Thursday, February 20, 2014

Bank of America: Overdrafts (2001-2011)

Bank of America logo
During the decade between 2001 and 2011, Bank of America abandoned Generally Accepted Accounting Principles by choosing to post transactions by dollar value rather than by chronology.  Accounting is the measure by which a business can determine its financial footing.  “GAAP is exceedingly useful because it attempts to standardize and regulate accounting definitions, assumptions, and methods.”  While there are ten major principles of GAAP, the specific issue in question is Bank of America’s abandonment of the Time Period Assumption, that is, transactions are to be posted as they occur.  By posting by transactions by dollar value rather than chronologically, Bank of America was able to rake in massive amounts of money on overdraft fees from people who, if their Bank of America account is any indication, were already were strapped for cash.  This is would be roughly analogous to a big shot in a Lamborghini pulling up to a red light and asking the beggar for spare change.

The stakeholders in this case are Bank of America’s 13.2 million affected customers, their non-affected customers, potential customers, employees, and management.  In a broader sense, the stakeholders could be said to be every person in the United States.  Those stakeholders who were customers lost hundreds, if not thousands, of dollars.  Potential and non-affected customers are also stakeholders in the sense that a consumer aware of this scandal would likely have misgivings about initiating or continuing business with Bank of America in the future.

The Math    
For instance, say John Doe has $50.00 in his Bank of America checking account.  That morning he goes to Starbucks and buys a $5.00 latte, for lunch he drops $10.00 on a Chipotle burrito, and on the way back to the office picks up a pack of gum and a soda at a convenience store for $2.00.  John then decides to join his coworkers for happy hour following work and runs a $45.00 bar tab.  Normally, the balance in John’s account would’ve decreased as follows:

$50 - $5  = $45
$45 - $10 = $35
$35 - $2  = $33
$33 - $45 = $-12
$-12 - $35 = $-47

Bank of America decided that they’d be better off posting transactions by value.  They argued that larger transactions were more important – would you rather bounce the check for the mortgage or be declined for the incidental purchases?  Under the scheme they employed, John’s account balance would decrease as follows:

$50 - $45 = $5
$5 - $10 = $-5
$-5 - $35 = $-40
$-40 - $5 = $-45
$-45 - $35 = $-80
$-80 - $2 = $-82
$-82 - $35 = $-117

According to Bank of America, they were simply looking out for their customer’s best interests.  However, it’s plain to see that they decided it was in their own best interest for John to incur three $35 overdraft charges rather than one.

As a result, numerous lawsuits were brought against Bank of America.  In 2009, more than a dozen of these suits were consolidated into a class action lawsuit against Bank of America.  The result of the lawsuit was a $410 million settlement that Bank of America agreed to pay.  Notwithstanding the fact that many of Bank of America’s customers would only recoup a pittance when compared to the hundreds of millions Bank of America swindled, Bank of America likely came out well ahead of the game.  If each of the 13.5 million affected customers were charged just one overdraft fee during this period, then Bank of America would’ve brought in nearly $473 million dollars, that’s $63 million dollars more than they were ordered to pay out.  According to the website,, these deceptive practices cost the consumer on average of $225/year.  Many of Bank of America’s affected customers incurred more than one overdraft charge, it is likely that Bank of America profited well beyond the estimated $63 million thanks to this scheme.  According to the complaint filed in court, these fees likely netted Bank of America more than $4,000,000,000.00.

Had Bank of America acted within the confines of Generally Accepted Accounting Principles, an individualist would have had no problem with Bank of America maximizing its profits, even at the expense of its least affluent customers.  However, the abandonment of these principles which serve as the backbone of our economy would lead the ethicist concerned with individualism to conclude that Bank of America’s conduct was unethical. 

It’s easy to see how Bank of America’s egoist determination to maximize their own profits at any cost was of the utmost importance.  Maximizing happiness of both the institution AND its customers was of absolutely zero importance.  In this respect, Bank of America fails to pass utilitarian muster.         

Bank of America CEO, Brian Moynihan

If every firm conducted themselves with such reckless abandon as Bank of America, the whole of the American economy would be in complete shambles.  By comparison, things would be so predictably horrible that the current state of the American economy with rampant unemployment, stagnant wages, rising inflation, and a currency robbed of its purchasing power would seem to be a preferable alternative.  In short, the Formula of Universal Law holds that this action is unethical. 
Additionally, Bank of America violated Kant’s Formula of Humanity as it deliberately went out of its way to use their customer base as the means to enrich themselves.  Their rationale in doing so was purely one sided and fails to take into account the negative effects this had not only on their customers, but also their potential customers.  This course of action was not pursued because it was the right thing to do, but because it was the easy way to make a buck.  A business person who goes out of their way to fleece their customers is acting with neither good will nor good motivation.  Had Bank of America simply not gone out of their way to change their overdraft policy, things would have been better for all stakeholders.
The Formula of Autonomy was not satisfied by Bank of America’s actions.  None of their customers willingly chose this system, it was thrust upon them using deceit to try to convince them that this practice was in their own best interest. 

Willie Nelson would pass a drug screening before Bank of America’s conduct could ever be considered ethical in the Kantian sense.  This begs the questions, what exactly were the higher ups at Bank of America smoking and did they really think they'd get away with it.

Statement by Bank of America that "they listened"
and are "making changes"
Virtue Theory
Bank of America’s conduct in this affair certainly took guts, but there was nothing courageous about it.  Their dishonestly and reliance upon deceit when explaining things to their customers goes to demonstrate the dishonesty with which conducted themselves.  We’ve already established these decisions lacked Kantian rationality and it goes without saying that Bank of America’s expectations and desires were beyond conscionable, let alone reasonable.


While the origins of this unethical action date back well more than a decade, it is still an ongoing issue.  To date, 22% of the $410,000,000 settlement, or $90,000,000 has gone unclaimed by the affected account holders.  As proven above, Bank of America conducted themselves in an unethical manner every measure of ethics.  Bank of America’s change in tune regarding overdraft fees may be a positive outcome to this affair.  However, had Bank of America never rigged overdraft fees in their favor, they wouldn’t have been put in a position which demanded a change in tune.


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