Friday, February 1, 2013

This Week in Bank Failures

When is a national government legally obligated to bail out a failed business, or a bank in particular? This was, in essence, the question facing a European court on Monday. Fortunately for all of us, the court ruled that bailouts are never legally required of governments, and noted that they may in many cases be legally prohibited.

The decision is an enormous victory for the country of Iceland, which would have been in debt for a lifetime or longer under a plan put forward by the United Kingdom. The U.K. sought to hold Iceland responsible for losses that occurred when three giant banks based there collapsed. It was a subject of tense negotiation for several years between the two countries, but it was a puzzling situation, as the U.K. never really did spell out a legal basis for its demands. Early on, Iceland offered to cover the losses in question in full, but over a period of several years and without interest, and it was an offer the U.K. flatly rejected. When it got its day in court, though, there wasn’t any way to connect the dots to hold party C liable for the failings of party B. The EU had thrown its weight behind the U.K., and more than a few people in Europe claimed to be stunned by the court’s decision.

The decision is a favorable one for Europe as a whole, however, as it rules out most of the avenues by which the EU might collectively be forced to replace the capital of the banking system of one of its member states (in the next banking crisis to hit a country in Europe).

Deutsche Bank owned up to some of its financial holes in its latest report, recording €1 billion in charges to cover potential legal penalties and €2 billion for problem assets. The legal entanglements at the bank include a carbon trade mess that may not be sorted out for several more years.

Spain fell deeper into a depression with the latest economic measures. Both output and employment have declined in recent months. The government in Spain says the economy there will start to expand again this year, but the IMF is not expecting an economic expansion in Spain until next year.

Economic news was not so favorable in the United States either, as austerity budgets bit into the latest quarterly GDP enough to record a decline. The decline was mainly in federal and state government spending, with most other areas showing increases. Of course, with the federal government effectively bankrupt as it exceeds its statutory debt limit, there is a strong chance of further federal spending cuts in the current quarter.

Customer approval ratings for Bank of America were at the lowest levels ever recorded in a new survey, but all the major banks are trending down in that category. Cost-cutting has led to reduced customer service and more mistakes at the same time that banks are changing terms to make consumer accounts less attractive. Customers are not leaving in large numbers yet, but they are slowly reducing the number of accounts they hold.

Credit card checkout fees take effect soon in most U.S. states, though retailers aren’t rushing to be first with the new surcharge. The charge passes on to purchasers some or all of the credit card transaction fees that retailers pay to banks. Retailers cannot legally charge more than the actual transaction fees, though there do not appear to be effective controls in place to prevent this. The new fees are expected to annoy shoppers and will drive more consumers to pay with cash and debit cards, even at stores that don’t add on a credit-card surcharge.

The fragile transaction network is another risk to the credit card business, and we saw that again this week with a national outage lasting several hours for Visa in Canada.

Moody’s this week downgraded Canada’s 6 giant banks, citing mortgage risks.

Former Peregrine Financial CEO Russell Wasendorf Sr. got a 50-year sentence and was ordered to pay $215 million in restitution after running a phony futures trading operation for 20 years.