Banking discussion with Metaliturtle

[Metaliturtle]

Obligatory shout-out to Elok for the idea

Hi, I'm Metaliturtle, you may remember me from such places as Polycon '06, or as a moderator at the now-defunct WePlayCiv (or weepy C).

Anyways, I saw Elok's post about what he does at work and thought I'd point out some stupid banking things that Hollywood, and/or the public gets wrong that kinda rub me the wrong way.

In 2001 for a summer, I worked as an assistant to a financial planner, mostly making cold calls off referral cards, I got paid $7 per sit-down scheduled on the calendar, and $3 for every new lead I could generate while on the phone with one of the referral card people.  I also would sub in at the front desk where I'd make minimum wage which was like $5/hr.  Talking with the financial advisors between client meetings and reading investment prospectus documents, gave me a love for stocks, and the eat-what-I-kill pay scheme usually had me taking home $140-$200 per day.  Since I was still in high school, they paid me in cash instead of putting me as a W-2 employee.  My exposure to the pre-9/11 financial world gives me a longer-term perspective than most folks who work in this industry now.  Stock trading was never like the movies, very mundane phone calls and repeating numbers to people on the other end of the line, most business was done by telephone and fax.

In 2006 my career in retail banking started in earnest, I got hired as a part-time teller and learned the ins and outs of the cash management and customer facing side of banking, eventually moving into a full time role. 

Some of my big pet-peeves comes from my work with cash:
 
Movies tend to show bank robberies filling up large canvas bags with cash, and they get away with millions of dollars. 

Issue 1: in my career, only once have I seen $1 Million in cash inside the bank, it was after my town had a large event which led into a holiday weekend where the bank was closed, we had a local gas station chain as a customer, and every day, each location's manager would prepare a night-deposit bag with the cash and any checks they received... well that Tuesday morning saw 5 days worth of above average deposits for 7 locations in the night drop.  When I finished counting all of it, twice, I was turning in a vault slip for just over $1 Million.  After banding and stamping the cash, I had quite a few 'bricks' (10 straps of 100 bills each rubber-banded together) and I was able to carry it all on a cash tray in one trip, with the small bills, I probably could have filled a briefcase, but 4 canvas bags like the movies usually show would've been overkill.

Issue 2: Believe it or not, most places don't keep that much cash on hand, they have insurance up to a certain dollar amount, so if the bank location exceeds that, it triggers a special trip for the armored car.  From the time I made that deposit and sold it to the vault to the time the armored car was there to pick it up was maybe 4 hours.  Typically the total cash in the building including all the small bills would be enough to fill a family-size cooler, with most vault space being devoted to rolled coin and/or loose coins if the location had a coin counter.

Movies like to show high-stakes building-takeover robberies.

Although these are exciting scenes, when a bank is actually robbed it usually looks like a person handing a note to the teller, the teller calmly gives them what the note requests, the robber leaves, and the building get's locked down with the staff following a robbery response procedure that gets independent witness statements, descriptions from each person of what they thought the robber looked like, and everyone is isolated from each other until the police arrive to question witnesses.  The average 'take' in a bank robbery where I worked was about $6000.  Staff are trained to notice unusual identifying features, and good managers will quiz tellers to describe the last person they saw on a slow day to help build the habit.

Things people say that show us they don't know what they're talking about.

As customer service professionals, what I'm about to share would never be bluntly relayed to a customer, but it really grinds the gears of people working the day to day when this stuff is said to staff and the person saying it is so confident that they know more than you to the point where you as the service person can't gently correct their understanding.

Using abbreviations combined with a word that's in the abbreviation, or just saying the wrong thing. 
The most common culprit being ATM Machine, this one usually gets a chuckle when it's pointed out, nobody really cares beyond that. 
"IRA Account", extra shame points if they say IRA like the name Ira.  If you have an IRA set up with the bank, the correct way to say this is "I would like to deposit into my I-R-A today."  If you want to open a new account, you need to use the words "Traditional IRA" or "Roth IRA".  Traditional IRA contributions are for reducing taxable income this year, and the government can tax the withdrawals later. Roth IRA contributions signify you were already taxed this year, so won't have to pay taxes on the gains when you withdraw funds.

"Notary Republic" I see you trying, you've got a scary looking legal document with words like "subscribed and sworn before me." I'm going to help you and make it easy because I'm a Notary Public, or just a Notary.  This means that my name is public record as somebody who's been trained to identify and witness signatures, and I know lots of rules that I have to follow, you can expect me to ask for your ID, scan your document, and document identifying information that I reviewed.

"Checkings" account... It's Checking... no s.  Some people say this so fast it sounds like "Chickens Account." We know what you mean, and we'll help you professionally, but if the building is empty when you leave, we're gonna laugh about chickens.

If the customer comes in looking for help with all the previously mentioned things, we love helping them learn, if they are acting like a butthole and being confrontational, or complaining about the wait, the chance of error on their account goes up significantly.

There is no one-size fits all solution.

Loans, Lending and Debt

This is how I make most of my money, by lending the bank's money, and I love writing loans because it helps people leverage their future earnings for instant benefit.  Since I'm a banker I'll start with how I get paid, then move into some common lending advice and my opinions on it.

The bank gets paid with interest, but the actual earnings come from something called a 'spread,' and bankers communicate spread in terms of basis points, or hundredths of a percent.  When my boss asks me how much a loan is paying he wants to know the spread, the answer will sound something like "208 bips" or in an email "208BPS."  If the interest rate on the loan is 7.08% this tells my boss that our cost of funds from the fed (the rate we borrow at) was 5% the day I wrote the loan. 

When I was lending mostly to individuals, I had no control over the spread, it got set every day and was take-it-or-leave it, that's because loans to individuals tend to be small (meaning less than $100,000) and negotiating rates usually costs more money in employee time than the reduced business would be worth.

In the commercial and ag world, where I lend now, it's different because the loans are larger, I have some latitude to go down as much as 50bps if it means I'm bringing in a $4 Million deal by virtue of size. 

When evaluating a loan, I'm really concerned about 3 things: Character (how likely you are to try to pay us back, usually determined by credit score or length of relationship with the bank) Collateral (if you can't pay us back, what can I take to recoup my money) and Capacity (your ability to pay determined by Gross income).  Lenders also will look at your capital reserves (cash on hand or in bank accounts) and we'll also look favorably on borrowers who are putting cash down on a deal or trading in something to get purchase price below the value of the item.  If you come prepared with this information for me, I'm going to fight harder on deals that walk the edge of my lending guidelines, if I have to pull information from you, or learn you gave me bad information, I'm not going to put in too much extra effort unless I've got nothing else to work on.

As a rule I tend to be my borrower's biggest cheerleader when it comes to paying off debts and will help them make a workable plan to get out of debts like credit cards, car loans, and other consumer-type loans like boats, atvs, furniture etc.

If you're drowning in debt, I tend to side with Dave Ramsay's debt snowball which is 1. Stop borrowing. 2. build a $1000 emergency savings fund. 3. put every extra penny towards the smallest debt while making minimum payments on the rest, when that debt is paid off, take all that you were paying and add it to the minimum payment of the next smallest debt.  4. Repeat until all the debt is paid off.  Mathematically, you'll pay less interest if you go highest to lowest interest rate, but in my experience, the people who are drowning in debt need the small wins to keep motivation.

If you always pay your credit cards in full, I will encourage you to find a credit card that offers the best rewards, I tend to prefer cash-back over points cards, but point cards are better if you like to travel.  If you're in this camp I'll recommend a main card and a backup card, and I'll also recommend a credit limit of at least 3x what you spend in a month to keep your credit utilization percentage as low as possible.

If you're borrowing for a business, I will want to see that the business is established and I'll evaluate how the loan will give you the means to generate income.  Startups will have more restrictive lending rules than established businesses, and unknown industries will have more restrictions than established industries like investment real estate.  Everything being equal, my favorite place to be is at a 50/50 with my borrower, so on a $100,000 building, you put down $50,000 and I lend $50,000. 

I want to be rich/have passive income/don't want to be broke anymore/don't want to work for a boss 9-5

The strategy is basically the same for all these people depending on how much effort they want to put in.

Minimal effort strategy: Reduce as much unnecessary spending as you can, stick the excess into a savings account until you've saved 6 months' expenses, then open a brokerage account, and put the excess into a total stock market fund like VTSAX, set dividends to reinvest, check it once per year, keep doing this until you have 25 times your monthly expenses, you should be able to safely withdraw 4% annually in perpetuity as passive income.  Read The Simple Path to Wealth by JL Collins for details.

Medium effort strategy:  Same as above, but borrow money to purchase assets that pay you money. Read Rich Dad, Poor Dad for inspiration but make your own plan.

High effort strategy: Same as the minimal effort strategy except I will tell you to save 3 years' expenses, and use 1 year's expenses to start a business that you will work in and grow.  Your first hire should be a good accountant to help you structure the business for maximum tax advantage, and you should pay yourself a set percentage of your profit to incentivize growing the business.  Read The E-Myth for an understanding of how to grow and build a systematized business that can one-day run itself.

Feel free to pick my brain on banking questions, as I've been typing this I realize I'm only scratching the surface.

[Buster's Uncle]

This is one of the loveliest things I have ever woken up to.

[Geo]

If the lender owes Meta a million $, that's his problem... 

Over 20 years ago, I worked as a security guard, mobile patrol. I was once called up to check out an alarm in a bank, and while doing so noticed a bag full of coins rising up to my knees under one of the counters.

[Buster's Uncle]

I imagine having that beard on your porch to collect is no fun.

[Metaliturtle]

This is one of the loveliest things I have ever woken up to.

Thanks!

If the lender owes Meta a million $, that's his problem... 

Over 20 years ago, I worked as a security guard, mobile patrol. I was once called up to check out an alarm in a bank, and while doing so noticed a bag full of coins rising up to my knees under one of the counters.

I currently manage a portfolio of around $60 Million in loans, probably $140 Million backs it as collateral though.

Coin bags are very heavy, and take up the most space in large vaults, during Covid I would pass the time with a coin guide sorting through the bags for rare/unusual/silver coins.

I imagine having that beard on your porch to collect is no fun.

It's a bad day for everyone if the lender is collecting.  My worst collection was a home repossession that my boss wanted me to clean and list without a realtor.  Place was trashed, there was a dead cat and fleas infested the property.  It took me a week to empty the house of garbage and get the place clean enough to sell, I bought a full-body plastic suit that first day, not fun in August with a broken air conditioner.

[Buster's Uncle]

 

[Metaliturtle]

Fancypants banking stuff demystified

This is an intelligent and well-read crowd, that being said, I work in an industry that has more 3-letter abbreviations than a can of alphabet soup.  I'm going to do what I've been doing for years on some commonly-used terms in the industry, and put them into 'normal words' as my customers say.

APR / APY: Annual Percentage Rate / Annual Percentage Yield.  These terms are usually accompanied by a number like 7.23%.  Essentially it's stating how much interest is going to be paid and to whom. 
APR is used for debts, and for a consumer is the cost of borrowing.  % means per hundred, so if you see an APR of 7.23% you know that means you will pay $7.23 for every $100 you borrow assuming you don't make any principal payments all year.  APR will always be higher than APY at the same bank.  The difference between the two is known as the spread, and is effectively the money the bank makes for moving money around.
APY is used for interest on checking accounts, savings, or certificates of deposit (CDs), basically APY is what the bank will pay you for the right to lend out what you've saved.  Usually, interest on Checking accounts is minimal because the bank needs to keep more funds in house to honor checks you write, or when you use your debit card.  Savings accounts usually pay a little better, since people generally can't pull funds from those accounts without a little more effort, the bank is able to lend a greater portion of the funds in Savings accounts.  Certificates of Deposit are contracts you make with the bank that you will not pull out that much money for a set time period, in return the bank pays a higher yield, and can lend out the majority of those funds.  The bank can also charge a penalty for early withdrawal of funds.

Example of how the bank makes money using APR/APY and spread

Buncle comes in to the bank with $1000 and says, "I want to put this money someplace where I can't touch it for a while, I need it for a trip I'm taking at the end of next year."
"No problem" says banker Metaliturtle, "I can put it into a 1-year CD, and we'll pay you 3% APY!"
Buncle leaves with a document outlining when interest will be paid to him and when funds will next be available without a penalty and is happy.  His balance sheet has an asset worth $1000.00.
Metaliturtle has $1000 that's now going to cost him at least $30 if he can't do something with it... his balance sheet has a liability of $1000! Oh no! Fortunately someone has just come into the door.... it's Buster's daddy!
BD says "I need to borrow $1000 to buy supplies for Buster's graduation party, I don't have the cash right now, but I can make small payments for a year."
"No problem" says banker Metaliturtle, I can write a personal loan to you for $1000 at 9% APR, your monthly payment will be roughly $91 for a year."
"wow, that was easy" BD says as Metaliturtle counts out $1000 cash to him.
BD leaves with loan paperwork outlining when payments are due, how much they will be, and what month the loan will be paid off, known as the maturity date.  His balance sheet shows a liability of $1000.
Metaliturtle the banker is happy, because loans to him are assets, so his balance sheet shows an asset of $1000 (the loan at 9%) and a liability of $1000 (the CD at 3%) and bankers have to be in balance at the end of the day to ensure the solvency of the bank.  Metaliturtle also calculates the spread on the day, he knows every month BD will be paying him about $91 . Since he gets to wait a full year before paying Buncle $1030, he will set aside 1/12 of $1030 or $85.84 of the $91 payment for CD maturity, and the difference is Metaliturtle's income, about $5.16 per month or $61.92 per year for that transaction.  He records the spread as 6% in the file, and adds the loan principal to his portfolio (also called his book of business, it's the total of principal owed on the loans he services directly), the 6% spread gets averaged in proportion to the principal amount into the total portfolio spread.

Real world example, my portfolio represents around $60,000,000 in loans at an average spread of 2.89%.  I calculate my portfolio income as $60MM x .0289, or $1,734,000 of revenue before expenses for the bank.  My base pay comes out of this number, and my annual bonus is derived from this number with a multiplier based on new money, referrals to other services we offer, and some discretionary adjustments my manager can make.

It's weird typing this out, I'm usually having a conversation on the lending/deposit side, and portfolio math is all done by the system (though I do double check leading up to bonus and raise time).

[Buster's Uncle]

TL;DR Gamera provides you banking service -and pays you interest- to get your money to make money with lending.  Everybody wins if there's no run on the bank and the borrowers don't mess up.  The FDIC is a wonderful thing within reason.

-Buster's Daddy only takes loans from Bank of Mom -actually gifts, I suspect- and I'm not supposed to know.

[Metaliturtle]

TL;DR Gamera provides you banking service -and pays you interest- to get your money to make money with lending.  Everybody wins if there's no run on the bank and the borrowers don't mess up.  The FDIC is a wonderful thing within reason.

-Buster's Daddy only takes loans from Bank of Mom -actually gifts, I suspect- and I'm not supposed to know.

That was a simplified example, just wait until I bring up fractional reserve lending and outline how much of a ponzi scheme the system actually is.

[Buster's Uncle]

Oh, it's all somewhat a pyramid scheme to begin with, thus I mentioned runs on banks and the FDIC.

[Metaliturtle]

What the hell I'll math it out a little bit.  Fractional reserves mean the bank has to keep a fraction of the total deposit book value at hand as a hedge against a bank run.

Now imagine we're on an island with only one bank.
The people of the island decide they want to have currency, so they give the bank permission to print $1000 to lend out to the people on the island, the bank starts with a $1000 liability on the books and $1000 cash.
Customer 1 comes in to borrow money, he needs to pay Customer 2 for some work.  Bank lends him $900, keeping 10% in cash on hand, now the bank has for assets $100 cash, $900 loans, and still the $1000 liability.
Customer 2 then deposits the $900 since they don't need to buy anything at the moment.  Now the bank has assets of $1000 cash, $900 loans and liability of $1900 total deposits.
Customer 3 borrows $800, because Customer 2 did work for him also, and again customer 2 deposits it into their account. Now the bank has assets of $1000 cash, $1700 loans, and liability of  $2700 total deposits.
Customer 2 now has more money than the island has physical currency, but on paper the bank is doing great, but what if Customer 2 wants to spend that money? Let's say he writes a check for $1500 to customer 4.  Oh no! there's only $1000 cash!  What does the bank do?  They present their balance sheet to the island government and say "we need to increase the supply of physical currency or commerce will stop! We have the assets to support printing more money, but the island's GDP has surpassed the money supply."  The bank is given authority to print more money, and since the island government doesn't want to have this kind of vote again, they add a provision that the bank can always print more money to bring the bank into balance.  So now the bank prints another $1000 in cash.  At the end of all this, the bank now has assets of $500 cash, $1700 in loans, and liability of $2200 total deposits.  Customer 4 is circulating $1500, buying things here and there.  Now it's time to repay the loans with 10% interest...

The island has printed a total of $2000. In circulation there's $1500.  At the bank there's $500 cash, and now the bank needs $170 in cash for interest on the loan payments.  Since the borrowers need to make payments in cash, if they can't get some of the circulation into their hands, they're out of luck and the loans go bad.  Customers 1 and 3 default on their loans and declare bankruptcy to free their liability.  By calling the loans in default, the bank can now lend that money out again... Oh no! another circulation issue! Money printer goes brrrrr again, and now the island dollar is worth 1/3 of it's original value.  Customer 2 gets wind of the decreasing spending power of a dollar and increases pricing accordingly, triggering more loans etc. and the money supply grows, triggering more devaluation of the currency.

[Geo]

-Buster's Daddy only takes loans from Bank of Mom -actually gifts, I suspect- and I'm not supposed to know.

BD's siblings never had to take 'loans'? 

[Buster's Uncle]

College professors make decent money -and she did that for decades- preachers may not, and hermits do not.  I just do w/o money.  They both been given houses; I get this one someday, but for financial/legal reasons I will not actually own it.


Gamera's island sounds like Rome; those guys were sophisticated about lots, but not so much economics.

[Geo]

College professors make decent money -and she did that for decades- preachers may not, and hermits do not.  I just do w/o money.  They both been given houses; I get this one someday, but for financial/legal reasons I will not actually own it.

You'll become the tenant of a Trust property?
I guess even so, some sort of taxes must be paid, even if only for the land on which the house stands.

[Buster's Uncle]

I've said too much already.