Saturday, February 28, 2009

Smirking at Volcanoes

Louisiana Gov. Bobby Jindal raised eyebrows a few days ago when he poked fun at the U.S. government’s interest in volcanoes. He picked it out as an item for his short list of examples of what he considered wasteful spending. That was not just a self-serving comment from the governor of a state that doesn’t happen to have volcanos. Jindal’s smirk was not just a way of showing indifference to the people who might be harmed by volcanic eruptions and the related problem of earthquakes in places like Alaska and California. It represented the worst problem in American politics these days — the “What’s in it for me?” attitude that sees government as a profit opportunity, a chance for personal gain, rather than a chance to work together for the good of people collectively.

Jindal can laugh at volcanoes, and say in so many words, “I don’t care if California falls into the sea,” but people who follow his example may turn around and say, “I don’t care if Louisiana falls into the sea.” A country like the United States can’t work unless policy discussions start from a basic feeling that we are in it together. Essentially, Jindal can’t join the national policy discussions in a way that means anything as long as he is looking at the country’s volcanoes and thinking of them as “those volcanoes,” or as “not my problem.”

To change this, Jindal only needs to change his point of view. It is almost as simple as mentally changing “those” to “these,” “that” to “this.” I am sure if Jindal were to visit one of the country’s active volcanoes, then visit one of the towns or cities nearby, he would never again be able to smirk when the subject of volcanoes came up.

When you learn about them or see then up close, volcanoes are fearsome and nothing to laugh at. The city of Pompeii was famously destroyed by a volcanic eruption in 79. More recently, in 1980, a catastrophic eruption of Mount St. Helens caused widespread damage across Washington and spread volcanic ash to 10 other states. Seismologists are doing better than ever at predicting volcanic events, and have succeeded on a few occasions in forecasting major eruptions long enough in advance to safely evacuate the surrounding area. To the extent that they can do that, the economic benefit is enormous. One can debate the extent of government resources that should be brought to bear on seismic activity. But to just say “volcano monitoring” and chuckle, as Jindal did, doesn’t count as engaging in a discussion of policy.

Friday, February 27, 2009

This Week in Bank Failures

Was it the hedge funds that, in 2004 and 2005, made banks suddenly want to make so many bad loans? The ability to resell loans so they could be packaged and sold to hedge funds certainly made some lenders less concerned about the quality of loan origination, and more concerned about volume. It looks like the preferential tax treatment of hedge funds is about to end, and that might slightly reduce this particular disturbance in the banking system. And if the hedge fund market is the root of the problem in home loans, then we might look at all the other loans that got the same treatment, to see if they offer the same risks for the financial system.

Of these, credit card debt seems the most problematic. Arianna Huffington this week called credit cards “the next economic domino.” Banks that issue credit cards have gone to extraordinary lengths in the last three years to increase fees, and this year, to raise interest rates. This might bring the banks more money in the short run, but it increases the risk of credit card defaults, which are already occurring at an alarming rate and can be expected to go higher as the unemployment rate increases.

Banks are not unaware of this risk and are taking steps to reduce their exposure. The number of new credit card offers sent by mail has plummeted since August. Banks are lowering credit limits for many cardholders and allowing inactive card accounts to expire. American Express is going to the unusual step of paying selected cardholders a bonus to pay off their balances and close their accounts next month. This is essentially a preemptive settlement offer from American Express for customers who are able to pay quickly. It’s a strange thing to see when you know that barely two years ago, banks were paying an average of nearly $1,000 for each credit card customer they acquired.

The U.S. Treasury seems not to be giving much weight to credit card risks in its “stress test” for banks, which according to published reports is based on quite a gloomy scenario for real estate prices, alongside the comparatively rosy prediction that unemployment never rises above 10 percent. I call that prediction rosy because even if the economy bottoms as hoped in the first quarter of 2010, unemployment would probably continue to rise well into 2011. It is easy to understand why. The number of workers naturally increases by about 2 percent per year, so the economy has to grow at a faster rate to take on those additional workers. On the far side of this recession, the economy might expand for quite some time before getting up to a 2 percent growth rate.

The “rising groundswell of anger against banks” has become potent enough that President Barack Obama mentioned it in his address to Congress this week. He and Congress must not govern out of anger, he said as he emphasized the importance of banks. I am not sure Obama recognizes that the disaffection people feel is directed, in many cases, toward their own banks, and he risks rescuing banks this year and next only to have them fade away in the near future due to the indifference of their customers. On the message boards this year, when people say, “I paid off my last credit card,” it is not to say, “Look at what I accomplished with my personal discipline and perseverance,” but rather may be accompanied by a line such as, “Those bastards won’t get another dime from me!”

According to the FDIC’s Quarterly Banking Profile, banks lost $26 billion in the fourth quarter of 2008. Just three large banks provided half of those losses, with Citigroup losing $8.3 billion, Bank of America, $2.4 billion, and Wells Fargo, $2.6 billion. In the previous quarter, banks collectively barely broke even. The quarterly loss is the first since 1990.

The pattern of losses has especially hurt the stock prices of the largest banks. Citigroup, with a market value of $8 billion, no longer has a realistic prospect of raising the additional capital it needs from private sources, so it has obtained $25 billion from the U.S. Treasury. In exchange, the U.S. government will increase its ownership share in Citigroup to 36 percent. This deal, announced this morning, is a further step toward nationalizing Citi unless its fortunes turn around sharply in the next few months. Citi CEO Vikram Pandit seems to be the only one who sees it differently: “In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest.”

Some banks, feeling more stable than three months ago, are returning the bailout money they got last fall. Iberiabank appears to be the largest of these so far, returning $91 million in bailout money that it had intended to use to fund increased lending (though apparently it did not do so). The bank issued a statement trying to be gracious about it, but not quite succeeding as it offered a series of oblique criticisms of banking policy. The bank will buy back $91 million in preferred stock and pay $575,000 in accrued dividends. More banks are likely to return bailout money, as it is now possible for the strongest banks to borrow money on much more favorable terms, with the Fed Funds target rate having fallen to zero in December.

No one seems to know quite what Treasury Secretary Tim Geithner meant by a “public-private partnership,” but maybe it’s something like what the FDIC is doing. The FDIC has set up an LLC to sell a 20 percent share in the mostly nonperforming real estate loans it acquired from First National Bank of Nevada when it failed. The FDIC is retaining an 80 percent share in the portfolio, but won’t have to administer the loans. Though the deal is structured as an LLC, a cross between a partnership and a corporation, it is more like the FDIC went out and hired an agent on commission.

Tonight, another bank failure, that of Security Savings Bank in the Las Vegas suburb of Henderson, probably leaves the FDIC with more Nevada real estate loans to dispose of. The FDIC transferred all its deposits and sold about half its assets to Bank of Nevada. Security Savings Bank had two offices and $175 million in deposits. Bank of Nevada is a Western Alliance subsidiary with 15 offices around Las Vegas, including three in Henderson.

The new president of Security Savings Bank, Jesse Torres, considers himself an expert in viral marketing, and has written a book on social network marketing for community banks. Awkwardly, the bank failure comes in the middle of a series of speaking engagements by Torres to promote the book.

In the suburbs of Chicago, Heritage Community Bank failed. It had four offices and deposits of $219 million. The FDIC transferred all its deposits to MB Financial, a bank with $9 billion in assets and 70 offices in the Chicago area, along with one in Philadelphia. MB Financial is also buying 99 percent of the assets at a 6 percent discount, with the FDIC sharing in losses on most of the assets.

The FDIC expects to face losses of $100 million on these two closures.

The two banks that failed were essentially running out of money because of loan losses.

Security and Heritage are both very common names for banks, and these closings do not affect banks in other areas that share the same names.

Thursday, February 26, 2009

Hard Work: Not Smart

“Work smarter, not harder.” I’m sure you’ve heard that new age management advice often enough to be irritated by it. But that cliché has some truth in it.

A Finnish study of British workers published in the American Journal of Epidemiology, then written up in BBC News (how international can you get?) found that just 55 hours of work a week was enough to reduce a worker’s intelligence.

Specifically, the workers who put in 55 hours a week or more scored lower on reasoning and vocabulary. The more hours they put in, the lower the scores got.

Traditional economic theory suggests that putting in extra hours of work in a week, beyond a certain point, will not produce any additional value. This new study suggests that the point of diminishing returns is lower than most people have imagined.

The people who run business startups commonly average 10 hours a day or more as they struggle to hold the new business together. And they often burn out, running out of energy and ideas after two years or so of hard work. This approach may be a bigger mistake than it appears. Instead of saying, “Well, I’ll work harder,” when problems come up, these managers may need to be more ruthless in simplifying and structuring the business so that it is more easily managed.

This line of thinking has implications for employers too. Employers sometimes think they are saving money on health benefits by having fewer employers and working them longer hours. But that conclusion is usually based on an accounting analysis that assumes workers are equally productive regardless of how many hours they work, and perhaps also that extended work hours do not increase the health care costs of workers. We can now say that neither assumption is true, and in recent years, some employers that have been taking steps to rein in overtime say they have been getting good results with that change in policy.

Wednesday, February 25, 2009

Solar Power, $1 per Watt

The cost of solar panels keeps falling year after year. And at the end of last year, the manufacturing cost fell below the magic level of $1 per watt.

That was at First Solar, a company that emphasizes low manufacturing costs for solar panels. First Solar’s panels cost less but are not as efficient, in terms of their use of space, as the panels from other manufacturers. Still, the results are indicative of the direction the industry is going in.

One dollar per watt is not just a nice-sounding milestone for manufacturing efficiency. It is also roughly the level at which solar panels become attractive enough to persuade people who have money to take money out of the bank and buy solar panels. In the right situation, solar panels are now a better, safer investment than money in the bank.

What does $1 per watt mean? In a less-than-ideal installation, a watt of solar capacity may provide a kilowatt-hour of electricity per year. With electricity costing 20¢ per kilowatt-hour, solar panels could theoretically replace part of a home or business’s electric purchases with a 5-year payback. That is, the solar panels would cost as much as the electricity they would generate in their first 5 years. That is probably the financial threshold that could make solar panels a popular do-it-yourself project. In practice, the cost of a solar installation is still much higher than $1 per watt, but having manufacturing costs for panels fall below $1 per watt shows that we’re getting closer to the point where solar panels become widely popular.

Tuesday, February 24, 2009

Four Signs of Strength in the U.S. Economy

Looking at the U.S. economy, there are reasons for hope — indications that, although the economy might not be at the bottom yet, it is not sliding out of control either. These are a few of them:

  1. Lower volatility in securities markets. The lower volatility and low volume when the stock market hits a new low point is a sign that stockholders aren’t that interested in selling stocks at these low levels, even if not that many people want to buy. It’s a sign that stockholders have a basic level of confidence in the economy.
  2. Few runs on banks. People’s reduced confidence in the banking system hasn’t resulted in many runs on banks, even banks that have been widely reported to be near insolvency. People still trust the deposit insurance system and are willing to let it do its thing.
  3. Steady inventories. An economic crunch usually results in a sudden rise in inventories, as businesses unexpectedly find themselves holding large amounts of manufactured products they can’t sell. When that happens, it forces economic activity to fall further. Inventories have piled up in a few areas, but these are balanced out by other areas where businesses have succeeded in cutting inventory. The steady inventories mean that manufacturers will have to go back to work almost as soon as the economy levels off, taking away most of the risk of a depression.
  4. Can-do attitude. People facing unexpected challenges still expect to find a way to succeed. In the early 1980s, it was common to hear people say, “There just aren’t any jobs out there.” Today, I’m more likely to hear, “I’m going to find a job if it takes me all year.” People who expect to solve problems do so faster, and it’s that problem-solving process that moves the economy out of a recession.

Monday, February 23, 2009

Bailouts for Depositors?

You might think that the purpose of bailing out banks is to protect the deposits, the money that people keep in the banks. But that’s not it at all. The stated purpose of the Wall Street bailout is to increase lending — to “unfreeze the credit markets” so that banks will make more loans. It hasn’t worked — banks are being even tighter with their lending requirements than they were when the Wall Street bailout was first approved — but the Obama administration is continuing it on the theory that it may eventually work.

There may be other reasons to funnel money into the banks, but it is certainly not for the purpose of keeping the deposits safe. If that were the priority, the banks teetering on the edge would be shut down, and the money paid out to the depositors. The longer these banks are left running, the greater the risk that there will be no money left for the depositors beyond the limited payouts provided by deposit insurance. Deposit insurance is the only bailout depositors can reasonably expect. The banks, meanwhile, are being kept running on the theory that it is good for the economy.

Economists and financial experts are by no means in agreement that keeping virtually all the banks going is good for the economy. No bank can be saved unless it can eventually make a profit, and one of the reasons it is so hard for banks to make a profit is that the banking system has so much excess capacity. Shutting down a third of the banks, if indeed that many were to fail, would make it easier for the banks that remained to be profitable. That potential for profit, again, is necessary for the banks to ultimately survive. Looking at it this way, the more banks we prop up, the more banks we will see fail.

The same logic applies if what we want is more lending. A bank that is failing can hardly make new loans with confidence, but if depositors take all their money out of that bank and put it in a healthy bank, the healthy bank will be able to make loans. If lending is what is needed to make the economy recover, and I am not sure that it is as important as some are saying, the sooner we shut down the failing banks, the sooner the economy will recover.

In the end, I think the real reason Washington is propping up the banking system is that the people there want more time to figure out what to do. Yet they have already had years to study the problem and prepare a response — this financial crisis did not exactly sneak up on us, but had already become evident, in its broad outlines at least, three years ago. The delay has been costly — costly in a way that has made “trillion” a household word. By now, policymakers in Washington should be encouraged to protect what is actually necessary for a functioning economy while allowing anything else that cannot justify its existence on its own merits to shut down.

Sunday, February 22, 2009

Journal Register Bankrupt as Newspapers Struggle for Relevance

Yesterday Journal Register Company filed for bankruptcy protection. The move did not come as a surprise. The New York Stock Exchange delisted the company last April after its stock fell to 16 cents a share. This year the stock was trading at 0.5¢, giving the entire company of 200 newspapers a market value around $200,000, or $1,000 per paper. Revenue was down by 20 percent in the last three years, and the company figures it can continue to operate if creditors agree to reduce its debt load by about half.

Journal Register’s aggressive cost-cutting strategy that was supposed to boost the profitability of its newspapers has instead become a symbol of the local newspaper’s decline. Newspapers keep getting thinner and thinner. It’s now commonplace to see a town council meeting take place with no reporters in attendance. Many local newspapers have been reduced to a single staff writer. The same local news story may appear in five or ten different papers (under a different headline in each paper). A paper may contain just three local news stories, as the editor tries to mix in enough press releases, wire service reports, and letters to make it still look like a paper. But the decline in content has led to a decline in readership and in advertising revenue. And as papers lost their uniqueness and local color, the civic pride in reading them also disappeared.

Always conservative in their political leanings, local papers have become more so. This might be reassuring to their regular readers, now mostly over 60 years of age, but it makes it harder for them to draw in new readers, as the newspapers seem out of touch with what is going on in the world.

And that, of course, is the opposite of what a newspaper is supposed to be. Newspapers caught on in a big way a century ago because they were brash, surprising, and cheap. Now they are just the opposite, staid, formulaic, and expensive, in an age when it’s already hard to get people’s attention. As Business Week put it last week, a paper today has to be meaningful enough to draw people away from Twitter and Facebook. Someone may yet find a way to break through the media clutter and make a local newspaper relevant to a town, but what the Journal Register bankruptcy filing tells us is that cutting costs and cutting content is not a way to get that done.

Update: Sunday night, during the Oscars, the Philadelphia Inquirer was also bankrupt. Philadelphia Newspapers Incorporated reported that it had filed for bankruptcy protection in order to restructure its debt.

Saturday, February 21, 2009

The Energy of Sexual Fear in the Roman Catholic Church

The Roman Catholic Church has gone to some trouble to paint the sex-cult aspect of its organization as a problem with American culture. But that is really just blaming the media — it was mostly newspapers that brought that story to the public, and the United States has the greatest concentration of newspapers in the world. The focus of the problem is, in fact, the Roman Catholic Church itself, and it is a pervasive problem that goes right to the core of the church and what it says it stands for.

The root of the problem with the Roman Catholic Church is found in the ugly, gross inconsistencies in the moral pronouncements it makes about sex. It is easy to see the basic honor and respect for humanity that is behind the church’s statements about almost everything else, even when you disagree with its moral positions. It is just as easy to see the energy of fear behind the church’s statements around the subject of sex. These statements contain an energy that is repulsive even when you agree with the substance of the statements, and this energy is the basis of the problems the Roman Catholic Church is facing.

To cite the most extreme current example, it is because of the energy of sexual fear that the Roman Catholic Church’s recent statements on genocide lack the credibility to stand on their own. Despite the strong moral basis for any statement against acts of genocide, the statements from Rome stand up only because they are a part of a chorus of people saying the same thing. Most of us would not immediately think of the link between genocide and sex, but the Roman Catholic Church has spoken so vividly of birth control as a supposed means of genocide over the years that genocide and sex are now inextricably linked in anything it says about either. The pope now cannot utter the word “genocide” without speaking out of the same energy of sexual fear that has caused so much suffering in and around the church he heads.

The problem with moral pronouncements made out of the energy of sexual fear is that morality does not come out of fear. Morality, which is about treating people well, can only come out of the energy of peace. Yet sex, the focal point of this energy of fear within the Roman Catholic Church, touches everything the church does. To begin with, this is an organization run exclusively by men (a sexual distinction) who are abstinent (another sexual distinction), and obviously, the focus on sex does not stop there.

How far does the obsession with sex in Rome go? The pope formally considered excommunicating U.S. Speaker of the House Nancy Pelosi for not being ardent enough in her opposition to abortion. The pope acted after a Catholic political action committee in the United States requested Pelosi’s excommunication. The pope took the request seriously enough to actually meet with Pelosi this week. After the meeting, the pope apparently decided not to excommunicate Pelosi, but was upset enough to issue a stinging statement about U.S. abortion law. To many Catholics, this reaction doubtless makes sense, but to the rest of the world, it makes no sense at all. When a religious leader has the opportunity to meet with one of the world’s more powerful political leaders and chooses not to focus on ways the world’s problems might be solved, but instead on an imagined slight on something related to the politics of sex that from an outsider’s perspective has hardly anything to do with anything, what is the world supposed to think?

Meanwhile, the pattern of sex and violence goes on. The Independent yesterday profiled a book by a former nun who had been the head of a college in the south of India. The book outlines a pervasive culture of sexual misconduct, violence, and intimidation among bishops, priests, and nuns there. According to the author, “mental torture” and inappropriate psychiatric treatment had become routine in the convent she belonged to, leading, she thinks, to a string of suicides among nuns. Eventually, the author says, threats to kidnap and drug her became serious enough that she was forced to resign her position and flee.

It is a story that even those familiar with the sexual perversions of the Roman Catholic Church in the United States might find shocking, yet the Roman Catholic Church sees the book in a different light. A church spokesman Thursday night said the church is familiar with the problems described in the book, and sees them as “trivialities.”

The world is waiting for the Roman Catholic Church to leave its sex-cult side behind and become a force for good again. It only needs to return to the basic integrity and respect for the human condition that is behind most of its thinking and teaching. The structure of the church makes this a challenge, but still, sooner or later, someone in the church will find a way to turn the tide. But it appears that this is a change that will have to come from outside the church’s current leadership.

Friday, February 20, 2009

This Week in Bank Failures

For once, it was the Securities and Exchange Commission (SEC), and not banking regulators, shutting down a bank. On Tuesday, federal agents raided offices of the Stanford Group and seized assets of Antigua-based Stanford International Bank and two affiliated companies. A court-appointed receiver took custody of the bank assets. Three bank officers, billionaire founder Allen Stanford, chief financial officer James Davis, and chief investment officer Laura Pendergest-Holt, effectively became fugitives when they failed to respond to subpoenas in the case. Allen Stanford was found late yesterday in Virginia, apparently on his way to Washington, and served with papers by the FBI. The SEC has called the bank’s certificates of deposit, sold mainly to U.S. customers through Stanford Group and affiliated companies, “a fraud of shocking magnitude that has spread its tentacles throughout the world.”

Stanford International Bank recently reported $8.4 billion in deposits. It claims that affiliated companies manage $51 billion in client assets. The SEC says Stanford Group was also running a second fraudulent scheme involving a mutual fund with false historical performance data. It also says the bank misled investors with a December 17 letter that said, “Stanford International Bank did not have any exposure to the Madoff Fund.” The letter is dated two days after the SEC says an analyst told the bank of a $400,000 loss tied to Madoff.

The Stanford banks are located in various countries, mostly around the Caribbean, but not the United States, and the countries that have Stanford banks are looking at them closely. Regulators moved to freeze Stanford offices in Panama, Ecuador, and Peru. Then Venezuela was the first country to seize its local Stanford bank. Tonight, Antigua was the second. The move in Antigua is particularly significant, as Stanford owns much of that island.

I wrote previously about new Internal Revenue Service (IRS) rules intended to prevent U.S. residents from passing themselves off as foreigners in order to invest in U.S.-based securities markets without the transactions being reported to the IRS. The IRS said Swiss banking giant UBS was involved in this, and the Swiss government has now come to the same conclusion, and has okayed a $780 million payment by UBS to the IRS to settle the charge. In addition, the Swiss banking authorities have found that in hundreds of cases involving billions of dollars, this kind of scheme represented not mere tax evasion, but actual fraud, and ordered the release of secret account holder information to the IRS. Swiss banking laws ordinarily keep bank accounts anonymous, but those rules do not apply in “clear” cases of fraud, and the thought that the Swiss banking authorities may be taking the fraud exception seriously is sending shivers through international banking circles.

It has been estimated that wealthy U.S. taxpayers may have evaded hundreds of billions of dollars in income taxes in schemes involving assumed offshore identities, and if the IRS can start collecting some of those taxes, it could help shore up the U.S. dollar (if you’ll excuse the pun). But it could, at the same time, pull the rug out from under some of the offshore banks, and offshore banking centers are a little nervous waiting to see what might fall down.

The financial press was talking openly this week about the possibility of the two largest banks in the United States being nationalized, to be followed, presumably, by dozens of others. The talk of nationalization gained momentum after Alan Greenspan suggested that it was an option to consider. Some talking heads have even suggested this was inevitable, not wanting to breathe a word of the simpler, less risky, less expensive scenario of liquidating the banks that fail. There was an effort midweek to come up with a softer word than “nationalization” in order to make the process more politically palatable. My suggestion, “bankruptcy,” does not seem to have gained any significant support.

The White House this afternoon tried to reassure Wall Street on the subject of nationalization with a statement that it prefers a privately held banking system. Obviously, though, it could not spell out the steps that might be taken for a large faltering bank, so its statement did not exactly address the issue at hand.

The bailout index (Nasdaq QGRI) fell below 500 this week, meaning that the largest bailed-out companies have lost half their market value since the beginning of the year (compared to a 10 percent decline in other stocks). Apparently, government bailout money isn’t so good for business after all.

Tonight, Silver Falls Bank was the third bank to fail this year in the Portland, Oregon, metro area. Silver Falls Bank had three offices in towns south of Portland. Citizens Bank, a community bank located a little further south in Oregon with its headquarters in Corvallis, is assuming all the deposits of Silver Falls Bank. Don’t confuse this Citizens Bank with the many other banks in other parts of the country that also use the Citizens name.

Silver Falls Bank had $116 million in deposits. Citizens Bank is acquiring about 10 percent of its assets. The FDIC is expecting a cost of $50 million as it disposes of the bank’s other assets.

Silver Falls Bank was founded in 2000 was considered one of Oregon’s rapidly growing banks. It reported record earnings in 2007 and was paying an unusually high dividend. The high earnings were illusory, however, as many of the bank’s loans started to go bad last summer. By the end of 2008, it was being closely watched by regulators, and employees were starting to depart. The bank agreed to stop paying sales bonuses that were based strictly on loan volumes, and to keep closer tabs on its operations. Bank executives admitted the bank had made too many construction loans, but in the end, it was apparently just one large construction loan that defaulted early in 2008 that made the difference between continuing and closing.

This is a story typical of recent bank failures. If you have been following the bank failure saga, you have surely noticed a disconnect between the public story about the financial crisis, which focuses mainly on home mortgages, and the actual bank failures, which are mostly caused by loans to real estate developers. Part of the reason is political. It is easier for politicians to point the finger at homeowners, most of whom are middle-income families, than at real estate developers, which are mostly controlled by millionaires who are far more likely to fund political campaigns. But part of the reason is structural. Banks routinely resold their home mortgages, especially the smaller ones, in a complicated securities arrangement that started to fail spectacularly about two years ago. When those loans started to go bad, it was companies that were deep in this secondary market, like Fannie Mae and AIG, not the banks that originated the mortgages, that failed. But banks have always been pretty much stuck with their larger loans. And a small bank with $100 million in deposits is reeling after just two or three $5 million loans go bad.

It is easy to make the case for tighter regulation. Part of the reason so many more bank failures are likely is that, the way the system works now, regulators can’t take any meaningful action until after the damage has already been done. If there were tighter regulations, and regulators could seize banks preemptively, just because bankers were disregarding the rules of banking left and right, there would be a lot fewer bank failures, because bank executives and officers would run their banks like their jobs depended on it.

Thursday, February 19, 2009

Auto Insurance When Car Prices Fall

People’s hesitation about major purchases like cars has not just slowed down sales of new cars. Used car sales are also down, and because of that, the prices of used cars are down. This year I am seeing prices for used cars, in live auctions and online directories, 20 to 30 percent less than they would have been two years ago. The kind of car that would have gone for $7,000 before might sell for $5,000 now.

The decline in value of used cars may affect you even if you aren’t planning on buying a car, because it limits how much an insurance company will pay to repair your car if it’s damaged in an accident. Ordinarily, an insurance company won’t pay more than its opinion of the “fair market value” of the car, a money amount that is loosely based on what cars of similar make, model, year, and mileage are actually selling for. The idea is that it’s better for you to take the money and buy a similar car.

When insurance companies are paying less, it reduces the value of the insurance, especially the “collision” and “comprehensive” parts of auto insurance, yet insurance companies have not necessarily cut the premiums they charge to match the decline in the amount they are paying out. It is something you might check on the next time you renew or adjust your auto policy. If you are shocked at how little the world thinks your car is worth now, and if the insurance premiums seem too high to reasonably protect that investment, you could drop the collision and comprehensive coverage for that car. But hold on to the money you save, of course — you will need it sooner or later to buy your next car.

Wednesday, February 18, 2009

The Dog Ate My Business Plan

The task force had gathered in Jimmy’s office, huddled around a table with four pizzas on it, to wait for the business plan to come in from the other task force down the hall. Personally, I was there just for the pizza, but I couldn’t help getting involved in the discussion.

“I think we should tell them, ‘Rome wasn’t built in a day,’” one man said.

“How about, ‘The dog ate it’?” suggested another.

“Excuse or not, shouldn’t someone go out there and say something?” I said, probably sounding worried. “From what you were saying, this business plan was supposed to be ready between four and five, and it’s already almost an hour late. And there’s a crowd out there waiting to find out if we’re still in business or not. I mean, I’ll go out and tell jokes if that’ll help, but . . .”

“You could start by telling them that automakers don’t know the meaning of the word ‘plan,’” one of the accountants suggested. “‘We had to look up “business plan” in Wikipedia just to figure out how to get started.’”

“Joking aside, we need a believable excuse,” a lawyer said. “We can’t just go out there and say, ‘We know the report is due now, but it isn’t done because we just started on it a week ago today.’ We have to do better than that.”

“Doesn’t anyone have a kid in college?” I asked. “If anyone knows about excuses for a late report . . .”

“I’m on it,” the accountant said, pulling a phone out of his jacket pocket. Barely a minute later he had the solution. “We can just go out there and talk like the report is done, making sure to emphasize what a terrific plan it is,” he said. “Then later, when people complain they don’t have it yet, we can say we’re trying to log into the email server to send it, but the email server says we can’t log in because we have a virus or something.”

“What a great excuse!” someone said. “It sure beats the heck out of, ‘The dog ate it.’”

“Yes, well, it’s that kind of creative thinking that put this company where it is today,” the lawyer said. “Now, who can say, ‘We’re very proud of this plan,’ with a straight face?”

Tuesday, February 17, 2009

Inventories and Output

Early in a recession, we expect to see inventories grow. Businesses usually don’t react instantly to the slowing pace of economic activity, and when they buy more than their customers are buying from them, their inventories get larger. And that is happening now, but not in quite the same way it has historically.

When inventories get larger, businesses respond by buying less or postponing purchases. This means manufacturers, importers, and transport companies have less work to do. This is one of the key mechanisms by which the economy slows down: high inventories lead to reductions in output.

Businesses have better information than ever and can make better decisions than in recessions of the past half century. This should limit the growth of inventories, and in fact it has. Inventory levels of most products have stayed even or fallen ever so slightly. Those are still bloated inventories, though, as inventories that have fallen by 1 percent may need to decline by 4 percent or more just to match the decline in economic activity that has occurred already.

In specific areas, inventories have grown frightfully large, just as you would find in a classic recession. You may have seen news photographs of the huge oversupply of automobiles that began to take over Detroit around August. Inventories of new houses are also at historic highs, and there are excessive inventories of toys and electronics, as consumers postpone purchases of those items. Store closings add to these inventories, as the merchandise from stores that close is shifted to other stores. The closing of the Circuit City chain is providing an excess supply of consumer electronics, and the many apparel store closings are adding to the already top-heavy inventories of some kinds of apparel.

Most inventories have been kept reasonably close to the ideal levels, though, and that is a reason for hope. The elevated inventories tell us that the economy has not hit bottom yet, but the fact that they are mostly not terribly high means that, if there isn’t further bad news, the economy might not be far from the bottom.

Monday, February 16, 2009

Poll Results

If the U.S. government’s proposed “bad bank” were to offer regular banking services, which would you be most interested in?

Bad bank poll results

Putting the Screws to Cardholders

Credit cards have become a sore spot for banking customers.

Banks, too many of them, have been stung by losses on loans, and hope they can make up some of the difference from credit card customers. And they’ve been trying to do that by catching consumers in a weak moment and putting the screws to them, typically by lowering the credit limit or raising the interest rate in a way that the bank hopes will lead to more fees. Some of those fees, meanwhile, have gone up from $19 to $97. These are just a few of the ploys that have been documented:

  • Freezing an account when the account holder becomes unemployed or is admitted to the hospital
  • Changing account terms while the account holder is overseas
  • Automatically raising the interest rate when the account holder pays money to a college or university
  • Automatically lowering the credit limit when the account holder uses more than 30 percent of the limit

And here are three signs of the level of resentment this business approach has inspired:

  • In a Shamanic Economist poll asking what services people would be most likely to seek out from a government-run “bad bank”, more than a third of respondents picked a credit card, the “Bad Visa.”
  • In a Los Angeles Times survey today asking “Are banks gouging credit cardholders?”, 87 percent said yes, and only 2 percent said no.
  • The Bush administration, made up mostly of Republicans, felt it had to draw up new rules to protect credit card customers.

The new rules go into effect next year, and banks are already figuring out ways around them. Based on the Los Angeles Times story, the largest banks seem to have agreed on the strategy of raising the interest rate each payment due date to the highest rate allowed by law, if the payment has not yet been received. If you hold a card from one of these banks, you’ll be paying the bank an almost-loan-shark interest rate of 30 percent if any payment you make is ever one day late. The only way to avoid this risk as a cardholder is to be prepared to pay off your credit card balance in full at the drop of a hat.

Carrying a credit card balance that is more than one month of after-tax income has become a grave risk. At a 30 percent rate, it could take more than a year to pay that amount off. Owing one year’s income on a credit card has never been a good idea, but if you owe one year’s income at a 30 percent interest rate, it is almost impossible to avoid the downward spiral into bankruptcy.

If you must carry a balance, it becomes especially important to make your payment the day you receive the credit card statement, then verify that the payment was received. This way, if something goes wrong and the bank does not receive the payment, you will have a second chance to get your payment in before the due date. Better yet, it is emphatically time for everyone who can to pay off their credit card balances. Put yourself in a stronger financial position, and when banks try to put the screws to you, you can just laugh at them. These days, that’s a good position to be in.

Sunday, February 15, 2009

Taking Governors’ Names off Signs

It’s one of the most visible ways to waste state government money — the name of the governor plastered on roadside signs and office doors, an exercise in gubernatorial ego-building that has to be redone every few years. These signs can also become an embarrassment if the governor becomes an embarrassment, as recently happened in Illinois, whose governor Rod Blagojevich was removed from office after he acknowledged that he had not set his personal interests aside when making decisions for the state.

Now the new governor and state legislature want to eliminate the practice. House Bill 286, to remove all state officials’ names from state signs, has been approved by a committee and seems likely to pass.

There is reason to hope that a few other states might copy Illinois’s example. In boom times, a legislature would have trouble fitting a bill like this into its schedule, but when money is tight, a quick, simple way to save a state perhaps $25,000 a year, that also has a good symbolic value, can look like a very good idea.

Saturday, February 14, 2009

Double Interest

It’s a favorite game of child mathematicians: offering to double something when the value in question is zero. If you are helping a child with something, they are all too happy to double, even triple, your pay, knowing that even after such a generous increase, they still won’t be paying you anything.

Now that interest rates are based on a reference rate of zero, this is a game that banks could be playing. In normal times, a bank couldn’t double the interest rate on your interest checking account or savings account even as a gimmick. There are rules from the FDIC and elsewhere that can limit how much interest a bank can pay. But when rates are based on zero, it becomes a possibility.

As an example, a bank could offer to double its usual interest for one day if you just check a box in its online banking portal. It might do that as an incentive for you to try out the online banking environment, and perhaps save the bank’s tellers some work if you can get a few of your transactions done online. The doubled interest rate sounds like a reason to take action, but it’s not really much at all. If you’re a typical interest checking account holder with a balance around $1,500 earning 0.86 percent interest, the interest you earn in a day is about 3 cents. Double interest would be about 6 cents. Don’t spend it all in one place!

Friday, February 13, 2009

This Week in Bank Failures

The deepening financial troubles of the United States seem complex and bewildering from the American perspective. You can see this is the curious omission of the “bad bank” discussion when Treasury Secretary Tim Geithner pre-announced his bailout plan this week. Everyone seems to agree that it will be necessary to separate some of the largest banks from some of their most untenable phantom assets for the banks to stay solvent. The “bad bank” concept is supposed to provide a mechanism for this.

Yet Geithner gives little assurance that this can happen on a significant scale. The reason is that people can think of only two ways such a thing could happen. One involves a massive giveaway of public money, trillions of dollars of it, to the banks. The banks do not have enough political capital to get such a large handout, and the Treasury does not seem to have that much money to spend. The other would have the government taking control of the banks and firing the executives and managers whose mistakes caused the banks’ problems. Washington does not have the political will to do this either. Reading between the lines in reports of administration discussions, it appears that Geithner talked some of the president’s economic advisors out of taking a tougher stance with the banks, but as part of that process, Geithner conceded any additional funding for the bank bailout.

From a European perspective, though, the situation is very simple. The solution is a combination of nationalizing and closing banks. Consider this interview question and answer published today in Deutsche Welle:

[Q] Economists Nouriel Roubini and Nassim Taleb, who predicted the global economic downturn, have called for a nationalization of banks in order to stop the financial meltdown. Do you agree?

[Joseph Stiglitz] The fact of the matter is, the banks are in very bad shape. The U.S. government has poured in hundreds of billions of dollars to very little effect. It is very clear that the banks have failed. American citizens have become majority owners in a very large number of the major banks. But they have no control. Any system where there is a separation of ownership and control is a recipe for disaster.

Nationalization is the only answer. These banks are effectively bankrupt.

The term “zombie bank” has gained a foothold in the discussion of this issue, referring to the many large U.S. banks that appear not to have the financial strength to ever work their way out of the financial holes they are in now. Some economists say this is probably almost all of the 50 largest banks in the country, though they are not able to tell specifically which ones.

On the other side of the discussion, there is a call to relax the financial requirements for banks, leaving it to account holders to force the closure of the most illiquid banks by trying to take their money out. I don’t think the FDIC will permit this, however, for the simple reason that once people get in the habit of making runs on banks, it is hard to get them to stop, and perfectly sound banks can be taken down in the process.

Tonight four more banks went beyond the “zombie” realm into receivership. The largest was in Florida, where Riverside Bank of the Gulf Coast was closed. This bank was based in Cape Coral, and had nine offices in that metropolitan area, including Fort Myers. It has no connection to the banks elsewhere in Florida that share the Riverside name. It had $424 million in deposits. TIB Bank, one of the largest banks in southwest Florida, is paying a 1.3 percent premium for the deposits and is also buying a fifth of the assets. This closing is expected to cost the FDIC $200 million.

According to the FDIC, Riverside Bank of the Gulf Coast closed because of sloppy real estate lending.

The three other bank failures tonight may cost the FDIC about $140 million, according to its estimates.

In central Nebraska, Sherman County Bank and Howard County Bank, the same bank operating under two names, was closed. Its deposits and four offices are being assumed by Heritage Bank, which is paying a six percent premium for the deposits and is also buying $22 million in liquid assets. Sherman County Bank is the first bank to fail in Nebraska in 19 years.

Sherman County Bank had $130 million in assets, compared to $85 million in deposits.

Heritage Bank is a larger bank based in Wood River. It has multiple offices in Grand Island, the nearest city, which is the county seat of the next county south of Howard County.

A bank in Pittsfield, Illinois, Corn Belt Bank and Trust Company, closed. This was a small bank that operated mainly from its headquarters, but it had $234 million in deposits. The Carlinville National Bank, a small bank located 75 miles away, is acquiring the deposits and some of the liquid assets of the bank.

Pinnacle Bank had its office in Beaverton, Oregon, a suburb of Portland. It closed tonight and all its deposits and nearly all its assets are being transferred to Washington Trust Bank. Pinnacle Bank recently had $73 million in assets and $64 million in deposits.

Washington Trust Bank is based in Spokane, Washington, and has about half of its offices in that area. It already had one Oregon office, in Portland, and this acquisition gives it a second office in the Portland area. It is acquiring the assets of Pinnacle Bank at a 12 percent discount. The FDIC is providing partial loss protection to Washington Trust Bank as part of the purchase agreement.

Monday is a banking holiday, so the offices that have been transferred to new banks will reopen on Tuesday.

Thursday, February 12, 2009

The Las Vegas Bailout

The mayor of Las Vegas just doesn’t get it.

The president mentioned Las Vegas in a comment about corporate bailout recipients wasting money on travel.

Now an angry Las Vegas Mayor Oscar Goodman is saying that Las Vegas ought to get its share of the bailout money too.

For the cooler heads among us, the incident serves as a pointed reminder of the slippery slope of bailout money. You start propping up some of the most essential companies that make the economy function, and just a few months later, the mayor of a city that doesn’t really have anything to do with any of that is irate that more of that money isn’t coming to his city.

First of all, it’s important to remember that the purpose of the bailout is not to stimulate the economy, but to keep it from collapsing. Las Vegas, though certainly hurting, is not in any danger of collapsing or of bringing down the whole national economy.

Banks need to cut their travel expenses for the same reason that the government sent them bailout money: so they don’t run out of money and go under. That’s just a reality, and we all have to live with it.

If Mayor Goodman can’t keep one of the wealthiest cities in the country running without federal bailout money, money intended not for cities but for the financial system, he is incompetent and should resign. His letter and its implied request for his city’s share of bailout money is an embarrassment to the country (example of a foreign headline: “Sin City wants Obama’s apologies”). Goodman has, intentionally or not, pitted his city against the survival of the country it belongs to. It is conduct not suited to the office of mayor, and I am sure I am not the only one hoping an apology or retraction follows shortly from Goodman or other leaders in Las Vegas.

Wednesday, February 11, 2009

Billion-Dollar Brainstorming

Business was down. Customers weren’t calling. I thought it was because of the recession, but the people at Quantum Paradynamics, or QP for short, assured me the downturn was all in my mind. “The ultimate secret to wealth revealed! After our two-day WealthSync event, you’ll be seeing million-dollar bills everywhere,” the flyer read. “No, it’s nothing like The Secret,” the woman I reached at the hotline assured me. “This is much bigger than The Secret. We’ll be teaching you to unlock the million-dollar bills that are already there inside your mind!”

“Sort of like the goose that laid the golden eggs?” I asked.

“Even better! When you know the ultimate secret, there’s no limit to the million-dollar bills you’ll be finding. You’ll be seeing them everywhere!”

“That’s just what the flyer said,” I thought. “There must be something to this.”

Saturday morning, I found myself sitting in front of a whiteboard in a hotel conference room along with 17 other “entrepreneurs” hoping to turn their fortunes around. “It is just as easy to think about a large amount of money as it is to think about a small amount,” said the workshop leader, a man named Patel. “To get used to the idea of thinking big, we’re going to make a list, in the next 15 minutes, of 80 ways an automobile company could save money — and then, for each idea, we’re going to scale it up, not to a million dollars, but to a billion, just by thinking big. Now, who’s good at writing quickly?”

With a volunteer at the board, we started to come up with ideas. “Use fewer Post-It Notes,” was the first idea.

“Okay, Post-It Notes,” Patel said. “How many Post-It Notes would it take to get to a billion dollars?”

“A trillion . . . 100 billion if they have the logo printed on them.”

“Okay, let’s say 100 billion.” In a moment, 100b Post-It was up on the board. “Excellent. Next idea.”

“Close a factory.”

“Would you save a billion dollars by closing one factory? No? How many factories?” After a quick discussion we guessed the number might be about 10.

“Lay off workers at headquarters,” someone suggested next.

“You’ve got to be kidding me,” I said. “To save a billion dollars, you’d have to lay off 10,000 workers.”

“You’re not resisting the idea of big thinking, are you, Rick?” Patel admonished. “Remember, we’re trying to practice thinking big so that we can experience big success.”

“Oh,” I said. “Oops. Ten thousand workers it is.” Lay off 10K, the board said in a moment.

“How about firing some of the senior managers and executives?” someone else suggested.

“Good idea,” Patel said. “You might not save money by firing executives because of the golden parachute payments, but what if we cut the executives’ salaries? How much would we have to cut?”

“Ten percent!” someone suggested.

“Say, this isn’t about General Motors, is it?” someone asked.

“No,” Patel said, “don’t limit yourself to General Motors. I’m not going to take your ideas back to Detroit with me Monday morning. Imagine any auto company that’s 80 billion dollars in the hole, and needs 80 ideas to save a billion dollars each. Who’s got another idea?”

“Sell off a division, or a trademark,” someone else suggested.

“Let’s take those one at a time,” Patel said. “Could a division be worth a billion dollars?”

We all agreed that it might take two divisions to get to a billion dollars.

Tuesday, February 10, 2009

Bailout “Overhaul”: Geithner to Go Begging for Hedge Fund Support

I am trying to piece together the details of the bailout overhaul. Treasury Secretary Tim Geithner says it’s a new approach but I haven’t been able to find anything really new that is big enough that you wouldn’t just call it window dressing.

The biggest funding change involves $100 billion that would apparently be used to encourage hedge funds to send more money to banks, so that the banks can increase lending to consumers, businesses, and now, shopping malls. If this plan were 100 percent efficient, it should in theory be equivalent to shortening the financial squeeze by a week or two, but it is such a screwy plan we will be lucky if it shortens the recession by more than one day.

The separate “public-private partnership” to get hedge funds to buy more bank assets, and perhaps make loans directly to businesses, doesn’t look like it will do anything at all. Possibly it is just a way for the Treasury to take credit for some of the routine transactions that hedge funds do anyway. For this plan to work, though, investors would have to load trillions of dollars in new money into some of the more troubled hedge funds. It’s hard to imagine where that private funding would come from, and Geithner didn’t seem to have any suggestions or scenarios to offer. It sounds as if Geithner will go visit the hedge funds, hat in hand. Perhaps they will buy him lunch.

We don’t know yet what the home mortgage initiative will be, but with $50 billion to spend — that’s a lot less than a month of mortgage payments — it couldn’t be very big.

“Stress test” is the buzzword for the stricter rules for banks to qualify for bailout money, but these “rules” appear to require little more than a nod and a wink from banks, and banks that have already received bailout money are exempt from even that. No real change there.

Less than five months ago, Obama was in Congress and was one of the key figures pushing through the Wall Street bailout funding. And so it should not surprise anyone that for now, the Obama administration is planning to continue the same disastrous bailout initiatives, trying, fingers crossed, to do them a little bit better. No one should be waiting for these programs to rescue the economy. Perhaps we should consider ourselves fortunate that Obama is not asking Congress for another trillion dollars to give to Wall Street.

Monday, February 9, 2009

Auto Dealers Get In on Bailout Fever

Auto dealers want a piece of the bailout. And they know they won’t be getting any money from the government, so they’re using the bailout as a marketing gimmick. The Automotive Bailout Auction promoted in some recent direct-mail pieces is just one example of dealers doing what they do anyway but trying to tie it in to the bailout.

It’s a tough time for dealers to decide what levels of inventory to keep. There are two scenarios dealers have to consider right now:

  • The bankruptcy of General Motors and/or Chrysler a few weeks from now could shut down most of the factories across the industry, making it hard to get cars for two or three months. This would suggest keeping a larger inventory.
  • The threat of bankruptcy could scare potential buyers away from dealers, even for makes that aren’t in any financial peril. This would suggest keeping the smallest inventory possible.

Dealers looking at the latter scenario really are desperate to thin out their inventory, but most can’t afford to lose any money in the process. This means the deals they offer can’t be as tempting as the deals they might have had five years ago when they had to make room for new inventory. So their challenge is to persuade buyers that this is the “last chance to get these amazing deals” when the deals aren’t actually so amazing.

Sunday, February 8, 2009

The Two-Party Story

If you follow the mainstream coverage of the economic issues being considered in Washington, I want you to notice how much the media is playing up the two-party story. For example, most of the news reporting on the so-called stimulus bill is not about the bill itself, but about the Republican opposition to it. To make this two-party story seem credible, they don’t mention that the Republican position on the bill is incoherent or that most of the Republicans in Congress aren’t involved in the bill at all.

The news media is focusing much more on the Republicans now than it did on the Democrats a few years ago when the Republicans controlled both houses of Congress and the White House. Is it that the news media likes Republicans better than it likes Democrats? Not at all. The news media likes all affluent viewers or readers of their news reports, or anyone who will support their advertisers. But the news media is pushing the two-party story harder now precisely because the story is so weak. If they didn’t hammer away at that story, and repeat the cliché of the political pendulum every day, no one would pay any attention — and for the media, that is the worst possible result.

The irony of this is that the reality is more interesting than the hyped-up story you see on the news. By voluntarily disengaging from the legislative process, the Republicans are giving the United States an initial look at one-party government. This is what we are likely to see for many years to come. I am sure the Republicans will eventually decide to go back to work, but they continue to move away from the mainstream and figure to lose ground in future elections because of that. We may have to wait until the country opens up the process to minor parties and independent candidates, or a new political party gains enough traction on the political left to challenge the Democrats. For now, though, this is a good time to see how one-party government can work.

Saturday, February 7, 2009

Hospital Layoff Trend Confirmed

Hospitals are cutting back. I could see this in the headlines, but it is confirmed by the Bureau of Labor Statistics, which reports more mass layoffs than ever at U.S. hospitals in 2008. American Medical News reports that physicians are among the workers being laid off and that cutbacks are forced by high unemployment, tight credit, and other economic trends.

Layoffs are just a glimpse into the cutbacks hospitals are undertaking. Most hospitals are able to cut staffing through attrition and selective pay freezes, so the number of hospitals cutting back is far more than the 107 that had mass layoffs.

Friday, February 6, 2009

This Week in Bank Failures

President Obama warned Monday that the bank bailout money is not unlimited. Some banks will fail, he said, and banks getting bailout money would have to use the money responsibly.

This cautionary mention came after the spot-the-bailout-money game turned up at the Super Bowl, where troubled bank Bank of America spent $10 million on a lavish party right next to the stadium where the game was held. The bank defended the event as an effective promotional expense and part of its “growth strategy,” but this view only added fuel to the fire, as people asked whether a bank whose near-term survival is not entirely certain should be so focused on growing bigger in the long run.

Bailout money has been in the headlines every day, with people predictably upset at the excesses of corporate living that this spotlight has revealed:

  • Wells Fargo first claimed that taxpayer money wasn’t involved in its lavish Las Vegas casino junket scheduled to run from this weekend to next. Then it canceled the trip. A day earlier, Morgan Stanley had canceled a similar trip to Monte Carlo.
  • AP reported that the largest bailed-out banks have applied for H-1B visas for 22,000 foreign workers for U.S.-based jobs in the last six years, at an average salary of $90,000. And that’s not counting a much larger number of foreign workers who are not employed directly by the banks, but who work in the banks’ offices.
  • By one count, Wall Street bonuses were $18.4 billion, and there were other reports of overblown bonuses and severance payments. Obama on Wednesday proposed a hard compensation limit of $500,000 a year for anyone working at a bank that receives large-scale bailout money. The limit would stay in place until the government is paid back. A similar scheme had already been proposed by Sen. Claire McCaskill.

Obama’s approach to the TARP program approved for the Wall Street bailout last fall will get the government more directly involved in the lending process, but will still include enormous giveaways for large banks, according to reports. Some of the giveaways may come from a government-sponsored “bad bank” which will pay above-market prices for delinquent loans and other distressed bank assets. An announcement spelling out the details of the plan is expected on Monday. If there is a “bad bank” it will be funded with only a fraction of the remaining TARP money. It could buy about 1 percent of the bad assets on banks’ balance sheets, making it not nearly enough to save even a single large bank. On Thursday and Friday, the Obama administration seemed to be floating the idea of adding about half a trillion dollars to TARP, but even that level of funding would leave the vast majority of bad assets on the banks’ books.

Obama has little choice but to change course. The original Wall Street bailout has failed in its original purpose. Far from encouraging banks to lend freely again, it has seen banks get even tighter with money. A Fed survey this week found that most banks have adopted more restrictive lending standards for every kind of loan compared to three months ago.

The parade of bank failures gained momentum tonight with banks closed in California and Georgia. As with many other recent bank failures, tonight’s failures were attributed to high loan losses on real estate development loans as real estate markets tumbled.

Alliance Bank, in the Los Angeles metropolitan area, was closed and its $1 billion in deposits transferred to California Bank & Trust. California Bank & Trust, a large bank with offices across the state, is acquiring 98 percent of Alliance Bank assets along with its five offices. It is paying a 1 percent discount for the assets and is also getting partial protection from losses from the FDIC.

Alliance Bank’s problems were well known, and the bank had said in November that it could be put into receivership if it could not raise capital quickly. The FDIC expects the closure to cost it $206 million.

Another billion-dollar California bank, County Bank, was closed tonight. County Bank had 39 offices, nearly all in the Central Valley of California, along Highway 99 from Stockton to Tulare. All deposits, assets, and offices are being transferred to Westamerica Bank — an unusual arrangement that helps to limit the losses and administrative costs of the FDIC. The FDIC is offering partial loss protection on the assets, and expects to pay $135 million on this closure.

Westamerica Bank is a very large community bank operating in the same territory, which may help to explain its interest in taking over County Bank’s operations. After a transition period, Westamerica will likely close many of County Bank’s offices, in the cases where its own offices are found within the same central business district.

Westamerica had been mentioned in press reports this week as a possible buyer for County Bank. County Bank’s parent company, Capital Corp. of the West, had spent several months trying to line up at least $50 million in additional capital. County Bank had operated since 1977. Last weekend there were rumors that it was closing, prompting it to issue a statement on Monday saying that all of its offices remained open for business. The holding company’s stock price fell that day from 75¢ a share to 19¢ a share, giving it a market capitalization of $2 million.

In Georgia, FirstBank Financial Services, with four offices south of Atlanta, was closed and its deposits and offices turned over to Regions Bank, a large regional bank. Regions Bank already has a strong presence in the Atlanta metropolitan area, with existing offices within blocks of the four FirstBank offices. Regions is also acquiring about 5 percent of FirstBank’s assets. Last year, Regions acquired the deposits of Integrity Bank, a bank failure on the other side of Atlanta.

FirstBank Financial opened in 2002 as First Bank of Henry County, operating under that name through 2006. Its loan portfolio was overwhelmed by loan defaults in the second half of 2008. By the end of 2008, it had over $100 million in problem loans, compared to $300 million in total deposits. The FDIC expects this closure to cost it $111 million.

The FDIC redesigned its home page tonight, separating bank failures from news to make it easier for account holders at failed banks to find bank failure information. With the new design, bank failures will never get buried at the bottom of the page no matter how many bank failures occur on the same day.

Thursday, February 5, 2009

Open Letter to Yahoo CEO Carol Bartz About Knowing What Business You’re In


I’ve enjoyed reading your weekly email messages to the employees. Okay, officially, I haven’t seen them, since I don’t work at Yahoo myself, but I went to your home page and followed the news links until I came upon news stories that quoted the messages in their entirety. It’s nice to know that you’re planning to make Yahoo relevant to the world again.

In your last note, though, I noticed that you repeated how unhappy you were that your messages had been leaked to the press, and said, “I hope whoever did it, feels bad enough to come forward and resign.” I don’t know if you realize this, but you were calling for your own resignation. You’re the one who sent the note to the press.

I know you’re new at Yahoo and still getting your feet wet, but I think you ought to take a few minutes to look at your new company’s home page and find out what kind of business it’s in. It’s so much easier to pump up the farmhands if you know what crops they’re putting in those silos. What I think you’ll find is that Yahoo is the press. Half of the home page is given over to news, and not just company news, but world news, with some of the stories written by Yahoo’s own staffers. But don’t take my word for it — check it yourself.

And so really, if you have something to say that you don’t want the news media to know about, discretion would seem to suggest that you don’t mention it to anyone at all at Yahoo, since everyone in the company, yourself included, is either in the news business themselves or supports or manages people who are.

Speaking of discretion, at a time when the news headlines are questioning executive salaries, suggesting that CEOs such as yourself are overpaid, it could make a better impression if you knew a little more about your own company, you know, if you would spend a few minutes finding out what business Yahoo is in. The way it is now, it gives the rank and file workers who have to check out a company’s web site before they even interview for a job, that CEOs must not have to work very hard, if two weeks into the job you still haven’t gotten around to this yourself. Oh, I know, there are more important things a CEO has to do, like shopping (or “retail therapy” as you so delicately put it), but still, it would help foster that air of diligence and hard work if you would spend just a few minutes on this. By the way, did you know that Yahoo is involved in shopping, too?

Just a suggestion, of course. And one more thing. Other people will be calling for your resignation soon enough. So that thing about calling for your own resignation — STOP IT!

Wednesday, February 4, 2009

DTV Is Postponed, Partly

The United States is not quite ready to pull the plug on analog television broadcasts. The Federal Communications Commission (FCC), which regulates broadcasting, had cautioned Congress that the country was not ready for the scheduled February 17 conversion. The Senate and House Democrats agreed in principle more than a week ago to delay the transition until June. But there were glitches in the process, and it took until now to get a bill passed.

The original DTV Delay Bill passed the Senate unanimously but was defeated in the House. The Senate put together a new bill with technical corrections, and that bill passed the House minutes ago. The bill allows television stations until June 12 to discontinue their analog television broadcasts.

Not all stations will wait until June. About 200 are expected to drop their analog signals on February 17 to save the costs, around $100 a day, for the electricity to drive the transmitters. Nearly all are already broadcasting in DTV.

Tuesday, February 3, 2009

Stimulus Threatens To Ruin Stimulus Package

Though President Obama has called it a stimulus package from the beginning, the legislative package that the Senate is now tinkering with is mostly a government spending package. And that’s good, because government spending, done well, could help the economy in a big way right now, but stimulus by itself will do more harm than good.

To see what harm stimulus can do, you only need to look at last year’s tax rebates and the Wall Street bailout. Those were the main causes of the current economic problems. Before that, we just had a financial crisis, which by itself didn’t have the potential to bring down the economy.

But the amendments in the stimulus bill since it was introduced in Congress have been adding stimulus and cutting spending. Provisions like special business tax cuts, if overdone, could compound the problems we are already facing. The rhetoric of “creating jobs” is ironically tied to tax cuts and similar efforts that actually destroy jobs. If this trend continues, we could end up with a real stimulus package. That kind of stimulus package would give the economy a sort of sideways jolt, but wouldn’t help it recover.

You can tell which legislators really don’t want to help the economy when they dismiss spending such as food stamps and extended unemployment benefits as pork-barrel spending. These are the kinds of things the government is ultimately responsible for anyway. It helps the economy, and doesn’t ultimately cost the government anything extra, when funds for programs such as these are available when they’re needed. Regardless of how they explain their actions, the people in Washington who are trying to strip these things out of the stimulus package are just trying to hurt the economy — presumably so they can thumb their noses at their legislative colleagues later. The majority in Congress who care about the economy should just get together and freeze out the few who are trying to sabotage the process, and I expect they will do so over the next day or two.

Monday, February 2, 2009

Savings Habit Comes to U.S.

The trend toward saving that has been particularly evident in the United Kingdom and northwest Europe is also happening in the United States. The U.S. savings rate has gone up from 1 percent a year ago to 3 percent. This means that Americans are spending 97 percent of their incomes instead of 99 percent.

It’s not a big difference in spending — most of the decline in consumer spending is because of layoffs, pay cuts, and investment declines reducing people’s incomes — but it turns into an enormous difference in financial well-being. If you are in debt, for example, going from a 1 percent savings rate to a 3 percent savings rate means you are paying off your debts three times as fast.

Most of the increase in savings is happening because consumers are feeling cautious and holding off on making major purchases. The difference in behavior is so slight that people might not realize they are doing anything different. Changes in habits can be especially hard to notice when other people are making the same changes. These are some of the changes people are making that result in decreased spending:

  • People used to buy a new computer every three years. Now it is more like every four years. That’s a 25 percent decrease in spending.
  • A new generation of video games, such as Rock Band, Guitar Hero, and Wii Fit, is more engaging than previous games. Players are spending more time on video games but buying fewer games. Spending on video games has declined by more than 10 percent.
  • Observers of the automobile market say the pattern of replacing a car with a new car every three to five years has been permanently broken, and drivers now may replace cars based on need rather than habit. If that means a new car every eight to ten years, that would be a 55 percent decline in spending in that area.
  • Some of the hottest designer handbags of two years ago have gone out of style, and no new bag design has come along to take their place. If people are going to buy just any old bag this year, that’s a decline in spending of about 95 percent.

Some say frugality is in style, but the decline in spending rates isn’t really a matter of style. Consumers are forced to be more cautious, knowing that the system won’t necessarily take care of them. In some cases, banks are forcing consumers to save by cutting credit limits. No one should hold their breath waiting for consumers to go back to spending around 99 percent of their incomes. Many survivors of the Great Depression remained frugal for the rest of their lives. Those who get through the current economic adjustment probably won’t become that kind of frugal, but they may never go back to living on the edge.

Sunday, February 1, 2009

RNC Keeps National Focus

The Republican National Committee (RNC) is not content to become a regional party. It could have chosen an experienced dealmaker with links to the party’s Southern, rural, racist core of support. By choosing a minor elected official from Maryland, emphatically not a core Republican state, the RNC is signaling that it wants to make the party relevant again to voters in places like Maryland.

In attempting this, though, the RNC will have to lock horns with the Republicans in the House. The overwhelming majority of Republican House members are from heavily Republican states. None, for example, are from New England states. In the past week, the House Republicans have decided to vote unanimously against economic recovery and a four-month delay in the digital conversion for TV broadcasts. Voting mindlessly as a bloc against popular initiatives, the House Republicans seem to be saying they don’t care what the country thinks, wants, or needs. They are almost daring their own constituents to remember to vote them out next year. At the same time, by locking themselves out of the legislative process, they have lost any influence on the political agenda. This allows the House Democrats to look like the party of prosperity and hard work, casting the Republicans as the slackers and naysayers, the “party of no” as one of them put it. If the RNC cannot persuade the House Republicans to get involved in the policy issues that could help to rebuild the party, the Republican Party will be hard pressed to take on an identity or a direction.