Friday, November 29, 2013

This Week in Bank Failures

A few quick notes from Europe: Berlusconi was expelled from parliament in Italy for his role in a tax-fraud scheme. Stripped of parliamentary immunity, he almost immediately faced new criminal charges, this time involving bribery. . . . Also in Italy, troubled bank Monte dei Paschi is shutting down its back-office operations at the end of the year and laying off more than a thousand workers. This step is presented as a cost-cutting move but may also be seen as a preliminary step toward shutting down the bank while selling off some branches. . . . The European economy in general is seen as doing better, but while Spain saw its debt upgraded, the Netherlands and France have seen downgrades this month.

In the United States, today is Black Friday, the busiest day of the year at retail. Early indications are generally favorable for the state of the U.S. economy and consumer confidence in particular, which were shaken by a near-default experience barely a month ago.

Wednesday, November 27, 2013

Pre-Thanksgiving Sales

Today in my area it is flooded intersections and ramps from a major winter storm causing traffic trouble in my area. Yesterday, though, it was the pre-Thanksgiving sales, putting shoppers on the same roads as commuters and holiday travelers. The resulting traffic jams were ferocious. But it shows that the retail promotions targeting the two data before Thanksgiving, the biggest innovation in this shopping season, are having an impact. Retailers may like the extra store traffic, but there is a cost: with so many scheduled sale days, few shoppers will be looking to pay full price for anything.

Monday, November 25, 2013

Earthquake Near Fukushima

Part of the idea with the spent fuel removal at Fukushima is the way that further damage may be avoided if the fuel is removed before the next big earthquake. The fuel removal has barely begun, and an earthquake in the area today served as a reminder of how chancy that plan is. The 5.0 earthquake was not strong enough to damage a sound building, but could have shaken something loose in the already damaged buildings at the Fukushima nuclear power station. Fortunately, there are no reports of damage, and we can hope that similar luck holds long enough for all the hazardous materials to be removed, remembering that the spent fuel is just a preliminary step.

£1 Billion in Student Loans

The British government has sold off a portfolio of almost £1 billion in loans.

The loans, which originated in 1990–1998, have a face value of £890 million, but were sold at auction for £160 million. The sale raises cash that will make the government’s books look better this year, but it also raises all the usual concerns about the takeover of higher education by big business and what may happen to society when students are treated as a cash cow.

Friday, November 22, 2013

This Week in Bank Failures

JPMorgan Chase’s $13 billion settlement with the U.S. Department of Justice, federal regulators, and four states became official. The settlement covers specific mortgage-backed securities issued by the bank and its predecessors.

A federal court ordered MF Global to repay $1 billion in lost customer funds. The order has little immediate consequence, but ultimately may ensure that the money is not spent on the bankrupt broker’s other debts.

The former chair of the collapsed Co-Op Bank in the United Kingdom was using hard drugs during his time at the bank, he admitted this week. Separately, an inquest found that the death of a Bank of America intern in London earlier this year, who worked 72 hours straight, then went home and died near the end of a 7-week internship, was due to natural causes, with no indication of the drugs that some had speculated about. In the middle of all this talk about drugs in banks, some have come to the defense of London bankers’ drug habits, arguing that the stimulants and narcotics are not such a problem because bankers use them only while on the job.

The U.S. Senate changed its filibuster rules this week after some Republicans threatened to block any vote on any judicial nominee. The changed rules make it unlikely that Janet Yellen’s nomination to head the Fed will face a procedural delay of a few months, something at least two senators who have proposed to abolish the Fed had threatened.

The NCUA liquidated one very small credit union tonight. Polish Combatants Credit Union of Bedford, Ohio had 52 members.

Wednesday, November 20, 2013

Americans Stay Put

Americans are not moving from one residence to another nearly as often as you would expect from historical patterns, according to the latest census report, “Geographical Mobility: 2012 to 2013.” The 2013 mover rate of 11.7 percent is not significantly above the record low of 11.6 percent set in 2011. It is not just that people are financially stuck in their current houses — among those who moved, most stayed within the same county. Only 4 million moved at least 200 miles and into a different state. For those moving from one state to another, the biggest group are moving from California to Texas — hardly a surprise given the size of the two states, but a large enough trend that it will surely soften Texas’ sometimes confrontational culture over time. The report notes that people living in poverty are more likely to move than others, but those numbers are skewed by the inclusion of a disproportionate number of college students in that category.

The pattern of moves is interesting, but the bigger story is found in the 88.3 percent of Americans who stayed in the same residence as last year. Part of this is financial pressure, to be sure, but part of it may also be the growing inertia that comes with owning more and more material possessions, making it more work to move. I think also people are not putting quite so much emphasis on living in an impressive home — perhaps because people simply aren’t as impressed with homes as they were a few years ago.

Tuesday, November 19, 2013

Belated Cleanup Begins at Fukushima

Those who misread the news might imagine that the process of dismantling the damaged nuclear reactors at the site of the Fukushima disaster has now begun. No doubt the power company involved would like you to see the story that way, but the actual reactor disassembly is still many years away. The new work this week concerns the fuel rods, essentially nuclear waste, which must be removed from onsite storage before they do any further harm. The fuel rods are stored upstairs from the reactors in structures resembling swimming pools, an arrangement that presents a wide range of possible problems. The earthquake itself may have disarranged some of the metal rods. Others may have softened and bent as the water supply in the pools became unreliable in the following three or four days. Subsequent explosions in the outer shells of most of the reactor buildings sprayed debris into the pools, debris that cannot be removed until after the fuel rods are taken away. Yet some rods may be stuck in the debris.

In an undamaged reactor, moving fuel rods is a delicate operation, but all in a day’s work. With all the damage at Fukushima, removing the nuclear waste may take years. The hope is that it can be completed before the next major earthquake. The more difficult cleanup below can’t really get started until the nuclear waste is moved out of harm’s way.

Sunday, November 17, 2013

Buying Off-Peak Electricity

Pennsylvania is one of the states that encourages consumers to choose their electric suppliers, and today, I signed up for an off-peak electric plan. Compared to plans that charge the same price all the time, this plan charges a price 80 percent higher during peak hours on weekday afternoons. The idea is to encourage you to shift electric use to off-peak hours, during mornings, midday, evenings, nights, weekends, and major holidays when there is excess electric supply capacity. During off-peak hours, the off-peak plan’s price is 20 percent lower than comparable plans. This pricing is possible only if your electric use is measured with a digital meter that keeps track of the time of day. The meters on my house were replaced with the new digital ones just a month ago.

An off-peak plan is not meant for anyone who runs air conditioning all summer. If you insist on keeping cool, air conditioning can be half of your total electric consumption over the course of the year, and almost half of this will fall during the peak hours. But if you do not use air conditioning at all, or if you are out of the house on weekdays and the air conditioner is off while you are out, it seems to me you would have to save money with the off-peak discount.

There isn’t the same issue with heating. If you use electric heating, you can heat up the house in the morning, then turn the heat off for the afternoon. Afternoon is the time of day when a house gets the maximum solar heating effect, so even without adjusting the thermostat, you use less heat in the afternoon.

In my case, I can save more money if I can put off cooking and using hot water until off-peak hours. I know there are days in the summer when there is nothing on in my house but the computer, stereo, and refrigerator during the peak afternoon hours. Perhaps the off-peak electric plan will encourage me to follow that pattern more often.

Friday, November 15, 2013

This Week in Bank Failures

Three European banks in terrible financial condition this fall, Monte dei Paschi and Carige in Italy and Britain’s Co-Op Bank have something in common: a history of being controlled by charitable trusts. Monte dei Paschi is government-controlled now after a series of bailouts, while Co-Op gave over control to Wall Street hedge funds as part of a rescue plan this fall. Carige looked to be in better shape until its latest financial report, when the erasure of €2 billion in phantom assets left it holding an embarrassingly weak balance sheet. In truth, Carige has broken even this year aside from its accounting corrections, so it has a fair chance of raising capital in the securities markets. With Co-Op Bank, by contrast, no one can say whether it will be viable next year its new form. It seems just as easy to imagine its customers abandoning it. As for Monte dei Paschi, it doesn’t have a way forward and faces liquidation in about a year if nothing is done.

Is there a governance problem with banks organized as charitable trusts? Trusts can stagnate, but that is a risk shared with every form of business. Looking more closely, there is no question that Monte dei Paschi and Co-Op were ruined by recession acquisitions. These were huge and arguably worthless asset purchases that the respective banks paid handsomely for, almost as if the recession did not exist. Carige is a different story, but its problem loan portfolio also may reflect a history of being oblivious to economic risks. It doesn’t quite add up to a pattern that explains anything, but I will keep looking for any neglected principle that this set of troubled banks might point to.

Thursday, November 14, 2013

Cell Phones as Document Scanners

This a technology transition that sneaked past me and had already taken place before I noticed. In the late 1990s there wasn’t any hand-held camera that could take the place of a flat-bed scanner. I know this because I tried it. The camera image was not sharp enough, and the shutter not fast enough, to produce a readable image of a business document. That changed sometime in the last few years. The best evidence of this is found in the millions of checks that are deposited from mobile apps every day. If a cell phone camera is sharp enough to create a check image, then it is also sharp enough to create a worthy image of a business letter or a retail receipt.

Obviously, there are compromises involved. Compared to what you get from a flatbed scanner, the image from a hand-held phone camera is blurry. The colors are grayish, the shapes skewed. But the advantage is that you don’t have to carry the document to the scanner. Often, that is a compelling advantage, and it is reason enough to predict, we will be seeing more and more cell phone camera images of documents in the years ahead.

Tuesday, November 12, 2013

A Catastrophic Hurricane Season

Some in America are saying it has been an exceptionally light hurricane season. Presumably they are looking at the North Atlantic Ocean. The number of North Atlantic tropical systems this year has been about what you would expect, but their wind speed and combined energy has been low, the lowest in three decades by one measure. Globally, it has been a different story, and that was true even before the typhoon that leveled whole towns over the weekend. The intensity was expected to match that of the most intense tropical cyclone ever to strike land, and early damage reports are generally consistent with that prediction. But with landfall occurring on a minor holiday weekend in the United States, I fear that many American TV news viewers may never learn of it, and may carry on imagining that the world got off easy this hurricane season. The vagaries of the U.S. news cycle often result in major stories getting lost in this manner, and policy decisions are distorted as a result. Of course, announcements of bad news are routinely scheduled for Friday afternoon so that the country will not notice. You could make the case that this is the United States’ Achilles heel, yet it is hard to say how the news of the weekend could be brought into balance with the news of the week.

Sunday, November 10, 2013

Christmas Shopping Off to a Quick Start

Last month’s government shutdown hasn’t dented this month’s Christmas shopping. Shoppers locally have been out in force in the last two weekends, during daylight hours anyway. There are not so many shoppers out after dark, but I think people are just trying to be practical, and that is what makes people undertake Christmas shopping in October and November in the first place. Retailers’ promotional discounts may be low-key at this point, but they are big enough to tell shoppers who know they will be busier in December that there is no need to wait.

Locally the weekend shopping has been lifted by favorable weather. That looks likely to continue today and tomorrow, not just here, but across most of the country.

Saturday, November 9, 2013

LED Prices Declining Again

Prices for LED light bulbs held nearly steady for a year as manufacturers focused on boosting volume, but now prices are moving down again. Locally I am seeing clearance prices as low as $8 (update: as low as $5 for 40-watt equivalent bulbs) and regular prices mostly between $11 and $19.

The $10 price point is significant because it represents the crossover point, from a consumer point of view, between incandescent and LED. At that price, an LED light bulb costs about the same as an incandescent bulb over the first year of operation. After the year is over, the LED costs are much lower, as the incandescent bulb burns out and has to be replaced, but the LED carries on. An LED bulb may last for 50 years — they haven’t existed for that long, so we don’t really know. Fluorescent bulb prices have also fallen, so that they have a slightly lower one-year cost, but they too are more expensive than LED over the life of the light bulb, and they have the disadvantages that go with a more fragile device and a lower quality of light.

It isn’t the season, in the north, to make the switch to LED — the waste heat of incandescent bulbs isn’t wasted during the heating season. If LED light bulb prices fall below $10 by spring, though, that may be the moment when the market shifts and LED becomes the dominant technology for room lighting.

Friday, November 8, 2013

This Week in Bank Failures

SAC Capital pleaded guilty today to insider trading. Under an agreement with prosecutors, the fund manager will close its hedge funds and pay a $1.2 billion fine. A related civil settlement, which included an additional penalty, was approved this week. The criminal penalties the company has agreed to must now be reviewed and possibly adjusted by a judge. Six SAC employees have pleaded guilty and two others are awaiting trial. Regulators have been criticized for going easy on SAC because of its size, but in my opinion it was probably prudent to allow a $15 billion fund to wind down over a period of a few months. Just shutting it down one day with no advance warning could have caused a cash crisis among banks and other third parties.

This week’s better news comes from Ireland, which is ready to exit its European bailout arrangement. The international lines of credit are set to be paid back next month, though there is a possibility of a delay or a transitional line of credit through about February. Ireland became insolvent from a series of ill-advised bailouts for banks that failed in the end anyway. However, it has climbed back much quicker than most observers had predicted.

In other developments, France was downgraded, Barclays and Deutsche Bank failed to get Libor claims dismissed, and the U.S. Department of Justice in a mortgage fraud case is seeking damages from a Wells Fargo executive in addition to the bank itself. New York Fed President William C. Dudley in a speech talked about a cultural problem in banking and criticized “the apparent lack of respect for law, regulation and the public trust” on Wall Street. It was startlingly direct language that may be a sign of the frustration regulators feel at the lengths the giant banks have gone to to circumvent laws and regulations.

Thursday, November 7, 2013

FDA to Delist Trans Fat

The Food and Drug Administration today proposed removing artificial trans fat from its Generally Regarded as Safe (GRAS) list of food ingredients that can be used with few or no restrictions. That might sound like a technical change, and the FDA presents it in those terms, but it is a revolution in food safety.

The FDA cites the estimated 5,000 heart attack deaths caused annually by trans fat. Some experts suggest a much higher number. Yet, strange at it may sound, heart attack death is actually one of the smaller effects of trans fat. Trans fat is a badly shaped fat molecule. Fat molecules form cell walls, so when trans fat is part of that mix, the result is a badly formed cell wall that tends to leak under stress. And guess what is made of cells: your entire body. So when we say trans fat causes leaky cell walls, what that really means is that it causes your whole body to start to break down. This creates openings for fungi such as yeast to attack your body. It is a lot like having the decay associated with death going on while you are still alive.

There is a great deal of irony in this effect. The reason food manufacturers make trans fat is that it resists decay better than natural fat. But the same qualities that make trans fat last a long time at room temperature also make it difficult to metabolize. The trans fat in your body is harder to burn off than natural fat — not good news if you want to lose weight. The best answer for trans fat is to not eat it if you can help it, but the FDA hasn’t been helping in that regard. It not only encourages trans fat in food, but allows moderate amounts of it, up to 0.5 gram per serving, before food manufacturers are supposed to tell you it’s there. Food manufacturers routinely go right up to that 0.5 gram limit. At that rate, you could be eating 2 kilograms a year of trans fat even if you stick to foods that are labeled as trans fat free.

Some of the dangers of trans fat have been well known to science since about 1994. Yet it is still on the “safe” list — a governmental lie that has been allowed for the past generation. As the FDA begins the slow process of changing its policies, it is understandable that it will be downplaying the change. The government is not about to say, “We’ve been encouraging food manufacturers to put potentially deadly poison in your food, but that is going to change in a few years.” Yet that is essentially the situation.

The proposed FDA rule does not affect “natural” trans fat, but I don’t think that matters. In reality trans fat occurs only in trace amounts in nature. The “natural” trans fat that the FDA is referring to is found in meat and milk, primarily from cows that are fed candy (along with bread and other surplus food) that contains artificial trans fat. If you think it’s natural to feed cows candy that contains dangerous chemicals, maybe you could work for the FDA too. “Natural” trans fat is really just another form of artificial trans fat. But this also means that as food manufacturers change their recipes, the “natural” trans fat will gradually go away too. Eventually, the surplus candy fed to cows won’t be so loaded with trans fat.

Changes won’t occur right away, so read food labels and avoid food that lists trans fat or that comes from a manufacturer that uses trans fat in any of its other products.

The partial ban on trans fat in New York City restaurants helped pave the way for today’s FDA action. When that ban went into effect, restaurant owners complained that the flavor of food would suffer. Yet restaurant patrons barely noticed the change. This makes sense when you consider that trans fat is an artificial chemical that essentially has no flavor of its own, the result of the same chemical properties I have already mentioned. As we find our way out from the effects of a century of eating trans fat, some thanks has to go to New York for paving the way.

Wednesday, November 6, 2013

Unmarried Voters Carry Virginia

In yesterday’s gubernatorial election in Virginia, Terry McAuliffe defeated Ken Cuccinelli by about a 2.4-point margin. The results were hardly the “squeaker” that so many people were saying last night when an eighth of the votes had not yet been counted. It was a race that was being watched nationally to see how a culture-war conservative might do in a “swing state.” The results can hardly be encouraging for social conservatives who think they shouldn’t have to pull any punches when they criticize students, singles, union members, and other groups who they see as responsible for social decline. One of the most surprising results seen in exit polls was the margin of victory for the Democrat McAuliffe among unmarried voters. From Ariel Edwards-Levy’s story in Huffington Post:

. . . unmarried voters, especially women, preferred McAuliffe by wide margins. He beat Cuccinelli by 25 points among unmarried men and 42 points among unmarried women.

This is a notable trend not just because there are so many unmarried voters. Unmarried voters also are more likely to be paying attention when they vote. Married voters have a greater tendency to choose their vote based on things they heard 10 or 20 years ago. Unmarried voters, by contrast, are more likely to vote based on current information. Unmarried voters, then, give a better indication of where the electorate is going over the next 10 or 20 years.

And what that indicates is a 2-to-1 margin of victory of a Democratic candidate over a Republican candidate in a swing state like Virginia. That will certainly be a problem for culture-war Republicans — and given the election result, it is a problem already.

Tuesday, November 5, 2013

Confidence and Credence

The bankruptcy in Brazil of oil giant OGX and the plea agreement in New York for hedge fund manager SAC show how quickly multi-billion-dollar enterprises running on bravado can unravel. It is a lesson we should have learned in 2008 when the Wall Street companies that boasted the loudest turned out to be the ones that were closest to the edge of disaster. That perhaps is still true, but most analysts and journalists still tend to automatically ascribe credence to CEOs who are artists when it comes to expressing confidence in the prospects of their respective organizations. Reports based on that error are in every day’s news, and when you read them, remember that confidence is just an expression. It won’t determine the actual outcome of a struggling business.

Monday, November 4, 2013

Shelling Cashews and Fair Trade Questions

The Guardian has a story about the cashew trade:

The story focuses mainly on cashews produced in southern India and sold in western Europe, though cashews are also produced in many other countries. People might be surprised at how labor-intensive a product like cashews is, and how little is paid for that labor. The biggest concern is the lack of hand protection for many workers who shell cashews. Raw cashews are naturally coated with a caustic oil similar to that found in poison ivy, and the need for skin protection is obvious. For it to be absent is a sign of cost-cutting gone too far.

Friday, November 1, 2013

This Week in Bank Failures

Royal Bank of Scotland went through the whole exercise of designating a portfolio of its “bad” assets, those with a projected value near zero, only to learn that it must continue to hold its bad portfolio on its own books. At least it will be able to report separately how its “bad” assets are doing. That may reassure investors, but with no restructuring, there has to be some doubt about whether RBS will be able to become privately owned again anytime soon.

At least Citizens Bank will eventually break free of state control. The RBS U.S. subsidiary, purchased in 1988 and based in Rhode Island, will see an IPO about one year from now, with plans to sell a 25 percent stake at that time. RBS says it will complete its spinoff of Citizens Bank by 2016, probably with additional stock offerings. As recently as last week there were reports of TD Bank buying Citizens Bank, but that apparently will not happen. The spinoff of Citizens Bank is seen as an important step toward recapitalizing RBS.

A probe of currency trading by banks is now targeting at least nine giant global banks. As a sign of how seriously the banks take the investigation, many suspended traders and executives this week, particularly in London. The suspicion of investigators and banks alike is that traders at several banks may have been working together to manipulate foreign exchange markets, similar to the way that other traders colluded to manipulate Libor base rates. One consequence of suspending traders is that it may prevent them from making new trades to cover their tracks.

There was a rare Wednesday evening bank failure this week. State banking regulators closed Bank of Jackson County, which had branches in Graceville and Marianna, Florida, near the Alabama border. It had $25 million in deposits and a similar amount in assets. First Federal Bank of Florida took over the deposits and purchased the assets.

The NCUA took charge of a credit union in Philadelphia tonight, placing Mayfair Federal Credit Union into conservatorship. Only the main office will stay open. The credit union has 1,500 members.