You’ve probably seen one of the stories on Bank of America moving to curb some of its fees on customers’ accounts. But you might have missed this Bloomberg account of how BofA is trying to charge high fees to public utilities and other municipal issuers of debt.
The upshot is that banks, including BofA and Wells, have increased their fees from 75 to 100 basis points on the credit they are extending to public and quasi-public entities. The rationale given — although BofA isn’t talking about this part of their business — is that credit is scarcer than ever, hence more expensive to provide. Yet this turns that old risk bug-a-boo on its head, and recall that the mispricing of risk blew up the banking system about a year ago.
Remember, local governments and public utilities do not go out of business. In fact, in the case of utilities their cash-flow is remarkably consistent and stable, with little of the political risk that might trip up governments trying to raise taxes. Utilities might hem and haw, but they will enact big rate increases relatively quickly if their debt situation demands it, as Charlotte experienced with that recent 14 percent rate hike from CMUD.
As a result, there is relatively little risk associated with extending credit to these types of public entities. Absent fraud or utter incompetence, it is a license to print money. This means that the cost of credit for public utilities should be lower, all things being equal, than is found in the broader market. Except it is not. It is higher, much higher in the past year, and perhaps increasing still. Why is that? Banks clearly are not pricing by risk. What are they using then?
It sure looks like banks are using ability to pay. Ability to pay is normally a principle of taxation, not finance. Yet the banks are taking customers with the manifest ability to pay higher fees thanks to healthy cash flow and a monopoly hammer-lock on their markets and levying an excess profits tax in the form of higher fees. Put another way the utilities are being penalized by the banks for having healthy balance sheets rather than rewarded.
Like I said, the notion of risk has been turned on its head. No risk means lotsa money, which means higher capacity to pay, which means a higher cost of credit. High risk means no money, which means little to no capacity to pay, which determines the amount of subsidy the banks extent to you. This is one more sign that banks are now functionally arms of the federal government. No longer do they serve the credit needs of the private economy by putting capital at risk. Instead they are elaborate shell-games which fund preferred social goals and policies. Regulators and politicians wish that banks continue to prop up an overvalued real estate sector while extending home loans to risky borrowers. This activity will be funded by charging low-risk and no-risk borrowers high rates for access to credit.
The ultimate kick in the crotch is that when these low risk borrowers are utilities or other government units, they will simply recover the sky-high fees BofA or Wells charges them by hiking the rates paid by ratepayers and taxpayers. In sum, the chronic BofA check-bouncer might lose that $10 overdraft fee, but all of us will wind up paying $5 or $10 a month more for water.
What a neat racket.
