Tuesday, October 15, 2013

Given the systemic financial fraud, how do you choose a bank?

Choosing a new bank
My fiance and I decided it was time to leave Bank of America behind. We talked a lot about systemic financial fraud which Bill Black, Yves Smith, Matt Taibbi, and others describe so well, and we asked ourselves a few questions:
  1. Diversifying: How do you diversify your savings? Should you keep some money in a Too-big-to-fail bank, even if it's known to be fraudulent and is at high risk of collapse? Should we diversify geographically, by bank size, or something else?
  2. How do you know if executives are honest? How do we know executives aren't engaging in control fraud? What research could we do, what questions could we ask either online or of the bank employees themselves?
  3. Should we even keep our money in banks? Is it better in physical cash? Credit unions? US Treasuries? Gold? Other currencies? Skills? A mix?
Point (3) I'll leave for another post. This story is about finding a non-fraudulent bank.

The risk of financial loss due to bank failure
Although the FDIC insures accounts, we learned in 2012 that even this insurance may fail (discussed here) during the next financial crisis.  And when a financial crisis comes, it can hit the victims instantly with little or no warning. Since the financial fraud that lead to the 2008 collapse was never rectified - too few fraudulent companies went bankrupt, no executive perpetrators were thrown in jail, etc - I expect another crash at least as bad as 2008 to come, and we don't want to be in a bank which will go belly-up when that happens.

We ended up deciding to go with smaller, local banks with the exception of USAA (discussed below). We made up barely plausible scenarios where it would be better to be in a TBTF (Too Big To Fail) bank, but in the end, we decided it's foolish to give your money to known frauds. We also don't want to contribute to such institutions.

So what questions do you ask?
My fiance and I kept trying to think of how to discover whether executives of a given bank were involved in control fraud or not. 

First we had a little fun. Our initial set of questions for each bank looked like this:
  • Are you Bank of America?
  • Are you LIKE Bank of America?
  • Is your bank name or acronym SNAKE related?
    • for example, Bank of America = BoA = BOA(constrictor)
    • We don't want any SNAKE banks (SNAKEs are Slimy Noxious Ass-wipey Kleptomaniacal Enterprises)
    • And any COBRA bank would be crossed off our list! (COBRA = Catastrophically Obese Bank of Rocky Assets)
After drawing up a list of banks to investigate, we cross-checked our list with Wikipedia’s list of snake breeds. There were no problems that we could tell (whew!).

We then proceeded to come up with more questions:
  • Are you like BoA?
  • how big are you?
    • number of assets you manage
  • regional? national? local?
    • this info is on the banks’ websites
  • how nice is your online banking and other customer service?
    • hard to find out until we sign up…
  • Is your website secure?
  • Do you have a branch in Arlington?
  • Have any executives been implicated in past criminal behavior?
  • Does the bank engage in any behavior very similar to what fraudulent banks did, such as giving out NINJA loans or selling off mortgages to other institutions as soon as they were created?
Answering questions, phase 1: Online research
This was super interesting: obviously, no bank will say "Yes, our executives are looting this institution, and you're likely to be victimized very traumatically over the next 5-10 years". So we had to do our own research and come to our own conclusions.

Bank comparison websites
Katie found some websites which claim to compare banks to make choosing one easier. The one that looked most promising was Deposit Accounts

It combines a lot of different data, including savings account rates, reviews, and a grade on institutional health. So far so good! 

But things started to look sketchy quickly. "Institutional Health" is a score based on 4 sub-scores: Texas Ratio, Texas Ratio Trend, Deposit Growth, and Capitalization. Strike 1: this doesn't seem like a very complete set of standards for judging a bank.

Katie noticed that USAA's sub-score grades were A+, C+, A+, C+ - and yet its overall health was an A+! So clearly something was screwy. Strike 2: their grading system fails at basic math.

We tried to think of a way to gauge how good the site is at scoring banks: how accurate are the grades? We went over to Bank of America's page and discovered their overall "Institutional Health" score to be.... A+! Clearly this site totally fails. Strike 3: The site fails to account for known control fraud problems which are by definition institutional in scale.

Lastly, I always ask "how biased are these sites"? While Bank Deposits claims, "advertising relationships never affect which rates we include in our tables or the order in which we show them", we did notice this line in its about page: "We receive no compensation for over 99% of the banks and credit unions we list". Advertising relationships may not affect those particular items, but there are many ways for a bank comparison site to favor advertised banks, including omission of fraud or other problems in their rankings. Also, they claim to receive compensation from some of the institutions they list, so that mode of influence always lurks. Strike 4: The site isn't financially independent from institutions it judges, and so can't be considered unbiased.

All in all, we didn't learn anything about banks, but it was a good lesson in how hard it can be to research things online.

Other online research
This too was difficult. Searching for criminal or suspicious behavior for the executives of our banks turned up nothing. Only one bank turned up articles or forum discussions of fraudulent behavior committed by the bank; other reviews were mostly about customer service. 

One question I had is "Does your bank package and sell off mortgages and other loans as they're made, or do you keep them?" If the bank sells the loans, we can't know if it's fraudulent or not. However, if it keeps the loans, especially 15-30 year loans, that indicates that the bank takes its loan underwriting super seriously: if it gives out crappy loans to just anybody, it will fail quickly.

However, I couldn't figure out how to learn this online. Determined to have some more fun, we decided to walk into banks and ask the managers some of our questions point-blank.

That lead to...

Answering questions, phase 2: In-bank research
I like asking uncomfortable questions. To keep things simple, we decided to stick to fraud-related questions, and came up with these to ask each bank we visited:
  1. Please show us your fee schedule and explain how it works.
  2. Does your bank package up home loans and sell them off, or does it keep them on its books?
  3. What protections does your bank have against fraud committed by its executives, such as control fraud? 
    1. Alternatively, how can you demonstrate to me that this bank is safer from control fraud than other banks?
About these questions:
  1. Many banks like Bank of America are known for having very abusive fee extraction tricks.
  2. No banks seem to be doing NINJA or other similar loans, so I settled on this as a good proxy for whether the bank takes underwriting seriously. Selling off loans doesn't necessarily mean they're fraudulent, but keeping their loans is a good sign they're a careful bank.
  3. This was the most fun. The alternative version is important: I don't know what protections a bank can even have from a bad CEO and CFO. Essentially, I'm inviting the manager of the branch to show me ways a bank can prevent bad behavior by executives based on his/her own bank's situation! I liked this approach. A narrow-minded manager wouldn't even be able to understand the question, while a thoughtful, aware one would jump all over it.

I wish in retrospect I'd asked about website security too, but these questions lead to enough awkward conversations that it may be just as well that I didn't. My bad experiences with bank website security will make for a good post sometime.

Anyway, with these questions in hand, it was time to approach actual bank managers! We narrowed our list of banks to 4, 3 of which had local branches and 1 (USAA) we ended up calling on the phone.

Katie and I did each of these together. I generally took the lead in starting conversations, but when Katie saw the opportunity to ask even tougher questions than I, she jumped right in. It was fun and educational!

First stop: First Virginia Community Bank
FVCB was recommended to me by my parents several years ago and I already have an account there. I decided to pretend I didn't have an account just by not bringing it up in conversation. After entering, we were talking to the branch manager within 15 seconds. First two questions were no problem:
  1. They have 'standard fees' only and directed us to the website for the schedule.
  2. They don't issue mortgages anymore.
Then it got interesting with question 3. The manager kept thinking we were asking about protections against credit card fraud! "No," I said, "I mean, are there protections against fraud committed by bank executives themselves?" After asking 3-4 different ways, the best I could get was that FVCB was a conservative, small bank with FDIC insurance. It is fee-friendly. Also, he offered to send us the bank's balance sheet so we could review it ourselves.

It was disappointing that the manager basically didn't understand the threat we were trying to understand until we explained it several times. It was even more disappointing that, 3 weeks after visiting, he still hasn't emailed us the balance sheet. All in all, a poor showing for FVCB on this question! It doesn't mean they're fraudulent, just that their manager didn't inspire us that they're any better than any other bank. And he failed to follow through on the only substantive response he gave - to send us a copy of their balance sheet.

Next up: Cardinal Bank
Cardinal is tied for closest to our apartment. It may be the ugliest bank location in Arlington, but we didn't let that scare us away. I'll try to get a picture to add to this post.

We walked in and started talking to a dude who ended up being their assistant manager. He was nice, but seemed new and didn't understand the mortgage and fraud questions. The manager overheard us though and barged in. Lucky thing he did...

Answers to our questions:

1) Fees: Nothing remarkable here. 

2) Mortgages: They both sell and keep loans.  I couldn't figure out the criteria for keeping them. This still seemed like a good sign though. 

3) Executive fraud risk: This was interesting. It turns out the branch manager, Robert, had worked at Wachovia before it was acquired by Wells Fargo in 2008. We had a very engaging conversation which hit a lot of good points:
  • Compare with Wachovia: Robert talked about being a manager at Wachovia and being forced to mislead/lie to customers about the status of the bank during the chaos of 2008. He described not having any insight besides what his boss the regional manager gave him to pass on to customers, and this oftentimes proved to be deliberately misleading. He said Cardinal bank does not behave like this; their culture seems much more honestly pro-customer than Wachovia's did.
  • All about relationships: Rob talked about how importantly they take relationships at the bank, including being on a first-name basis with customers. He compared their focus on relationships with other banks' focus on 'widgets' like free checking or particular website features or fees (Note: Cardinal does offer a free checking option)
  • No TARP money: Cardinal received no gov't bailout funds
  • Strong Bauer rating: I didn't know what Bauer was, but apparently they give Cardinal the highest 5 star rating.
Super interesting, especially hearing about Wachovia. I didn't learn anything about specific institutional safeguards, but it was enough for me to hear from a manager who was aware of the risks that this culture and specific group of leaders made it a good bank.

Third: Main St. Bank
Main St... was lame. We ended up talking to a very soft-spoken, button-downed assistant branch manager lady who was somewhat new.

1) Fees: Nothing interesting here

2) Mortgages: All mortgages are sold off,  though it was unclear if some types of commercial loans were kept at the bank.

3) Executive fraud risk: The assistant branch manager seemed to have an impenetrable shield of ignorance about this issue. For the 14th time, we're not asking about credit card fraud - we're asking about fraud committed by executives at your bank!

We did learn that they're 10  years old, Virginia only, with low risk-tolerance. They also have a relationship manager. Katie and I discussed later whether it's a good sign or not that they have a relationship manager. Shouldn't that be everyone at the branch? Or the branch manager? I don't know.

After leaving, Katie and I had an interesting discussion: should it be discouraging to us that branch managers/assistant managers have basically no understanding of internal risk controls? I don't really know what it takes to be a branch manager, but they are leaders. I much prefer having local managers that are aware of these issues and can address them. Otherwise it'd be like having an nurse with no knowledge of medicine, only the ability to mindlessly carry out doctor's orders. It's good to have people ostensibly 'lower ranked' who are thoughtful enough to make sure all's well.

Last: USAA
I already have an account with USAA. Since they have no branch offices, we had to call. This was hard - we wanted to ask for a manager, but of course we couldn't get directly routed to one. 

We ended up calling and going down the bank services telephone tree branch. The guy was all ready to open an account for us. "Hold on, we have some questions!" I said. 

1) Fees: again, nothing interesting.

2) Mortgages: do you want a mortgage? I can only help with savings and checking accounts. "No," I responded, "I don't want a mortgage. I want to know what USAA does with mortgages." ... he couldn't help on this one, but he was very confused that after bringing this up, I didn't want to be referred over to a mortgage specialist.

3) Executive fraud risk: Wow this guy sucked. Like the others, he assumed we meant credit card risk despite repeated questioning. I asked to talk to his manager, but he said he couldn't put the manager on the line without a specific question. "Fine," I said. "What internal mechanisms does USAA have to ensure executives don't commit control fraud. How can you prove to me that this risk is minimized?"

He replied, "Uhhh... what?" After repeated questioning, he never did understand the question. He offered to shift our call to the credit fraud department and promised the wait would be less than 1 minute. We debated whether to wait at all, but after waiting for 2 minutes we just hung up.

For now, I'm keeping my USAA account. However, this was a really good example of the downsides to online-only banking. The quality of the conversation was poor, and the ability to get to someone who could answer subtle or unusual questions was lacking.

Final decision
In the end we set up an account with Cardinal. I'm happy about this, but of course it leaves us dependent on a systemically fraudulent and highly fragile financial system. I hope to find a better long-term solution.