Archive for the 'Business' Category

06
Mar

Sub-Prime Made Easy

By Cynapse 0 Comments
Categories: Business

The collapse of the sub prime mortgage market has been at the top of the news lately. The massive defaults on American subprime home equity loans have had negative repercussions for financial markets:

  • U.S. Mortgage foreclosures are at a record high. The Mortgage Brokers Association of America estimates that 1 million borrowers, or 2% of all U.S. loans, are in foreclosure. Another 3 million homeowners were behind on their payments during the fourth quarter of 2007. These figures are expected to rise by the end of 2008.
  • Larger financial institutions are curtailing subprime lending and disengaging related lending units. Merrill-Lynch, who just wrote down $11.5 billion for the 4th quarter of 2007, recently ceased funding loans for it First Franklin home lending unit. Losses incurred from the 2006 purchase of the California subprime lender led to the ouster of M-L chief executive Stanley O’Neal.
  • Canadian banks have not been spared by the subprime collapse. CIBC recently posted a $1.46 billion (Canadian dollars) quarterly loss resulting from $3.4 billion in write-downs. The Bank of Montreal’s shares plunged nearly 7% today on fears about the risk related to its American structured investment vehicles.

But what exactly is a subprime mortgage? What caused the subprime meltdown? Who is to blame?

Having read a few books and watched a few movies on the topic … I like this PowerPoint presentation best.

Subprime Made Easy

I have no idea who created this presentation but it is hilarious and informative at the same time. Most financial types I’ve shown it to said the descriptions were spot-on, but the lay person will enjoy it just as much … and marvel at the lack of common sense these market geniuses possess in their chase for short-term profits.

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29
Jan

Should the Government Control Bank ATM Fees? No!

By Witchdoctor 2 Comments
Categories: Business

Federal Government Finance Minister Jim Flaherty was quoted recently as saying that the government would be investigating why Canadian banks charge fees to users of their automated teller machine devices (ATMs). While I applaud this move, there’s more to the story than meets the eye. Yes, Canada’s big banks are making record profits but are they making profits from ATM fees? I don’t think so.

There are about 20,000 ATMs in Canada of which less than half are owned by Canadian banks. A bank will charge you ATM fees only if you are a cardholder of another bank. Let’s estimate the revenue and cost profile of a typical Canadian bank with 1,000 ATMs which generate ATM fee revenues on 5 million transactions a year.

Annual Statement of Income and Expenses
Revenue:
Interac Fees at $1.50 per transaction $7,500,000.00
Surcharges at $2.00 per transaction 10000000
Total Revenue $17,500,000.00


Expenses:
Fees paid to Interac – estimated at $0.30 per transaction $1,500,000.00
Suppose the average bank machine costs $ 20,000. Let’s say we write off 20% for depreciation & interest on the purchase 4000000
The ATM must be loaded with as much as $120,000 in cash (which must be financed by deposits). This cash could have been used for lending purposes. Cost of cash (5% x 1,000 ATMs x $20,000 average float) 1000000
The ATM owner must pay for servicing the machine – cleaning the area; maintaining the device; and periodically changing the empty cash cassettes with full ones. Let’s say each machine is visited 200 times a year and it costs the ATM owner $40 per visit 8000000
The ATM must be connected via a data network to a host server system which performs transaction routing and processing with the cardholder’s bank deposit systems. The ATM owner must pay for these software services and for the costs of the network. Let’s assume this costs $150 per device per annum. 1800000
The ATM must be monitored on a 7 x 24 basis to ensure that it is fully functional and able to service cardholders. Let’s estimate this cost at $200 per device per annum. 200000
There would be other costs. For instance: the ATM owner may be required to pay rent for the space occupied by the ATM. Let’s estimate this at $1000 per device per annum. 1000000
Total Expenses $17,500,000.00


Net Income / Loss $ Nil

This case study does not take into consideration the costs of deposit envelopes or the payroll costs associated with opening these envelopes, or clearing and processing the deposited cash and cheques. Banks do not charge their customers for making ATM deposits.

The Canadian public receives fairly reliable service from the highly competitive ATM industry. Instead of imposing price controls on an industry that provides quality service and convenience for millions of Canadian consumers, the government should direct its attention to non-bank owners of ATMs. Do these companies ensure that the cash in their ATM’s is not counterfeit? Does the government confirm that ATMs of non-bank organizations are not stocked with illegal (laundered) money? I don’t think so.

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