The BankDeals Blog posted an excellent article today regarding a letter sent from the American Bankers Association (ABA) to FDIC Chairmwoman Sheila Bair. The letter asks the FDIC to intervene to force Ally Bank (formerly GMAC) to lower the rates it offers on certificates of deposit and savings accounts. Why? Here are a few excerpts from the letter:

Recognizing that the Internet forces banks to compete in a national market for deposits, the FDIC recently issued a proposal to amend its rules by suggesting a bank, under restrictions for deposit growth, use a "national rate" when determing whether the bank is offerfing rates that significantly exceed the market rate. Notwithstanding the government's concen about banks using high-rates to solicit out-of-market deposits, GMAC/Ally Bank is apparantly is permitted to solicit deposits over the Internet by offering rates that are generally the highest in the nation.

The letter ends by asking the regulators to force Ally/GMAC to lower rates:

ABA believes it is completely innapropriate, and indeed risky, for GMAC/Ally Bank to be allowed by regulators to continue to pay rates well above the market. We urge you to apply the same princples that would apply to other banks in a comparable situation to GMAC/Ally.

The ABA's argument is that banks should not be allowed to collect deposits above a certain average "national rate." So what ever happened to bank competition? The statement above alludes to the FDIC's program to force impaired banks from collecting depoists at an excessive rate. But Ally bank is not part of that program, yet. The letter states that the Treasury added $13 billion in capital to the bank but much of this capital was actually used for GMAC Financing and is unrelated to the actual bank, which existed as a separate entity within the company's finance division.

Nor are high deposit rates a cause of failure. Banks fail because of a run on the bank, usually precipitated by loan losses. Or they can be closed by regulators due to capital ratios, non-performing assets, etc. Bank of America, Citi, etc. were not bailed out due to high cd and savings rates. Bad loans made by ABA companies have caused the financial crisis, not a bank that is offering depositors a good deal.

Nor should the high deposit rates offered by Ally be a source of its losses. Ally may not make as much money, but it should be able to make money. Because of the slope of the yield curve there has almost been a better time for banks to make money. They can borrow money from depositors at 2-3% and lend it out to consumers at 5-20%. I recently received a notice from Chase that my credit card rate was increasing to Prime rate plus 14.99%, which is currently 18.24%. I'm not alone.

If banks can't borrow at 3% and lend out at 18.24% and make money, they shouldn't be in business.

Savers have already been punished as banks have dropped savings and cd rates precipitiously over the last year. This occurred because of a financial crisis precipitated by these same banks. Now, they want savers to subsidize their recovery by both funding the TARP and by accepting artificially low rates while at the same increasing fees and the rates they charge on various credit products.

Let the FDIC know that you want competition in savings and cd rates. Send them an email at webmaster@fdic.gov.

So here's an interesting question: how are bank profits increasing when the economy and many of the loans written by the banks are in worse shape then ever? Don't believe the numbers. AI close look at those bank profits show that most of them weren't from better performance, but rather from the same type of financial manipulation that got the banks into a bad situation in the first place.

First, many of the banks benefited from the recent change in accounting rules that relax mark-to-market accounting. I wrote in an article last week about the FASB mark to market accounting change:

"The bottom line is this. Banks, which have shown they are incapable of pricing assets and managing risks are now going to have more latitude in pricing the crap they hold on their balance sheets. I say stay away. It's clear it's just another tactic by the financial powers that be to preserve their own companies and wealth at the expense of shareholders and the tax paying public."

Now, two weeks later, lo and behold, the banks have better than expected earnings. One would be wise to question those earnings. The economy and loan delinquincies have not improved. Foreclosures continue to surge and now credit card, commertical loans, student loans, and other types of debt are showing ominous default rates. The only thing that could positively impact the banks would be the super low, taxpayer subsidized liquidity. Bank can borrow money at 0% and lend it out at 4-5%, a recipe for profits - if they were lending.

In the case of Bank of America, Ken Lewis even has an incentive to juice earnings for the quarter - his job is on the line. He's fighting for his job amidst what is expected to be a close proxy vote on whether he should remain as Chairman and Chief Executive Officer. My answer: look at the stock's performance over the last ten years and see if he and his management team have maximized shareholder value.

As Andrew Sorkin wrote in the NY Times Dealbook Blog:

Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as “a testament to the value and breadth of the franchise.”

Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch’s assets it acquired last quarter to prices that were higher than Merrill kept them.

“Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won’t be pretty,” he said.

Yesterday, the markets saw through these financial shanigans and punished bank stocks, driving Bank of America down more than 20%. You'd think the "financial titans" would have learned that the jig is up. I guess not yet.

Wells Fargo posted a first quarter profit today that exceeded analysts expectations. CFO Howard Atkins came right out and said it was because they are no longer paying high rates on deposits. Bloomberg states:

"Margins are better because of the competitive situation” after many of the “irrational players” were eliminated, Chief Financial Officer Howard Atkins said in a telephone interview. The bank’s net interest margin, the spread between what it pays depositors and receives on loans, was about 4.1 percent in the first quarter, compared with about 3.10 percent in the fourth quarter and 4.7 percent in the same period a year earlier.

Wachovia paid extraordinarily high rates to attract deposits last year, Atkins said. He also said that many of those accounts now are running off, which should benefit Wells Fargo’s profitability later this year.

Wachovia did have competitive rates last year that benefited savers. Since then, the Fed has dropped rates to 0%, bringing down bank deposit rates. As the spread between deposits and mortgage loans has widended, banks have reaped a windfall. Savers are getting a double whammy, paying for saving the bank via TARP and also subsiziding them via low deposit rates. At least mortgage rates have come down a bit although credit rates continue to remain high and even rise.

As a saver, you can make the best of a tough situation by choosing to deposit your money in a bank with a competitive interest rate.