This Week in Bank Failures

Last weekend brought a new European huddle to try to address the rapidly deteriorating banking conditions there. Leaders decided the European Union could not put together a special fund to support the banks, but the separate countries are alert to opportunities to act in a coordinated way, as several did midweek in a simultaneous interest rate cut (which the United States also participated in). There was a hint that executives may be held responsible when banks fail — though that may be little more than an admonition to bank executives to be sure they are making responsible decisions.

I learned how bad the Iceland situation is: banks there have borrowed 6 times the nation’s annual GDP, and now it is hard to imagine how this can be paid back. The country began negotiating for help from its trade unions. On Monday, trading was halted in shares of Iceland’s major banks, while the government guaranteed all deposits and the banks sought to sell off overseas holdings. ING Direct UK quickly offered to purchase £3 billion of UK deposits from two Icelandic banks. The government took over the third largest bank, Landsbanki, after it failed Tuesday. Wednesday, the larger bank Glitnir, already nationalized two weeks ago, was put into receivership. A day later, Iceland nationalized its largest bank, Kaupthing, and shut down its stock market for the rest of the week.

On the continent last weekend, Germany’s chancellor tried to reassure depositors after a 35 billion euro bailout package for Hypo fell apart. The message was, please continue to put your trust in the banks, and, we promise to hold things together. By Sunday night, a new bailout plan, valued at 50 billion euros, was on the way.

Germany’s promises to depositors seemed to fall short of the blanket deposit guarantees put forward a week ago by Greece and Ireland. There was some concern that deposits would flow to those countries, emptying out the banks in other countries, but that did not seem to materialize. On Tuesday, the European Union raised its minimum deposit guarantee to 50,000 euros.

Benelux banking giant Fortis, after being propped up for a week, was nationalized in the Netherlands and sold off to a French bank in Belgium and Luxembourg.

Russia, whose stock market has suffered the worst, put a trillion rubles into its banking system to keep it liquid.

Another stock market in crisis is Brazil’s, yet that country is in a strong financial position and took further steps to protect its banking system from the global crisis.

In the United States, the Treasury Department took its Wall Street bailout plan back to the drawing board to try to figure out how to morph it into a bank liquidity fund within the limits of the legislation that was passed a week ago. The original plan would have done little or nothing to slow down bank failures, a concern that has become a higher priority in the weeks since the plan was proposed. The Federal Reserve, though, cautioned that bank failures would continue regardless of anything the Treasury might do.

Citigroup spent the week disputing the deal between Wells Fargo and Wachovia before finally relenting Friday morning. In court papers from one of the many lawsuits Citi filed, we learned how close to the edge Wachovia has been. It had been advised by an FDIC official that it could be taken over within a day if it could not find a buyer. Obviously, an adverse court ruling could leave Wachovia in receivership. One resolution that was floated would transfer hundreds of Wachovia branches to Citi, but this idea fell apart when Wells Fargo and Citi could not agree on a division of the Mid-Atlantic offices. An arrangement along those lines could still be negotiated and would leave Wells Fargo less top-heavy while providing Citi the geographical expansion it is seeking.

Citi’s aggressive posture in this dispute has resembled that of a wounded animal, and this raises questions about Citi’s own financial health. We now have to take seriously the scenario that Citi could fall before the year is over, rather than next year as observers had previously worried. If the wrangling between Citi and Wells Fargo over Wachovia had led to all three banks collapsing, that would have been the worst possible outcome, so the FDIC was reviewing all the proposed deals carefully to try to minimize the risks.

It was in some ways the worst week ever in the stock market, setting new records day after day for volatility. U.S. banking stocks fell roughly in line with the rest of the market, that is to say, down roughly 16%. The market turmoil reportedly led the White House to consider more drastic actions to intervene in the economy, but President Bush read a statement from the Rose Garden today that seemed to say that the actions taken so far would be sufficient.

On Friday night the FDIC closed two banks. It was the first simultaneous closure of two unaffiliated banks this year. These are small banks. Main Street Bank of Northville, Michigan, had $98 million in assets earlier this week. It had two offices in the outer suburbs of Detroit, in Northville and three miles south in Plymouth.

Meridian Bank of Eldred, Illinois, had offices in five Illinois towns near Saint Louis, Missouri. It last month had total assets of $39 million.

Main Street Bank was hurt by late payments on mortgages and construction loans, but most of all by the decline in manufacturing in eastern Michigan. Monroe Bank & Trust is taking over the deposits of Main Street Bank along with $17 million in assets. The FDIC is giving it 90 days to decide whether to purchase any of the Main Street Bank offices.

Meridian Bank had operated since 2003 as a successor to the troubled State Bank of Eldred. It had been cited in July by regulators in Illinois for sloppy lending practices and other procedural and financial problems. One problem was a $2.5 million loan to local travel agency YTB, whose web site emphasizes franchise and investment opportunities rather than travel destinations. That loan was due to be repaid in 2007, but nothing was paid until January 2008, when YTB repaid a fifth of the amount due. National Bank of Hillsboro, Illinois, is taking over the deposits and a small part of the assets of Meridian Bank. This represents a geographical expansion for National Bank, whose previous locations are all in south central Illinois.

Customers of both banks have had uninterrupted access to their accounts.

Soy Overload

There are some foods Americans just eat too much of. Wheat, milk, corn, and refined white sugar are prominent examples. Most of us eat each of these every day as processed food ingredients. Eating the same thing every day, even in moderate amounts, presents far greater risks of subtle toxic effects and undetected food allergies than if you eat something just occasionally. It is perfectly fine, most experts think, to eat the same thing two or three days in a row, but it is safer not to eat the same thing week after week. Another food we get too much of is soy, and the risks associated with soy are becoming more clear all the time.

Through the 1990s, soy was a fad “health food.” The fad faded as safety questions started to pile up. I was always skeptical about the health claims associated with soy, knowing that much of the early research that claimed health benefits for soy was done by the same people who claimed that tobacco use was safe. We have since sorted out the most egregious lies about tobacco, so what happens when we sort out the lies about soy? It is becoming abundantly clear that although a few of the health benefits of soy are real, they are smaller than we thought, so that the damage done by soy greatly outweighs its benefits.

Joseph Mercola this week collected recent research and analysis on soy. Taken together, the evidence is so one-sided that the title he chose for his article is “The Evidence Against Soy.”

Most damaging to what is left of the soy fad is an American Heart Association Science Advisory that found that soy has only a trivial effect on cholesterol and no measurable effect on other biomarkers for which a benefit from soy had been claimed. No significant beneficial effect was found even when excessively large amounts of soy were consumed. People ate so much soy in some studies that, for example, the soy alone exceeded the ideal levels of total daily protein.

Many of the health risks associated with soy are now well established. It blocks absorption of various nutrients and neutralizes essential body chemicals, creating imbalances and deficiencies that have caused widespread diseases including birth defects. All this was the result of people eating too much soy, often in the mistaken belief that soy was a good thing to eat. The evidence against soy does not suggest that everyone should avoid soy entirely. Rather, it suggests that soy in its unfermented forms should be classified as a junk food, to be eaten sparingly and not used as a substitute for real food.

Heating Costs Affect Different Places to Different Degrees

From Forbes, I found an article that digs into the regional differences of home heating economics. It’s the kind of analysis that economists use to forecast the effects of energy price changes on regional employment rates and other measures of economic performance, but the Forbes story attempts to explain it in non-technical, journalistic terms:

What It Will Cost to Heat Your Home

It is mainly the northeastern states where oil is heavily used for home heating, and it is here that rising oil prices will force us to adjust our heating strategies in the near future. Other energy prices could go up too, but oil is likely to go up first and fastest.

The obvious answer is to have everyone who uses oil switch to natural gas and electricity. Maybe that’s too obvious, because there could be a shortages if everyone switched at once. Ultimately, we need to use less energy for heat, which basically means better insulation, and find new sources of energy that we can deliver to homes for this purpose.

Real Hurricane Damage

Surfside Beach, Texas, has electricity again.

The sewer system is “still up and down.” And water? That will come later. They won’t be able to repair many of the leaks until more storm debris is moved.

Surfside Beach was well away from the center of Hurricane Ike as it made landfall near Galveston, Texas. On the right side of the storm, whole towns were effectively leveled by the 4-meter storm surge. Houston is finally back in school, but still watching to see which of its businesses will be able to reopen.

I wrote yesterday about the importance of the real economy and how the financial crisis could lead us to overlook things that are more important. The hurricane damage that is still being repaired in Houston, along most of the Texas and Louisiana coasts, at least as far inland as Missouri, and also along most of the length of Cuba, is an example of the real economy at risk.

The Federal government basically blew off the hard-hit greater Houston area, providing only the most minimal assistance for its hurricane disaster recovery as it sought to save its money to bail out Wall Street. That was almost a month ago. Now as Washington obsesses over a few small businesses that allegedly may have short-term layoffs because they ran out of money and can’t get short-term loans, the unemployment statistics are starting to pile up from Texas on north. It seems safe to say that more than a million people are or were temporarily unable to work because workplaces were not ready to operate. Sometimes all they are really waiting for is electricity.

The U.S. government has spent, I believe, over a billion dollars on recovery efforts from Hurricane Ike, and more for Hurricane Gustav before it. That is a lot of money. But it pales in comparison to the $3 trillion it has sunk into financial markets in the past three weeks — apparently over $1 trillion yesterday alone. All that money is being put out there to get the economy moving again. But one of the most powerful ways to get the economy moving again is to clear debris from roads and restore electricity so that people can go back to work and back to school. It matters how quickly that happens, and it would take a lot less than a trillion dollars to speed up the recovery by a matter of weeks.

The President claims to be a resident of Texas, but his recent misplaced priorities show that his real home is on Wall Street. Ultimately, the U.S. economy does not live and die by what happens on Wall Street. In the meantime, we still do not know how many people died when Hurricane Ike hit the Texas coast.

You Can’t Eat Credit Default Swaps

There is a problem with the way we measure economic activity.

We include products of actual value, such as food that restaurants cook and serve to customers, right alongside products of only theoretical value, such as food that restaurants cook and throw away unserved.

Some of the “products” we count are so very abstract, they could be completely empty of any value, and we wouldn’t be able to tell. This is especially true in deals between one public corporation and another in which no tangible product is exchanged. Many of these deals serve mainly to make each company’s financial statements show more profit or less risk than is actually present.

These abstractions threaten to crowd out the things we are really trying to create — food, drinking water, housing, clothing, transportation, and the other real products that go together to form what in financial circles is called the real economy. The real economy contains the things that really matter in the end. Abstractions are valuable only to the extent that they support the real economy. Eventually, you have to take out some of your money (an abstraction) and use it to buy food (something you really need). As my mother warned me when I set out to make my fortune on Wall Street, you can’t eat credit default swaps.

The abstract economy has become so much bigger than the real economy that it is no longer possible to measure economic progress using economic aggregates. GDP, the oft-cited measure of national income, can go up even as the real economy shrinks. Financial measures of wealth can go up while material wealth declines. Anecdotes are more powerful than economic statistics if you want to know how well the economy is treating people.

How about you? Are you focusing too much on statistics and abstractions and losing track of what you really want?

Forget your salary and bank account for a moment and consider this: How easily are you getting the things you really want? Stop worrying about health “coverage” and answer this: How is your actual health? Instead of checking the latest count of your online “friends” — how happy are you?

This kind of check is good anytime, but it is especially important when the economy around you has been affected by a bubble, such as the currently declining credit bubble. In economic theory we assume that values can be represented by amounts of money, but that assumption fails us when a bubble exaggerates the value of something. You can avoid or escape the influence of a bubble by looking at what is actually important to you.

This is the same thing the economy in the aggregate must do to recover from the credit bubble. It is harder for the whole economy to do, though, because the usual aggregate measures of economic success, such as GDP, can be especially misleading around a bubble. That’s why it is sometimes hard to identify the public policy moves that will get the economy going again.