Friday, September 23, 2016

This Week in Bank Failures

Cuts: Commerzbank, the second largest bank in Germany, is planning job cuts. The board next week will consider a plan to cut 2,000 jobs as the bank scales back its offerings to business customers. Deutsche Bank is making plans to close its loss-leader Australian wealth management business. It will serve Australia and New Zealand clients from Singapore.

CNN spoke to employees of giant banks and what they found could be trouble for the industry. Current and former Wells Fargo employees said the bank routinely identified and fired workers who reported improper marketing practices to the bank’s supposedly anonymous ethics hotline. Employees of other major banks said the marketing practices at Wells Fargo are not far removed from the rest of the industry. 

Wells Fargo’s CEO has resigned his Fed position, obviously needing to focus on the continuing crisis at Wells Fargo.

The SocGen trader convicted of forgery for his high-risk trading won’t owe €4.9 billion in damages to the bank. The bank’s own management failures were the primary cause of the subsequent losses, an appeals court ruled in reducing the damages amount to €1 million.

Tonight’s bank failure was Allied Bank, with five locations in the general area of Fort Smith, Arkansas. The failed bank had $65 million in deposits. After state regulators closed the bank, the FDIC turned the deposits and assets over to almost-local competitor Today’s Bank. Allied Bank was founded in 1902 in Mulberry and was known as Bank of Mulberry before 2002. The bank’s holding company filed for bankruptcy reorganization in 2014, but was ordered liquidated in 2015. The bank had a high level of bad loans but also had higher than average expenses, making it more difficult to recover from financial setbacks. This is only the fifth bank failure of the year.

Thursday, September 22, 2016

Yahoo Discovers Biggest Data Breach Ever

Yahoo says 500 million accounts had user data stolen in 2014. In terms of the number of accounts, this may be the biggest data theft ever. On the other hand, it is easier to acquire a Yahoo account than almost any other Internet account, so the magnitude of the problem is not as big as the raw numbers would suggest. I ended up with at least five Yahoo accounts over the years, mostly through Yahoo’s acquisition of other services, though I had the good fortune to close all of them before the massive data breach in 2014. Yahoo itself closed hundreds of millions of inactive accounts in what, in retrospect, looks like a sensible precaution.

Hashed passwords were among the data stolen, so if you had a Yahoo password in 2014 and are still using the same password, you should change that password soon. If you use the same password anywhere else, change it there too. If you have several Yahoo accounts that you have kept open even though you no longer use them, consider whether you will be more secure if you close them now. It was only because I closed my Yahoo accounts years ago that I don’t have to worry about the current data breach.

The Yahoo data theft is believed to be the work of a national government, though Yahoo either doesn’t know or can’t say what country was involved. Multiple countries in recent years have been collecting user passwords wherever they can find them because half of Internet users reuse passwords at multiple sites, potentially giving spies access to highly sensitive information. The systematic theft of passwords is one of the reasons why it is safer to use a new password at every domain where you have an account.

Sunday, September 18, 2016

A Messy Bankruptcy for a For-Profit College

A week ago, for-profit college ITT Technical Institute closed. At the time it appeared the company had simply run out of money. Now that is confirmed. ITT Technical Institute is in bankruptcy.

The bankruptcy is as problematic as the shutdown. In bankruptcy the college will sell off its assets and pay as much as it can to its creditors. The largest group of creditors are the roughly 30,000 students who paid for fall courses that the college wasn’t able to deliver. This group includes, at a guess, 5,000 students who planned to start their studies this fall. They paid their tuition, bought their textbooks, in many cases quit their jobs, only to have the rug pulled out from under them just as their studies were supposed to get going. At the same time almost the only substantial assets in the bankruptcy are the loans due from students, including this new group of students and also including at least 10,000 graduates who can’t get jobs and have no means of repaying their college loans. One hopes the bankruptcy court has a keen sense of fairness about this and doesn’t use money from students who were tricked into handing over their life savings and then some to pay off Wall Street investors. Even if that goes well, we will be left with investors trying to collect student loans from graduates who are unemployed, unqualified, and broke — not to mention what happens to the students who were a few courses short of graduating. It paints an unflattering picture of what American higher education has turned into.

In filing for bankruptcy, ITT Technical Institute says it went broke because it had fewer new students this fall. Total enrollment fell only slightly, but new students had a disproportionate impact on the college’s finances. In this respect, the college may be seen as the equivalent of a Ponzi scheme. It depended on a steady stream of new customers to meet its obligations to its existing customers. If that were not the case, it could have continued to serve its existing customer base using the money its existing customers were providing.

The business plan of higher education is not a mystery. Students pay tuition, and that money goes to pay the hourly wages for instructors and the rent for the classroom. It’s a highly scalable business model — it works for schools that have ten students and for those that have 100,000. ITT Technical Institute charged some of the highest tuition rates in the world. That it could not simply scale back by 5 percent and keep operating, even for a few days, shows that its finances did not follow the normal financial model of a school. It was using borrowed money to pay its operating costs while using its revenue to defend its ability to borrow more. That’s technically not a Ponzi scheme but doesn’t differ financially from one in any important respect.

When a Ponzi scheme is discovered, the only solution is to shut it down as soon as possible. The longer it operates, the greater the financial pain when it eventually collapses. I believe the same logic applies to ITT Technical Institute, and perhaps this was the logic that the board of directors applied. As long as its continued operation depended on proving it can expand its customer base, there was no reason to hope it could wind down gently. Had it succeeded in enrolling more students this year only to collapse next year, the cost of the collapse would have been that much greater. Conversely, had it been shut down ten years ago, the cost of the shutdown would have been smaller.

If the closure came 10 or 20 years later than it ideally should have, tallying the cost of the delay is only a theoretical objection. In practice, institutions never stop the day they start doing more harm than good. Instead, that decision comes long after, and the delay in this case is no different. When a board of directors says it’s time to shut down a corporation, it is almost always too late to second-guess the decision.

Friday, September 16, 2016

This Week in Bank Failures

Deutsche Bank worried publicly about how much it might have to pay to settle deceptive U.S. marketing of mortgage-backed securities. The bank’s worried tone cast a shadow over global stock markets.

A fire suppression system caused extensive damage in ING Bulgaria’s main data center last Saturday, effectively shutting the bank down for most of the day. It was supposed to be a routine test and the bank was caught off guard by the damage, but engineers say the inert gases released by the system can create sounds loud enough to destroy hard disk drives if they are set up in metal racks.

After Wells Fargo got caught padding its numbers with ghost accounts created behind customers’ backs, it will have to explain itself to its customers, the SEC, the Senate and House, and possibly in federal court. The bank has suspended its cross-selling scripts at call centers in order to avoid adding further upset to customers calling to close accounts they never knew existed. However, underlining the bank’s difficulties in coming to grips with the situation, nothing has changed at branches, where insane cross-selling quotas remain in place and staff members who fall short are still being fired. More details of the bank’s actions might come out in a class-action suit filed by account holders seeking compensation under identity theft laws.

UniCredit, the largest bank in Italy, is negotiating with buyers over the sale of operating units and other assets. The bank made a poor impression in recent stress tests and now hopes to raise enough capital to avoid intervention by regulators.

Fifth Third is closing 44 branches in addition to 130 branch and facility closings previously announced.

Tuesday, September 13, 2016

Congress in Brazil Expels Cunha

Brazil took the obvious next step against corruption last night, expelling former Speaker Eduardo Cunha from Congress not for bribery, but for the simpler charge of failing to declare Swiss bank accounts that appear to hold the proceeds of bribes. The outcome is the same: Cunha is no longer in public office and faces an eight-year ban from any government position. The timing shows how hesitant the country is to address corruption. The expulsion was put off almost until the last possible moment, and Cunha now goes off to face the first of what could be dozens of criminal charges. Cunha has said all along that if expelled, he was prepared to testify against half of Congress in the ongoing corruption probe, and it appears he will now have that opportunity.