Thursday, December 31, 2009

Move Your Money

Here’s an idea for a new year’s resolution, from a group called Move Your Money: if you have accounts at the major Wall Street banks, close those accounts and move your money to a place where it will be safer and do more good, such as a community bank or credit union.

Personally, I don’t understand why someone would have an account with one of the banking giants. These banks needed and sought government help for exactly the same reason that they are not as safe as the average bank: they do so little that matters to anyone that their customers wouldn’t be interested in bailing them out. If Congress decides not to bail out these banks again the next time they falter, which could happen any day with no warning at all, you’ll have to move your money anyway — so why not move it now?

Community banks, by comparison, are economically important — they make the loans that make the economy run, the loans that the super-large banks have stopped making. Most community banks are not in any financial trouble, but they will be able to make more loans if they have more deposits. There are personal advantages in doing business with a local bank or credit union, if you choose one carefully. The fees you pay could be considerably less. You are less likely to be hit with surprise fees that don’t make any sense. You are also less likely to have accounts canceled or changed around for reasons that no one can explain.

Here’s the Move Your Money movie:

Happy new year!

Wednesday, December 30, 2009

The 00s: Clinging to the Past

With hours to go before the decade is over, it is about time for me to try to sum up the decade of the 2000s. As I do so, I don‘t have any hesitation about the key theme of the decade. It was often a frustrating period for a future-oriented person such as myself because institutions and people in power spent so much of the time clinging to the past. This is easy to see if you just look at what people expected for this decade when it got started, and compare that to the way it turned out.

Just a few quick examples:

  • In the book industry: We went into the decade talking about digital presses and electronic books. As the decade is ending, we are still fiddling around with those ideas — and we find ourselves asking when we can finally get the industry to communicate by a more modern medium than the fax machine.
  • Solar panels: This would be the decade when generating electricity from sunlight would go mainstream. Not. We entered the decade with a chronic shortage of solar manufacturing capacity, and as the decade ends, the shortage has not only persisted, it has become more acute.
  • Digital music downloads: What more advanced file format would replace the MP3 in the 00s? None! It’s not that better file formats aren’t available. People just aren’t using them very much. In fact, as the decade ends, lawyers are still mopping up after the lawsuits against Apple — it was unfair competition, competitors and government regulators said, that Apple allowed its music players to play other file formats in addition to MP3!
  • Clothing: This was the decade in which the fashion industry just about died. It started out with people becoming nervous about being seen in new clothing styles. It ended up in a year in which most people didn’t buy any new clothing at all. I defy anyone to tell apart scenes from 2000 and from 2009 by the clothing in the photos. You can’t do it, because for the first time in more than a century, clothing styles at street level didn’t shift perceptibly in any direction over the course of the decade.

As widespread as this nostalgia and resistance to change was during the 00s, it didn‘t stop progress. It only dictated that the most rapid progress would occur in areas where people weren’t paying attention or didn’t understand what was going on. Much of the most important progress over the course of the decade took the form of a simplification of something people were already doing. The perfect example of this in the 00s, in my opinion, is Unicode. Most people probably never stopped to think about the fact that web pages gradually started to display characters with accent marks or that some YouTube videos were captioned in traditional Chinese. That became possible because the world decided to mostly use one character set, in place of the 200 or so that computers used at the beginning of the decade. This transition might not seem so important, especially if this is the first time you are hearing about it, but it is this kind of simplification that sets the stage for further progress.

Tuesday, December 29, 2009

Christmas Travel, Flu Decline?

U.S. health officials were bracing for a burst of flu cases around the Christmas holiday because of so many people traveling. Instead, reports so far suggest a sudden drop in new flu cases, particularly those of the H1N1 virus. Travel, it seems safe to say, is not the main factor in spreading the flu this season. The evidence points again to hand-contact surfaces in schools, most of which are closed this week, as the primary point of concern.

There is reason to hope that the two-week holiday break at most U.S. schools will be enough to break the flu trend, just as Mexico City’s two-week shutdown took away the momentum of the flu epidemic there last year. The World Health Organization (WHO) cautions, as they must, that we cannot assume the H1N1 pandemic is winding down now. A smaller second wave of infections could appear without warning. But four months after the peak of the first wave, there is still no sign of that happening.

Monday, December 28, 2009


What is the point of exchanging Christmas presents?

About one person in 20 will answer, “To get the stuff that people give to me, of course!” This answer is so obvious to the author of the new book Scroogenomics: Why You Shouldn’t Buy Presents for the Holidays that he does not even feel the need to ask the question before he leaps into his explanation of how economically inefficient it is.

The author, economist Joel Waldfogel, collected subjective reports of the value of holiday gifts from the people who received them, in order to estimate that roughly 25 percent of the value was destroyed by the gift-giving process. Put more simply, people tend to be disappointed by the gifts they receive, as the items they receive are subjectively worth about 25 percent less than was spent on them. This is a higher degree of disappointment than is found in things that people buy for themselves. Or, to put it another way, you would get more stuff if, instead of buying anything for anyone, you spent all the money on yourself. In this sense, commercialized gift-giving is inefficient. And the main purpose of the book is to persuade readers to buy things for themselves instead of giving gifts because that will be more efficient.

If this view sounds crass, well, Waldfogel warned you about that with the book’s title. The title starts, after all, with the name Scrooge, the fictional character who popularized the phrase, “Bah! Humbug!” as a response to celebrations of the Christmas holiday. Scrooge, though, had a change of heart at at the end of the story, and decided that Christmas gift-giving made some sense after all. Waldfogel does not have a similar change of heart, but grudgingly offers advice on ways to do gift-giving more efficiently, as long as we are forced to continue doing it.

Yet the advice, ten pages of it, does not go far. Half of it emphasizes the importance of minimizing risk by knowing the recipient’s preferences, and by not spending a lot. The other half considers strategies for charity tie-ins and gift cards. Most of the advice, like the rest of the book, misses the point of Christmas gift-giving.

There is a correct answer to my opening question, one that Waldfogel, at least in his Scrooge character, seems not to have considered. Christmas gift-giving is, at its heart, an excuse for a social occasion. Christmas gift-giving is not so inefficient if one takes into account the subjective value of the social occasion. Scroogenomics does not acknowledge this possibility. And those of us who actually enjoy getting together with people at Christmas will surely take offense at this, and at the book as a whole. Worse, those not trained in economics may not catch the intellectual slight-of-hand by which the bulk of the value of the Christmas celebration is whisked away, and may come away from the book grumbling suspiciously about how economic theory destroys the value of the things that matter most in life.

Again, it is the title that tells you who this book is really for. It is not really for people who grumble about the difficulty of Christmas shopping. The same people would also grumble about the difficulty of reading 146 pages of often dry economic theory. No, this book is for unrepentant Scrooges. It’s for the kind of people who can say, “I hate Christmas,” with such passion that you hope that they don’t happen to be carrying their machine guns on any occasion when they run across Santa Claus. It’s for people like the book’s Tommy, whose response to receiving a gift is, “A friggin’ kaleidoscope? What the heck were you thinking, you old bat? I hate this thing, and I hate you.” If, like Tommy, Christmas makes you fly into a rage, and if you don’t mind reading economic prose that’s more dry and soulless than what you see in The Wall Street Journal every morning, then Scroogenomics provides all the scientific-sounding rationale you need to justify being as angry as you are about such an inefficient holiday.

Sunday, December 27, 2009

Christmas Shopping Season 2009

With the Christmas shopping season winding down, here is my take on what happened:

  • It was the latest Christmas shopping season in years, not getting rolling until Thanksgiving. People spent hours on Thanksgiving (and the day before, for those who were not traveling) researching their purchases online and in many cases, buying items online. Some retailers leaked their Black Friday circulars early, but these leaks were roundly ignored by the public. The traditional rush of online orders on the Monday after Thanksgiving never materialized because people had placed many of those orders already.
  • The season also ended early, with the heavy retail traffic on the day after Christmas winding down by the middle of the afternoon, even though that day fell on a Saturday this year.
  • Inventories were small. Individual items at individual stores ran out. Items as basic as gift wrap and candy ran out days before Christmas. There were few bare shelves, however; stores filled their shelves with whatever they had left to sell and made it look good. People often had to go to a second or third store to find essential things during Christmas week.
  • With smaller inventories, discounting was minimal. Many items sold out at full retail price or 20 or 30 percent off.
  • Shoppers visited most stores only once. They rarely checked back to see if prices had been cut. In my opinion, this is a sign of time pressure, with shoppers feeling that they did not have the time to do the intensive shopping that many had done last year.
  • Not many shoppers were paying with credit cards. When compared to last year, there was a move from credit cards to debit cards and from debit cards to cash.
  • When shoppers couldn’t find the items they wanted at the prices they wanted to pay, they traded down, looking for anything suitable at discount stores, especially Dollar Tree and Five Below.
  • More people were giving items they made themselves, sometimes as a replacement for gift cards. In this connection, Christmas-themed items, such as gingerbread, were common.
  • Clothing sales were down sharply, and when people bought clothing, they were looking for practical things. The fashionable thing to wear this year was last year’s stuff, and that’s a trend that has continued right through the end of the year.
  • Jewelry, luxury items, and upscale department stores showed further weakness even when compared to last year.
  • Outlet stores also fared poorly. I can only guess it was because they had relatively little interesting merchandise to offer.
  • Sales of gift cards were apparently down slightly, and as in the last two years, there is no sign of a rush to spend gift cards by the people receiving them.
  • With the smaller discounts and small leftover inventories, this shopping season was surely more profitable for retailers than last year’s rout, but not enough to provide much of a financial lift.

Saturday, December 26, 2009

Signs of Weakness in Iran

The botched election fraud in Iran this year cost the regime its legitimacy. Before that election, Iran was seen as a semi-functioning democracy, but that view has fallen away. After the current regime made only the barest pretense of counting the ballots in this year’s election, it will never be able to hold another election. The post-election government is still struggling to pull itself together amid internal feuding, while unrest continues on the streets, where people expect a declaration of martial law any day now.

But Iran did not become a failed state merely through bad decisions by its leaders. The people who really pull the strings in Iran, the diverse criminal organizations that operate under the umbrella of the Revolutionary Guard, are having trouble getting along with each other these days, and the reason is economic stress. The greater the degree of political stress Iran shows at street level, the more it tells of the country’s underlying economic weakness.

The solution to Iran’s very serious economic problems can only come with new ideas, and those ideas will mostly have to come from people under 40 years old. This is true simply because these are most of the people in the country, but it is also true that they are better educated than the aging criminal leaders who are running the country now. A generation gap, reminiscent of the United States in 1970, has the older generation in power unable to trust anyone under 40. This lack of trust, and the corresponding inability to delegate, results in important work not getting done. The situation is probably too fragile to evolve comfortably into some kind of new working order. Instead, Iran’s leaders need to undertake, as quickly as they can, the tough questions involved in rebuilding that country’s failing institutions.

Friday, December 25, 2009

Sometimes, Taking a Positive Approach Means Expecting a Miracle

It’s easy to be dismissive of a situation that looks hopeless or a scenario that seems impossible. “That will never work,” we say, “because first this would have to happen, and then this, and then this.” This approach can be logical enough when you apply it to forces of nature: “A hurricane could never reach the North Pole, because first Quebec would have to be warmer than it has ever been, and then a hurricane from the Atlantic would have to cross Quebec in just the right direction, going as fast as a hurricane can possibly go, and keep going without meeting any crosswinds until it got to the North Pole, and what are the chances of any of that happening?” But it is a mistake to apply this kind of thinking to anything that matters to a specific person.

It is a mistake because it ignores the role of intent. It isn’t so logical to tell an author that his book will never be published because no publisher has ever published a book on that topic, and if a publisher were to do so, there are dozens of people who would be more qualified to write the book, and even if the book were published, the public wouldn’t pay any attention because no one is looking for a book like that. Those may indeed be the circumstances that an author faces, but if the author intends for the book to be published, he may find a way to change each of those circumstances one by one.

People who used that kind of logic to say that a black person could never be president of the United States have had to backtrack. Now they are saying, more accurately, that it took an unprecedented sequence of events for Barack Obama to be elected. But the people who said that if the United States were to elect a black president, it would prove that the country had fundamentally changed, do not have to backtrack; their comments, however skeptical they might have been at the time, look visionary in retrospect.

It is easy enough to change a “That will never work” statement to one that the course of events will not so easily disprove. Change the statement to a positive form, something like, “That could happen if this happened and this happened and this happened, and if any of that happened, that would really be something new and different.”

Sometimes this means you’re asking for a miracle to take place before an outcome can occur. But there is more than a semantic difference between expecting a miracle and saying that something is impossible. It’s a different way of looking at a situation. When you’re looking for something surprising and new to get you to an intended outcome, every now and then, you will find it.

Thursday, December 24, 2009

Safe Travels and a Fresh Perspective

I know many people are traveling today, and I also know that, for many, the trip they take now is the closest thing they have had to a vacation since the year got started. If this is your chance to get away, make the most of it. A vacation trip does not have to be far, expensive, or even particularly pleasant to provide the change of perspective that can give you fresh ideas about your situation and the challenges you face. We all need new ideas in times like these, and just looking at the world from a different place can give you a new way of thinking about the whole range of subjects that have been on your mind. I wish everyone who is going somewhere today safe travels.

Wednesday, December 23, 2009

Young Shoppers, and the Super-Rich

Why are U.S. retail sales down by more than the decline in personal income? Part of the answer, as a Reuters story explains, can be seen by looking at who is unemployed. Employers are giving an unusual degree of preference to experienced workers, leaving many workers with less than ten years of experience — who are mostly under 30 years old — out in the cold. Employment has fallen about 25 percent among workers 16–19 years old and among males 20–29 years old.

This is bad news for retailers, because younger people are more reliable shoppers. By the time people get to be 30 or 40 years old, they have had years to accumulated personal possessions, and typically have all the possessions they can use, with plenty to spare. Younger shoppers do not have the same level of material affluence. A 20-year-old, for example, may go shopping to buy a second pair of shoes. But with younger shoppers taking a huge hit in income because of being unemployed in such large numbers, they don’t have the money to spend, and retailers are feeling the effects.

Conventional thinking going into this month was that it wouldn’t matter how much most of us spent at retail, because a resurgence in confidence among multi-millionaire households would make up for all the spending that the sub-millionaires among us were not doing. So far, there is no sign that this is happening. Last year’s decline in jewelry, high-end departments stores, and luxury goods is continuing this year. Multi-millionaries may be more confident, but that doesn’t mean they need to buy anything.

Tuesday, December 22, 2009

Why First-Time Homebuyers Are Important

The United States faces the largest excess of housing stock of any country ever. That doesn’t mean there are more houses and apartments than people, though that is true in a few isolated places. It does mean there are too many houses compared to the people who might occupy them. This is why first-time homebuyers are so important, and why the federal homebuyer tax credit specifically focuses on them.

When people who already own a home buy a new home, ordinarily they move out of the old one, leaving it vacant and available for sale. The transaction, then, typically doesn’t change the number of houses on the market. It is a different story when people buy a home for the first time. They leave, at most, a vacant apartment behind. The number of vacant houses declines when they buy a house.

Vacant houses are significant for a number of reasons, among them: they may serve as staging areas for criminals targeting the neighborhoods they are in; market values for all houses in the area go down; builders cannot rationally build new houses in the area (though so far, that hasn’t particularly stopped them).

Many of the vacant houses were previously owned by people who fundamentally couldn’t afford them. The banks they were borrowing from ended up owning the houses and offering them for sale. If there is a way to get people who can afford the houses to purchase them, it reduces the number of vacant houses.

In the end, this is fighting a losing battle. Other factors tend to increase the number of vacant houses on the market, and at this point, they have the upper hand. Homebuilders keep building enormous numbers of new houses, at a rate that is more than half of their pace at the peak of the bubble; millions of foreign workers, unable to find jobs, have left the country; there is a mass movement of households from houses to apartments. Over the next five years, the number of vacant houses will probably go up, no matter what government policy is. But there are benefits to be found in postponing that increase.

Monday, December 21, 2009

Study Connects Happiness With Quality-of-Life Metrics

A new study sought to find out whether there was anything to the quality-of-life measurements that economists conventionally use to compare one place to another. These quality-of-life indexes are created using objective data on factors such as climate, air pollution, and tax rates. Economists have been reluctant to rely on them, though, because there hasn’t been much to indicate that they really meant anything.

That’s where the new study comes in. The study, “Objective Confirmation of Subjective Measures of Human Well-Being: Evidence from the U.S.A.,” by Andrew J. Oswald and Stephen Wu, published in Science Express on December 17, put together quality-of-life indexes of U.S. states with life-satisfaction self-rating data (that is, people were asked how satisfied they were with their lives). It found a strong correlation between quality of life, as estimated by economists, and life satisfaction from surveys. People tended to be more subjectively happy in places that had a high quality of life.

This is important as economists approach public policy questions. Economists and policymakers will now be able to rely on qualify-of-life indexes in order to attempt to craft policies that may improve the quality of life. Currently, government economic policy mainly seeks to expand the economy, without much concern for how this affects quality of life, because quality of life is considered to be unmeasurable. Now that we know that quality of life is somewhat measurable, at least as a quality of places, we can start to shift the focus of economic policy toward improving quality of life.

Sunday, December 20, 2009

December Shopping: Retailers Are Still Waiting

The weekend snowstorm is putting a damper on the Northeast and 20 percent of shoppers in the country, but how is this month going at retail in general? Retail analysts say that shoppers are still holding out for bargains. But what this really means is that shoppers so far haven’t been buying as much as retailers were hoping. Every year, retailers say they’re expecting a last-minute push from shoppers, but realistically, this is the year that that is least likely to happen, with financial pressure limiting consumers’ options.

And the employment news also suggests that the shopping season has not gone well. Post-holiday layoffs at retail started two weeks ago, mostly in clothing shops where the shoppers never materialized. Ordinarily, the post-holiday layoffs don’t get underway until Christmas Eve at the earliest.

Online sales and gift cards are up, but only slightly. And in keeping with the payment trends, credit card sales are down sharply from last year. This means that consumers who can’t find the discounts they are looking for can’t just pay full price. If they buy something, it will have to be something less. This is one reason analysts are expecting dollar stores to be the busiest places on Tuesday and Wednesday.

Saturday, December 19, 2009

Christmas Shopping, Snowed Out

Snow today is messing up retailers’ holiday plans.

The Saturday before Christmas is almost always the biggest day of the year for retail sales. We’re not just talking about Christmas gift shopping, though the day is the last hurrah for many Christmas gift shoppers. But it is also a big grocery shopping day, and some households will spend as much on Christmas-weekend food as they spend on Christmas gifts. And of course, today is a big day for Christmas trees and other decorations.

But today, a major snowstorm is interfering with this pattern. And although the storm is not particularly widespread in a geographical sense, it is affecting major cities from North Carolina to Connecticut, with the heaviest snow, 10 to 20 inches, expected across the densely populated area from Washington to New York. The storm is forecast to continue on Sunday between Philadelphia and Boston. I have to guess that the snow will keep most would-be shoppers at home across the affected region for much of the weekend. Some will catch up on their shopping on Monday or Tuesday, but life is busy, and it isn’t realistic to expect most people to catch up on anything, once they fall behind — they will make do with less.

This is bad news for retailers, of course, and it is a big enough event to make its mark on the sales summaries and economic statistics that come out at the end of the month. But as much as it affects the retailers, this reduced spending has little impact on the shoppers. Another present, decoration, or pie would be quickly forgotten, but the snow, which will still be on the ground on Christmas Day, will be remembered.

Friday, December 18, 2009

This Week in Bank Failures

Tonight is the finale for bank failures in 2009 as the year winds down. With the wheels of commerce slowing down for two holiday weekends, more bank failures will happen only if something sudden and unexpected occurs at a particular bank. There were 140 bank failures in 2009, five times the pace of 2008. If past bank failure episodes are a guide, the number of failures will double in 2010, and the end of 2010 will mark the midpoint of the bank failures, which will continue at a declining rate for at least five more years. Of course, a great many things about the current period of financial turbulence are not like what has happened before, so this is certainly not a time to become complacent and imagine that we know how things will turn out.

Among the challenges that banks will face next year:

  • A change in accounting rules for credit card securitization could lead to the failure of the credit card business at several large banks or conceivably at every credit card issuer in the United States. Security issues related to card transactions may also hit a crisis point with little or no warning.
  • The largest wave of mortgage resets ever will occur over the next 10 months or so, and this is expected to lead to the largest wave of foreclosures in history. This, of course, will further depress housing prices and lead to more problems with real estate development loans.
  • Commercial real estate values, which have held up pretty well so far, are expected to tumble in 2010. This will mean that some very large loans, some of them over a billion dollars, will be left with incomplete collateral.
  • Several waves of layoffs are coming, starting with the retail layoffs that come every year at the end of the holiday shopping season, and the largest wave of government layoffs ever. U.S. unemployment is expected to hover between 10 and 11 percent all year. Unemployment is traditionally the main factor that prevents consumers from repaying loans.
  • The economic recovery underway in other countries will lead to higher global energy prices, and that will squeeze U.S. businesses and consumers.

The big advantage that banks have going into 2010 is that they have had plenty of time to see that the world has changed, and that some risks are greater than they looked a few years ago. The banks that are most likely to fail in 2011 and 2012 are the ones that take a back-to-normal philosophy in 2010 and try to do business as if it is 2005 again.

Developments this week: Giving up on recruiting an outside candidate for its CEO vacancy, Bank of America has selected an insider, Brian T. Moynihan, for the position. Moynihan seems like a good choice — he has experience in many of the bank’s divisions, so he is less likely than his predecessor to overlook any of the many challenges that the bank faces. ◾ With major banks rushing to repay the TARP money they got from the Treasury, there has been a delay in Citigroup’s stock offering for that purpose, apparently because after Wells Fargo’s stock offering, there wasn’t enough big money left to cover Citi’s planned stock offering. The Treasury stands to lose about $1 billion as it sells off its share in Citi, but this is less than its gains in shares of other banks. ◾ Venezuela is tripling its deposit insurance limit to boost confidence in its banks, but banks there are complaining about the increase in deposit insurance fees.

On what I expect to be the last night of bank failures this year, four billion-dollar banks failed. Two were in southern California: First Federal Bank of California, with 39 branches and $4.5 billion in deposits, and Imperial Capital Bank, with 9 branches and $2.8 billion in deposits.

The 80-year-old, expansion-minded First Federal Bank of California had grown to be the second-largest savings & loan in the country, and was still opening new locations through last year. But then, after a $245 million quarterly loss, it realized it was in trouble and started laying off workers and selling assets.

In its expanding period, unfortunately, it had emphasized adjustable rate home mortgages, issuing more than $4 billion of them in 2005 alone. Loan losses piled up as soon as real estate values stopped rising.

OneWest is acquiring the bank’s deposits and assets. OneWest is the successor to IndyMac Bank, which was one of the largest originators of risky mortgage instruments, and its experience with those loans may help OneWest sort out the First Federal Bank of California loan portfolio. The FDIC estimates its costs for this bank closing at $146 million.

Imperial Capital Bank had been operating under a cease-and-desist order since February. It went on to lose more than $100 million in the first three quarters of this year. Its lending problems were compounded by the high interest rates it paid on CDs, some of the highest in California, making it hard for it to make a profit on its loans. Three of its nine locations were outside the state — two in Nevada, and one in Maryland.

The successor to Imperial Capital Bank is City National Bank, which is assuming the deposits and purchasing 78 percent of the assets. With the acquisition, City National Bank becomes the largest bank in Los Angeles.

Another bank in Florida failed tonight, but this time, it was in the Florida panhandle. Peoples First Community Bank was based in Panama City, but also had offices across the northern half of the state, 29 in all. It had $1.7 billion in deposits. Mississippi-based Hancock Bank is assuming the deposits and purchasing about 90 percent of the assets.

The OTS issued a prompt corrective action against the bank last month, ordering it to arrange a sale or merger immediately. This came after it rejected the bank’s capital restoration plan, submitted in August. The bank blamed its difficulties on the real estate crash, which hit parts of the Florida gulf coast three years before it hit nationally.

Hancock already had branches in Pensacola and Tallahassee, but this acquisition gives it a much stronger presence in Florida.

The FDIC estimates its costs for this bank closing at $557 million.

In Alabama, New South Federal Savings Bank failed. The bank had just one office, in Irondale, a suburb of Birmingham, but had $1.2 billion in deposits. Mounting losses, $41 million in the third quarter, forced the bank to shut down its mortgage lending operation, which at one time had been the heart of the bank.

Beal Bank is acquiring the failed bank’s deposits and assets. Beal Bank, based in Texas, previously had made its money as a wholesale bank, acquiring problem mortgage loans from other banks and often reworking them or foreclosing. In this deal, it has acquired New South’s entire portfolio, with loss-sharing from the FDIC to limit its potential losses. New South’s single location, compared to the size of its loan portfolio, probably made it a less attractive target for more conventional banks to bid on.

The FDIC estimates costs of $212 million for this bank closing.

Three smaller banks also failed tonight, and the FDIC was unable to find a successor:

  • Independent Bankers’ Bank (IBB), a correspondent bank in Springfield, Illinois, with $512 million in deposits. At least two other correspondent banks have nearly identical names, but are not affiliated with the failed bank. Its depositors were about 450 banks located in four states. It had been operating under a cease and desist order from the FDIC since September. Like other correspondent banks, it was involved in loan participations and other complex deals among multiple banks, and I can only guess that it allowed itself to get caught in the middle of too many deals related to loans that ultimately failed. The FDIC has created a bridge bank, Independent Bankers’ Bank Bridge Bank, to continue operating the business of the bank for at least several months. The cost to the FDIC is estimated at $68 million, and it could gain or lose money on the operation of the bridge bank.
  • RockBridge Commercial Bank, in Sandy Springs, Georgia, along the Atlanta beltway. It opened three years ago with the intention of concentrating on business lending, but instead, nearly three fourths of its loans are to real estate developers. The bank started out with an impressive $36 million in capital, but had virtually none left by the time the FDIC issued a prompt corrective action against it in September. The bank had $292 million in deposits, and the FDIC estimates that 1 percent of deposits were uninsured. The FDIC will send checks to the depositors on Monday, but because of the Christmas holiday and the heavy volume of mail next week, many of the checks may not arrive until the following Monday. Debit cards issued by the bank will no longer function, and this will surely affect some people’s shopping plans. The FDIC could not find a buyer for the bank, in part because it was located in an office building, away from the street. The FDIC estimates its costs for this closing at $124 million, though based on the mix of loans, the ultimate costs will probably be higher. Georgia had 25 bank failures this year, the most of any state.
  • Citizens State Bank, with 6 branches around New Baltimore, Michigan, north of Detroit, with $157 million in deposits. About 0.5 percent of deposits were uninsured. The bank had been operating for 87 years. It took big losses on real estate development loans, including loans to a developer who fled the country a year ago after his projects failed. The FDIC is creating a bridge bank, which will hold the deposit accounts for 45 days, but depositors should begin taking action immediately on Monday to open new accounts at other banks. The bridge bank is called Deposit Insurance National Bank of New Baltimore and will be operated under the management of Huntington National Bank. The FDIC estimates its costs for this closing at $77 million.

Thursday, December 17, 2009

5 Qualities to Look for When Selecting a Gift

With Christmas barely a week away, and the busiest shopping day of the year coming up on Saturday, I know many people are looking to pick out some gifts for people quickly. The good news is, gift-giving is not as complicated as the people who want to sell you the gifts would have you believe. You can’t go too far wrong if a gift has these five qualities:

  1. It’s pretty. Above all else, gift-giving should be pleasant, and the easiest way to make this happen is to give something that looks nice. This means, for example, if you’re giving tea, you might pick out tea that’s packed in a tin, rather than the usual paperboard box.
  2. It’s something you can hold in your hand. The most emotionally compelling way to “present” a gift to someone is to hand it to them, and even if you’re not there to do this personally, someone else may do it. If a gift is too large, presenting it becomes awkward. Get something smaller instead, if you possibly can. If it is too small, put it in a pretty box that is large enough that it can’t get lost.
  3. It’s easy to understand what it is. This is so a person’s reaction when they first see it won’t be, “What a nice . . . um . . . um . . . well, what is it, exactly?”
  4. It expresses something of the personality of the person giving it. This is easier than it sounds. Anything you pick out is the result of the way you see the world.
  5. It matches up with something in the personality or lifestyle of the recipient. This is mainly a matter of not going overboard with point #4. Set your own preferences aside just enough to give a different thing to each person, based on who they are.

And there you have it. Time is running out, but with this checklist, you won’t have to resort to gift certificates, magazine subscriptions, or any of the other things you might offer as your way of saying, “I’m sorry I couldn’t find the right gift.”

Wednesday, December 16, 2009

3 Misconceptions About Circuit City

Months after the Circuit City consumer electronics chain closed, misconceptions continue to pop up in the media about what happened. These are three misconceptions I’ve come upon this week:

  1. Consumer spending is down because major chains like Circuit City and Linens N Things closed. Stores can’t pull people off the streets and make them come in and shop. These chains closed because consumers were already not spending very much in their stores.
  2. Circuit City made a mistake in laying off its “top sales people” to cut costs. The real mistake at Circuit City came five years earlier, when Circuit City strongly encouraged its sales people to sell overpriced extended service plans and accessories. That’s the reason customers stopped coming back. By the time the layoffs rolled around, Circuit City’s reputation was already ruined, and it was too late to save it.
  3. Former Circuit City customers are all shopping at Best Buy. To Wall Street, Circuit City and Best Buy were in direct competition, but that’s not the way consumers saw it. There are dozens of places where consumers can buy electronics. Consumers don’t care that KMart and (just to name two) aren’t considered consumer electronics stores, if they can buy what they want there.

Tuesday, December 15, 2009

Best Buy Report Points to More Active Consumers

Electronics retailer Best Buy is doing okay, according to its new earnings report. It made a convincing profit. Revenue was up about 5 percent, same-store sales up about 2 percent from last year. This is not so encouraging when you consider that a year ago, Best Buy had a major national competitor in Circuit City, which has since closed. Indeed, Best Buy told people not to get too excited about its results, offering a warning about profit margins. More shoppers, it said, are focusing on low-markup items, particularly low-end televisions and notebook computers.

I expect the trend toward lower markups to increase in the next three years as consumers try harder to get a good price. I’m not talking about consumers shopping around, going from store to store before they make a purchase. Some consumers do that, of course, but most are too busy, busier than ever, and that trend shows no sign of going away in the next few years. But consumers no longer have to shop around. They are getting better information on where the bargains are.

I have heard, for example, of a mobile phone application that can scan a product barcode and show other places where the product or similar products can be found, often with prices. Sometimes, it produces a map showing nearby places, marked with product prices. When consumers have access to this kind of information, it is harder for a retailer to slip an extra $20 into the price of an item. And this is the kind of information that will become commonplace about two years from now.

Retailers benefit when consumers are more active, but only up to a point. The most active consumers have relatively little need for retailers — these consumers always have other options. No matter what a retailer is offering, highly active consumers can take it or leave it. And consumers seem to be getting more actively involved in the shopping they do. That’s an emerging trend that will favor some retailers while forcing others to adapt.

Monday, December 14, 2009

The Problem With College Is Time Pressure

A new Public Agenda report, “With Their Whole Lives Ahead of Them” (PDF), reports the results of a study on why U.S. college students don’t finish college. This is no academic question; less than half of students who begin a 4-year degree program complete it within 6 years. The problem, most of the time, is not merely that college is too hard, but that life is too hard.

A full-time college schedule typically requires about 70 hours a week — 14 hours of classes and four times that for study, commuting, paperwork, etc. Yet the average college student also has a job and works 20 hours a week. If the combination of work and school is 90 hours a week, that is an average of 13 hours a day, leaving very little slack in the schedule so that the student can recover and catch up if any little thing goes wrong. Maybe half of college students who have jobs also have some family responsibilities, such as children to take care of. Some of these students actually find a way a graduate, but that’s one of those accomplishments that falls into the I-don’t-know-how-they-did-it territory.

There has been a lot of attention on the high cost of college in recent years, and I have focused particularly on the high cost of textbooks, many of which now cost over $200. And the high cost is keeping many students out of school. But the top reason students can’t finish college is the time pressure. If you have to work to support yourself, how are you supposed to find an extra 10 hours a day to keep up with classes?

It is clear from this study that the structure of college is an obstacle for most students. Part of what is needed is more flexibility in class schedules, but it is important to remember that this does not simply mean more evening and weekend classes. Less than half of U.S. workers now work the traditional weekday daytime work schedule or an approximation of it. No matter how you might fix a class schedule, it will still be inconvenient for a significant fraction of potential students who work. Students need actual flexibility, and most colleges probably can’t imagine what that would look like.

Another change that is needed is a greater institutional acceptance for part-time students. Studying 70 hours a week may be impractical for most people who have to work, but 47 hours may be a much more realistic approach for many. That leads to a college degree in six years, rather than the traditional four, but that is a lot better than not getting a degree at all, which is what is happening now for nearly half of all college students.

Sunday, December 13, 2009

Phasing In the Public Option

As the health care debate continues in Washington, one suggestion that has been offered is to put government employees, starting with members of Congress, staffers, and their families, on the public option from the outset. This is a very good idea. In fact, I would suggest doing this for a year or more before the public option is available to the public. This would allow the plan to get rolling, and smooth out some of the inevitable rough edges, before the plan scales up to the 50 to 100 million customers that it would eventually have to cover.

It’s less expensive to get something going on a small scale, then make it bigger, than it is to try to launch something on a massive scale from the outset. But from day 1, the public option would cost the government less than it currently pays for employee health care. The immediate cost savings would also make the public option more politically acceptable. It still looks unlikely that any effective health care bill will pass Congress this year, but if it does, I hope it will include the amendments that would start the public option with government employees, or at least Congressional employees.

Saturday, December 12, 2009

Squeezing the Sugar Out of Breakfast Cereal

It took a supply squeeze on sugar to make it happen, but still, the amount of sugar in breakfast cereal is about to fall.

General Mills says it’s planning to cut the sugar in some of its most popular breakfast cereals to single-digit levels, which in practice appears to mean 9 grams per serving. That might not sound like a reduction, but Lucky Charms, for example, currently has 11 grams of sugar in a 27-gram serving. After cutting this to 9, the cereal will still be one third sugar. Competitors Kellogg and Post have also been notching down the sugar levels in their cereals, and will probably follow General Mills’ lead into single-digit territory.

It couldn’t be a coincidence that these moves come at a time when a supply squeeze has increased the price of sugar. Cereal manufacturers put so much sugar in their products in part because it was the least expensive ingredient. Now that sugar and grains cost about the same amount, they won’t be paying extra to put in less sugar and more grain.

Friday, December 11, 2009

This Week in Bank Failures

Developments this week: “Take the money and run” can’t be the strategy for bank executives, the government has decided. New Treasury rules limit cash salaries for executives at bailed-out banks to $500,000 per year, with other compensation deferred three years or more. This gives executives a new incentive to keep their companies from collapsing. ◾ Bank of America paid back all its TARP funds to steer clear of the new pay restrictions, but the move has not improved its luck in recruiting a new CEO. Some at Bank of America are now convinced that the new CEO must come from outside the company because of the ongoing legal problems that may entangle the current executives. ◾ The banking crisis in Venezuela has shaken consumers in that country, who are spending less on Christmas gifts as a result, retailers say. Some indicted bankers have fled the country.

The largest bank failure reported tonight was SolutionsBank, with five offices in and around Kansas City, plus its original office in the opposite corner of Kansas, and $421 million in deposits. The bank’s optimistic approach, forging ahead with its real estate lending strategy despite the conditions of the economy, is what did it in. The go-for-broke mentality, which emphasized expansion and growth right up through today, fueled a rapid expansion in the real estate boom years from 2002 to 2005, but then burned through the bank’s capital just as rapidly when the real estate expansion came to a stop.

Arvest Bank, an expanding regional bank with more than 200 locations in four states, is assuming the deposits and purchasing the assets of SolutionsBank. Arvest Bank got its start in the Kansas City market by purchasing the three area branches of Harrington Bank four months ago.

Republic Federal Bank failed tonight in Miami. The bank was formed out of the 2006 combination of Hemisphere National Bank and Pine Bank, but lost $5 million in 2007, $25 million in 2008, and $11 million in the first quarter of 2009, giving it a negative net worth. The bank’s president resigned at that point, and it closed one of its five branches and tried to raise more capital, but its loan portfolio continued to deteriorate. Its deposits fell from $383 million in March to $353 million in September.

The deposits are being transferred to 1st United Bank, which is also buying 62 percent of the assets. The cost to the FDIC is estimated at $123 million.

A small bank failed tonight. Valley Capital Bank, with a single office in Mesa, Arizona, and $41 million in deposits was closed tonight, and its deposits and assets were purchased by Enterprise Bank & Trust. Enterprise Bank & Trust is based in Missouri, but had previously opened a lending office in Arizona with an eye toward expanding into that state.

Thursday, December 10, 2009

Step Away From the Credit Card Time Bomb

I keep hearing from people who tell me they have given up their credit cards, or are trying to. Living without a credit card is the subject of a new story released last night, which offers profiles of five people who are adjusting to life without credit. I wrote my own account of a month without credit cards in June. This trend is spreading, and I see it as a good thing. A credit card, right now, is the financial equivalent of a time bomb, so it’s a good idea to take a few steps away from it.

The credit card time bomb hits different people at different times. Thousands of people have been forced into bankruptcy, or at least into poverty, by having their credit card interest rates increased to around 30 percent. Others learn only when their card is declined that their bank has canceled their account or lowered their credit limit to the current balance, so that suddenly, no more credit is available. Next year’s credit card reforms provide a slight measure of protection for cardholders, but it comes too late to restore the old idea that credit cards are safe to use.

As I have written before, the credit card industry is facing disaster on two fronts. The transaction side is on the verge of collapse, and the financial side is in dire straits as well.

Fraud, organized crime, and security lapses could bring down the transaction side of the business any day, without warning (and this affects debit cards too). Credit card security breaches keep getting larger. Five years ago, a leak of one million credit cards seemed large. This year, one incident allowed criminals to gain identifying information on 300 million credit card accounts. In the next step in this escalation, I believe criminals will gain access to every credit card there is. The industry knows of this risk, but has plans to phase in the needed changes over a period of five years or more — and even then, there will still be gaps. It will be too late to matter. I fully expect to wake up one morning next year and hear that the Fed has ordered the credit card transaction network frozen because of fraudulent transactions on a scale too large to track. You’ll go to the gas station that morning, and the card readers on the gas pumps will be taped over. The gas station, and every other business, will need you to pay in cash.

The flaws in the credit card transaction network are more than enough to bring down the entire system, but the financial problems the industry faces may do so first. Advanta, previously one of the largest credit card banks, has already been forced to shut down when investors lost confidence in its cardholders (and that failure in turn hastened the collapse of CIT Group). Credit card banks depend entirely on investors who buy credit card debt securities, and this securitization process could fail next year for any bank that issues credit cards. The accounting rules for credit card securitization are changing, but even without that change, investors have reason to be leery of credit card debt. Banks have been changing the rules of their credit cards in a way that has driven away many of the best customers while driving many of the worst customers into default, a trend made worse by the worst unemployment in more than a generation. With this change in the customer mix, any bank that used a scattershot approach to increase its cardholder base over the past decade is likely to see a collapse in its credit card funding next year.

Even if the securitization process holds up, a bank ultimately has to make a profit on its credit card business. With the best customers paying down their balances, that will be hard to do. The total of U.S. credit card balances have increased year after year every year since the names Visa and Mastercard were invented — until this year. Now, suddenly, card balances are falling rapidly, with each quarterly report showing balances 1 to 2 percent lower than the quarter before. If credit card balances decline 6 percent this year, it does not mean credit card profits will be 6 percent lower. A decline as rapid as this is enough to squeeze all the profit out of a passively managed card portfolio.

With so much stress across the credit card business, everyone needs to stop taking credit cards for granted. For businesses, this means not relying on customers who pay by card. Thousands of businesses require customers to pay for all transactions by card. If the credit card transaction network has to be shut down and rebuilt, any such business could see its revenue fall to zero, not just for a few days, but for weeks. In a time when business credit is almost nonexistent, I have to believe that most of those businesses are not prepared for that.

For consumers, the problems with credit cards don’t merely mean that it’s important to pay off credit card debt. That has always been a good suggestion, but the more important thing now is to stop depending on credit cards (and debit cards too) to make routine payments. You might wake up tomorrow to find that all the credit cards in the country, or just yours, have turned into ID cards, no longer useful for paying for anything. You will need cash. You will need to go wait in line at the bank. Are you ready for this? Travelers are affected the most. Plan your travel so that you will be able to get home even if credit cards stop working along the way.

I realize how tricky this will be. Credit cards have been so reliable for so long that people use them unconsciously. It’s not so easy to take an unconscious habit and make it conscious. It is so difficult that the five people profiled in the story decided they had to give up credit cards entirely. But a conscious approach is what the situation calls for: to think before you use your card for anything. — So that the day the credit card time bomb goes off, you can keep going.

Wednesday, December 9, 2009

Cutting Costs and Creating Jobs

There is a way for the government to spend money to create jobs that won’t increase the budget deficit for years to come. The money should be spent on labor-intensive projects that will save the government money in the years to come.

The most obvious case for this is spending on projects to improve the energy efficiency of government-owned buildings. If the government can spend $2,000,000 on improvements in one building that will reduce the energy bill for the building by $250,000 a year, then that is a plausible investment to begin with. At a time like this, when the spending can also immediately reduce the government’s costs for unemployment benefits, it is an investment with an impressive rate of return.

Repeat this thousands of times on similar projects, and the government can create the jobs that are needed now while cutting its own costs going forward.

Tuesday, December 8, 2009

Flu Decline Continues

U.S. flu reports peaked shortly after the flu hype at the end of September and beginning of October and have fallen week by week ever since. Actual U.S. flu cases appear to have peaked in the second half of August. The most encouraging news, though, is the reason epidemiologists believe flu is now declining.

Flu cases are declining in the United States, they believe, simply because so many people have already had the new H1N1 flu. About 30 to 40 percent of people have had the flu already, with most of them not reporting any symptoms at all. A large number, approaching 20 percent, have been vaccinated. Another group, roughly half as a rule of thumb, are naturally immune to the new virus. There is considerable overlap among these groups, but any way you look at it, the pool of people available to spread the virus is much smaller than it was, with statistically more limited chances for the virus to spread from person to person. In simple terms, if you are worried about the H1N1 flu, you have probably had it already, and just didn’t notice it.

The number of flu cases reported in the next three weeks will surely increase, as the Department of Health and Human Services launched a new flu awareness campaign yesterday. The resulting hype will lead to more doctor visits and more testing, and therefore more flu reports. Health officials will point to this increase to justify their flu hype. But it will not mean that the actual number of flu cases is increasing unless the increase is confirmed by other measures.

This 2009 H1N1 flu spread so quickly in part because it was so mild. Only a small fraction of people with the infection showed obvious symptoms, and people who don’t know they have an infection are more likely to spread it. Epidemiologists now say it is certain to be the mildest pandemic ever recorded.

Quite obviously, though, milder pandemics occur all the time and go undetected. The H1N1 flu pandemic could easily have been missed if it had not showed up in such a concentrated way in Mexico City, New York City neighborhoods, and U.S. universities. The hot spots aside, there was nothing in health statistics to make researchers look for the virus. This is one reason epidemiologists believe the H1N1 virus could have been around for 3 to 5 years before it reached Mexico City, perhaps infecting only a few people around factory farms.

The ultimate toll of the H1N1 flu pandemic is now estimated to be a small fraction of one regular season of flu. As scientists get quicker at detecting new infections and viruses there will be more pandemics reported, and we will come to understand that most pandemics are nothing to worry about.

Monday, December 7, 2009

The Shrinking Data Center

This is the time of year when the information technology business waits for year-end orders to come in. These orders traditionally come from data center managers who want to beef up their data centers with whatever money they have left in their budgets. This year, though, more managers are holding on to their money, and where they are spending it, it is more likely to be spent on shrinking the data center than on expanding it.

Computers cost less than they did five years ago, while energy prices are creeping upward. The cost of electricity to operate a server is now considerably higher than the cost of the server itself. A data center can cut its electric bill by installing a new server to replace an old one — but it can save even more by installing a new server to replace ten old ones. A data center can shrink, and still get its work done, with:

  • Newer, faster computers (smaller or fewer than the ones being replaced)
  • Increases in hard drive capacity
  • Blu-ray replacing DVD for archiving
  • Adjustments in workflow scheduling, moving computation-intensive tasks into off hours
  • Furniture that maximizes use of floor space
  • Virtualization, to allow multiple operating systems to run on one server
  • Replacing custom software with more efficient off-the-shelf software

Some companies are spending millions of dollars to redo their data centers right now just to make more efficient use of their real estate. The objective could be to turn over floor space to another department, or to move out of a separate building that the company had leased for the data center.

Sunday, December 6, 2009

Driving in the Snow

I was a little surprised yesterday to see heavy traffic still on the roads several hours into a well-publicized heavy snowstorm that would last well into the night. So many people were out, I imagined, because they were determined to finish their holiday shopping, before parties and other seasonal obligations started to take over their weekends. And many were too pressed for time to slow down for the snow on the roads.

This fits with everything else I’ve seen that suggests that people are busier than ever. This is not, of course, what economic theory predicts. In a recession, we expect the pace of activity to slow down, not to continue to speed up. That slowdown does not seem to be happening in very many places in this recession, though. In an economically rational world, the slight risk of smashing up your car in the snow would lead you to drive with a great deal of caution or save the trip for another day — but many people don’t have time for that, and for every thousand cars I saw on the road yesterday, I saw one driven into a wall or a tree.

If people are pushing their schedules this close to the breaking point at the low point of a recession, how will it be after the economy starts to improve? There is, you could say, an activity bubble that has not yet been dented by the economic slowdown, but it cannot simply continue to expand year after year. Something will have to give. My hope is that people will be able to cut back on much of the trivia of life while keeping most of the activities that really matter — but the time pressure people feel is almost certain to lead to institutional changes in addition to personal changes.

Saturday, December 5, 2009

Seasonal Employment to the Rescue

The latest jobs report showed the U.S. economy adding jobs in November. It’s a hopeful sign, but no one should get carried away with excitement:

  • There was an increase in the number of people employed, but only up to about the level of September, and more huge layoffs are coming a month from now.
  • The traditional seasonal increase in employment happened this year, but it was smaller than usual, and most of the new jobs will end before New Year’s Day.
  • The unemployment rate fell, but mostly by forcing another 100,000 workers out of the work force.
  • The retail hiring shows that retailers were optimistic about this year’s holiday season at the beginning of November, but the retail report for November shows that this optimism was not particularly justified.
  • The jobs report clashes with all other measures of employment, which probably means that the number of permanent office and factory jobs declined again during the month.

Still, it is better to have a job for a month or two than not to have one. And the relative stability of the economy in this season suggests that the economy is not likely to fall apart with the new shocks that are on their way next year.

Friday, December 4, 2009

This Week in Bank Failures

Bank failure hit Venezuela in a big way this week. Four banks that were seized two weeks ago during a criminal investigation were shut down Monday, and three more banks were seized today.

While the government’s statements about the four banks on Monday emphasized that the banks were violating banking regulations, it appears to be a simple matter of banks running out of money. Two apparently were broke, and two more were dangerously low on funds. The owner of the four banks, a business tycoon with close ties to the government, has been indicted for lending money to himself in ways that violated banking laws. If true, it is basically the same as stealing money from the banks, as the loans to the bank owner weren’t paid back. In addition, 16 executives have been ordered not to leave the country as the investigation continues.

The two banks that appear to be broke, Banpro and Banco Canarias, are being liquidated. Regulators are still looking at the other two banks, Bolivar Banco and Banco Confederado, to decide whether to reopen them or liquidate them also. The regulators are probably hoping to find buyers for them, but that is a difficult prospect in Venezuela, where the government has already nationalized 20 percent of the banking system. In any case, depositors are mostly protected by national deposit insurance. The deposit insurance limit in Venezuela is $4,667, but that is high enough to cover more than 90 percent of depositors.

Three more banks were seized by Venezuelan banking authorities today: Banco Central Universal, Banco Real, and Banivest. Regulators closed the banks and say they are likely to rehabilitate them, although they also have the option of liquidating them if they turn out to be in worse financial condition than they appear.

The four Venezuelan banks closed on Monday held 5 to 6 percent of bank deposits in Venezuela, making that day larger in proportion than any day of bank closings in the United States. By comparison, the Washington Mutual failure, the largest in U.S. banking history, was barely 2 percent of the U.S. banking system. The three banks closed today in Venezuela were also large, holding 2 percent of the country’s deposits.

There is understandable concern over the banking system in Venezuela. Most Venezuelans remember the banking crisis of 1994, in which half of the country’s banks went under, and they might worry about a repeat of that. Also, some worry that the government may intend to nationalize the whole banking sector. The government, for its part, has accused its political enemies of organizing runs on the banks. So far, though, there isn’t much evidence to back up any of these worries. Analysts say that the Venezuela banking sector is generally pretty strong, and that the government wouldn’t want the distractions of running the banks. However, there is reason to imagine cases of corruption within the banks, as has been seen in many other businesses in Venezuela.

Other developments this week: Mortgage fraud was instrumental in creating many of the current credit problems, yet efforts to reduce it have been unsuccessful, and now, observers say, banks may be involved in mortgage fraud as sellers of foreclosed properties. More than half of home sales this year have involved foreclosures, and these sales often occur under rules that are more lax than other home sales. ◾ Mortgage defaults often occur after mortgage rate resets, and real estate analysts are warning that the largest group of these is ready to hit next year. Continuing high unemployment will also be a problem, so the rate of mortgage defaults and foreclosures could go twice as high as anything we have seen so far. ◾ The CIT Group bankruptcy may be affecting the National Hockey League (NHL). The Nashville Predators team owes an estimated $85 million to CIT, and the CIT bankruptcy has created a liquidity problem for the team’s majority owner, who was already dealing with the problem of a minority owner who is in jail and in bankruptcy. It sounds messy, but the majority owner is confident he will be able to raise the money he needs soon enough by selling other assets. If that doesn’t work out by summer, though, it’s possible that the team could be sold and moved to another city. ◾ Bank of America is preparing for a stock issue to raise money to repay its TARP funds. It’s a move the bank says will make it easier for it to hire a new CEO. ◾ An auction the U.S. Treasury held to sell warrants it purchased from Capital One went well today. The securities, which resemble stock options, sold for a net of $175 million. The government also earned interest on the $3.56 billion that it lent to Capital One last year, money that was repaid earlier this year. Other warrant auctions will follow, probably next month.

A small credit union was liquidated on Monday. The NCUA sent checks to the 747 members of Fairfield County Ohio Federal Employees Federal Credit Union after determining that it was insolvent.

Anchor BanCorp Wisconsin, parent of AnchorBank, appears to have worked out a deal to avoid a collapse. An investor group will put in $400 million to acquire a 95 percent share in the bank holding company. A month ago, AnchorBank had sold off 11 branches that it decided were outside its core territory.

Bank failures, which took a week off last week, returned with a vengeance tonight with the failure of AmTrust Bank, which had 66 locations in northeast Ohio, south Florida, and Arizona. It had $12 billion in assets and $8 billion in deposits in October, but the deposits may have been barely $7 billion as of today. It was founded in 1889 and was known as Ohio Savings Bank until 2007.

The writing was on the wall for AmTrust Bank when its holding company, AmTrust Financial Corp., filed for bankruptcy on Tuesday after a board meeting on Monday. The holding company is bankrupt because of declines in the value of assets in its real estate and insurance subsidiaries, a situation that was aggravated by a loss of revenue from the slowdown in real estate. AmTrust Bank was not directly affected by the bankruptcy — U.S. banking law prevents that — but the bank’s real estate loan portfolio was affected by the same problems. It is possible that the parent company anticipated regulatory action to close the bank, and filed for bankruptcy preemptively as a way to protect its creditors.

AmTrust Bank knew it had too much real estate exposure, and it was one of the banks that, around April this year, began paying its customers to close their home equity lines of credit. But by then, it was probably already too late for AmTrust. It had missed a December 31, 2008, deadline from the OTS to improve its financial condition, and its finances did not improve this year.

New York Community Bank is assuming all the deposits and purchasing 75 percent of the assets of AmTrust Bank, including all of the branch offices. New York Community Bank, also known as NYCB, is a large regional bank with 124 offices in New York and 53 in New Jersey. Its holding company also owns New York Commercial Bank, with another 35 locations.

The FDIC estimates its costs for the AmTrust closing at $2 billion.

State Bank and Trust Company, which until July had only two offices, in villages in south Georgia, grew larger tonight with the acquisition of two more failed banks in the Atlanta metro area. The larger of the two failed banks had $838 million in deposits and used a separate name for each location:

  • Buckhead Community Bank, Midtown Community Bank, and Cobb Community Bank, in different neighborhoods of Atlanta, Georgia
  • Sandy Springs Community Bank, in Sandy Springs, Georgia
  • Alpharetta Community Bank, in Alpharetta, Georgia
  • Forsyth Community Bank, in Cumming, Georgia
  • Hall Community Bank, in Gainesville, Georgia

Buckhead Community Bank was created in 1998 specifically to lend to Atlanta-area real estate developers. It’s one of those business plans that must have looked like a good idea at the time. The bank lost $60 billion in the first three quarters of this year and may have had no capital left by the time it was closed.

The smaller failed bank, First Security National Bank, had four locations in the northern suburbs and $123 million in deposits. State Bank and Trust Company is assuming the deposits and purchasing 99 percent of the assets of the two banks, and says it plans to keep all the locations open. The combined cost to the FDIC for these two closings is estimated at $272 million.

These other small banks, with deposits between $47 and $181 million each, also failed tonight (from largest to smallest):

  • Benchmark Bank, 5 offices in and near the suburbs of Chicago. Successor: MB Financial Bank.
  • Greater Atlantic Bank, 4 offices in the Washington, DC, metro area. The bank had had two additional locations that it sold off in the last two years. It had worked out a deal in June to be merged into MidAtlantic Bancorp, but a financial snag had prevented that deal from closing. Successor: Sonabank.
  • The Tattnall Bank, 2 offices in Tattnall County, Georgia. Successor: HeritageBank of the South.

The estimated cost to the FDIC for these three closings is $113 million. Tonight’s 6 bank failures bring the total for the year so far to 130.

Thursday, December 3, 2009

Gold Records

Gold prices have hit new record highs in each of the last three weeks. Gold prices are going up mostly because investors are anticipating inflation, which reduces the value of money and bank deposits. Gold, they hope, will retain most of its value.

It is funny to see investors reduce their expectations this way. The previous bubble that created the current crash came about because investors weren’t satisfied with investment returns of 5 percent a year, and were looking for ways to bump that up to 15, 20, or 25 percent a year. Most of those investment schemes not only fell short, but actually lost money — take the stock market, for example, which is struggling to hold on to levels it first reached a decade ago. And with retirement funds withdrawing more money from the stock market than they will be putting in over the next ten years, few experts expect stocks in general to be higher in 2019 than they have been in 2009.

Gold might lose a little of its value from one year to the next, but it could do better than what you get in a savings account, where your 0 percent interest will do little to make up for a rate of inflation that could be between 4 and 8 percent. There simply is no store of value that is entirely reliable right now — and that’s one of the reasons more people are looking at gold.

Wednesday, December 2, 2009

Are Home Builders Really Necessary?

I wish more real estate analysts could read Alvin Toffler, because the tone of the recent conversation about home building suggests that most people thinking about the subject can’t even imagine the possibility that a country’s need for indoor space could actually decline from one year to the next. They assume that more buildings will be needed every year, and it is just a question of how many more. Yet you don’t have to go far to see that this is not always true — that there are places where the construction of new buildings is not enough to keep up with the old buildings that are abandoned and demolished. To see what this looks like, you can go to a place like northern Pennsylvania. There, the population has remained relatively stable, and it is considered perfectly normal to live in a house originally built in the 1880s. There are new homes being built, for those families who insist on it, but the more common story is an old home being renovated.

The population of the United States is growing at about 2 percent a year, mostly from immigration. It is easy to look at the demographics and imagine that the country will need to build 2 percent more buildings every year. Yet that is not necessarily the case. People are also getting more efficient in their use of space. If space efficiency were to increase at the same rate as the population increase, there would be no net increase in the need for buildings.

Space efficiency is increasing because of technological improvements: flat-screen televisions that can hang on the wall, storage systems for closets, online magazines. It also increases because of social trends: people are giving away some of their excess possessions and are spending more time away from home. Current economic trends also encourage efficiency of space, notably the increasing cost of heating, cooling, and commuting. Looking at the next few years, it’s not hard to imagine people finding 2 percent improvement in space efficiency year after year.

As long as that’s the case, the need for new construction could be confined to high-growth areas. Observers waiting for a return to a 2 percent building rate in 2011 could be disappointed. Instead, building construction could decline from its current levels.

And a decline in construction would have implications beyond the building sector, in areas such as banking, lumber, and pickup trucks. General Motors pointed out recently that its sales of full-size pickup trucks, its strongest product category, are closely tied to new-home construction. If builders don’t have many new homes to build, they can keep driving the trucks they have.

Personally, I imagine another wave of building construction coming along in the 2020s. But I don’t know that, I’m just imagining it. No one really knows what the future holds that far in advance, because so many things will change between now and then.

Tuesday, December 1, 2009

The Day of the Vanishing Endorsements

Thousands of marketing web pages, videos, and even Twitter accounts disappeared today, but there’s no reason to panic. Today is the day when new Federal Trade Commission (FTC) rules go into effect — rules that make it illegal for an advertiser to fake customer expressions of satisfaction.

With the new rules, the television commercial where a football player says, “Most people don’t lose weight like me!” is no longer allowed. Any advertising that shows the results of any one person also has to state the average result. That could be embarrassing for get-rich-quick schemes, if they have to say, “The average person who bought our system didn’t even find time to read it, and among those who did read it, most didn’t understand it, did everything wrong, and lost money.”

The era of paid blog posts isn’t over, but it’s coming out of the closet. Bloggers who are paid to write about a product have to disclose that. Blogs that are fictional creations of an advertiser have to say so.

Most readers can tell a fake blog when they see it, but many people would be surprised at how many blog comments and discussion board messages are paid for, especially by software companies trying to pump up the image of their own products while tearing down competitors. Obviously, a discussion board note from a supposed data center engineer who can’t stand Linux won’t have much impact if it has to say, “Microsoft paid me to write this.” Software companies who continue to pay writers to create the appearance of grassroots support online will be breaking the law.

On Twitter, you will probably see the hashtag “#ad” more often on paid advertisements. That is probably enough to live up to the FTC rules, though experts are not sure. I am not sure what will happen to the fake advertiser-created personalities on Twitter. It is probably sufficient for the advertisers to disclose their ownership of the accounts in the account bios, but that might look bad. In some cases, it might be safer for them to delete the accounts.

The new rules can feel like a minefield to advertisers. This Adweek article sums up a few of the key issues advertisers need to think about: Navigating FTC's Guidance on Social Media Marketing.

And when you see web content that could be an advertisement, you shouldn’t assume that all advertisers will be following the new FTC rules. Advertisers have been ignoring laws and misleading potential customers since long before there was an Internet, and the FTC has a long history of giving big business a free pass when it comes to new regulations. The FTC is talking like it is serious about today’s new rules, though, and we’ll find out with the enforcement actions in January just how serious it is.

Monday, November 30, 2009

A Bad Weekend at Retail Is Good News for Consumers

I may never forget the moment when I drove into the Ikea garage on Friday morning and said, “Oh my God! Are they open?” I had fantasized that I might see the garage nearly full, but in my first glance, the lights were all on, but I couldn’t see any cars at all. It took only a second for me to realize that it would be impossible for any U.S. retail store to close for the day after Thanksgiving — they call it Black Friday, after all. And it took only another second for me to advance far enough to see that there were cars at the front of the garage, filling at least 20 percent of the spaces. It was similar to what you would see at this store on a normal Saturday.

Inside the store, and the various other stores I visited over the weekend, I saw a fair number of shoppers, but without the hype that often accompanies Black Friday and the Thanksgiving weekend. Shoppers were more relaxed, not feeling much pressure. This is partly due to the very limited discounts of this year, but also, I am sure, because shoppers were not putting much pressure on themselves. It was like they were saying, “I have all day to shop, and all I need to be ready for the holidays is these few things I have on my list here.”

That was true inside the stores, at least. Out on the highways on Friday, driving speeds were unusually high with shoppers rushing from store to store. I was startled by the scene of dozens of drivers blowing right past multiple police cars, part of an expanded police presence on the highways for the holiday weekend. Perhaps what this means is that people had limited time for shopping, but were determined not to stress out over it.

What I saw is consistent with the anecdotal reports from the extended shopping weekend. “People are going to buy for the holidays, but they’re not going to go crazy,” as Aaron Task summarized the situation on Tech Ticker. Multiple reports said that shoppers had lists and budgets and were sticking to them.

This may be bad news for retail, but it is good news for consumers, who are buying what they need and want, but not getting sucked into the retail frenzy. Economic statistics will record the reduced retail spending of the holiday season as a negative, but that doesn’t necessarily mean it’s bad for the economy. I would rather see consumers continue to pay down their credit card balances, because in the long run, what is good for consumers is good for the economy.

Sunday, November 29, 2009

Black Friday Fails to Rescue Retail

Early reports from Black Friday indicate that the sales totals that day were about the same as last year. But this is not as positive a note as it might appear on the surface.

  • Last year, serious Christmas shoppers had already been shopping for three weeks before Black Friday hit. Black Friday was the day they finished their shopping, in many cases. This year, many did not get out to the stores until Black Friday, or perhaps Thanksgiving, the day before. They still hoped to finish their shopping obligations in just one day. This means that the total shopping is falling far short of last year.
  • The deep discounts of last year have not been repeated this year. If shoppers spent about the same amount of money on Black Friday, they bought fewer things — about a third fewer.
  • Shoppers were more easygoing, more relaxed, this Black Friday than on any in recent memory. They are not putting as much pressure on themselves. This confirms the surveys in which shoppers said they expect to spend less this year (30 percent less, according to one survey).
  • According to reports from Friday, far fewer shoppers are spending with credit cards this year. Last year, nearly half of shoppers were paying for holiday purchases with credit cards. This year, it is only about a third. Without the credit card, it is much harder for shoppers to spend more than they had planned.

In spite of the gloomy picture for retail revenue, there is good news for retail earnings. With the credit crunch, this season is certain to be more profitable than last year. This is because, with credit hard to come by, retailers have loaded their stores with much less merchandise than in any year in recent memory. With thinner stock, there aren’t many deep discounts. And by mostly clearing off the shelves, retailers will have less to liquidate at a loss in January. To the extent that this works out, retailers will surely want to repeat this process in coming years, even if credit becomes widely available again.

In financial terms, lower revenue with a higher markup can give you a higher profit. This is good news for retailers, but bad news for the manufacturers, importers, and shippers, who have less merchandise to manufacture and deliver.

Saturday, November 28, 2009

Las Vegas and Dubai

The story behind the financial squeeze gripping Dubai is eerily similar to what we have already seen in Las Vegas. The two places are similar to begin with. Both function essentially as isolated city-states. Las Vegas is a four-hour drive across the desert from Los Angeles; it and its suburbs contain most of the population of the state of Nevada. Dubai is a city-state in its formal political structure, with half of the population of the United Arab Emirates, at the end of the Arabian Peninsula.

And both seemed to be trying to build their economies on top of a style of excess, particularly when it came to buildings. It seemed like a brilliant strategy for a while, but began to break down in 2007, with projects canceled, workers leaving town, and businesses not earning enough to pay back the bank loans. In Las Vegas, there have been thousands of foreclosures and a collapse in real estate values. Dubai on Thursday suggested it might stop paying on its debts for six months.

The economic lesson from these two stories, if there is one, is that excess by itself cannot serve as an economic base. If a place wants to use excess as a selling point, there has to be considerable substance behind it to serve as the selling proposition. What Dubai and Las Vegas had to offer turned out not to be enough to pay for all that massive construction.

Friday, November 27, 2009

This Week in Bank Failures

How much money did banks get from governments and central banks at the height of the financial system breakdown late last year? The Bank of England revealed on Monday that it had provided emergency loans of £61.6 billion (about $100 billion) to two British banks. The loans were repaid in January, but were kept secret until this week to avoid causing alarm. In the United States, the Fed routinely makes emergency loans to banks, but keeps them secret, not wanting the public to have any idea how frequent bank runs are. This year, as Congress has considered measures to audit the Fed, Fed chair Ben Bernanke has said loudly and repeatedly that this would cause substantial harm to the banking system, and this is probably the effect he is referring to.

Developments this week: A U.K. government report recommends that banks disclose the number of employees they pay £1 million or more per year. Previous salary disclosure discussions had focused only on executives, but the report estimates that more than 1,000 other employees are also paid more than £1 million a year. ◾ Dubai World suggested yesterday that it might miss payments due in December for $60 billion in debt. The idea of a Dubai insolvency has stirred fears of a new global financial meltdown simply because of the financial size of Dubai’s activities. Dubai World owes much of its debts to banks worldwide and to Japanese construction companies. Dubai’s liquidity has been hurt by last year’s decline in world oil prices and by the decline in value of $10 billion in U.S. real estate it purchased in 2006–2007. ◾ Banks made a tiny profit in the third quarter. Total earnings for FDIC-insured banks were less than $3 billion. During the same period, bank assets declined by $54 billion, or 0.4 percent, and staffing was cut by by 23,655, or 1.1 percent. Nearly all categories of bank loans are falling: real estate loans, down 2.7 percent from the previous quarter; commercial loans, down 6.4 percent; credit card balances, down 1.3 percent. ◾ When Colonial Bank and Taylor, Bean & Whitaker failed in August, Bank of America failed to maintain custody of at least $1 billion in collateral that it was holding as trustee in deals involving the two companies. That’s according to lawsuits filed separately by BNP and Deutsche Bank against Bank of America this week.

Thursday, November 26, 2009

Giving Thanks When Everything Is Changing

It is not an accident that the Thanksgiving holiday comes at the end of one season and the beginning of another. It is a holiday created, first and foremost, to give thanks for having food to eat, and the most powerful time to do that is near the end of the harvest season when the stores of food have reached their maximum size for the year.

You only have to look beyond this particular moment to realize that, as winter wears on, the amount of food that is stored away has to decline. This is the nature of food: we are, every day, deciding how much to eat today and how much to save for tomorrow. If we are giving thanks for food, this can serve as a reminder to be thankful for every fleeting thing that we build our lives out of — to be thankful even when everything is changing.

The tendency, sometimes, is to be disappointed at the things that are no longer here or that are not here yet. Life is sunnier, though, and you live your life in a bigger, bolder way, if you don’t limit your thankfulness to the here and now, or to the most permanent and reliable things you enjoy in your life. This Thanksgiving, be thankful for everything that helped, however briefly, to bring you to where you are. Also be thankful for everything you are prepared to come upon in the future, even though the actual shape of the future is unknown. When everything is changing, you can still feel thankful.

Wednesday, November 25, 2009

Day-Before-Thanksgiving Traffic

Traffic is different today, on the day before Thanksgiving. And it’s not just that traffic is lighter on commercial through streets and heavier on highways. The traffic has a different character. An unusually large proportion of drivers, the highest of any day of the year, don’t quite know where they are because they are going somewhere they don’t go often. They are more hesitant. When they stop at a stop sign, they may take a second longer to size up the intersection before they proceed. They might be reading the street signs. They act like they’ve never been in this town before — and in many cases, that’s true.

The behavior of the traffic on the day before Thanksgiving must be maddening to people who otherwise drive only in rush hour, a time when they can expect nearly all drivers on the road to be quick and decisive. You can be quick and decisive when you’re driving to the same place for the 1,000th time. It’s not a realistic pattern to expect when you’re going someplace for the second or third time, as many people are today.

Patience and caution are helpful traits to adopt when you have to deal with a bunch of newbies on the roads (or anywhere else, for that matter). Patience, because it takes everyone longer to figure things out when they’re seeing them for the first time. Caution, because people who are in unfamiliar territory are likely to see things differently, and to make decisions you might not anticipate. I wish safe travels for everyone who is going somewhere today.

Tuesday, November 24, 2009

U.S. Flu Decline Confirmed

The CDC is reporting a decline in U.S. flu cases. The CDC’s numbers are potentially misleading, but are confirmed by other measures. It is now safe to say the H1N1 flu really did peak in August.

The CDC’s measures can be misleading, as they are mainly influenced by the number of doctor visits, which in turn are strongly affected by the hype surrounding the flu. Health authorities engineered an avalanche of media reports about flu at the end of September and in the first half of October to try to persuade people to get the H1N1 flu vaccine. The scare tactics worked. They also scared lots of people into thinking they had the flu, and when they went to the doctor, many got tested, and sure enough, nearly half of them did have the H1N1 flu. The spike in flu cases confirmed during that period does not indicate a spike in flu during that time, though, just an increase in testing, as other measures showed flu at a much lower level than during its August peak.

The flu hype certainly faded as we went into November, so the decline reported by the CDC also has to be taken with a grain of salt. Yet the picture coming from the CDC of a substantial decline in flu this month is probably true because it matches other measures, based mostly on self-reporting. These show a total rate of flu barely half that of late September and October, and perhaps a fifth of the rate of the second half of August and first few days of September.

According to one epidemiological estimate, based mostly on lab tests from people who appeared healthy, about 14 percent of Americans came down with H1N1 flu during the summer, and if I can extrapolate that, that would mean about 4 to 5 percent caught it in the fall — with most showing no more than vague, fleeting symptoms. The first wave, then, was over long before anyone could have produced a vaccine. The current fuss over the way the vaccine was produced and delivered is largely academic, at least in the United States.

Doctor-visit reports from Canada are still showing an increase in H1N1 flu, but remaining at a much lower level than seen in the United States. There, the vaccine probably did arrive before the flu peak.

There will be a second wave of H1N1 flu in the United States during the winter months, and probably again during the following winter, but the first wave was so large that any subsequent wave would have to be smaller — too small to notice, if we weren’t all looking for it.

Across the northern hemisphere, there are concerns about the spread of H1N1 flu, but the facts so far are not living up to the worst fears. This is particularly so with an epidemic in Ukraine in which more than one fourth of the population was thought to have come down with flu. The Ukraine epidemic is worrisome because of the number of deaths reported, even though tests so far suggest that most of the cases do not involve flu. This means that the problem is probably a different infectious disease. At this point, determining the cause and nature of the Ukraine illnesses ought to be a greater priority than the mop-up work remaining to be done for H1N1 flu.

Monday, November 23, 2009

The Personal Impact of Job Loss

An ABC News/Washington Post poll released over the weekend shows the personal impact of job loss in the United States. The headline number: 30 percent have seen a household member lose a job within the last year (or have lost a job themselves). That’s a number to rival the Great Depression, and it helps to explain why consumers are so downbeat about the economy.

Another number that sheds some light on this is the number of people who were surprised when a job loss occurred: 52 percent. This suggests that people are taking economic conditions personally. If so, consumer sentiment could fall substantially as millions of additional job cuts occur over the next year.

A more encouraging note from the survey: nearly half of respondents believe the economy is starting to improve, or will do so within the next few months.

The poll and the ABC News report of it are worth taking a look at:

Beyond the Financial Damage, Layoffs Take a Heavy Emotional Toll

Sunday, November 22, 2009

Taping Toy Guns to Trees

Al Gore was on Saturday Night Live last night, appearing in a Weekend Update bit to complain about how hard it is to get people to pay attention to climate issues. Science and reason aren’t working so well to persuade political leaders, he said, but he had a plan B:

I’m going to start acting crazy. . . . I think it’s crazy that our politicians aren’t more worried about the climate crisis, so it’s time for us to out-crazy the crazy.

Within this joke, there is a serious point about the typical approach of management by failure. Waiting for a problem to grow serious enough to do damage in a dramatic way puts us at a distinct disadvantage with some problems. If we wait until the sea level rises enough to flood Interstate 95 before we respond, we miss the chance to avoid, at a relatively modest cost, the extensive damage that would accompany that degree of climate change.

Saturday, November 21, 2009

The Thirsty Economy

Why is money so important? Why does it matter that the financial system, and with it, people’s ability to use money, is breaking down?

This may be easiest to see with a metaphor taken from biology. Any living organism needs water to carry materials into and out of cells. The cells are where the action takes place in an organism, so if there is less water, the action slows down.

This is why, if you have an illness, water may be the first recommendation you hear (along with rest). Recovery and healing are a body’s natural responses to illness, but when you are thirsty, these processes slow down. If you have enough water at the cellular level, you recover faster.

When money is scarce or uncertain, or impaired in some other way, it is as if the economy is thirsty. The action in the economy is the action of individuals, but money makes it easy to transfer work and its results from person to person and from place to place. When there is a problem with money, the result is less action, and the whole economy slows down.

There are quite a few problems with money right now. Bank deposits and other ways of storing money are not as safe as they were two years ago. The credit card transaction network is under assault from criminal organizations, along with their collaborators inside more than a few banks. Many consumers have become wary of using their debit cards because of the risk of hidden transaction fees. The exchange rates between currencies have gone through awkward adjustments this year, and that will continue into next year, and perhaps beyond, as there is a huge risk of inflation in some currencies, but only a slight risk in others.

The result of all these problems with money is a shift in the way people work. You see this in its most stark form in the boom in subsistence farming. Growing your own food might be hard work, but one thing you can say for it is that it is one thing you can do, assuming you have land to do it on, when your access to money becomes uncertain. In many other smaller ways, people are on their own, having to solve their own problems because they are unable to buy a solution.

When money isn’t working, the people responsible for economic policy do what they think they can to get money working again. The rest of us have two other angles we can look into to alleviate the problem. One of these, which I alluded to already, is self-reliance — getting better at solving our own problems. The other, though, is as modern as self-reliance is ancient. This is the use of technology to get better information on the things we’re trying to do. Most of the Internet didn’t exist yet during the last recession, so this is basically new. Money ultimately acts a form of information anyway, so it isn’t so strange to see information being used as a substitute for money.