Banks Win, Again (BAC, C)

The banks win again, as yesterday’s Fed vote on interchange rules gave the banks more than expected. If you don’t know, interchange fees are also called "swipe" fees. It’s the money retailers pay when consumers swipe their bank cards.

The Rate had been $0.44, which is the highest in the world. The Fed had threatened to drop the rate to $0.12, but yesterday compromised on a $0.21 interchange fee.

We could have seen this coming. The Fed, the Obama administration, the Bush administration before, the Basel bankers — every regulatory body on the planet seems to talk tough and then cave when it comes to the treatment of corporate America (in general) and the banks (specifically).

On the one hand, it makes sense. Corporate America drives the economy, and also contributes to political campaigns.

But on the other hand, it’s definitely, disconcerting to see continued favorable treatment, especially of the banks. Both the Bush and Obama administrations opted for status quo during the financial crisis. They propped up the banks instead of dissolving them.

I argued at the time, and still do, that Bank of America (NYSE:BAC) and Citigroup (NYSE:C) should have been broken up. (Of course, the pieces would have been picked up by other banks, making them bigger and more powerful, but sometimes you have to start somewhere.)

The Bush administration was taking its cues from former Goldman CEO Hank Paulson. And the Obama administration followed former Fed guy Tim Geithner. So it’s no surprise that they sided with the banks and the opportunity for real reform is lost.

Don’t be surprised to see other financial regulation initiatives watered down or abandoned altogether.

Of course, this raises the question: if banks will inevitably receive favorable treatment, shouldn’t they be considered good investments?

I have very mixed feelings about this. If the equation were that simple, I’d say yes. But the fact is, the big banks aren’t the picture of health (they’re more like the picture of Dorian Gray).

The perpetually weak U.S. economy makes the big banks risky, and I sure wouldn’t want to own them if growth flatlines. (For the record, I’ve recommended stable regional banks paying healthy dividends in the High Yield Wealth advisory service.)

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