This Week in Bank Failures

Italy might be spending €6.6 billion or €8.8 billion to rescue Monte dei Paschi, according to two official estimates. The bank plans to issue €15 billion in new bonds in 2017.

The currency crisis in India could turn into a food crisis. The country is not expected to have a normal amount of currency in circulation until late 2017. In the meantime, rural farmers who have money in the bank may not be able to get the cash they need to buy seeds and pay farm laborers for planting. With currency in desperately short supply, bank customers wait in line for days to withdraw $30, the largest cash withdrawal available.

Venezuela will soon be recalling most of its paper money, but that deadline has been extended until January 20. New coins began circulating on Wednesday but could initially be found only in the capital Caracas.

Toshiba Nuclear Writedown Raises Questions About Nuclear Sector

A Toshiba writedown on its U.S. nuclear business will be several times the nearly $1 billion charge that analysts expected. The loss is large enough that investors now have reason to wonder about the solvency of the company, a sprawling conglomerate mainly known for its computer memory chips. A bigger concern is what the Toshiba loss might say about the health of the U.S. nuclear sector. A few U.S. nuclear power stations announced shutdowns this year because they were unable to operate without fuel subsidies. You have to wonder if nuclear operators are wealthy enough to pay for the decommissioning of power plants, most of which will reach the end of their useful lives in the next 40 years, along with the long-term storage of the spent nuclear fuel. The public might be left to pay much of the cost of winding down the nuclear experiment at the same time it is paying to clean up hundreds of sites contaminated by coal.

Lease Expiration, Taxes, Vacant Retail Space

Expect thousands of store closings in the next eight months. Ten-year leases signed in preparation for the 2007 Christmas shopping season expire in 2017. The recession began around December 6, 2007, and many of the store locations that opened that year were never profitable. The list of ten-year lease locations includes more than 500 belonging to just two retail chains, American Eagle Outfitters and Abercrombie & Fitch. Those are two slowly fading chains that surely can’t wait for the chance to close most of their locations, and of course, there are other, smaller examples. At the same time, the risk of tax increases in 2017 will make retailers reluctant to make long-term commitments on stores that show anything less than a consistent healthy profit. Combine these factors and a down 2016 holiday season with the many other uncertainties that retailers face, and the U.S. is likely to end 2017 with a record-setting amount of vacant retail space, exceeding what we saw in 2009.

Late Christmas Shoppers Arrive

I heard of local stores opening at 7 a.m. starting on Tuesday. That day the stores were sadly empty in the early morning, but by Wednesday the late Christmas shoppers started to arrive. Since 5 p.m. Wednesday it has been easy to see that it is the holiday shopping season. Today is Friday, many people are taking the day off, and stores have been busy since early this morning. The 50%-off sales mean that purchases don’t count for quite so much revenue this week, but retailers are still happy to see shoppers in the stores. Everything seems to point to a healthy shopping season just slightly below last year’s numbers. Retailers (other than Walmart) held back on their seasonal purchases this year, so they should come out well enough. Struggling apparel and specialty chains that were counting on a blowout Christmas season to lift them over the top, though, may find that this shopping season was not quite enough.

This Week in Bank Failures

Ukraine took over its largest bank, ironically named PrivatBank, which was suffering from a $5 billion capital shortfall. Other insolvent banks in Ukraine have been liquidated, but PrivatBank was considered too big to fail.

We were waiting most of the week for news of the fate of Italy’s oldest and third largest bank, Monte dei Paschi. There was no further progress in the final days of the stock sale. A sovereign wealth fund that the bank had hoped would be its anchor investor decided early in the week, perhaps actually last week, that the whole deal was too risky. There did not seem a way to structure a capital arrangement that properly protected the interests of the new investors. Around the same time, the bank acknowledged that it was not as liquid as previously thought, and it could run out of money as soon as April. The bank’s future was in doubt for a few days. The bank faced a December 31 regulatory deadline to raise capital, but the clock ran out on its stock offering at 2 p.m. today. According to published reports, the bank raised a small fraction of the money it needed, between one tenth and one fourth of the €5 billion it was seeking. The board met this afternoon and formally requested government assistance. Then the cabinet met late in the evening and around midnight, approved a state rescue of the bank. Exact terms of the rescue have not been spelled out and it seems that some decisions will be postponed until a new audit of the bank is underway in January. There is a plan to convert the junior bonds held by bank customers into senior bonds in order to protect those investors from large losses at this stage. Government officials have said, though, that all investors would have to take some kind of loss in any government rescue of a bank.

In New York, law enforcement officials say two Platinum Partners hedge funds worth more than $1 billion had been run like a Ponzi scheme since 2012, with secret accounting, phantom assets, and exaggerated earnings. The scheme was uncovered after an officer of the company tried to bribe a government official. Weeks later, Cayman Islands regulators ordered the funds liquidated. Six executives have been arrested and charged after an investigation that included the FBI, the SEC, and others.

Update, Friday: Deutsche Bank will pay $7 billion, and Credit Suisse, $5 billion to settle charges of misrepresenting mortgage-backed securities sold in the United States between 2005 and 2007. For Deutsche Bank, the settlement is larger than the amount the bank had set aside, but the bank has assured investors that it will not need to seek government support as a result of the penalty. A similar case pending against Barclays will apparently be decided in court.