem like the banking industry is getting something for nothing.

Most countries have something called a reserve requirement. This is the percentage of the total assets the bank has lent out that it must have on hand. This is usually in the form of physical cash in a bank vault or deposits to the central bank. For instance if a bank has lent out 100$ then it must have 3$ in its  reserves under Dodd-Frank or 10$ if it wants to get the benefits of the Choice act.

This is important because banks earn money by lending out money. Whether it be thru fees, interest or any other method money has to be lent out before it can earn money. This is also the reason why Giant banks cannot benefit from the Choice Act. All the giant banks have shareholders who expect the same level or more of profits every year. You just cannot make the same level of profit by loaning out that much less money.

Giant banks also make most of their money on fees. Whether the accounts are paid back or not what is most important is there is a lot of them generating various fees. If they go into collections then the big banks just sell it to an agency and make some of the money back anyway. Smaller banks make most of their money on interest. It is important to them to have the loan active and current. They have to pick and choose who to lend to carefully so the 10% reserve requirement fits their portfolios perfectly.

This creates a two tiered system. When you ask for a loan or a credit limit increase with a giant bank they do not generally want to have a live person make a decision for you. They don’t really have the manpower or inclination to decide whether Bob gets a 200$ increase or whether you get your 10000$ loan to start a pizza shop with a basement. They want to run everything thru an algorithm based on current regulations and base the decision on that.

Smaller banks are different. Since they normally service local communities they rely more on face to face interactions as well as judgement calls based on the persons history with the community. Instituting a system with far less regulations makes sense for them. This also creates a unique market for them of customers who literally cannot do business with giant banks due to regulations but can do business with them increasing their market share.

Why Small Banks?

Smaller banks need to be encouraged and protected instead of systematically eliminated under Dodd-Frank. Smaller banks have a significantly lower default rate on loans and they make significantly more loans to start-up businesses. 33% of business loans come from small banks while only 23% come from giant banks. Having the assets of the banking industry spread out over more sources reduces the risk of any single one of them causing a crash and needing to be bailed out.

We finally have legislation that will help fix the banking industry and Republicans are to shy to explain it to the public.