Saturday, October 31, 2009

Svalbard Breaks Loose

A funny thing happened in the Arctic Ocean this week. Svalbard, suddenly, is surrounded by water.

Svalbard is a Norwegian archipelago, a little smaller than Scotland, located in the Arctic Ocean at 81° north latitude at its northernmost point. Normally, there is solid or near-solid ice from there to the North Pole — normally, but not this week.

Instead, according to the satellite map, the sea ice edge has moved a good 100 kilometers north of the north coast of Svalbard. This hardly ever happens and would be a notable event if it occurred in summer. It is even more remarkable that it is happening now, at the end of October, with the Arctic Ocean in darkness. To the east, there are areas of open water that extend farther north than this.

The Arctic Ocean refroze slower than usual this October, so much slower that the ice extent is now about equal to what it was in 2007, the year of the record low ice extent. Refreezing has not yet begun on the European side of the ocean nor along the Alaskan coast, partly because the land is not cooling as fast as it did in the fall in years past.

There are still four months of night to come, so it is a safe bet that these areas will freeze up. The slow pace of freezing, though, reflects a changing Arctic in which ice cannot be taken for granted in quite the way that it was before.

Friday, October 30, 2009

This Week in Bank Failures

GMAC got a government guarantee for its bond issue this week. Washington wants to keep GMAC going as part of its auto strategy, and the guarantee will save GMAC about $150 million in interest payments over the next three years. There is talk of additional aid for GMAC in the coming days.

Congress is considering a move to freeze credit card interest rates on existing accounts starting December 1. After February, under credit card reform legislation already passed, credit card issuers will need a cardholder’s permission to raise interest rates, so banks have been rushing to raise rates, often drastically, before that deadline. A problem with the higher interest rates is that banks are driving away their best customers, while their more desperate customers may have nowhere else to go.

What should regulators do about banks that are too big to fail? The White House has proposed keeping a secret list of these banks, but Rep. Barney Frank says that secrecy is the heart of the problem. He’s talking about a change in regulation that would prohibit any secret deals between regulators and too-big-to-fail institutions. This would cover everything from the $100 billion giveaway to Citibank a year ago to the secret arrangement with regulators under which Bank of America has apparently agreed to change its management practices. Under the amendment that Frank is putting forward, and that seems likely to be adopted by the House, the too-big-to-fail list and all enforcement actions for companies on the list would be conducted in public.

The Fed, FDIC, and other federal banking regulators today issued a policy statement related to commercial real estate. Commercial real estate is in unfamiliar territory for most of the bankers and regulators working on it because the value of most commercial real estate has declined. The decline in value could make loans based on the real estate look worse than they are. The key point in the policy statement is that a decline in value of the commercial real estate should not by itself reflect on the quality of the loans. In addition, loan modifications made by the banks in response to the declining value of the real estate should also not reflect on the quality of the loans. However, the declining income of borrowers — a significant problem for many commercial real estate owners as stores and offices close — is a factor to consider if it means the borrowers may not be able to repay the loans.

Yesterday, the NCUA liquidated a small credit union in Los Angeles, the Second Baptist Church Credit Union, which had 340 members. The credit union accounts and assets were transferred to the much larger Prosperity Federal Credit Union. The Second Baptist Church Credit Union had become insolvent, according to California banking regulators, which ordered the liquidation.

U.S. Bank added 153 new locations in 4 states tonight as it acquired the assets and deposits of 9 failed banks. The failed banks were the banking subsidiaries of FBOP Corporation and were, from largest to smallest:

  1. California National Bank, with $6.2 billion in deposits and 68 locations, nearly all in Los Angeles and Orange counties in southern California
  2. Park National Bank, with $3.7 billion in deposits and 30 locations in Chicago, Illinois, and its suburbs
  3. San Diego National Bank, with $2.9 billion in deposits and 29 locations in San Diego County in southern California
  4. Pacific National Bank, with $1.8 billion in deposits and 16 locations in northern California, along with 2 in southern California
  5. North Houston Bank, in Texas
  6. Madisonville State Bank, in Texas
  7. BankUSA, in Phoenix and Scottsdale, Arizona
  8. Citizens National Bank, in Teague, Texas
  9. Community Bank of Lemont, in Illinois

The total deposits of the 9 banks were over $15 billion. According to reports, there were several bidders for various of these banks, but U.S. Bank was believed to have the only bid for all of them.

FBOP is a privately held bank holding company, owned by banking tycoon Michael Kelly, which started with First Bank of Oak Park in Illinois. It acquired other banks starting in 1990. Its web site lists 29 acquisitions between 1990 and 2007, though apparently that is not the complete list. FBOP secretly owned shares in Fannie Mae and Freddie Mac, which hurt the holding company’s balance sheet when those institutions were nationalized a year ago. Its loan problems were concentrated most heavily in its three large California banks. After banking regulators ordered it to raise capital, FBOP claimed to have $600 million, then $750 million in commitments from private investors, but was never able to present this plan in writing.

Among the banks FBOP owned, Park National Bank was still solvent, but was closed under the cross guaranty provision of deposit insurance, when it did not have enough capital to pay the costs of closing its affiliated banks. The cross guaranty prevents a bank holding company from hiding its good assets in one banking subsidiary while other subsidiaries fail.

For U.S. Bank, already the 6th largest bank in the United States, the acquisitions give it the Chicago presence it has been seeking, and provide more coverage in California.

These 9 bank closings are estimated to cost the FDIC $2.5 billion and bring the count of bank failures for the year so far to 115. California National Bank was the fourth largest bank failure of the year. If these nine banks had been a single bank, it still would have been smaller than Colonial Bank, the largest bank failure of the year so far.

Thursday, October 29, 2009

Commercial Real Estate Rents Down, Vacancies Up

Financial reports from the past two weeks are reinforcing the common view of commercial real estate, which is that businesses are using less space and are paying less in rent.

A Dow Jones story focuses on recent reports from two office space owners operating mostly in the Northeast. Both are reporting lower occupancy rates, and they are making rent concessions to keep tenants. A positive note is that not many of their long-term office tenants are in such financial distress that they are having trouble paying the rent. However, when leases expire, many tenants are taking the opportunity to move out or shut down.

A similar picture is seen in recent reports from retail leasing operations. They are reporting a small but significant part of revenue in the quarter coming from lease terminations, the lump sum payments that tenants make as they move out early. This means that store closings are continuing and retail occupancy rates will be declining. These reports also show that the investors that own retail space are having to reshuffle their financial arrangements in order to meet obligations to their lenders, most of whom are very large banks. As vacancy rates go up next year, we are sure to see more commercial real estate owners unable to refinance and facing foreclosure or bankruptcy. This, in turn, will put further downward pressure on rents.

Wednesday, October 28, 2009

Those Crazy Wall Street CEOs

Reuters’ Andrew Marshall yesterday came out with a thought-provoking article on North Korea. The article, under the headline “Why it's sane for Kim Jong-il to be crazy,” explains the political position of North Korea and its leader through the lens of game theory. The basic idea is that Kim Jong-il has to appear highly irrational to get any bargaining leverage with the outside world, and that, in turn, is needed for him to stay in power.

As I was reading that analysis, I couldn’t help thinking that some of the CEOs on Wall Street were playing the same game. To extort money from Congress, Wall Street’s leaders have to be appear to be crazy enough to blow up the national economy. The same thing happens on a smaller scale all over Wall Street on a daily basis. Yet it is all an act, a sort of Halloween costume for Wall Street players. Wall Street CEOs cannot actually be crazy, or they would quickly lose their jobs or bankrupt their companies.

You see how “crazy” Wall Street is in the latest headlines on CIT Group. The near-bankrupt company’s management and its large bondholders are each trying to gain the upper hand by acting more crazy than the other party. Billionaire-investor Carl Icahn is trying to get in the middle by acting even more crazy than either group. So far it’s not working for Icahn because no one quite believes he’s as crazy as all that. CIT management, after all, already has the track record of taking the crazy risks that drove the company into the ground, while the bondholders were crazy enough to lend money to this apparently bankrupt institution. But Icahn keeps gamely trying, raising the stakes in his seemingly irrational offer. Meanwhile, with all this pretending going on, some observers have started to wonder whether CIT really is facing bankruptcy — could it all be an elaborate act?

AIG management has been using a similar strategy to get the multi-billion-dollar bonuses for its employees even as it spirals down into a seemingly inevitable bankruptcy. The company can’t keep its charade up forever, but management will drag it out as long as they can.

The largest banks are facing increasing challenges and some of them will be back to ask for more money from Washington in the coming months, and when that happens, the White House can put an end to this version of the bank-with-a-bomb act. It can call the bank’s bluff by putting the bank into receivership, filing to put its holding company into bankruptcy, and firing all the executives immediately. Wall Street might retaliate by creating a stock market crash, but it no longer has the financial muscle to make its market manipulations stick for more than a few weeks, so the crash would have little lasting consequence for the economy. After that happened just once, you wouldn’t see a second bank going to Washington to say, “I’ve got a bomb and I’m not afraid to blow up the national economy.” Instead, the banks would start to take responsibility for their own problems. And that would be a good thing. It is, for the moment, the best chance we’ve got of getting Wall Street’s problems solved.

Tuesday, October 27, 2009

Universal Charging Solution Will Be Used By More Than Just Phones

Last week the International Telecommunication Union approved a standard for mobile telephone chargers. The Universal Charging Solution (UCS) standard had already been recommended by an industry group, GSMA, and was originally based on a recommendation, “Common Charging and Local Data Connectivity,” released in February by another industry group, the Open Mobile Terminal Platform (OMTP). UCS has also been endorsed by the European Union as a recommendation for all data-capable mobile phones. The idea is to have nearly all mobile phones use the same connector for charging and data exchange, so that you don’t have to buy a new charger every time you buy a new mobile phone.

The initiative is also expected to save electricity by reducing the standby power consumption of phone chargers. Currently, the average phone charger uses 1 to 2 watts of power when it is plugged in but not doing anything. UCS reduces that power consumption to no more than 0.15 watts by having the phone use the data link to tell the charger when it is connected and charging.

At least 26 mobile phone providers and manufacturers have already indicated their support for UCS, and probably the entire industry will adopt the standard within two years. One reason UCS is so easy to support is that it is built around a familiar cable that you can already find at any consumer electronics store. It’s the USB cable used to connect most digital cameras. This makes intuitive sense, as so many phones include cameras. You will be able to recharge your phone using this standard cable and a compliant computer, in much the same way that iPods have always recharged. But you will also be able to plug the cable into a UCS power adapter that plugs into an electric outlet. This equipment will cost less to manufacture, partly because it is simpler than most chargers in current use, and also because any phone manufacturer will have the option of buying the adapters and cables on the open market. To give you an idea of how simple UCS is, the OMTP document that defines it is only 22 pages long.

Although UCS was created specifically for mobile phones, there is nothing to stop any other mobile device from using it. An engineering team with a portable device to design will like find that it is easier to adopt the popular charging and data interface than to design a new one, and so we are likely to see UCS connections on the whole range of portable devices. It may also be used, as a cost-cutting measure, in some plug-in devices that can fit within its power limitations.

Monday, October 26, 2009

The Iranian Uranium Conundrum

While the world debates what to do about the uranium program in Iran, many of the proposals being considered don’t quite make economic sense.

Iran’s nuclear power plan would be simple enough if Iran were a stable country. The mountains appear to contain enough uranium to supply the country, and Iran has worked out most of the technology of refining the uranium ore. Building a nuclear power station is a large-scale undertaking, but as it uses technology that has scarcely changed in the last 15 years, it is obviously something Iran could do. And Iran will need the energy. Its oil will largely run out in about 50 years, and even if it did not, it is better off financially if it saves the oil for export. The only reason this would not work is that Iran is a failed state, largely run by competing criminal organizations, and the world does not like to see a material as volatile as uranium in the hands of organized crime.

Yet the proposal to send Iranian uranium overseas for one critical step in refining is conspicuously inefficient. Transporting refined uranium twice as far within Iran, and then around the world and back, does not result in any gains in security. Having uranium change hands so many times does not result in any gains in accountability. At the same time, the costs of transportation eat up a noticeable fraction of the energy value of the uranium.

A less costly and less risky plan might be to have Iran create its own nuclear fuel, but with its processing plant under continuous video surveillance, along with some form of auditing. This has security risks too: anyone who could tap into the video feed could learn practical tips on how to refine uranium. Yet the costs and challenges in keeping a video feed secure are tiny compared to those of protecting uranium containers on the high seas, or even on the highways of Iran.

Sunday, October 25, 2009

The Flu Hype

There is reason to be skeptical of the official flu statistics. In the United States, there was a huge spike in flu cases in the second half of August — they increased tenfold — yet this does not seem to show up in the official statistics at all. Last week the CDC was emphasizing a jump in flu-like illnesses reported in doctor visits, but the increase coincides with the government’s unusually aggressive immunization campaign, so it probably reflects patients’ worries rather than any actual increase in cases. Among people who are being tested for flu these days, more are seeing the tests rule out flu than are seeing flu confirmed. This unusual result is more easily explained by an increase in testing than by an increase in cases.

From everything I can see, the U.S. flu peak occurred in the second half of August — a highly unusual occurrence that perhaps just shows that a flu pandemic doesn’t act like the usual seasonal flu. Until there are signs that flu is picking up again, the flu hype coming from the government, including a state of emergency declaration that came out yesterday, is not justified. In a way, this fall’s flu hype can be seen as a repeat of the financial hysteria of one year ago. That was an episode that led the White House and Congress to make some panicky and ultimately very damaging decisions about the economy, and it kept millions of people awake at night worrying. The new flu hype is, I am afraid, leading many of the same people to worry needlessly again.

Saturday, October 24, 2009

Gasoline Prices and a Puerto Rico Fire

U.S. gasoline prices usually fall from August to December and rise again from January to June. You may have noticed that prices are not falling the way they usually do this fall. Instead, gasoline prices have fluctuated within the same range they were in during the summer. As of this week’s Department of Energy reading, nationwide gasoline prices are only 12¢ per gallon below the peak prices of June 22.

There are several factors at work propping up gasoline prices. Prices weren’t so high to begin with, when compared to the global oil supply. The lower prices are, the harder it is for them to fall. This month, the most obvious factor keeping gasoline prices from falling is the decline of the U.S. dollar. The U.S. dollar gained compared to other currencies a year ago in a “flight to safety,” as investors saw the U.S. dollar as safer than other currencies during a time of global financial turmoil. That flight to safety is now reversing, and the U.S. dollar is likely to decline for the rest of the year as investors’ one-year certificates of deposit mature. As the U.S. dollar declines, U.S. prices for products produced mostly outside the United States rise. Gasoline is produced in the United States, but most of its value comes from the crude oil it is made from, and the oil is mostly imported.

Another factor driving up prices right now is a fuel depot fire burning in Puerto Rico, in a suburb of the capital city, San Juan. The fire started in an explosion yesterday. The cause of the fire is unknown, but usually this kind of fire starts from a leak in a pipe or valve. It is the kind of fire that firefighters cannot put out, but they might be able to keep it from spreading. This fire might or might not destroy enough gasoline and other fuel to boost national gasoline prices by 1¢ temporarily, but gasoline distributors are likely rushing to raise prices by 2 or 3 cents as a precaution.

Friday, October 23, 2009

This Week in Bank Failures

Tonight is the night when the bank failure tally was expected to pass 100 for the year. It did, and then some. The first report this afternoon, though, was of the NCUA (National Credit Union Administration) taking action on a troubled credit union.

The NCUA placed a Mississippi credit union, First Delta Federal Credit Union, into conservatorship this afternoon. This means the NCUA will take over management of the credit union in order to protect deposits. The credit union continues to operate while the NCUA takes steps to improve its management and operations.

Bank failures started early this evening, with three early failures in Florida and one in Georgia. These four small banks had deposits between $65 million and $175 million. The combined cost for the FDIC is estimated at $176 million. From largest to smallest, they are:

  • Flagship National Bank, with four offices in Bradenton and Sarasota. Its loan portfolio had been deteriorating rapidly for the last year. Assets and deposits were purchased by First Federal Bank of Florida.
  • American United Bank, with one office in Lawrenceville, Georgia, on the eastern edge of the Atlanta metro. It had been in business for four years. It was the 20th bank to fail in Georgia this year. The FDIC had issued a prompt corrective action order in August because of inadequate capital. Assets and deposits were purchased by Ameris Bank, a regional bank with offices in the southern end of Georgia and in three neighboring states.
  • Hillcrest Bank Florida, based in Naples, Florida. The bank had been in business for barely three years. Deposits and one third of the assets were purchased by Stonegate Bank, which is using the acquisition to extend its reach across the Florida peninsula to the Gulf Coast.
  • Partners Bank, also of Naples. It was founded in 2005 and had been seeking additional capital for most of its four-year history. Assets and deposits were purchased by Stonegate Bank.

More bank failures followed as the evening wore on. Illinois banking regulators closed First Dupage Bank in the Chicago suburb of Westmont. Founded in 1999, it had one office and $254 million in deposits.

First Midwest Bank is purchasing the assets and deposits, paying a slight premium for the deposits. First Midwest Bank already had a dozen locations across the outer suburbs of Chicago, including one in nearby Bolingbrook.

First Dupage Bank apparently lost more than $12 million last year in the financial collapse of a developer that had borrowed money for a condo project. Nothing was ever built, and the developer left the country and subsequently filed for bankruptcy. IndyMac Bank took a similar loss on the developer’s previous project, which is now tied up in court and may not be completed for a few more years.

The FDIC estimates costs of $59 million for the First Dupage Bank closing.

A short distance to the north, Wisconsin banking officials closed Bank of Elmwood, based in Racine, Wisconsin, a city on the coast of Lake Michigan midway between Chicago and Milwaukee. The bank had five offices and $273 million in deposits. The Fed had rejected the bank’s capital restoration plan and given it an August deadline to raise capital or find a buyer.

Bank of Elmwood had been operating since 1960. As of seven months ago, one eighth of its commercial real estate loans were delinquent, and more than one fourth of its real estate development loans were delinquent. The bank’s president in July traced the bank’s difficulties to the economic problems of the community, noting the 17 percent unemployment rate in Racine.

The deposits and assets are being purchased by Tri City National Bank, a Milwaukee metro bank that already had a presence in Racine County. The FDIC estimates its costs for this closing at $101 million.

One state to the west, Minnesota closed Riverview Community Bank, a small bank with offices in Otsego and Anoka. It had $80 million in deposits. Deposits and assets are being purchased by Central Bank. This is the third failed bank purchased by Central Bank in a three-month period. All three acquisitions were in areas where Central Bank already had offices. The FDIC estimates its costs at $20 million.

With these seven closings, there have been 106 bank failures so far this year. To mark the 100th bank closing, FDIC head Sheila Bair released a YouTube video, which appears to have been written and recorded in the second half of September. In it, she assures depositors that their money is safe, up to the deposit insurance limits, and that the FDIC has essentially unlimited financial resources, even if it is not eager to use them.

It’s worth remembering at this point that less than 2 percent of banks in the United States have failed so far, and there is no risk that the country, or any state or region in it, will run out of banks.

Thursday, October 22, 2009

Applying Antitrust Law to Health Insurance

Congress is working on real health insurance reform after all. The idea is to repeal the industry’s antitrust exemption, so that health insurance companies can no longer act like a monopoly. A Washington Post story, since pulled, summed up the idea pretty well in its headline: “House committee votes to repeal antitrust protections for health insurers.”

The New York Times characterized the move as retaliation by the Obama administration after being double-crossed by the insurance industry, which initially supported reform, then had much of it rewritten for its own advantage, and now has begun openly attacking it. In truth, though, this is a measure that Congress has been working on for some time. If it hasn’t gotten much attention until now, it is largely because TV news shows have found it hard to explain what it means in ten seconds. For them, I can suggest a way to phrase it: It closes a loophole that allows health insurance companies to act like a monopoly. Any real TV news anchor can say that in six seconds or less.

The health insurance industry has fallen all over itself in the last two days to try to argue for keeping its monopoly-like powers. The best example I have seen is an opinion in the Wall Street Journal yesterday, which argues for keeping the exemption essentially because “the insurance industry’s antitrust exemption is inconsequential.” It is the same position that others in the industry have taken. But this argument doesn’t make much of a case politically. If there is no moral or practical justification for a law on the books, then most people would say the law ought to be repealed, even if the actual harm it causes is relatively small.

And you can make a pretty good case that the harm caused by the antitrust exemption is a big problem. The antitrust exemption allows insurance companies to create secret deals in which they agree not to cover specific diseases and treatments under certain conditions. When insurance companies collectively refuse to pay for routine tests for early-stage skin cancer, or to treat cervical cancer in patients under 30 years old, or for flu tests for patients who are not pregnant and have not been hospitalized, is this because of a secret arrangement among the insurers? The way the law stands, there is no way for the public or the government to find out. Regulators can’t compel industry officials to answer questions under oath because what the industry appears to be doing behind closed doors is not illegal. And this is just one of several problems that appear to result from secret deals within the health insurance industry — deals that would no longer be legal if Congress closes the antitrust loophole.

This is one measure where a few calls and letters from citizens could make a difference. If enough people call to say, “Please vote to close the antitrust loophole that allows health insurance companies to act like a monopoly,” Congress will know that they have to follow through.

Wednesday, October 21, 2009

The Low-Power Server

Among Apple’s various computer announcements yesterday was one that people might have overlooked: the new, faster Mac Mini is available in a server configuration, with Snow Leopard Server installed. At $999, it’s certainly not the least expensive server you can buy, but as far as I can tell, it is the least expensive to operate, at least in places where you need just one small server. That’s because of its low power consumption.

Power consumption isn’t something that businesses always consider when they purchase a server, but they should. If you set up an average server and run it for a year, the electric costs can be around $100 — and if you have to pay for the air conditioning, that cost goes up to $200 or $300. That’s not a huge expense if you’re paying $1,000 for the server hardware in the first place, but over a period of a few years, the electrical costs could add up to as much as the initial hardware purchase costs. As energy prices rise and hardware prices fall over the next 5 years, the cost of electricity for a server will be noticeably larger than the hardware costs, and people will be seeking out energy-efficient servers.

The largest data centers do this already, of course, and as I wrote one week ago, there is even talk of moving some data centers to Iceland basically just to save on the air conditioning. The issue of energy efficiency is one that the rest of us ought to become more aware of as servers become more common in business settings and, eventually, at home.

For most of us, this is still several years away, but Apple yesterday showed that it’s aware of the trends by offering the Mac Mini in a server configuration.

Tuesday, October 20, 2009

Finding Medical Equipment Innovations in the Next 50 Years

For the last half-century, most medical equipment has come from the United States. The United States created medical equipment for its own use, and the rest of the world largely got its equipment from the United States, or in imitation of its designs. In the next half-century, this flow could largely reverse. Important innovations in medical equipment are more likely to come from countries such as Bangladesh and Korea, countries that have a robust engineering tradition along with higher levels of economic stress.

It is a matter of incentives. There is little incentive for a medical clinic in the United States to seek out or develop new equipment that would be less expensive or more productive than the equipment it already has in place. Anything new that cuts costs could lead to lower revenue for the clinic. This could be especially painful financially if expensive equipment has to be discarded before it has gone through its planned useful life. In an environment where revenue is largely determined on a cost-plus basis, the greatest financial incentive for medical practitioners collectively is to fully exploit all the costs that are available. This leads to resistance to disruptive innovations in medical technology, not just among the managers who would be responsible for paying for them, but also among reputable medical opinion.

The regulatory environment in the United States also offers little encouragement for innovation. A U.S. clinic that did invent a new piece of medical equipment would then face, among other issues, a 7- to 10-year, multi-million-dollar process of getting regulatory approval before it would be permitted to use the new equipment.

The incentives are entirely different in many other areas of the world. Where clinics lack basic equipment and cannot realistically plan on purchasing it, new equipment designs that offer disruptive cost savings are welcomed. In countries where governments and charities provide significant financial support for medical treatment, there is an active incentive to cut costs and improve productivity. Further, regulators in other countries are less skeptical of medical equipment innovations, often approving them for use as soon as it finds that the equipment works and does not pose any novel hazards.

Imagine that you are a venture capitalist who invests this year in breakthrough medical equipment projects in the United States and Bangladesh. The U.S. project potentially offers access to the big-budget U.S. market, where you might make a ridiculous markup on the cost of manufacture, but it won’t be easy; when you check on your investment in 2019, after ten years of work, the equipment might have just been approved, and your sales force could be scouring the country trying to make that all-important first sale — meaning you haven’t made any revenue from your investment yet. In Bangladesh, the selling price is much lower, but all the costs are lower too, and by 2019, you could have several years of sales in Bangladesh and the beginnings of exports to countries like China, Indonesia, and Australia. If both projects produce equipment that does essentially the same thing, it is the Bangladesh project that is far better positioned to take over the global market — and the U.S. market.

The United States still has the advantage of having more researchers and engineers working on medical equipment. Most of the time, however, this will not be enough to overcome the advantages that other countries can gain with an imperative for innovation and a shorter lead time in bringing products to market.

What we are likely to see, then, is a stream of medical “gadgets” developed in unexpected places, mass-manufactured at strikingly low prices in East Asia, and taking the medical world by storm for years before they are approved for use in the United States. U.S. patients will increasingly have to travel to places like Costa Rica to get the latest in medical technology, and they will do so without the advice of their U.S. doctors, who legally aren’t permitted to recommend any way to bypass U.S. medical regulations. Some devices that are sold over-the-counter in other countries will be available only to medical practitioners in the United States. Eventually, most new medical equipment in the United States will be versions of the world’s medical equipment, perhaps following three or four years behind the rest of the world. That, however, will be a politically uncomfortable situation, and it could lead to some much-needed reforms in U.S. medical regulation.

Monday, October 19, 2009

Getting Out of Sync With Your Own Stuff

Over the weekend I wrote about techniques of getting out of sync to avoid getting entangled in the news of the world and to avoid getting the world entangled in your story. After I wrote those two posts I realized there was a further issue with entanglement that I needed to mention, something that is actually a bigger issue for most people. This is the possibility of getting entangled in your own story.

The idea of getting entangled in your own story can be confusing to begin with. Wouldn’t you want to resonate especially well with your own story? But it depends. If you are doing something with great success and just want to keep going at it, resonating with your own success story is one of the simplest things you can do. But if your story is of things you aren’t doing, projects you can’t seem to finish, and possessions you bought that you don’t seem to have time to use, resonating with that story can keep all that frustration going and keep you stuck where you are.

You know this is your situation if you have a to-do list and you don’t really like to look at it, or if every time you’re in a particularly good mood, you want to go out somewhere, just to get out of the house. When you just want to get out of the house, it is mostly a desire to get away from clutter, from your unused possessions and the story they tell about what kind of person you are.

Getting out of the house just to escape is a short-term solution. The next step I would suggest is to clear the clutter out of one important room in the house. This could be your bedroom, office, kitchen, or living room, but it should be a room where you do important things — or you would, if the atmosphere in the room did not seem so oppressive. Take away all the possessions you don’t use or that don’t relate to what you imagine you would do in that room. With one room cleared, you’ll have a place at home to escape to — you’ll no longer need to leave the house every time you want to escape. You can use that room as a base of operations to clear away the clutter from the rest of the house.

It’s hard not to pick up the resonance of your immediate physical surroundings — but when your home is filled mostly with things you don’t use and don’t have time for, the energy that creates for you is the energy of fatigue, inaction, and waiting. It is the same energy that is created by a to-do list of things you don’t do. By changing this, so that the energy you surround yourself is more active, you become more active, and it becomes easier to change whatever it is you want to change in your life.

Sunday, October 18, 2009

Getting Out of Sync, part 2

Yesterday I described what can happen when your life resonates with the outside world and how to minimize the potential for entanglement by either reducing the level of detail in your story or by saving the story for afterward. The same principle works in reverse. Simply put, if a story upsets you, it is better not to follow so closely while it’s happening.

As I like to emphasize frequently, it is important to put the biggest part of your attention on what you are doing and on situations where there is something you can do. That’s important because the quality of your life depends mostly on the quality of your action, and you can improve your action by paying more attention. It’s a problem, then, when a story resonates with you so well that it grabs your attention, even though there is effectively nothing you can do about it.

A friend, after reading yesterday’s post, recounted her experience of watching the satellite pictures of Hurricane Katrina at the point when it was the largest hurricane ever seen in the Gulf of Mexico and appeared to be just three days out from the Mississippi Delta and New Orleans, an area that would take three days to evacuate because it was a three-hour drive to get to higher ground. The area was just starting to think about evacuating, and my friend imagined herself in the city, rallying everyone she knew to get out of town while there was still time. In reality, though, she was not there and knew no one who was still in harm’s way. She stayed up late into the night watching the news reports, gripped by the drama of the situation, but there was nothing constructive she could really do.

This happens when a story we come across resonates with something we are already feeling. The story might be a disaster, rescue, injustice, controversy, prediction, competition, or campaign. It does not matter whether the story comes to us through mass media or a personal account. We can get entangled in the story and lose track of where we are, and forget how separate our own situation is.

It is common enough for people to worry and lose sleep over news stories that psychologists have a range of suggestions and solutions to offer. The most basic thing you can do to protect yourself, though, is to get out of sync with the story. That is, don’t follow the events in real time as they are happening. Keep yourself updated in a way that is suitable the distance between the story and where you are. If there is a huge fire in your own town, it is probably prudent to keep up with the latest developments once per hour. But if the fire is three counties away, there is probably no reason to follow it more closely than a few minutes once a day.

Creating this distance is easier said than done. When a story resonates strongly, it seems larger and more important than it is. One way to put a story in a more constructive context is to ask, “How much will my actions affect the way it comes out?” If a certain kind of story always seems to grab you and distract you, you might try to find out why you resonate so strongly with it. What is the pattern and where does it come from?

If you look at this in terms of law of attraction, being a resonant match for a random story from a distance means you are not being a very strong resonant match for the things you are trying to accomplish. You can improve your own success by reducing your resonance with stories that don’t really involve you or the things you want for yourself.

Whether you look for this level of insight, the basic technique is still to avoid following the story in real time if it does not involve you directly. Continue to follow the story, but day by day rather than minute by minute. When a story bothers or upsets you, just getting out of sync with the story takes away most of the effect that the story might have on you.

Saturday, October 17, 2009

Getting Out of Sync, part 1

There are times when it’s good to have the whole world watching. But having the attention of any large group of people all at once presents a security problem that most of the time is better avoided.

One way to understand this is to look at how few television programs are broadcast live. Whenever possible, a television production is completed before any of it is broadcast. Often sports events, political events, and awards ceremonies have to be broadcast live because the impact of the information depends on its timeliness, but doing so requires a prodigious amount of security, with multiple layers of security surrounding both the event and the broadcast. By contrast, producing a program for later broadcast requires only ordinary business security.

The need for these layers of security has long been known in broadcasting, and it became evident again in the early history of the MTV live program Total Request Live. In its first few days, this was just a small show done in a small studio that happened to have floor-to-ceiling windows that showed the studio’s Times Square location. After viewers started to understand what was going on, though, all subsequent shows were shot with a crowd of several hundred to several thousand spectators on the sidewalk and street below, trying to get a glimpse of or any connection to the show that was going on inside.

Anywhere large numbers of people are paying close attention to any focal point of action, it is inevitable that they may imagine themselves influencing the action. This is not the result of a conscious choice, or even a suggestion. Observation and intention go together automatically — you see a puddle and walk around it without having to stop and think. Sports fans are encouraged to cheer and applaud, but the security is needed in case some spectators have ideas of of getting closer to the action. The issues are the same regardless of the nature of the action.

The connection is broken, however, when people are watching a broadcast of action that took place previously. As long as the viewers believe the outcome is predestined, because “it all happened already,” then they will not have the thought of connecting to the action or influencing the outcome.

I have been using television as an example, but the same issues arise with any communications medium, even word of mouth. Celebrities and business executives know not to tell too many people about their travel plans in advance, lest they be met at the airport by the wrong people. Some e-mail addresses and telephone numbers are known to the public, while others are kept relatively secret — a telephone is useless if the whole world is trying to call.

This issue is important this year because more people are more “live” than ever. In an increasingly interconnected world, we are all important in our own ways, and we all have to take on some of this celebrity mindset at times. The idea involved is simple enough to remember: don’t be too live. That is, don’t broadcast too much of your action while it’s still going on. How much is too much depends on who is watching, how strongly your action resonates with people, and how much security is around.

Here is an exaggerated example of saying more than you can safely say in real time. Imagine that I’m live-blogging my life, and I write:

[Wrong] I won the lottery! The very first ticket I bought here at the Florida Ave. Pathmark is worth $250,000! I can’t wait to walk the six blocks home to tell everyone there!

The time element is critical. Notice how much the story changes if it appears in the newspaper two days later:

[Better] “I was stunned,” Aster recalls. “The very first ticket was a winner. I was so excited I didn’t stop to think about the fact that I was walking the six blocks home with a piece of paper worth $250,000 in my pocket!”

The story loses its security implications when it’s told after the fact. That’s because it is no longer possible for anyone to get in sync with the story — they can’t meet me on my walk home because that part of the action has already ended. There is still, of course, the issue of the junk mail that some people like to send to lottery winners, but that does not present the same level of risk because the level of resonance is so much lower.

The simple answer is the same answer that television has found: to not broadcast your action live in any level of detail when you don’t have a compelling reason to. Time and detail are equally critical. People get entangled in your personal drama — they resonate actively with it — only if they have a relatively vivid and coherent account of it while it’s happening, and even then, only if it matches up with something they are already feeling. It doesn’t take much reshuffling to keep this from happening.

You can make your story as vivid, compelling, and public as you want — after it’s all over. You can give people the news as it’s happening — but save most of the key details for later. And on those occasions when it is valuable enough to be presenting a vivid, compelling, live, public story, be aware of the resonance you’re creating with the people watching, and know what your escape route is.

This principle of resonance and entanglement also works in reverse, and that is a subject I turn to tomorrow.

Friday, October 16, 2009

This Week in Bank Failures

The clock is ticking for business lender CIT Group, which appears likely to go into bankruptcy in a matter of weeks. Many of its small-business and retail borrowers are struggling to make loan payments, and that may make it impossible for CIT to persuade its own creditors that it has a chance of making a profit over the next few years. With so little credibility remaining, it’s not clear that CIT will be in a position to negotiate the form of its bankruptcy in advance.

The early quarterly earnings reports from banks have been encouraging, but have not been strong enough to persuade Wall Street that banks will be able to earn their way out of the various financial holes they are in. There continue to be concerns that banks have not yet recognized many of their losses, particularly in U.S. commercial real estate and Eastern European businesses. The most troubling thing in the earnings reports, though, is a pattern of decline in revenue that suggests that banks are losing their customer base. The available banking business shrinks whenever the economy shrinks, but in addition to this, some customers are finding new ways around the banks.

Credit card results are particularly problematic, and suggest that banks’ strategy of soaking their credit card customers to make up for losses elsewhere has driven away most of the profitable customers. Meanwhile, the largest credit-card banks are suffering unprecedented losses from the credit card customers who remain. This is happening at the same time that increasingly large security breaches threaten to bring down the whole credit card transaction network. The credit crunch that is coming next year as banks and borrowers try to cut their losses could mark the end of the credit card as we know it.

Last Friday night’s eerie silence at the FDIC continued well into the evening tonight. For those who had started to wonder whether the FDIC was still solvent and functional, proof came with the west-coast closing of San Joaquin Bank, a bank with five locations at the southern end of the Central Valley of California, four in Bakersfield and one in Delano.

The $631 million in deposits and $775 million in assets are being purchased by Citizens Business Bank, a regional bank operating in the southern half of California. Citizens Business Bank previously had only one location in Bakersfield.

San Joaquin Bank tried to reassure depositors after missing a deadline yesterday to raise capital. That deadline followed a series of regulatory actions dating back almost a year. Regulators in May had prompted the bank to reexamine its books, and in doing so it found it had lost $18 million in the first quarter of this year, four times as much as it had initially thought. In recent weeks, the bank reshuffled its board of directors and tried to finalize deals it said it had worked out with new investors. The closing will cost the FDIC an estimated $103 million.

Thursday, October 15, 2009

Finland Makes Internet Access a Right

According to a YLE story, Finland has made high-speed Internet access a legal right: “Starting next July, every person in Finland will have the right to a one-megabit broadband connection, says the Ministry of Transport and Communications.” The country hopes to bump up the speed to 100 Mb/s five years later.

This kind of blanket rule makes planning simpler. If everyone will be getting Internet access, it takes away the need to decide who can and can’t get it. There is still the question of how to deliver Internet access to every town, but that shouldn’t be too complicated in a country where more than half of households already have high-speed Internet.

France had, earlier this year, made Internet access a right, but Finland is the first country to adopt a rule making broadband access a right. The Internet is especially important in Finland because of its high latitude. During the very short winter days, there isn’t so much time for outdoor activities, but the extended evenings allow plenty of time to go online. The new rule, which will be in effect next winter, won’t make the winter nights any shorter, but at least Finns will be able to spend those long nights at high speed.

Wednesday, October 14, 2009

Iceland’s Cool Data Center Plan

According to a recent BBC story, Iceland is about halfway through building a large new data center that, based on its description, looks to be the most energy-efficient in the world.

The energy efficiency is largely the result of Iceland’s climate. Iceland’s subpolar island climate is consistently cool, so a data center won’t need artificial climate control. In a warmer climate, half of the energy cost of operating a data center can go to cooling the rooms that contain the electronic equipment. That expense is not needed in Iceland, where the outside air can usually provide all the cooling you would want.

Megawatts of electricity are still needed to run large data centers, and Iceland has an advantage here also. It potentially has enough geothermal power to run all of the world’s data centers — or as many as the world might want to place there.

But it is Iceland’s unique geographical location that provides its most compelling advantage. It is close to Europe — 17 milliseconds from London, according to the BBC — but at the same time, almost as close to North America. With so much data already going back and forth between Europe and North America, Iceland may become known as the low-cost stopover point for data along the way.

Tuesday, October 13, 2009

How The New York Times Shrank the Banks

The first story in the Sunday New York Times was the bank failure story. The story was accurate enough in a narrow factual sense, but misleading in its use of context. The misdirection starts with the first word of the headline:

Small Banks Fail at Growing Rate, Straining FDIC

There is no factual reason for the inclusion of the word “small.” It is true that most bank failures are small, simply because most banks are small, but large banks are also failing, and it is the large bank failures, not the small ones, that create the financial strain on the FDIC. Some of the largest bank failures in history have occurred since last year. These few large bank failures have sapped the FDIC’s reserves far more than all the small bank failures combined.

I have to imagine that the Times added the misleading word “small” to the headline (and within the story) just to make the situation seem more like an academic concern than the economic threat that it is. “Banks Fail” would be more accurate, but readers might find that thought too alarming.

The story emphasizes the losses from real estate development loans, and that has been key in the list of bank failures so far. Yet the greater concern looking forward focuses on commercial real estate, with loans funding not just new building projects, but also acquisitions. The confusion between real estate development and commercial real estate is common because they overlap and because of the confusing way the terms are used in the worlds of banking and real estate, yet you get a clearer picture if you make the distinction between the two categories.

The prediction of “1,000 small bank failures” is probably overdone. It helps to recall that it was just one year ago that experts were predicting a total of 200 from this recession. At the same time, it misses the larger picture. While every bank failure comes at a cost to customers and the community, the greater concern is about the large, perhaps record-setting bank failures that may occur, similar to the ones that have occurred already. No one should imagine that the remaining large banks, including the 19 banking giants tagged as too big to fail by the U.S. Treasury, are now protected from the economic forces that affect the rest of the economy. The Treasury may be determined to keep the largest banks going, but it does not have a magic wand that can undo the tragic business decisions that have put most of these banking giants at risk. The failure of any one of the 19 largest banks in the United States would be an event large enough to cast the current run of bank failures in a very different light.

These quibbles aside, though, it is a hopeful sign that the United States’ most prominent newspaper has given, on one day, its most prominent story position to the troubles in banking. This kind of spotlight may lead, eventually, to the long overdue reforms that could still prevent a few of the failures of the next few years and, more importantly, could limit the scope of economic damage from future bank failure episodes.

Monday, October 12, 2009

A Tight Job Market

The U.S. job market is getting tighter, a trend illuminated most starkly by the low number of job openings, a record low when compared to the number of workers. The average duration of unemployment is another indication. People who lose their jobs and do not immediately start another job can now expect to be unemployed for more than 26 weeks on average. That is significant because 26 weeks is the standard length of unemployment compensation. At the same time, the number of layoffs continues to increase, a sign that employers are still under pressure to cut spending.

The low number of job openings is the opposite of what usually happens in a recession. More often, job openings increase as employers move slowly to fill whatever vacancies come up. Hiring managers spend extra time searching for the perfect candidate for the job, and if the perfect candidate does not appear, they leave the position vacant and try again six months later. Hiring speeds up again when economic conditions improve, and as employers adopt more realistic standards for who they will hire, the openings are eventually filled.

If employers are not taking that approach this time, it shows that they do not expect to be hiring again within the next 18 months. Rather, they are preparing for the possibility of more cutbacks. Businesses, for the most part, cannot borrow money to get through this recession, as they might have done in previous recessions. They have little choice but to cut back as much as their customers do — and that means more layoffs and pay cuts are on the way.

Add in the 2–3 million public sector jobs to be cut in December and January, and we will be looking at the worst job market that most of us have seen in our lifetimes. I am sure economists and politicians will still be talking about the economy bouncing back, as they have been doing every month for the last 27 months, but at that point, the public will not be seeing the economy in those terms.

Sunday, October 11, 2009

Spending Less on Heat: 5 Reasons

Residential heating is likely to cost less this winter than last winter. Here are five reasons why:

  1. Natural gas prices are lower than they were a year ago. Natural gas is not easy to store, so when businesses are using less of it, it leads quickly to lower prices. (Unfortunately, oil prices look to be about the same, and electricity prices have edged up slightly.)
  2. Last winter might have been on the mild side, but forecasters are predicting milder weather this winter.
  3. Millions of homeowners have improved their homes this year to reduce heat loss, mostly by sealing gaps and cracks and adding insulation. These might seem like small improvements, but engineers say they typically improve heating efficiency by 5 to 15 percent. Some homes also have new furnaces, which are more efficient than the old ones that were replaced.
  4. With foreclosures proceeding at a record pace, more homes than ever will sit vacant this winter. The vacancy rate for apartments might also, by winter, be the highest it has ever been.
  5. With unemployment going up, consumer incomes declining, and consumer credit harder to get, consumers are forced to cut back in all areas of spending, including heat.

Yes, this list is not all good news, but the reduced energy consumption is good for the U.S. economy, which may sit a little more comfortably with the smaller energy imports.

Saturday, October 10, 2009

After Reforms, Huge Losses From Personal Bankruptcies

The number of personal bankruptcy filings in the United States this year passed the one million mark late in September, based on numbers from the American Bankruptcy Institute. More than 4,000 people per day are going bankrupt — that’s one every 20 seconds.

It’s a pace that may soon exceed the flurry of bankruptcy filings that preceded the bankruptcy reform deadline in 2005. The 2005 reform was intended to make consumer bankruptcy virtually impossible, though in fact it reduced it by less than half. Tinkering with the qualifications for bankruptcy turns out not to make much difference when people really don’t have any money left. With consumer income falling, and now with historically high unemployment levels and credit card interest rates, lots of people are finding that they don’t have any money left. If you flip through the bankruptcy headlines, you read about personal bankruptcies that come from business failures. The high-profile personal bankruptcies involve homebuilders, auto dealers, printers, hedge fund managers, and clothing designers whose businesses fell apart, but the vast majority of personal bankruptcies involve consumers.

Ironically, the tighter rules of the bankruptcy reform rarely prevent consumer bankruptcies, but merely delay them until the consumer’s assets are thoroughly depleted. This means that creditors get less, on average, than they did before the reform. Creditors who became more confident in lending to consumers after 2005 (this, of course, added to the credit bubble and subsequent collapse) should have been more cautious instead. Creditors’ two tricks for collecting unpaid debts, seizing assets and garnishing wages, turn out to be not much help. A creditor might get a few thousand dollars by seizing a consumer’s checking account, but usually this means that the consumer’s checks to other creditors bounce, leading to more financial distress and, often, bankruptcy. Attaching a person’s wages almost always leads directly to bankruptcy. Typically a single creditor can take between a fourth and a third of a paycheck, but that is more than half of a consumer’s income after taxes and insurance and almost always forces a consumer immediately into bankruptcy. From the creditor’s point of view, this is a loophole they didn’t anticipate.

Another problem for creditors is that financially distressed consumers are getting more skilled at hiding their assets. Hiding assets is a crime if a consumer is in bankruptcy, but perfectly legal and often necessary for someone who is short of money but doesn’t yet qualify for bankruptcy.

More than 1 percent of U.S. adults have filed for bankruptcy since last year, and another 1 percent will be going bankrupt before the end of next year. This trend will not improve until consumer income starts to increase again, and that may not happen until early in 2012. Until then, the high rate of consumer bankruptcies will eat into the profits and capital of businesses that lend to consumers. The bankruptcy trend is just one of many factors that make a broad economic recovery difficult at this point.

In retrospect, the 2005 bankruptcy reforms can be seen to have destabilized the economy by minimizing the amount recovered by creditors when a consumer goes bankrupt. They made personal bankruptcy a more catastrophic financial event than it was already without reducing its frequency in any useful way. A revision to the bankruptcy code ought to encourage consumers to visit the bankruptcy court earlier, before it is too late for the court to salvage anything.

Friday, October 9, 2009

This Week in Bank Failures

Bank of America is looking for a new CEO. There are reportedly two committees at work, one seeking a highly qualified CEO to start in January, the other to pick an “emergency” CEO in case Ken Lewis’s legal troubles catch up with him before his scheduled retirement in December. All the candidates that have been mentioned so far have proved controversial. Stockholders and industry observers have complained that some have awkward backgrounds, while others are too unfamiliar with the workings of a bank like Bank of America. The “emergency” CEO, if one is needed, would presumably be an insider, a current Bank of America executive who is thought to be untouched by the bank’s legal difficulties. The bank appears to be leaning toward an outsider for the replacement CEO, who might be characterized as interim or permanent, but who should probably not expect a long tenure in either case. If it is true that the bank intends to select an outside candidate for CEO, it is probably a sign that the bank does not think it has the resources to survive the tough financial conditions of the next few years without substantial help from outside.

The FDIC said it had eight bidders for the assets of Corus Bank, which failed a month ago, and the winner in the auction was a group led by Starwood Capital Group. That deal is expected to close as early as next week, with the FDIC retaining a 60 percent share in the loan portfolio, a portfolio that features condo development loans. Real estate observers expect Starwood to undertake a flurry of foreclosures on failed condo projects. The result of that could be to flood the market in several cities with condo units at significantly lower prices, forcing other condo developers to also lower their prices, almost certainly leading some of these other condo projects to fail.

There were no bank closings tonight, leading me to wonder whether the FDIC’s cash flow situation is more dire than it appears on the surface. The number of banks in financial distress only increases week by week, so the gap in bank closings is the result of administrative forces. Besides the obvious cash flow concerns, delays also result as the FDIC’s limited staff is stretched thin by the growing number of problem banks. Computer system maintenance at FDIC scheduled for this holiday weekend may also be part of the reason why the FDIC was not in action tonight.

Thursday, October 8, 2009

Instability and Low Interest Rates

Australia has started to raise its interest rates. It is doing so in spite of having one of the highest central bank interest rates among major nations. But at 3 percent, it is the lowest rate ever seen in Australia and is considered an “emergency” rate there, so the increase to 3.25 percent has people breathing a little more easily there, and rightly so.

Super-low interest rates, below about 4 percent, serve to destabilize the economy, pushing investment money out of banks and into high-risk speculative investments. Sometimes, to be sure, that is what you need. You don’t want the economy to be completely stable when it’s in the doldrums — you want to shake it up a bit. But it is easy to underestimate the risks. Keeping interest rates artificially low for an extended period is like setting fire to your car in the hope that this will get the engine going again. It might work, but you’d rather not have to take the risks involved.

That, however, is what the Fed is planning to do. A Fed official hinted this week that the Fed might not raise interest rates in the United States until about two years from now. That, unfortunately, leaves more than enough time for a few well-funded investors to take some huge gambles that could create a worse recession than what we have already seen.

Last year I was calling for an immediate interest rate increase to 4 percent. The Wall Street meltdown of a year ago might have been avoided if interest rates had been kept at sustainable levels in the first place. A year later, the United States is still on the verge of a financial system collapse, and it might not be too late to stay out of trouble by raising interest rates, perhaps over a period of a few months, to 4 percent.

Wednesday, October 7, 2009

Where Is the U.S. Chamber of Commerce Going?

Is the U.S. Chamber of Commerce turning into an extremist group?

It is a strange question to have to ask about the United States’ largest business lobbying organization. For ages, its political positions were calculated to be bland and inoffensive. The Chamber wouldn’t take a position that would pit large numbers of its members against each other, let alone one that the vast majority of Americans would quarrel with.

But that has been changing. For at least five years, commentators have been warning about corruption in the U.S. Chamber of Commerce and headlines have todl about the Chamber’s increasingly polarized political views. In the past year, the Chamber has showed that it doesn’t mind arguing against the political views of 70 percent or even 90 percent of the public. In political terms, it seems to be turning into the National Rifle Association. One year ago, it staked its reputation on an election-season campaign against unions. This year, it has taken high-profile positions against health care, investors, and now, climate management. This fall, the Chamber is spearheading a lobbying blitz that aims to repeal broad areas of air pollutions laws and bring back the see-no-evil approach to climate change of the early Bush years.

This issue seems to have been the last straw for some Chamber members, leading to a series of high-profile resignations from the group since the middle of September. This kind of issue, by nature, favors some businesses at the expense of others. It is always the case that some businesses are trying to align themselves with the market on one side of the issue, while others try to position themselves to win favor with customers on the other side of the issue. By taking sides and favoring some businesses over others, the U.S. Chamber of Commerce has given up the pretense of broadly representing the views of American businesses. Meanwhile, you only have to check the public opinion polls to see that it does not represent the views of any significant groups of voters.

Lobbyists go where the money is, and the U.S. Chamber of Commerce must have decided that its previous broad pro-business approach wouldn’t be as profitable as representing selected big-money interests. Yet it gains most of its credibility from its 3 million members, and it now finds itself in a race against time, trying to complete its lobbying objectives before its membership fades away. That is not to say that time is running out quickly. The most notable resignation at the U.S. Chamber of Commerce was Nike, which resigned from the board of directors, but maintained its membership in the organization, saying it would use its position as a member to try to change the organization’s policies. Hundreds of thousands of members may take this approach, but they will not keep trying forever. The U.S. Chamber of Commerce, much as it opposes stockholder control of business corporations, is unlikely to yield to the wishes of its members before their patience finally runs out.

Tuesday, October 6, 2009

Half-Built Office Buildings

Money runs out, and construction comes to an abrupt halt.

This happens from time to time in real estate development projects, but it is happening more than ever this year. The combined effect of a lending crunch, budget cuts, high energy prices, and a collapse in the real estate market make it unusually difficult to get commercial real estate development projects finished. It can take eight years to plan and build an office building or shopping center. Thousands of projects have been called off before construction began. But other projects ran out of money after construction was underway, leaving a partial building sitting awkwardly for months, potentially for years, waiting for new financing to be arranged, or perhaps waiting for a new owner to buy out and redesign the project.

Thousands of commercial real estate development projects have come to be owned by banks. In some cases, the bank foreclosed on a project after construction delays and overruns left the developer out of cash and unable to refinance. In others, the bank and the developer agreed to call off a project after they realized it was no longer economically viable.

It’s a problem for banks, which don’t really want to be in the business of owning real estate. The partially finished buildings are a special problem. In banking terms, they are high-value assets with very low liquidity and no earnings.

The Fed is trying to figure out what it can do about the half-finished commercial real estate development projects that banks already own, or may end up owning over the next two years. One thought is to devise a special kind of financing instrument so that the half-built buildings can be completed quickly. But the Fed does not want to take this approach too far in a real estate market that is already seeing high vacancy rates and falling rents.

Most of the country is seeing commercial real estate more than 10 percent vacant, with rates more like 20 percent in most large city centers. With so much excess space already, it might be better for the real estate market if many of the incomplete buildings could be mothballed for five to ten years, and the construction completed only when the space might be needed. Adding more buildings to an already overbuilt commercial real estate market could further depress rents and put more pressure on building owners and developers.

By some estimates, most of the cities in the United States have more than enough commercial space for the next 10 years. Some local politicians have been calling for a moratorium on new downtown construction until the market gets back into balance. Instead of a moratorium, restrictions on lending for commercial real estate development might be a more flexible approach. A rule preventing banks from lending more than 80 percent of the value of a project, in areas that are already overbuilt, would go a long way toward limiting the kind of real estate speculation that puts banks and developers at risk.

Monday, October 5, 2009

Busy Weekend at Retail

Venturing out to retail stores this weekend, I saw more people out shopping than I had seen on weekends in August and September. But while people were eagerly shopping, they did not seem to be in a spending mood. The busiest places I saw were Goodwill and Starbucks, and even there, people were being choosy about what they bought. There was plenty of traffic on the roads, so other stores I didn’t visit must also have been busy.

Falling gasoline prices are part of the reason people are shopping again, and fading concern about the flu season may be another reason. The U.S. flu season appears to have peaked around a month ago, and the new H1N1 flu is becoming more familiar and less worrisome to people as time passes.

Sunday, October 4, 2009

Post-Clunkers Drop-Off Not As Big As Feared

People kept buying cars in September, even though the Cash for Clunkers incentive program was over. September sales figures were only about 10 to 15 percent lower, as the noise surrounding the Clunkers program had people thinking about cars. But this still means the pace of sales was much lower than last year — typically 15 percent lower. General Motors had the largest decline, off 45 percent from last year, while Kia and Hyundai bucked the trend with 24 and 27 percent increases from a year ago.

Industry analysts are expecting October sales to bounce back to summer-like levels, but that’s probably just wishful thinking. With cars out of the news and consumer incomes squeezed further, October auto sales could easily fall to a new low.

Saturday, October 3, 2009

Arctic Ice: a New Era

If it happens three times, it’s a pattern. The ice melt on the Arctic Ocean has followed almost the same pattern for the last three years, but it’s a pattern that had never been seen before 2007. It is a new era in the Arctic, and the experience of Arctic ice through 2006 can probably be disregarded, as the pattern of 2007–2009 appears to represent the new normal. Here’s how much has changed:

  • Arctic ice is generally about 1 to 2 meters thick. Previously, it was mostly 2 to 8 meters thick. Into 2007, there was a sharp distinction between first-year ice, which had just formed, and multi-year ice, which would grow thicker every winter for at least 6 years. That distinction no longer meant much by the winter of 2008, as the ocean now apparently remains warm enough in winter to melt away the underside of thicker ice.
  • Summer offshore breezes prevent ice from building up near the mainland of a continent in late summer. An onshore wind pattern may allow ice to pile up against the coast, but it will melt again when the wind blows offshore. The open coastline of Asia, Alaska, and Northwest Territories now tends to be ice-free in September. Previously, you could only count on this pattern along the European coast. Barring a persistent onshore wind pattern, the north coast of Asia is open to commercial traffic in September.
  • Arctic ice is no longer effectively anchored. Through 2006, you could count on Arctic sea ice being solidly attached to the far northern points of North American and Asia. This limited its movement, especially in winter; the wind would blow the ice around, but the ice could not go far. Since 2007, Arctic ice has been too thin to anchor effectively. When the wind changes direction, the ice can move halfway across the ocean.
  • With more ice movement, more ice is being ejected from the Arctic Ocean into the Atlantic Ocean. Previously, ice was ejected mostly east of Greenland. Now, a substantial amount of ice is also being ejected along the west coast of Greenland.
  • Summer ice that is less than 1 meter thick blows around easily and tends to jam up straits and channels. This makes cargo traffic through the Northwest Passage somewhat doubtful.
  • The ocean surface is refreezing later in the fall. One effect of this is that much of the fall snowfall is falling into the water. With less snow to provide insulation between the ice and the air, the thinnest ice can grow thicker quickly during the winter.

How long will this era of Arctic ice last? Not very long, I’m afraid. With ice only 1 to 2 meters thick it will take only one year of strange summer weather to clear substantially all of the ice out of the Arctic Ocean. This could be as simple as the wind blowing in just the right direction in July to carry the ice out to the Atlantic to melt. Or it could be a pattern of stormy weather that breaks the ice into smaller pieces and stirs it around.

There’s no telling when something like this might happen because it all depends on the weather — it could be next year, for all we know. However it happens, if most of the waters of the Arctic Ocean are directly exposed to sunlight in August and September, it will increase the ocean water temperature in a way that we’ve never seen before. New ice will still form that fall, but it will surely not look quite like the ice we are seeing now.

Friday, October 2, 2009

This Week in Bank Failures

Bank of America CEO Ken Lewis is resigning at the end of the year, two years earlier than previously planned. Usually the surprise departure of a CEO would hurt the stock of a company, but in this case, stockholders saw it as a positive step. It seems that the fatigue of managing the world’s most top-heavy bank was the deciding factor in Lewis’ decision.

With Bank of America still in a state of crisis, the new CEO is likely to be an insider who already understands the bank’s operations and challenges. Some of the candidates being suggested have previous experience as senior executives of banks that Bank of America acquired.

Facing the possibility of running out of cash as soon as next month, the FDIC has proposed to collect the next three years of deposit insurance fees in advance. The FDIC is hoping those advance payments will be almost enough to get it through the current run of bank failures. Realistically, though, this approach is likely to buy the FDIC no more than a few more months. With bank failures expected to run at historically high levels for the next three years or longer, the FDIC will need many times the funding that its usual insurance fees could bring in.

Troubled business lender CIT Group has drawn up a bankruptcy plan. CIT still hopes to restructure its debt outside of bankruptcy, but it is running out of time to do so, and the bondholders who would need to approve the restructuring are skeptical of CIT’s plans. If CIT goes into bankruptcy this month, that could limit retailers’ ability to finance Christmas-season inventory.

Warren Bank, of Warren, Michigan, was the first bank failure announced tonight. Warren Bank was already in desperate financial condition in July, when the Fed rejected its capital restoration plan and issued a Prompt Corrective Action directing the bank to raise capital immediately. The bank at that point had $501 million in deposits and only $37 million more in assets. It had six locations in eastern Michigan.

The Huntington National Bank is purchasing the deposits, paying a slight premium, but is purchasing only 15 percent of the bank’s assets, a ratio so low that it probably does not include any of Warren Bank’s loans. Huntington is a regional bank that already had a strong presence in eastern Michigan, including six offices in Warren.

The FDIC will sell Warren Bank’s loan portfolio at a later date. The FDIC estimates its costs will be $275 million.

There were small bank failures in Minnesota and Colorado. These failures cost the FDIC an estimated $18 million.

  • Jennings State Bank; two offices in Spring Grove, Minnesota, and Stillwater, Minnesota, farm country along the state’s eastern border; $52 million in deposits. Deposits and 67 percent of assets purchased by Central Bank, based in Stillwater, with locations across the Minneapolis metro area. Stillwater is on the fringes of the metro area, and residential real estate development loans in this area ran into trouble. Jennings State Bank also had substantial losses from loan participations, in which it bought shares of other banks’ loans.
  • Southern Colorado National Bank; two offices west of Pueblo, Colorado; $32 million in deposits. Legacy Bank purchased the deposits and assets, paying a 1 percent premium for the deposits. The latest blow to SCNB came three weeks ago when the municipal government of Pueblo West voted to pull its deposits out because of concern over the bank’s financial condition.

Yesterday morning, the NCUA closed two credit unions:

  • The Members’ Own Federal Credit Union, Victorville, California; $85 million in assets, 11,000 members. Share accounts were transferred to Alaska USA Federal Credit Union, which already had a presence in California.
  • West Texas Credit Union; $78 million in assets, 25,000 members. Share accounts were transferred to Security Service Federal Credit Union, which is based in San Antonio and operates nationally.

Thursday, October 1, 2009

Price Cuts Boost Video Games

If you are in the video game business, how do you compete with The Beatles Rock Band? When it was released on September 9, most in the industry expected it to be the biggest video game release in history, but sales are far ahead of those lofty expectations. The publisher warned last week that the limited edition package of the game is likely to sell out before the Christmas shopping season arrives.

Most of the video game industry, though, is still trying to sell the previous generation of video games, which are based on a lower level of interactivity, and they’re hard to sell when customers can choose the new games instead. Video game sales in August were 1/6 less than a year before, and Movie Gallery was discouraged enough to decide to close the Game Crazy video game departments in 200 of its stores.

Faced with all these challenges, game publishers and stores have come to the conclusion that low-interactivity games will not be able to command quite the same prices that they have sold for in the past. Experiments with price cuts have showed that customers are responding to price cuts around 20 percent. The game hardware makers that tried price cuts at the end of August were the only ones that showed a year-over-year increase in sales that month. And now, new games with lower price points are crowding out the game releases that are sticking to the previous price points.

The move to lower price points is likely to stick, but this puts new pressure on game developers. Already hard pressed to develop profitable games, they will be under that much more pressure if 20 percent of their revenue goes away. Developers will have to come up with more productive ways to develop games, and they will probably have to make fewer of them.