Consumer rights v. broke banks: guess who just lost.
By Don Quijones, Spain & Mexico, editor at WOLF STREET.
After eight years of chronic crisis mismanagement, moral hazard and perverse incentives have infected just about every part of the financial system. Earlier this week, the U.S. Congress published the findings of a three-year investigation into why the Department of Justice chose not to punish HSBC and its executives for their violations of US anti-money laundering laws and related offenses – because doing so would have had “serious adverse consequences” for the financial system – the “Too Big To Jail” phenomenon, a perfect, all-purpose, real-world Get-Out-of-Jail-Free card [read… Congress: “Too Big to Jail: Inside the Obama Justice Department’s Decision Not to Hold Wall Street Accountable”].
But now there’s “Too Broke to Fine.”
Today over a dozen Spanish banks were given a life-line by the EU’s advocate general, Paolo Mengozzi, that could be worth billions of euros in savings for the banks. For millions of Spanish mortgage holders, it could mean billions of euros in lost compensation.
A Legal, Abusive Practice
Just over seven years ago, when conditions were beginning to sour for Spain’s banking system, 40 out of 42 Spanish banks decided to insert “floor clauses” in their mortgage contracts. These effectively set a minimum interest rate — typically between 3% and 4.5% — for all their variable-rate mortgages (which are very common in Spain), even if the Euribor dropped far below that figure.
This, in and of itself, was not illegal. The problem is that most banks failed to properly inform their customers that the mortgage contract included such a clause. Those that did, often told their customers that the clause was an extreme precautionary measure and would almost cerainly never be activated. After all, they argued, what are the chances of the euribor ever dropping below 3.5% for any length of time?
At the time (early 2009), Europe’s benchmark rate was hovering around the 5% mark. Within a year it had crashed below 1% and is now languishing deep below zero. As a result, most Spanish banks were able to enjoy all the benefits of virtually free money while avoiding one of the biggest drawbacks: having to offer customers dirt-cheap interest rates on their variable-rate mortgages. For millions of Spanish homeowners, the banks’ sleight of hand cost them an average of €2,000 per year in additional interest payments, during one of the worst economic crises in living memory. Many ended up losing their homes.
While legal, the bank’s behavior was eventually deemed “abusive” and “non-transparent” by Spain’s Supreme Court. In May, 2013, the court ruled that three financial institutions named in a class-action suit would have to reimburse all their customers the money they’d surreptitiously overcharged them, but only from that moment on. The court argued that the law couldn’t be applied retroactively to 2009, when the banks began introducing the clauses, since it would potentially cripple their finances.
Too Broke to Fine
A more recent ruling that applies to the whole sector adopted the same reasoning: banks need only reimburse customers the money they lost from May 2013.
Not everybody agrees. The European Commission argues that the refunds should extend all the way back to the first mortgage payments, the rationale being that if a clause is declared void, “it is so from its origin.”
It makes perfect sense — until you factor in the fact that if most Spanish banks were forced to refund all the money they had thus extracted from their customers, they would be even less solvent than they are today, raising the prospect of more bail-ins and/or bail outs, which would in turn mean more contagion risk in Europe’s fracturing financial system and more public debt on Spain’s burgeoning balance sheets.
All of which is out of the question – with Italy’s banks teetering on the brink of collapse. Hence, today’s decision by the EU’s advocate general that Spain’s national courts can be trusted to strike the right balance between consumer rights and the broad needs of the financial system. Like Spain’s Supreme Court, the advocate general placed “macroeconomic considerations” (legalese for “what is best for the banks”) before the microeconomic needs of consumers.
While the EU Advocate’s ruling is not binding, in most cases it presages the ruling of the Court of Justice of the European Union (CJEU), which is expected to take place later this year. If the CJEU adopts the same decision as the advocate general, it will set yet another worrying precedent in Europe’s financial sector: not only will the employees and executives of banks be immune from prosecution for the crimes they commit; the banks themselves could soon be immune from any financial consequences of their actions. Put simply, they will be Too Broke to Fine.
Not only will taxpayers have to bail out the banks whenever they run into trouble, stiffed bank customers will also soon have to accept that they have no lawful right to compensation if doing so could run afoul of “macroeconomic considerations.” And with the banks as weak as they are, just about any punitive fine could be construed as posing a risk to the macroeconomic environment. Which advances the theme: the more protection banks are given, the more likely they are to commit further misdeeds down the road, at a hefty cost for everyone else. By Don Quijones, Raging Bull-Shit.
Global banks are now in search of a “New London” after Brexit. Read… Race to Displace “City of London” Turns into Feeding Frenzy
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The day draws ever closer …
when bankers swing from lampposts alongside their pet politicians.
i think you call those Pinata(s). I’ll got get my bat and prepare.
‘Void ab initio’ is the operative word.
Else what other point is is relevant for voiding the consequences of a clause?
‘And with the banks as weak as they are, just about any punitive fine could be construed as posing a risk to the macroeconomic environment. Which advances the theme: the more protection banks are given, the more likely they are to commit further misdeeds down the road, at a hefty cost for everyone else.’
So open the envelope: Who wins? Which is it?
Do we impose a punitive fine, which poses a risk to the macro (i.e big) environment, or do we allow them to commit further misdeeds?
You can have either but not both, if that is how you define the positions.
There is a persistent trend in most of the articles posted, and needless to say, the comments. They are long on critique and short on prescription.
It reminds of the advice given to debaters about that perennial philosophical question – free will.
The advice: always let your opponent go first, it is easier to attack a position than it is to defend one.
My suggestion is along the lines of a pooping puppy. Stick his nose in it, give him a stern NO but next time, a smack on the bum.
Or re: the banks- identify individuals- tell the bank they must retire.
Lest I be misunderstood- I think Glass-Steagall should have been reinstated post 2008. Actually it should never have been repealed in the first place.
Banks should take deposits and make loans- not speculate on their own account, i.e, compete with their customers.
This allows lots of room for legitimate customer service, e.g. the Brit who wanted to import a new BMW but was afraid the pound would fall, so he locked in a forward rate. He pays a fee for what is really insurance.
Legitimate fintech, which some of the 750,000 industry workers in the UK are doing. (How much longer they will have those jobs is another question, but they will have their sovereignty)
I realize an author can’t be responsible for the comments, but this is starting to sound like a reunion of old Bolsheviks.
The piece by DQ mentions HSBC and Spanish banks. My comment is about the former- I despair of trying to understand or criticize, Spanish, Italian or Portuguese banks.
Spanish, Italian or Portuguese banks? Think politics and power.
I highly recommend reading Antal E. Fekete for actionable suggestions Nick. IMO most posters here are of the “oops I took my silver eagles out in my canoe and it capsized” variety. My own convictions stem from my religious beliefs and seem to give the discussion constipation,,,so I have ceased mentioning them. It doesn’t mean that I, nor others, are Bolsheviks.
Nick: Keep in mind one thing about the Bolsheviks. They were true to the words of Marx, who argued vehemently for the government having full control (through a central bank) of the monetary system.
Secondly: NOT doing what was done is the equivalent of providing a solution. Therefore, to state what is wrong is also stating that the solution should be to not do what was done (and pointed to in stating the case). At the same time, it shows that there are multiple solutions to a problem without having to start back at square one. And sometimes, different people will have a different idea of what the right square one is.
Dear ones, I found shadowstats latest open source summary with graphs:
http://www.shadowstats.com/article/c810x.pdf
On the real unemployment(23%)
I don’t have any pity with the average Spanish homeowner in this story. Somebody has to pay the bill for the WAY too low interest rates in Europe, and IMHO the ones to pay should be the excessive borrowers, not the savers. After all, one big reason of the continuation of NIRP policy in Europe are the homeowners who fully depend on keeping mortgage rates way below inflation, and especially those in Spain who mostly have mortgages directly tied to Euribor.
In Spain the homeowners get to pay (a small part of) the cost, in Northern Europe it is mostly the savers who get the bill for these idiot policies while homeowners with mortgage enjoy the full benefits, sometimes amounting to a full extra family income.
I don’t like the position that the banks are TBTF, but if they are broke anyway it doesn’t matter if and how much they are fined, because it will always be others who pay the bill. We should start with firing all the banksters, economists and politicians who are responsible for this mess and making sure they never get a public job again (in reality most of these gangsters will get even better paid jobs after the next crash).
And we should let all the bankrupt banks AND bankrupt homeowners fail, and hope they learn something. Homeowners who live beyond their means should not be TBTF either. If people take out a loan for hundreds thousands of euros, they can be expected to make sure they understand the contract especially if the conditions seem too good to be true in the first place (many Spanish homeowners have had mortgage rates of 1-2% for nearly ten years, thanks to the ECB). Saying they are ‘stiffed’ because they now get to pay part of the real cost of their homes is not realistic.
“If people take out a loan for hundreds thousands of euros, they can be expected to make sure they understand the contract ” Years ago I was in real estate and we had a form called ‘reg Z’ where the buyer/borrower had to sign declaring they read and understood the documents. I must imagine in Europe, where the laws seem to be pro consumer ( as opposed to the USA where they are not any longer), that these banks would have something similar. That doesn’t mean the loan officer explained it.
I have zero sympathy for any modern bank using deceptive practices, but if the Europeans are a anxious to use there homes as ATM’s or buy ‘uninformed’ or buy to beat the ‘housing increase value’ game…just as Americans did…well, what can you say.
The current warning is, all the banks are at it again with potential home buyers In every country….no money down, instant fortunes to be made. Just don’t count expenses, those details are a disastrous as the fine print.
Just one more brick in the wall.
even without knowing the details about deceptive small lettering in the contracts (the usual position from buyers is that those contracts are too many pages, so nobody should be expected to read it all …), we know that buyers use all kinds of lying and cheating to get into homes that are way too expensive for their income, just in order to get their ‘fair share’ of the bubble gains, e.g. not mentioning student debt even when it is explicitly demanded (and is easy to check), lying about income (some years ago in London UK area it was found that more than 90% overstated their income – because they knew nobody cared and with the rapid price increases you would be in the green within a year).
In the Netherlands we have peculiar issues like that over 3/4 of people who have to sell their home at a loss mention divorce as the reason to sell. Of course, because in this case the taxpayer gets the bill and it costs the homeowner absolutely nothing. Many of those ‘divorced’ couples are happily together again a year later, in a new and sometimes even more expensive home for the next round of the housing bubble game. Politics smiles on all this, what is better than make people wealthy without having to work for it?
So yes, it’s similar to the US subprime stories; most of these people had no business being ‘homeowners’ to begin with and I have little sympathy for them if they ‘lose their home’.
As to expenses: in my country even those are still covered by the mortgage for most starters. It isn’t ‘fair’ to expect a buyer to cover the closing cost etc. so the standard mortgage is something like 103%. Consumer organizations and certain politicians are already railing against the ‘too restrictive’ 103% mortgages, even though they know that this is about the most lax standard worldwide. And unlike in the US, this isn’t just for a small part of the market but this is the norm. 103% looks better than 110-200% mortgages that we had ten years ago, but if you take into account that home valuations have risen over 100% in some areas over the same period, the ‘improvement’ is entirely a statistical artifact.
Still, if you look at what the stock market is doing these days you have to wonder if politics will ever allow homeprices to decline again. Seems like they would rather follow the Weimar script than suffering the consequences of widespread ‘wealth’ implosion.
A well balanced view. The central bankers, and overleveraged consumers need and prop each other up like two drunks.
It would be too rational to assume that the insane policies are driving people into real estate as the only escape from rampant inflation, but in my personal experience those who bet their money on real estate happen to be the most financially clueless people around.
The author does not seem to get it.
As long as the market accepts the absurdity of central banks printing money out of thin air to buy longer term bonds that yield close to or less than zero ,then rules will be changed to allow for tax payer financed bank bailouts
.Currently Spain pays .24% on their 5 year bonds and 1.15% on their 10 year bonds while Italy pays .3% on their 5 year bonds and 1.207% on their 10 year.
These rates are silly even for countries who are fiscally responsible let alone for 2 countries which are highly irresponsible fiscally and whose politics are unstable
agree, silly rates.
For most ClubMed countries the 10 year should be closer to 10% than the current 1%. But thanks to the ECB their bond bubbles keep growing and going back to free market rates is impossible by now. Even my own ‘fiscally responsible’ country would have huge budget problems if rates go up a few %, because currently they get paid to issue debt so the government budget looks great. In reality the ECB makes sure that all eurozone countries live far beyond their means and this gets worse every year.
Of course, it’s even more silly that in some countries homeowners pay even lower rates than the government, despite the fact that their homes are often financially underwater to begin with (e.g. in Spain a few years ago the government paid around 5% on its debt while many deadbeat ‘homeowners’ paid 1-2%).
While we need the banks in some form, there are no apparent reasons why we must have the current bankers, either here or in Spain.
IMNSHO what is required is a massive purge of the existing directors, executives and cadre management of the insolvent banks, and a prohibition of their employment in any financial sector in any policy making or position of fiduciary responsibility, not for the most part because of incompetence or venality, but rather because their socioeconomic mindset/perception is no longer compatible with the new socioeconomic realities of globalization and instantaneous communications/transfer of funds. We cannot have 19th century bankers attempting to operate 21st century banks.
A question and two comments.
First, was there a cap on high adjustable rate mortgages could go? If so the clause would seem to be fair.
Second, the banks could argue this was a case of ‘force majeure’ as the low rates were the result of ECB policy decisions, approved by the EU governments, and thus beyond the banks control or ability to foresee.
Finally, this is a Spanish affair and not something the EU judicial system should be involved in.
Just a reminder for all who want to liquidate bankers etc.
IT’S BEEN TRIED!
The French Revolution, the Russian Revolution, the Chinese Revolution- those are the biggies with umpteen African and Asian juniors- all liquidated (often terminally) the financial class- as well as anyone deemed rightist.
The result was that things got VERY much worse.
Today China and Russia still lack what we take for granted in day to day bank services.
The Chinese ‘shadow banks’ may be as bad as Italy’s but are even more shadowy.
Trivia: some time ago the US introduced a new $100 bill.
This produced a near panic in Moscow and a few other places until they were assured that this was not a People’s Republic currency theft- the old notes were still good.
FYI The currency exchange offices do not accept old $100 in Moscow. They also charge you 2% fee on top of exchange fee for the bills with pencil/pen marks and any sign of wear and tear. Though the ATM’s accept this “damaged” bills