This Week in Bank Failures

Gotcha banking has turned out to be less lucrative than banks had planned on, as courts order one bank after another to refund fraudulent fees they imposed over the last decade. Some of the biggest schemes involved unexpected overdraft fees on deposit accounts. Billions of dollars were collected in hard-to-explain overdraft fees that are not standing up in court. Courts have mostly ruled that fees assessed only as a result of phantom transactions or other creative accounting by the banks, or where banks did not operate the way they told their customers they did, have to be returned.

The two banks closed last weekend were owned by the bankrupt and rapidly shrinking holding company Capitol Bancorp. A third closure was delayed four days, reportedly by a late legal challenge. On Tuesday, state regulators closed Central Arizona Bank, in Scottsdale, Arizona. North Dakota-based Western State Bank took over the deposits and purchased the assets. Combined, these last three failed banks had $110 million in deposits.

In bankruptcy Capitol Bancorp has been reduced to a stock market value under $2 million. In less than five years it has shrunk from 60 subsidiary banks to just 8. Its remaining banks stay open only because the FDIC has waived the cross guarantee provisions that normally apply to a bank holding company. It is safe to say the FDIC has done this because if the holding company had to make good on the cost of any of its bank failures, all of its banks would have to be liquidated, a scenario that would be costly and is potentially avoidable. All of Capitol Bancorp’s banking subsidiaries operated under the same top-heavy business model, though, so the prospect of more failures under that umbrella seems more likely than not.

Yesterday the NCUA placed First Kingdom Community Federal Credit Union, with 76 members in Dallas County, Alabama, into conservatorship. This means the NCUA is taking over management of the credit union with an eye toward returning it to solvency and sound operation.

White Meat or Dark Meat?

I like to notice cultural references that fade from importance. Often the change is not obvious for years. This is the case with the old question “White meat or dark meat?” which was an important part of the conversation in the 1980s. For those born since then, the question refers to preferences in turkey and chicken. I realize it doesn’t necessarily sound like a food question, but that is actually what it was about. There was a theory, which came to prominence about 1982, that eating meat with a lower fat content would help a person avoid heart disease and possibly a couple of other common diseases and syndromes. People who subscribed to this theory would self-righteously select the white meat from turkey and chicken. On occasion they would lecture their family members on how they ought to be eating healthier.

It is hard to say when this idea and question faded from importance. It happened so slowly you couldn’t possibly pin it to a specific year. Regardless, the cultural view has shifted, and the consensus now is that there is really not much difference between white meat and dark meat. They are not even all that different in fat content, as it turns out. And the science behind low-fat meat was a mistake, stemming from a misinterpretation of data in a 1970s research article. The actual answer for better health was not eating less high-fat meat, but eating less meat in general. There are still culinary reasons to prefer white meat or dark meat, but somehow the question has shed most of the significance it held a generation ago.

Water Level Rises in Great Lakes

April precipitation raised the Mississippi River from worryingly low levels to worryingly high levels, but what about the Great Lakes? Lake Michigan and Huron, in particular, was at risk of setting an all-time low, before the heavy rains last month. The Great Lakes were nearer the edge of the heavy April rains, though, and it takes more water to fill a lake than a river.

It was an extra two inches of rain in April, though, and that was enough to bring Michigan-Huron up to last year’s levels. Water levels are still low enough to cause problems, but it would take a summer drought to take the lake down to record low levels and possibly bring a stop to large-scale shipping.

Opposing Trends in Phone Prices

CNN has a story suggesting a sharp price increase for cellular telephones as wireless carriers do away with subsidies. Without subsidies, prices foe a high-end cell phone could go up by $300 or $400.

It is hard to predict how quickly that will happen, though. I have a hard time imagining that phone subsidies could completely go away over the next 24 months. In the meantime, advances in manufacturing will push prices lower, while new high-end designs with more features and components could cause higher prices.

So which effect will predominate? What I expect is that consumers will gravitate toward the $99 phone regardless of the level of subsidy. If subsidies go away relatively quickly, over a two-year period, that could be the equivalent of the iPhone 3. But if subsidies go away more slowly, it could be the equivalent of the iPhone 5. The important thing to note is that it is not easy to see the difference between the iPhone 3 and the iPhone 5. The newer model does some things twice as fast, and it has a longer battery life, and these are differences that are obvious to the experienced iPhone user, but they may not be so obvious to the new user in the store making the purchase decision.

What could happen, then, is not so much that phone prices change as subsidies fade, but that phone designs change instead. Prices could hold almost steady, or go up and down as the opposing trends get out of sync.

Unions in Bangladesh

Political change in Bangladesh: the government is moving to legalize trade unions and raise the minimum wage. Currently trade unions are effectively illegal, and the minimum wage for workers in factories is $39 a month, set in 2010. These changes are a result of the discussion surrounding the factory building collapse that killed more than 1,000 last month.

Hastily conducted inspections of garment factories found critical safety violations at about 800 of them, and those factories are threatened with closure if they can’t correct the problems quickly.