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The Masterful Long Con?

I'm not reporting on the portfolio today, I'll update the value soon. Today some disturbing legislation popped up amidst the busy news that made me wonder...WTF. It takes years to get a bill before congress, so I dug a little they say, Follow The Money.

Please read this short civics lesson before reading the story:

The Board of Governors of the United States Postal Service is an eleven-seat board comparable to a board of directors of a private corporation, except in service of the American postal system. Nine members are appointed by the President of the United States, subject to confirmation by the Senate (and usually first deliberated in the Senate's Committee on Homeland Security and Governmental Affairs). The nine presidentially appointed Governors choose the Postmaster General, who also serves as a member of the Board. These ten then choose a Deputy Postmaster General, who becomes the 11th member of the Board. The Postmaster General and Deputy Postmaster General serve at the pleasure of the Governors.

Until 2007 each Governor was appointed to a nine-year term or to the remainder of the unexpired term of a vacant seat. Terms of the ten Governors are staggered to expire each year on December 8. A Governor whose term has expired may continue to sit on the Board for up to one year until a successor has been appointed. No more than five of the nine Governors may be of the same political party. On December 20, 2006, President George W. Bush signed the Postal Accountability and Enhancement Act, P.L. 109-435, which changed the terms of subsequently appointed Governors from nine to seven years.

The Board directs the exercise of the powers of the Postal Service, directs and controls its expenditures, reviews its practices, conducts long-range planning and sets policies on all postal matters. The Board takes up matters such as service standards, capital investments and facilities projects exceeding $25 million. It also approves officer compensation.[2] The Board generally meets once a month. Each January, the Governors elect a Chairman and a Vice-Chairman. Each Governor receives $300 per day for not more than 42 days of meetings each year and travel expenses, in addition to an annual salary of $30,000. The Governors employ a full-time Corporate Secretary who serves as the primary staff assistant to the Board.

The Board has not been fully staffed since 2010. By 2017 there were just two remaining members and nine vacancies.

  • Megan J. Brennan, Postmaster General and CEO

  • Ronald A. Stroman, Deputy Postmaster General

In October 2017 President Donald Trump nominated three individuals to the Board, the first such nominations since 2010; none have been approved as they are awaiting democrat approvals.

Now on with the story-

Roughly 8% of America’s 115 million households are frozen financially in the past, relying on cash instead of a bank account. For the other 92% of us banking is as common as cable or a cell phone contract. While many of us are depositing checks via PayPal or with the camera on our phone, 9.2 million households stash cash wherever they can. Some estimates place the number of people at up to 17 million individuals are un-banked.

Try to imagine a day, a week a month, a whole year, using nothing but cash. You can’t rent a car, reserve a hotel room, pay a bill online, or have an online account. Renting an apartment can be difficult at best or impossible without a bank account.

The un-banked in America are mainly poor, earning less than $15,000 per year. Some are homeless, some are undocumented workers who avoid institutions for fear of deportation. But according to the FDIC the majority are people who held a bank account in the past and choose to be un-banked. Surveys of un-banked individuals concluded that many of these people simply couldn’t make sense of paying a bank in order to have an account. High fees for overdrafts were another common complaint. As an investor I see this as a highly rational decision. The un-banked see the bank lending their money and making a profit while at the same time charging high fees for their deposits and charging even higher fees for credit (overdraft fees) than would be charged on a credit card. However, if they open another account, for a fee, you can have over-draft protection. At many banks you can only open an account with a minimum deposit made by direct deposit. Most banks use systems like ChexSystems to rate creditworthiness further limiting who can open an account.

For an un-banked person who dutifully pays and files taxes every year, getting that refund check is a problem, because the only way to cash it is at a convenience store or pay-day-loan center. Convenience stores charge on average $7 to cash a tax refund check. A working un-banked individual has further challenges getting cash for their payroll as most businesses can’t pay employees with cash. Wal-Mart pays their un-banked employees with pre-paid debt cards. Digging further into this story I found articles by other researchers who went to work for check cashing businesses in order to learn more about them. A common theme was that their customers made a conscience choice to be un-banked and to use the more personalized services of a check cashing institution. Often a customer of a check cashing firm with a late charge can spread that fee out over time while still being able to get cash for current transactions. Instead of being turned away as a credit risk, these customers are welcomed and provided services that quickly and efficiently meet their needs.

However, that scenario of banks only lending out what depositors store in their vaults is a fairy tale told to economics student’s with disturbing regularity. We have what is known as a Fractional Reserve Banking system. In this system a bank can loan multiples of what it holds in reserve cash. If the bank has a reserve requirement of 10%, it can lend 10 times more than their reserves. Banks don’t need your cash to make loans, but it’s a hell of a lot cheaper to take your deposit at current interest rates then it is to borrow from another bank.

In 2014 a report from the Office of the Inspector General proposed the idea of offering small dollar loans through postal offices and estimated that The Postal Service would see almost $9 billion in new revenues by receiving 10% of the interest and fees charged for non-banking transactions.

In 2015, Presidential candidate Bernie Sander’s offered up the idea that the U.S Postal Service could be used to help the un-banked poor. That’s right, take a failing institution, and give it additional responsibilities in a business it doesn’t understand, to provide a service to a fractional minority of the population.

“If you are a low income person, it is, depending on where you live,

very difficult to find normal banking. Banks don’t want you.

And what people are forced to do is go to payday lenders

who charge outrageously high interest rates.

You go to check-cashing places, which rip you off.

And yes, I think that the postal service, in fact, can play an important role

in providing modest types of banking services to folks who need it.”

Well we can be glad that idea is dead…or is it?

In 2016, Sen. Mark Warner (D-Va.) was on the same tack from a different angle when he told a group at The Brookings Institution that Wall Street and the old banking system wasn’t keeping pace with American’s. He said that changes in demographics and the American work force created an era of “unprecedented income volatility” and “an opportunity to bridge part of that new social contract”. Warner talked to this influential group from the prestigious think tank about “a much more aggressive way to upscale people through an enormous number of intersection points, including your relationship with that FinTech provider.” In July 2016 Warner introduced the “Protecting Consumers’ Access to Credit Act of 2017”. The short form of the bill is that it would allow payday lenders to skirt the state interest rate caps (usury laws) on consumer loans; all they had to do was partner with a national bank in order to get certified. While the bill has support from Rep. Patrick McHenry (R-N.C.) and Reps. Greg Meeks (D-N.Y.) and Gwen Moore (D-Wis.), and tea party Sen. Pat Toomey (R-Pa.) and Sen. Gary Peters (D-Mich.); the bill faces opposition from Americans for Financial Reform, the Center for Responsible Lending and the Consumer Federation of America, even the NAACP and the Southern Poverty Law Center.

Today Sen. Kirsten Gillibrand (D-NY) proposed legislation that would essentially turn the U.S Postal service into a pay-day-lender. Called the Postal Banking Act, this bill would empower the postal service to provide banking services at all U.S Postal Service locations.

Consider a new bank opening with 30,000 branches nationwide, overnight. The primary function of these postal banks, providing small dollar loans at lower fees, making the U.S Postal Service a direct competitor to the pay-day-loan industry.

Last October the CFPB authorized banks and credit unions to offer small dollar loans, a program authorized by the US Treasury as a way to get more people connected with traditional banking services; but the regulations imposed on these institutions require that they get approval from their respective regulators; which include the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corporation and the National Credit Union Administration, making the transactions costly and time consuming to the pint of impossible. This program was dead on arrival.

David O'Connell, senior analyst at independent research and advisory firm Aite Group said,

“If the postal bank offers lower rates on payday loans,

chances are they will have to be subsidized to account for the risk.

That could fall on non-payday loan borrowing taxpayers.

The government would also have to assume the responsibility

of collecting on any defaulted loans made to cash-strapped individuals, he said.”

So here we are at the culmination of what can best be called ‘A Masterful Long Con’.

  1. Banks are put in a position by Congress to not take small dollar deposits.

  2. Due to reserve requirements, banks charge fees for the privilege of borrowing from you.

  3. People unable to get services they need from banks go un-banked.

  4. Congress in the name of protecting the un-banked propose to open a bank in the post office.

  5. U.S Postal Service requires a Board of Governors to vote on operational decisions.

  6. Congress has failed to provide a Board of Governors since 2010 but has been hamstringing the USPS for over two decades. Congress requires USPS to pre-fund 75 years of pension needs.

  7. Amazon contract with USPS ends in 2018, Trumps wants to renegotiate deal. President Trump attacks for abusing the postal service by shipping so many packages so cheaply.

  8. Congress sees the financial opportunity, restricts big bank competition through regulations, attacks pay-day competition as predatory and proposes bill to open a competing institution to provide the same services through The U.S Postal Service.

  9. Tax payers will foot the bill for losses, adding to the roughly $18 billion in subsidies the USPS already receives.

Congress can just as easily pass legislation that requires banks and credit unions to provide accounts for low income individuals and restrict the fees they can charge. Instead they choose to enter a business they know nothing about with every expectation that it will cost the rest of us more in taxes to subsidize the losses that are inevitable.

Stay Invested,

Clay Baker

Disclosure: I am personally invested long in some or all of these funds that appear in the Mother's Little Helper portfolio or manage these investments for my Mother's portfolio and may purchase or sell shares within the next 72 hours. I am also invested in other stocks and funds that do not appear in the MLH portfolio but may be mentioned or related to this article. It is not my intention to advise or encourage the purchase or sale of any security. Since I may on occasion discuss Bitcoin and other cryto currencies I disclose here that I personally own investments in the cryto-currencies listed here: DBC, VTI, VWO, VEA, VIG, XLE, MUB, TBT, GLD, Bitcoin, LiteCoin

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. This article is not intended to offer investing advice, guarantee 100% accurate predictions, or to be interpreted as providing a personal recommendation.

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