This Week in Bank Failures

To what extent did banks create the mortgage crisis by pushing borrowers toward high-risk “subprime” mortgages, even borrowers who were financially qualified for standard mortgages? The Illinois attorney general is accusing Wells Fargo of reverse redlining, targeting minority neighborhoods for mortgages, then fudging the paperwork to prevent borrowers in those neighborhoods from qualifying for the less expensive standard mortgage terms. If true, the borrowers in those neighborhoods who were victims of the mortgage fraud may be entitled to have their mortgages restated based on the terms they should have qualified for. The attorney general asked a court to order that remedy, among others, in a civil suit filed today against Wells Fargo. If the suit is successful, you can be sure that other states will copy Illinois’ approach.

A New York Times review of AIG found alarming signs of financial tension in its insurance subsidiaries. The hundreds of companies, which are supposed to be separate operations, have been “investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good.” Individually, these transactions are not anything improper, but when they are carried on continuously, as the Times says they have been in recent years, it suggests a conglomerate in financial trouble, with barely enough money to squeak by from week to week, the way Enron was in the two years before its collapse. It’s like borrowing money from your mom every week — it shows that you don’t have as much as it looks like from the outside. AIG insists its insurance subsidiaries are sound, but its suggestion that the myriad transactions between companies amount to a form of reinsurance, in which insurance companies share risk with each other, does not fit with the volume of transactions the Times says it is seeing. Even if its insurance companies were sound, AIG would still face financial ruin from its credit default swaps, which also were issued without the financial strength to back them up. The AIG insurance companies have been losing business, though, especially this year, and if they are not as sound as they appear, then there is nothing to hold up the roof at AIG, financially speaking.

There were dueling headlines about Bank of America this week: is it closing hundreds of branches, or opening a new division? It’s not such a contradiction when you realize that Bank of America plans to close branches across the United States, while simultaneously opening new branches as part of a new subsidiary in China. Perhaps realizing that this combination may not be politically popular, the bank has been downplaying both announcements in recent days — the China move is far from certain, and the bank now does not know how many U.S. locations it may be closing in the next few years.

The FDIC thinks it can sell off failed bank assets faster. The plan is to bundle all the worst assets of a bank and sell shares to investors through a Treasury program. This program is the Public-Private Investment Program for Legacy Assets, or PPIP, that we’ve heard so much about, but that until now hasn’t shown any signs of doing anything of importance. The investment vehicle is a corporation that is sometimes called a “bad bank,” but it won’t have a banking license. If enough hedge funds are interested in investing in speculative bank assets, this could allow the FDIC to improve its liquidity. The disadvantage of this is that the FDIC will take larger losses on the assets.

My feeling is that this will involve only a small fraction of the failed bank assets that the FDIC is left with, perhaps 5 to 10 percent, and that it will cost less to operate if the FDIC does it on only selected bank failures where there is specific investor interest. Still, the liquidity that the FDIC could gain from this is not inconsequential. Congress will surely have to act to expand the FDIC’s line of credit from the Treasury at some point next year, but it is better for the Treasury if that day can be postponed. When the FDIC borrows from the Treasury, the Treasury in turn has to borrow money on global financial markets through its bond auctions, and those interest rates are going up because of the large sums that the Treasury is borrowing. The interest payments are one of the largest expenses in the federal budget.

The pace of bank failures continued tonight. With five Fridays in July, all busy, the number of failures this month is nearly as many as the total for all of last year.

The largest bank to fail tonight was Mutual Bank of Harvey, Illinois, which had 12 branches in and around Chicago. It had $1.6 billion in deposits and a similar amount in assets. A Texas bank, United Central Bank, is taking over the deposits, offices, and assets.

A Fed deadline had just passed for Mutual Bank’s holding company to raise capital. As of March, more than a third of the bank’s loans were at least 30 days behind in payments.

The bank rarely sought publicity, but had a colorful recent history, more colorful than you would really want in a bank. It was owned by a direct marketing executive. Its former head was a major political contributor to the state’s former governor, Rod Blagojevich, and the governor’s wife was his real estate agent. Newspapers had reported on strange-looking loans made by the bank to the governor’s supporters and other politicians. Blagojevich was forced out of office after a federal prosecutor accused him of seeking bribes in connection with the appointment of a U.S. senator to fill the seat vacated when then-senator Barack Obama was elected president. One of the bank’s larger borrowers was Tony Rezko, who was a fundraiser for Blagojevich. The bank’s actions were scrutinized when Rezko was indicted (and ultimately convicted) on federal corruption charges.

Banks have to have assets that are larger than the deposits they hold. The fact that Mutual Bank’s assets were about the same size as its deposits tells you how rapidly its assets, especially loans, had been declining in value. The cost to the FDIC for the closing of Mutual Bank is estimated at $696 million.

United Central Bank bills itself as a “local bank,” but has 9 branches in Texas and a similar number spread across the southern part of the United States from Maryland to California. With the addition of 12 offices in Illinois, it can start to take on the look of a nationwide bank.

At closing time in the Cincinnati area, the OTS closed Peoples Community Bank, which had 15 locations in Ohio and 4 in Indiana. The bank had deposits of $600 million and assets of $700 million, though it was much larger than that three years ago. The bank had been trying to sell itself off all last year, but two deals failed to close. After the failure, regional bank First Financial is taking over the deposits, offices, and assets, paying a 1.5 percent premium for the deposits.

First Financial already had 47 locations in Ohio, 29 in Indiana, and 3 in Kentucky. Only a few of the Peoples Community Bank offices were right near First Financial locations, so First Financial will strengthen its branch network with the new locations. First Financial has been trying to make deals to expand regionally. It had already agreed, in May, to acquire about half of Peoples Community Bank, though that deal never closed. In a similar deal, it is planning to acquire three Indiana branches of Irwin Union Bank and Trust.

Peoples Community Bank had a portfolio heavy in real estate development and construction loans and reported losses last year as borrowers fell behind on payments. By the end of the year, it was reporting a negative net worth, a financial condition that a bank almost never recovers from. It continued to lose money and customers this year.

Integra Bancorp, which had thought to acquire Peoples Community Bank last fall, took a loss in the second quarter, largely because of a loan it made to Peoples Community Bank at that time. It wrote off the $17 million loan on its June 30 balance sheet, announcing its results just hours before the Peoples Community Bank closing was announced.

The Peoples Community Bank closing is expected to cost the FDIC $130 million. Three state bank closings in New Jersey, Florida, and Oklahoma may cost the FDIC a combined $86 million.

New Jersey closed First BankAmericano, which had $157 million in deposits at six offices across the New Jersey suburbs of New York City. It had been founded in 1997 with the intention of being multi-cultural in its approach and concentrating mainly on small business customers. It had already agreed to a takeover by Crown Bank, a bank based on the New Jersey shore in Brick, New Jersey, but with most of its operations in the same area where First BankAmericano had operated. Regulators had not approved the deal while First BankAmericano was still operating, possibly because of concerns over the size of the losses at the bank. Now, Crown Bank has taken over the locations, deposits and assets of the bank after its failure.

Florida closed Integrity Bank of Jupiter, Florida, on Florida’s east coast just north of West Palm Beach. It had one office and $102 million in deposits. Its office and deposits are being taken over by Stonegate Bank, a small bank with four offices in South Florida, including one in Jupiter. Stonegate Bank is also buying about half of the assets of Integrity Bank.

Integrity Bank started in 2004, just in time to get hit by the real estate development bubble. It reported a $4 million loss in the first quarter of this year, leaving it with a slim capital margin that worried regulators. Integrity Bank was not related to the Integrity Bank that failed last year in Georgia.

Oklahoma closed First State Bank of Altus, which had just under $100 million in deposits. It apparently had one standalone branch and one located in a store. The bank had been operating under a cease-and-desist order since February. While First State Bank of Altus had its share of difficulties with real estate developers, its biggest borrower was Quartz Mountain Aerospace, a local aircraft manufacturer that started up in 2007 but ran out of money by the time the FAA approved the design for its first aircraft late in 2008, and then went into bankruptcy. The offices and deposits have been turned over to Herring Bank of Amarillo, Texas, which is also buying about half of the assets. Herring Bank is a community bank with offices mostly in the Texas panhandle, but extending south to Dallas-Fort Worth and north to Colorado Springs.

Elsewhere in Texas, we continue to watch Guaranty Bank, along with Fortune, which this afternoon described its plight under the headline, “Big Texas bank on verge of failure.” It was not put into receivership tonight, and that is probably a sign that the FDIC continues to try to find a buyer, or perhaps multiple buyers, for its California branches.

3 Meals, 3 Reasons

We eat several meals a day partly because the meals provide energy we can use throughout the day. But we use different kinds of energy at different times of day. If you eat three meals, it is useful to think of them as having three different objectives.

Action

Breakfast is about action. Eating breakfast helps you make the transition from resting to activity, from dreaming to problem-solving. Accordingly, it is the one meal where quick energy matters the most. For most people, breakfast doesn’t have to be big at all, but it should contain a touch of sugar to get you started and enough starch, fiber, and fat — it doesn’t take a lot — to keep you going through the morning.

If you skip breakfast, you can expect a slow start to the activity of the day. You may not really get anything done till after lunch, and with the deficit of energy from the morning, you are likely to overeat for the rest of the day. Get to breakfast bleary-eyed, and a breakfast that is mostly sugar and caffeine can seem like a good idea, but this is not much better than skipping breakfast; it will get you going but provides energy only for the first hour or so. Eating a heavy breakfast, too large or with too much fat or protein, also slows down the transition from rest to activity — after a big breakfast, most of your brain goes back to sleep. Don’t let the vision of a “hearty” breakfast fool you — a breakfast should not contain more food energy than you will actually burn off between breakfast and lunch unless you are in a hurry to gain weight.

Purpose

Lunch is the meal that is most closely tied to your purpose in life, or at least your major goals of the day. Even if you eat most of your meals at home, there is a good chance that you eat lunch out in the world somewhere near all the things you are doing. Likewise, lunch is the meal you are most likely to eat with some of the people who are involved in the things you are doing. With all the activity around you, it can seem natural to eat lunch quickly, but it is better to relax and enjoy lunch, if only for a few minutes. If you must eat lunch in just five minutes, eat less than you really want.

Lunch is also the most individual meal of the day, especially when it comes to the food you choose. What you are doing should determine the shape of your lunch. For example, on a day when you are doing manual labor, you will get more done if you eat a large lunch of energy foods and if you take your lunch break at a time when your legs and back could use a break anyway. But if you will be sitting at a desk and doing detailed work all afternoon, a smaller lunch that includes traces of brain foods (basically mixed sugars and fatty acids) will help you work more accurately. Or, if you are in the middle of making tough decisions, it could be a reason to put off lunch until later.

Healing

While breakfast and lunch are the meals that get you ready for what you are doing during the day, supper is the meal that gets you ready for the night. Most healing takes place during the night. Accordingly, supper is the meal where nutrition matters the most. Getting all the different nutrients that food can offer at supper can help you heal more completely that night. It’s a way to assemble all the building blocks that you’ll use to put your cells back together overnight.

To let your body concentrate on healing, eat low-inflammation foods at supper. Almost anything you eat is inflammatory or acidizing to a small extent, but some much more so than others, and supper is a good time to minimize high-inflammation food like white sugar, coffee, and alcohol. That’s especially important at supper. During the day, inflammation is irritating; at night, inflammation takes away from your ability to heal.

If you can possibly manage it, eat supper early in the evening. My suggestion is to “eat before eight” because that’s a catchy phrase that is easy to remember and the title of a song I wrote on the subject, but many experts say it is better to finish eating before 7 p.m. You don’t really start healing until after supper is digested, so eating early gives you more time for healing. When you must eat later, eat less. When I eat supper after 8 p.m., my objective is to eat just enough that I can get to sleep.

For similar reasons, it is important for supper to be a feel-good occasion. The most important thing I can suggest is simply never to have arguments at supper. Arguments are unfortunate at any meal, but they are especially problematic when the meal is supper. Just don’t discuss any subject that could turn controversial at the supper table. Even a small argument can be as irritating as a cup of coffee. The irritation slows down both digestion and healing. I realize that dinner-table arguments are a cliché of Americana, but I can assure you that they are completely avoidable. Don’t discuss the problems of the day at supper, but instead use the time to focus on subjects that feel comfortable, or that you can feel grateful about. When you are hungry and have food to eat, it is only natural to feel good, and if you just go with that element of human nature, you can have a peaceful supper regardless of what has happened during the day.

When you think of breakfast, lunch, and supper as three distinct occasions that fit in different parts of your day, it is easier to pick the right food and the right approach for each meal. That way, each meal provides the kind of energy you need for what you are doing at that time of day. If you have never experienced what it is to get the full benefit from three meals in a day, try it for a few days, starting with eating supper before 8 tonight. You may be surprised at how good you can feel and how much you can get done.

Vegetables in Greenland

Temperatures this week are hovering around 9° C all along the west coast of Greenland, from Nuuk to Qaanaaq. That might not sound very warm, but it is warm enough to grow vegetables. Previously an exotic hobby, vegetables have become a commercial pursuit in Greenland now that the climate has turned warmer, as seen in a BBC report this morning.

The area is also becoming less isolated. Greenland is located along the Northwest Passage, a sea route from the Atlantic to the Pacific that it is hoped may open to commercial shipping for the first time about one month from now. The same shipping lanes may make mining and forestry more practical possibilities in Greenland.

Climate change may be causing difficulties for some of Greenland’s traditional fishing activities, but as BBC puts it, “people in Greenland are making the best of the effects of climate change.” And with less ice cover, Greenland is a little closer to the rest of the world.

Unrest, Malaise, and Corruption in Iran

To the news media, political unrest comes out of nowhere. Take the current protests in Iran, for example. News reports explain the origin of the protests with a two- or three-word phrase such as “disputed election result.” There must be a secret reference book, a sort of news media almanac, where reporters can find this explanation if they don’t know it already. A news report is really digging deep if it explains that massive election fraud wasn’t enough to throw the election to the incumbent, so the government just started making up numbers during the vote count.

But it takes more than a single triggering event, such a rigged election, to create large-scale political unrest. You cannot understand the political wrangling in Iran without understanding the economic climate there. Iran has been struggling to get its economy moving for the last 20 years, and it was finally starting to get some traction last year, with the bubble in world oil prices, only to have its hopes dashed with the collapse of the bubble at the end of the year. The economy is also being affected by the global recession, despite the government’s ideological assurances that Iran was above worldly problems like business cycles. Especially in Tehran, unemployment is high and businesses are failing.

Behind any sudden political movement like the Sea of Green in Iran, you find an economic crisis within the context of a long-term economic malaise. You can see the same dynamic at work in the United States, where the most energetic political reformers (and the most frequent political demonstrations) occur in cities where there are large neighborhoods living on the edge of poverty, not just for a few years, but for decades.

Economic malaise also does not come out of nowhere. It could have natural causes, but more often, it is found together with a culture of official corruption. How many troubled U.S. cities that had struggled for decades finally managed to turn around financially within the ten years after city officials were convicted of bribery and corruption charges and removed from power? From economic principles, it makes sense that official corruption could cause economic malaise. When officials see public policy decisions through a lens that is unrelated to the good of the public, the result is horrific inefficiency in government operations, whether it is trash collectors that don’t collect trash or a military that does everything but defend its country against attack.

It is something like this latter scenario that people point to when they look at the troubles in Iran’s economy. There is more than enough corruption to go around in Iran’s government, but everywhere you go in Iran you find the corrupting influence of the Revolutionary Guard. Far more than just a security force and a sort of thought police, the Revolutionary Guard is the biggest player in Iran’s black market, and it has come to own and operate factories, clinics, and countless other businesses that, in happier times, were privately managed. The Revolutionary Guard’s fortunes have grown tremendously under President Mahmoud Ahmadinejad. Among Ahmadinejad’s many other corrupt decisions, he has thrown huge sums of money to the Revolutionary Guard in the form of government contracts. Some of the contracts are completely legitimate, but others are thinly veiled political protection payments to Iran’s version of the mob.

The protesters in Iran are certainly sincere when they ask for peace, freedom, and fair elections. But a big part of the impetus behind the protests is economic in origin. The people in Iran are hoping for a government that won’t rob their country blind.

Cutback Steakhouse

With less customer traffic, higher food costs, and little flexibility to raise the prices on their menus, restaurants have to cut back somehow, but they don’t want to be obvious about it, for fear of losing more customers. In some cases, they seem to have done studies to find out how much smaller they can make the food before people notice the change. That’s about 10 percent for food that has a definite shape, like cake and pie, and possibly 20 percent where the shape is different every time, like a leafy salad. These are examples of specific changes at restaurants within the past year. Most of these are changes I’ve seen personally.

1. Smaller steaks. As hard as it is to shrink the item that gives a restaurant its name, a steakhouse has no choice. Prices can’t go up near the bottom of a steakhouse menu, so the steaks are a third smaller than before. Where there used to be just one selection under 16 ounces, now there are several to choose from.
2. Salads that are mostly lettuce. The restaurant’s house salad still has as much lettuce as before, but the other ingredients have been cut back by half. On another salad, the bacon bits have disappeared completely.
3. Greasy salad dressing. The least expensive ingredients in a salad dressing are water, salt, oil, vinegar, sugar, and gum, and restaurant salad dressings these days are not much more than that, containing only traces of the “featured” ingredients.
4. No bread on the salad bar. An American diner may have cut back in the wrong place, as taking the rolls off the salad bar seems to have cost it more than 10 percent of its customers. Along with the bread, the carrots and cucumbers are also gone.
5. Less light at dinner. A restaurant that sees its biggest crowds at lunch is saving money by turning on only half the lights in the dinner hour and leaving the candles on the table unlit. A disadvantage of this is that customers who arrive after dark might think the place looks closed.
6. Meat loaf with beef fat but no beef. Beef used to be the featured ingredient in the meat loaf, but now the hint of beef comes from beef fat and barley, and I doubt most customers notice the difference.
7. Smaller plates. At a Chinese buffet, the new plates are prettier — and about 8 millimeters smaller.
8. More vegetables. The same buffet is taking its vegetable ingredients more seriously. It is now easy to tell the pineapple chicken from the chicken with broccoli.
9. Less expensive toppings. The new featured pizzas added to the menu at a pizza place emphasize less expensive toppings such as broccoli and onions.
10. No mints. The bowl of after-dinner mints that used to sit near the cash register at a restaurant is gone.

If restaurant menus seem a little more alike now, it’s because a few more of the items on the menu are coming out of the freezer, instead of being cooked in the kitchen. The restaurant suppliers are being squeezed along with the restaurants, and have had to find ways to meet the restaurants’ price points.

High-Interaction Video Games Hurt Revenue

Last week’s earnings reports seem to confirm the decline of traditional video games. Amazon blamed its weak North American revenue mainly on a lack of interest in new video game releases. Amazon’s sales in many categories were up, but the dropoff in video games was big enough to counter its other gains in North America.

But at least Amazon had a growing business to talk about. Microsoft’s revenue was down 18 percent across the board, the biggest decline in its history. Its entertainment division was especially hard hit, as sales of video game equipment and games were down sharply, though music and music players were even worse. Microsoft blamed the economy, and plans to cut 5,000 jobs in the next year. Also blaming the economy was eBay, which again reported declining revenue and web traffic as what is left of its auction business continues to fade from people’s minds, while its retail integrator strategy, which was supposed to replace auctions on the site, has yet to come into focus. EBay used to be the go-to place for video games, but its higher fees, compounded by higher shipping costs, have made selling difficult across all its media categories. A cursory look at the video game category today shows lots of listings but few bargains and a slow pace of sales. Video game publishers are faring even worse, with sales down 31 percent across the industry.

Why are video games doing so badly? There are lots of problems you can point to, starting with declining personal income that cuts into discretionary purchases such as games first. There was a huge copy protection scandal last fall. That scandal affected only a single game, limiting its effective life to just a few months, but it has significantly impaired consumers’ trust in the industry as a whole, much as the Sony BMG spyware scandal took its toll on the entire music CD business, not just Sony BMG, a few years ago. The industry complains about an absence of exciting new releases, but that is really just another way of saying that consumers aren’t excited by anything new that game publishers are offering.

People are still spending plenty of time on video games, but most of the attention is going into just a few games: Wii Fit, Rock Band, and Guitar Hero. And the fact that this list is so short tells you that the video game business has changed.

The traditional video games of the past decade are based on high speed, rich video, and creative scenarios. A video game enthusiast would buy a new video game at least once a month to keep things interesting. But the current list of the three most popular games is the same as it was 14 months ago. That tells you that these games hold people’s attention in a new way.

The new games offer less of what people have come to expect from video games. The video content is minimalistic, the story trite and repetitive. The games never go so fast as to make your head spin. But the games offer something traditional video games don’t have — a high level of interaction.

Traditional video games use a very low level of interaction that never rises much above point and click. Instead of rich interaction, the games use high speed to challenge the player, but then require rich content to relieve the tedium of the repetitive game actions. It is a very hard way to develop a game. The new games have a much higher level of interaction, so the high speed and distracting content aren’t so critical. And the games maintain their interest, apparently, for at least 10 times as long.

And for the industry, that’s the rub. Part of the business plan in traditional video games was that players would buy new games frequently as the old games became too predictable. If people can continue to play the same game for a whole year or more, it is harder to sell them new games. It looks like the number of game titles the market will bear has fallen off by half and could fall farther.

This is happening at the same time that the cost of developing new scenario-action video games was becoming prohibitive anyway. If costs are going up and revenue is falling, the whole industry will have to move away from that approach.

To die-hard gamers, the timing must seem ironic. The high-performance game consoles of the last two years were supposed to usher in a golden era of video game action. Finally, the hardware would keep up with the pace of game action. Instead, the whole genre is falling flat, and the new video games are actually slower — much slower. But maybe this is not an irony, nor a coincidence. Perhaps after a few months of high-speed video game challenges, people came to the conclusion that there is more to playing games than going as fast as you can.

The Flu Virus: We Have No Idea

I have the factory farm flu, commonly known as H1N1 swine flu. Most likely I was exposed to the virus at a festival, July 5. By the end of that week I was unaccountably tired, and for most of the next week I had the unmistakable symptoms of flu. To reduce the risk of spreading the virus, I kept myself at home for eight days in a row. My symptoms are starting to fade now, just as you would hope.

But I won’t be showing up in the flu statistics. They only count cases in which an actual virus test has been done. Technically, I am only guessing that I have the flu. But the guess is almost certainly correct. There is a story that goes with flu symptoms, and my case matches it. It is also safe to say that the flu I am experiencing is the factory farm flu, because that is what the vast majority of flu cases are this summer in North America. And most cases are even milder than mine, especially in people who are more than 27 years old. According to estimates, more than one million people in the United States have already had the factory farm flu, with most not even noticing that they had it. That is typical for summertime flu.

Fall, winter, and spring are another matter. There is no telling how much damage factory farm flu might do in those seasons, according to the World Health Organization (WHO), which keeps track of such things. It might be useful if we could keep track of the cases, but the United States is not doing that very effectively. We are testing and recording only about 1 case out of 50.

A funny thing has happened on the flu tracker map. The United Kingdom has jumped ahead of the United States in reported factory farm flu cases, 63,179 compared to 46,157. Has the United Kingdom suddenly become the epicenter of the pandemic? Hardly. Nothing suggests that the United Kingdom has had one million cases, or anything close to that. Perhaps it has had about 150,000 cases, but it has managed to report nearly half of them.

How can the United Kingdom be doing so much better than the United States at this? It’s easy to see if you look at my case. My symptoms weren’t serious enough to get me out to see a doctor, but if I had wanted to see a doctor, it is far from certain that I could have gotten in to see one while I still had the illness — it might have taken the doctor’s office two or three weeks to schedule me. That’s a striking contrast to the United Kingdom, where telephone hotlines can direct people to flu treatment offices that provide basic flu treatment to thousands of people. If I had seen a doctor, it is highly unlikely that the doctor would have recommended any tests at all. My story already indicates a flu diagnosis. The test would be somewhat useful, but there is no particular reason for me to pay for a test to confirm a diagnosis that would have me applying the treatment that I am applying anyway.

The test would have little value to me, but would have significant value for the Centers for Disease Control as they attempt to track the spread of the H1N1 virus. The obvious question, then, is why our system assumes that I would want to pay for a test that is mainly for the good of the public. Shouldn’t the government be somewhat eager to pay for these tests so it can have better data to look at?

It is really a political problem. The fear of “socialized medicine” prevents the government from getting deeply involved in tests on flu patients. You can see that this is the issue when you see how much the government’s approach changes when people die. Health officials routinely bear the entire cost of flu virus tests when anyone dies with flu-like symptoms. There is no fear of “socialized medicine” in that situation, because there is no possibility of medical treatment — the patient has already died. But how does it really make sense to wait until people die before we are willing to test them for flu? We would learn about the spread of the H1N1 virus much more quickly if we collected more data, which we could do at rather modest expense to the government. At the same time, more people would recover sooner and fewer would be exposed to the illness. The way it is now, we have no idea where the virus is headed next. We aren’t out there looking for it, so we don’t give ourselves a chance to do anything to contain it.

Economically, it would make good sense for the United States to go to the other extreme and adopt some kind of single-payer health care system when it comes to infectious diseases. These costs are a tiny fraction of all health care treatment costs, and they are a natural extension of existing efforts to track these diseases, a task made more difficult by the scarcity of hard data.

There is no reason to hope that something like this could be included in this year’s health care reform, but eventually, it will have to come to this. The current you’re-on-your-own approach to health care, in which the government is little more than a disinterested observer when people fall ill, encourages epidemics. It ensures that when there is anything contagious, the maximum number of people get sick. The cost of treating the illness and the lost productivity from it are also maximized. A more active approach would stand a better chance of limiting the spread of a disease, thus reducing all the costs associated with the disease.

No one can say that flu, or any other disease that spreads readily from person to person, is someone else’s problem. If other people have the flu, it creates the risk that you will catch it too. But the U.S. health care system treats it this way — and that approach, ultimately, doesn’t make sense.

This Week in Bank Failures

CIT Group spent last weekend searching for a lifeline, and ended up Sunday night with $3 billion in rescue financing. It’s not clear how far that will take the company, but it doesn’t look like enough to keep CIT going through the fall, so it is still looking for additional funding. Meanwhile, even if CIT finds a way to avoid bankruptcy, the sobering reality of what CIT’s limited financial means will imply for the rest of the economy is starting to sink in. As just one example, it could be a depressing Christmas season. With limited financing for manufacturers and retailers, we could see sparse merchandise on store shelves, most of it selling at full price. Some are saying Christmas season sales could be 10 to 15 percent below last year’s levels and could prompt another round of retail closings.

The problems at retail end up affecting the banks, of course, and this week some experts said that the financial fallout from commercial real estate, which includes retail, office, and industrial buildings, will ultimately be larger than the ongoing problems with residential real estate.

Problems in the housing market keep getting worse, as the number of vacant homes has hit a new record, mainly as the result of bank foreclosures. The huge inventory of vacant homes assures that real estate values will continue to fall. Many vacant homes are being kept off the market because of low real estate values, and there seem to be enough of these to prevent prices from recovering after they stop declining. Banks have about a 54 percent ownership share in all U.S. houses combined, so their balance sheets are very much affected by changes in real estate values.

Interest rates on savings accounts are so low that savers have little incentive to keep their money in a bank. As people take their money elsewhere, often just keeping it at home, it is draining the deposit base of the banking system. To address this, an FDIC advisory committee is looking into the possibility of lottery-based interest payments. In one version of this scheme, every dollar kept in a savings account acts like a lottery ticket. It’s an interesting idea, but one that would have to be done carefully. It would also appear to be illegal under current laws. Still, with the right approach and enabling legislation, I think the chance of winning a prize could persuade many people to put money in the bank. Of course, a better solution would be if the Fed would raise its interest rates to a more sustainable level around 4 percent. Then, banks could reward every depositor, and not just the lucky winners.

Iceland has announced a plan to put its economy back together. The government will put in $2 billion to restart the banks, and will turn over ownership in the banks to creditors. Parliament is still working on a way to pay back the rest of the overseas depositors. It’s an uncomfortable issue because of the amount of money the government will have to spend, but is seen as a necessary step in paving the way for the country’s application for European Union membership.

The problems in banking are now being felt even in Chile, which by some measures is the most stable economy in the Americas. Banks in Chile tightened lending requirements in the first half of the year and have cut back on the amount of new loans.

If you want to see the kind of austerity that can result from a faltering financial system, the country to look at is Lithuania, which like neighboring Latvia has seen its economy fall off about 18 percent since last year. The compromises in the Lithuanian government’s budget make California’s (where a budget agreement was finally passed this afternoon) look like a walk in the park. Across the Baltic Sea, banks in Sweden are busy denying and minimizing whatever exposure they have in Lithuania, Latvia, and Estonia. It sounds eerily reminiscent of American banks’ comments about subprime mortgages and mortgage-backed securities two years ago.

Speaking of California, Guaranty Bank, which operates in that state and its home state of Texas, said yesterday in a regulatory filing that it does not have enough money to keep going for long. The bank said it has no capital cushion left. Its stock has fallen by 99 percent since it was spun off from its former parent company two years ago. Even after recent losses, Guaranty Bank has about $16 billion in assets, which puts it in the same class as last year’s failed IndyMac Bank. It is safe to assume that the Office of Thrift Supervision (OTS) and FDIC have been looking for a buyer for Guaranty Bank, but the chances of finding a buyer for such a large bank in California seem remote, so they may mainly be looking for a buyer for the Texas locations.

Georgia had already seen 10 banks fail this year, and you can add 6 more to that list tonight, as Georgia closed the six subsidiary banks of Security Bank Corporation. The Security Bank subsidiaries of Bibb, Jones, and Houston counties, all three in the Macon area, had a combined $1.7 billion in deposits. The other three Security Bank subsidiaries were in the Atlanta metro area and had a combined $700 million in deposits.

The banks’ offices and deposits are being taken over by State Bank and Trust Company, a much smaller bank with its two offices in Pinehurst and Unadilla, along Interstate 75 south of Macon. State Bank and Trust Company is also buying an amount of assets to match the amount of deposits. That will leave the FDIC with about $400 million in other assets to sell. The FDIC estimates costs of $807 million on this group of bank failures.

It is a Disney-quality story for State Bank and Trust Company. Until today, it was the well-managed bank of a central Georgia village. When it opens tomorrow, it will be the fourth largest bank in the state. State Bank and Trust Company did not have the money to buy the six Security Bank subsidiaries, so as part of the transaction, it collected $300 million in capital from a group of 26 investors. The investment group was organized by Joe Evans, a Georgia banker who in 2006 started putting together a fund to buy a distressed bank in the state. According to reports, Evans will become the president of the bank.

Security Bank was historically based in the Macon area, but gambled that it could expand into the Atlanta metro. Its timing was unfortunate, though, and loan losses on residential real estate loans in the Atlanta metro area, some made by its Fairfield Financial subsidiary, appeared to be the main factor in its failure. Loan losses took away two thirds of its capital last year, and the losses continued into this year.

Earlier, at closing time tonight, New York State closed Waterford Village Bank in the Buffalo area. The bank was as small as its name suggested, with one office and $58 million in deposits. The office, deposits, and assets are being taken over by Evans Bank, which has ten offices all along the Lake Erie coast of New York.

Waterford Village Bank spent most of its short existence in litigation with its original president, who the bank accuses of ignoring federal banking regulations. It had just laid off ten workers and was in such financial distress that it had not issued a financial statement for the last four quarters. A series of deals to rescue the bank had fallen through, and stockholders this month objected to a proposed acquisition by a foreign investor, saying any such action should be delayed until proper financial disclosures were made. The would-be buyer had offered to buy the bank for $9 million. About $200,000 of that would go to stockholders who had invested about $10 million to start the bank in 2007. It was not clear, however, that the buyer would be adding enough capital to meet regulatory approval for the purchase.

The FDIC expects to spend about $6 million to clean up this mess. Its estimated costs are smaller than usual, largely because this bank was too new to have loans that originated in the very problematic period of 2005–2006.

So far this year, the FDIC has recorded 64 bank failures, with a fourth of them in Georgia. The Georgia economy went into decline more than a year before the national recession hit, so the experience there may be an indication of what other states might expect a year or two from now.

Perils of New-Vehicle Rewards

After getting an oil change yesterday, I found that I had become an honorary Ford owner.

The Ford dealership where I got the service done handed me a membership card that reads, “Ford Owner Advantage.” It seems I qualify for this customer rewards program even though I do not actually own any Ford vehicles.

The attention-getting aspect of the program is the possibility of getting a discount on a new vehicle purchase. In this way, the program is similar to the disastrous GM Card program, which lets General Motors customers get new-vehicle discounts. But when I read the fine print, I found that the Ford new-vehicle rewards were nowhere near as costly to Ford nor as damaging to its reputation as GM’s have been.

For one thing, you can’t accumulate rewards for a new-vehicle discount. Only vehicle purchases qualify for discounts on future vehicle purchases, and only at the same dealer, and you have to keep your rewards active by purchasing parts or service at that dealer at least every 18 months. That’s a striking contrast to the GM Card program, which allows ordinary credit card purchases to accumulate toward new-vehicle discounts.

When I checked on the GM Card, I was a little surprised to find that a scaled-back version of the rewards program is still going on. The GM bankruptcy seemingly gave GM the perfect opportunity to publicly discontinue a program that had such a prominent role in pushing it toward bankruptcy. The rewards program has been modified over the years so that it isn’t so expensive or rewarding, but there has been no big announcement, so car buyers who don’t have a GM Card may not realize this.

I have to imagine that GM doesn’t realize how much the GM Card rewards program has hurt its image. Certainly there are positive aspects to the program — Americans are still suckers for big discounts, so it’s a way to get them to take a close look at what you have to offer — but look at the negative impressions it makes (especially for consumers who mainly remember the original GM Card promotion from years ago):

• that GM vehicles are gimmicks that you get as credit card rewards, rather than products that can stand up in their own right
• that if you aren’t a rewards program member, you probably shouldn’t buy a GM vehicle, because you’ll have to pay $1,000 extra
• that GM probably has to bump up the prices of all its products to pay for such an expensive rewards program
• that people who buy GM vehicles are people who don’t know when to stop spending
• that GM vehicles are especially hard to pay for (that’s the impression you get if you really go for the program and have to make the loan payments on your GM vehicle purchase at the same time that you are struggling to pay off your mountain of credit card debt)

It would have made a lot of sense if GM had very publicly killed the GM Card rewards last month as part of a broader campaign to tell people, “Today’s GM products are strong enough to stand on their own.” The bankruptcy would have given it extra leverage to modify its contracts with the card issuers, HSBC and Chase. It will likely get another chance, as banks are having second thoughts about credit card rewards, but the changes won’t have the public impact that they could have had last month when GM was in the news.

Is there any chance that GM’s rewards problems will rub off on Ford? It doesn’t look like it. Ford Owner Advantage is being promoted as a fluffy, feel-good idea and something that will make you like your participating Ford dealer better. It doesn’t commit to any rewards percentage, and it’s good only for continuing customers of the same dealer, so it’s hard for customers to think of it as something they can invest in. The program is limited enough, and its presentation vague enough, that Ford can have a rewards program without having it cheapen the Ford nameplate.

It is another example of the way Ford is avoiding the potholes that seem to be plaguing Detroit lately. It’s almost as if Ford has a stay-out-of-trouble department that fixes whatever bad ideas the company has before they turn into dumb mistakes.

What Is the Economy Doing to People?

Economics journalist Suzanne Garland tells a story about six blind reporters and an elephant. In this adaptation of a folk tale, the six reporters examine an elephant and come to completely different conclusions about it by concentrating on different parts of the animal. The raja, who owns the elephant, breaks up the ensuing argument by explaining that you can’t judge an elephant based on any single measurement of it. The raja goes on to show the reporters how to combine their various observations to create an index (the Raja Index of Elephant Indicators, they call it), which is still a single number, but provides a more complete picture of how the elephant is doing.

Indexes are a part of daily life if you follow economics. They are especially valuable when you want to compare one time period with another. They can show you what direction the economy is moving in.

There are hundreds of indexes that economists look at in the United States alone. There are several to measure various kinds of wholesale energy prices, others to measure how optimistic home builders and real estate brokers feel. But you never seem to hear about indexes that set out to measure the broader impact of the economy on people.

That’s why I’m so excited by the announcement of the Huffington Post Real Misery Index. It started out as an attempt to create a more sophisticated version of the Misery Index, which became famous in Ronald Reagan’s presidential campaign in 1980. Despite its name, though, the Misery Index does not provide much of an indication of people’s economic miseries. Instead, it is more of a simple measure of how badly the economy is being mismanaged according to a popular but fundamentally flawed model of economic management.

The Huffington Post put together a more complete index by asking what well-measured economic events actually make people miserable. The resulting index is still not really a measure of economic misery, but it comes much closer to that than the original Misery Index. The Huffington Post index is a pretty good indication of the economic stress people are experiencing because of economic changes beyond their control. It is based on eight measures, but half of the index is a broad measure of unemployment. The other seven measures are yearly changes in prices, credit card delinquencies, food stamps, and similar measures related to financial distress.

It is important because it is the most prominent single measure to date of what the U.S. economy is doing to people. The purpose of the economy, of course, is not just to make as much stuff as we possibly can, but to take care of people. The Huffington Post Real Misery Index will provide some indication of whether we are doing better or worse at that from one month to the next.

Sadly, an index that tracks actual economic misery is impossible at this point. The government does not collect accurate data on how many people have homes to live in or food to eat. We do not know how many of us fall ill in a month, nor how many of those are able to get medical care for their illnesses. The reason this kind of data is not collected is that traditional economic thinking does not consider them important in managing the economy. They are not considered important because most of the people directly affected do not have much money, or the amount of money they have is rapidly declining. If the wheels of commerce are made of money, as traditional economic thinking supposes, then pictures of the wheels of commerce need only include the people who have their hands on the money at the moment. The drawback of this approach, of course, is that it is impossible to determine whether the economy is doing better or worse by the people it is supposed to serve. This is nevertheless something we have to try to measure, and the Huffington Post Real Misery Index is probably about as good a measure as you can get from the data that is available now.

One reason I take the Huffington Post Real Misery Index seriously is that it looks like it will have some power to predict the difficulties that banks will be facing over the next couple of years. When people are miserable, economically speaking, their banks tend to become miserable a few months later. If my hunch is correct, this will be an index that the banking industry will want to keep track of.

As of June, the Huffington Post Real Misery Index stood at 29.9. The number doesn’t mean anything by itself, but a month from now, when we can compare July to June, the index will give an indication of which way the economy is moving — are economic changes causing people more distress, or less?

Continuity or Drift?

The new person in charge often wants to emphasize from their first day on the job that they want to keep things going roughly the way they are. We saw this earlier this year at Yahoo, where the new CEO needed to reassure employees that she wasn’t there to shut the company down or auction it off in pieces. It is also the usual strategy of a new U.S. president. When a president takes office, he needs to nominate hundreds of people for executive, administrative, and diplomatic positions and deliver a budget proposal all within the first few weeks, so it’s not the right time for any sort of soul-searching about changes in direction.

Take this too far, though, and continuity turns into drift. Six months in at Yahoo, the biggest initiative we’ve seen is a home page redesign that looks like it might have been cribbed from AOL in a couple of hours by a summer intern. And when you look at President Obama’s policies, at least when it comes to the economy, they still seem mostly geared toward making his predecessor look good. The “economic stimulus” package was little more than a dressed-up repeat of Bush’s tax rebates of eight months earler — and as we are not in the kind of recession that responds to stimulus, it was no more effective in turning the economy around. Obama’s other headline-grabbing economic initiatives are continuations of measures adopted last year, with nothing important changing. The Wall Street bailout is still going on with every cash transfer that the Treasury sends to the big financial companies in New York. General Motors and Chrysler are still limping along with their futures very much in doubt.

It’s a track record that’s hard to explain, especially when you stop to consider the source of the policies that Obama is so studiously continuing. These are policies that were adopted in an atmosphere of panic by leaders who were in denial and advisors who were unqualified. They were meant as stopgap measures. When the Bush administration agreed to prop up the two failing Detroit automakers, it was supposed to be to give the new administration a chance to do something about them in February — not to have both companies still paralyzed by indecision as we go into August.

The whole strategy of continuity is a stopgap measure in its own right. It’s not supposed to go on for a whole year, unless you are another Gerald Ford, a caretaker executive who is just expected to hold things together until a real leader can be brought in. The U.S. economy is on the brink of depression — after just 3 or 4 million more job losses, some economists will consider it that — and action is needed. When it comes to the economy, the Obama administration seems to be stuck in neutral. The country is correct in expecting more than this from its president.

Google Advertising Is Not So Targeted

News that Google’s growth has stopped, at least in terms of paid clicks and U.S. revenue, caught many people by surprise. The thinking was that when money is tight, advertisers would switch from broad-based advertising media, such as television, to highly targeted advertising, such as Google. That’s what I thought too, until I had the experience of advertising on Google.

The truth is that Google advertising is only very loosely targeted. It does not necessarily have a higher hit rate than television. And this is by Google’s own choice, though the reasons it has made this choice are mysterious.

People think Google search advertising is highly targeted because of the timing. As an advertiser, you catch people in the moment when they are actually searching for something.

The mistake is the thought that you can advertise to someone searching for something specific. If you’re an Atlantic City belly dancer, you place your ad where people will see it if they are searching for Atlantic City belly dancer. Well, no. That’s not the way it works. Yes, you can buy those ads. But Google will not display them — at least not often enough to matter.

The Google ad system is geared toward single terms, even though most web searches are based on combinations of terms. The very first time you search for Atlantic City, to find out where it is, you might search for Atlantic City. But after that, you’re looking for something more specific, so you’re searching for Atlantic City parking or Atlantic City pizza or Atlantic City marathon, a combination of terms. Guess what ads you see then. There are tons of ads for Atlantic City, but scarcely any for anything combined with Atlantic City. Advertisers pay Google for ads on those pages, but Google does not want to display them. I can only suppose that Google does not want to cheapen the market for the Atlantic City ads, or the other ads that display for single search terms. But as a result, Google displays no ads, or very few, next to most search results.

You can get your Atlantic City pizza ad to appear if you pay Google so much for the ad placement that sometimes it will display in searches for Atlantic City. But that, of course, is not targeted advertising. The people who are trying to find out where Atlantic City is are not the people who are about to go out for a pizza.

Here’s a very specific example from my experience. If you search for the title of my book, Fear of Nothing, there is only a very slight chance that Google will display the ad that I’ve targeted for that search phrase. Google will not display the ad more than about one time per week unless I am willing to also have the ad appear on searches for fear and searches for nothing. And yet, any such ad placement would be completed untargeted. A person searching Google for fear is probably less likely to be interested in Fear of Nothing than a person chosen at random. And a person searching Google for nothing — well, I can’t imagine what they are searching for.

In the case of Fear of Nothing, the missing Google ad scarcely matters, as the book is easily found in the search results, but Google is giving up revenue by not displaying ads like this — ads targeted to phrases and combinations of search terms. I am sure that there are thousands of Google advertising professionals who know various little tricks to get around some of these limitations in the Google ads system. That’s an option for advertisers, but it won’t help Google much. These Google advertising experts are the same people who can help advertisers cut their Google spending by targeting their ads better. Anyway, for Google’s revenue to grow, they need to be collecting money from millions of businesses, not thousands.

So that’s why Google isn’t reporting the kind of growth they had in the past. The highly targeted placements that advertisers are hoping for mostly don’t exist. It’s not that advertisers aren’t trying to spend money on Google. They are trying. But Google doesn’t make it easy to do.

Cooler, Lighter, and Easier to Handle

The Madonna concert that was scheduled for tonight in Marseilles will not be going on. Something went wrong when the touring stage was being assembled, and the stage roof came apart. The falling pieces destroyed the stage and killed two workers.

It is a tragic occurrence, and everyone who works in large-format touring wants to know what happened, with an eye toward what they might do differently to be safer. In addition, it is a reminder of another one of the costs of low-efficiency lighting.

The difficulties of a stage roof occur mainly because it is so heavy. Everything about an outdoor stage has to be heavy enough to be stable if the wind blows, but the reason a stage roof is so heavy is that it supports all the lights that are above the stage. The lights, in turn, have to be heavy enough to dissipate all the heat they generate — heat that results because only a tiny fraction, perhaps 3 percent, of all the energy they use gets turned into light. The overhead lights for the stage of a large nightclub can easily be a ton — and the lights above a stadium stage are so heavy you don’t really want to think about it.

This is not just true of the stage, by the way; in almost any structure, the lighting weighs more than the wiring. Lighting fixtures take up about 1 percent of the carrying capacity of a house or a typical office building, and perhaps 5 percent in a warehouse-type building. That might not sound like much, but if it adds $250 to the cost of the structure of your house, it’s a difference you might care about.

But simplifying a structure is not just about saving money. A simpler structure is also more reliable, in the sense that there are fewer things that can go wrong. We don’t know quite what went wrong in Marseilles, but it is possible that it had something to do with the weight of the structure that was being put up, and that a lighter structure, the kind that high-efficiency lighting would allow, could pose less risk.

High-efficiency lighting is about to catch on in a big way starting in 2012. As we replace the current inefficient incandescent and fluorescent lights with high-efficiency lighting, we won’t just be using less electricity. That is reason enough to make the change, but we will also be dealing with lighting that is cooler, lighter, and easier to handle.

More Homes, More Problems

The summertime uptick in single-family home construction is not good news for the U.S. economy. There is already a huge inventory of unsold homes, and now builders are building more, at more than half the pace of last summer.

Many of the new houses will go unsold for a year or two and could end up on bank balance sheets after the banks are forced to foreclose on the builders. To the extent that the homes are sold, they take buyers away from the existing-homes market, ensuring that prices for existing homes continue to decline. Some builders will end up selling the new homes they build this summer for no more than the price of materials and construction, taking a loss on their other costs. This kind of investment loss reduces the capacity of the economy to fund anything new in the future.

The former Treasury Secretary, Henry Paulson, based his whole economic recovery plan on the theory that housing prices could be made to stop falling by December 2008, leading to a recovery in the financial sector. That, in turn, was supposed to lead to a new period of easy credit that would help the economy rebuild. Some economists and policymakers are still promoting that strategy, even after experience tells us it is not as easy as it looks. I am sure we will continue to hear that a bottom in the housing market is just two or three months away. It is a message we have been hearing for more than a year. But that prediction is unlikely to come true as long as home builders keep building at such a rapid pace.

This Week in Bank Failures

Credit card reform might not be hitting the United States until next year, but a few reforms are taking hold now in China, where regulators are worried about late payments and delinquencies that are approaching U.S.-like rates. Under the new rules in China, banks must stop issuing credit cards to teenagers who do not have a source of income, stop setting sales quotas for credit cards, and stop offering gifts to consumers who accept cards. Other rule changes are meant to prevent banks from charging fees they have not earned.

All this week, CIT Group has been seeking emergency funding, and Wall Street was not optimistic about its prospects after talks with regulators broke off Wednesday night. Trading in the stock was halted late Wednesday afternoon, and the stock lost three fourths of its value overnight as Wall Street concluded that a bankruptcy was likely. The stock recovered some of its losses this afternoon on reports that CIT was in negotiations for short-term financing. The problems at CIT do not involve its bank, but its business lending operation, which is set up as a separate company to avoid the capital requirements of banking. Still, its continued operations depend, in the same way as a bank’s, on the liquidity of its borrowers.

It is rare, but possible, for a bank holding company such as CIT to go bankrupt while its bank is still operating. One risk in that scenario is a possible run on the bank by customers who may not want to rely on the legal separation between a bank and its holding company.

A larger risk stems from the common confusion between CIT Group and the similarly-named Citigroup. A quick look at blog comments and message boards this week confirms that many consumers, along with a few Wall Street reporters and traders, get the two companies confused. This could lead to a run on Citibank, or even a run on banks generally, if people mistakenly believe that the largest bank in New York is involved in a bankruptcy. Citigroup’s own financial difficulties could contribute to this kind of confusion.

In Washington, Henry Paulson yesterday acknowledged that he threatened to have Bank of America CEO Ken Lewis removed. Paulson was testifying before the House Oversight and Government Reform Committee about his role as Treasury Secretary in the Bank of America acquisition of Merrill Lynch. That deal nearly fell apart between the stockholder approval on December 5 and closing on December 31 because of huge trading losses at Merrill Lynch during that quarter. Paulson pushed to have the deal go through anyway.

Paulson insisted in his testimony that the purchase was a good investment for Bank of America shareholders. The acquisition, though, along with Bank of America’s other recent acquisitions, seems to put the bank’s future in doubt, and $20 billion of the bailout money Bank of America subsequently received was tied to the Merrill Lynch deal, according to Paulson.

Separately, according to reports, Bank of America is now operating under a secret regulatory sanction which requires it to upgrade its management.

The largest banks are reporting profits for the second quarter, but the profits are small and stem more from securities trading than from banking. That was during a quarter in which the stock market had its biggest run up in recent memory, and the next quarter could easily reverse that. Lewis was in a cautious mood when Bank of America released earnings today: “Profitability in the second half of the year will be much tougher than the first half.”

Profitability is very important for banks right now, as it allows them to rebuild their capital base, which serves as a cushion for any future loan losses or other risks.

Under rules proposed by the FDIC, the easiest way for private equity firms to acquire a failed bank is if they operate a bank already. This has led to an increased interest from private equity in buying out very small banks. One such deal was announced today with First American Financial Management Co. paying $16 million to buy Community Bank of Rowan, which has offices in the towns of Salisbury and China Grove in west central North Carolina. The buyers are paying a 50 percent premium over the bank’s book value and plan to keep all of the bank’s management in place.

Two large California banks failed tonight, each with about $1.5 billion in deposits. The two failed banks were Vineyard Bank, which had 16 offices mostly across the suburbs east of Los Angeles, and Temecula Valley Bank, which had 11 offices along the I-15 corridor north of San Diego.

Vineyard Bank faltered last year when many of its real estate construction loans went bad. New homes in the area are selling at half the price they were when many of these loans were made. The collateral for the loans is not worth much now. The bank knew it was in financial trouble at least a year ago. Its chairman formed a new company to buy out the bank and spent at least 6 months trying to round up investors to fund the buyout. When that fell through two months ago, the bank was out of options.

Vineyard Bank was the leader in some West Coast loan pools, and observers are now wondering about the health of the other banks participating in those loan pools.

Deposits, offices, and about 95 percent of assets are being purchased by California Bank & Trust.

California Bank & Trust is based in San Diego and already had a presence in the area, but had been stronger in the I-5 corridor than in the I-15 corridor. The new acquisition comes just a month after California Bank & Trust announced that it had completed the conversion of accounts in its February 9 acquisition of another failed bank, Alliance Bank. With the three Alliance Bank branches, and adding the 16 Vineyard Bank branches, California Bank & Trust will have 109 offices in California.

Temecula Valley Bank had been negotiating with institutional investors to try to add more than $200 million in additional capital. That deal fell through on July 1. Bancroft Capital, which would have been the lead investor, ultimately could not persuade all the investors to go along. It cited “the continued deterioration in market fundamentals” as a challenge that it could not overcome.

The bank had been losing money since early last year, and faced a July 15 deadline from the state to raise more capital.

The deposits, assets, and branches are being taken over by First Citizens Bank, a regional bank based in Raleigh, North Carolina, with a territory extending north to Maryland and west to Tennessee.

The two California banks had remarkably similar stock charts, reflecting their similar business risks. Both stocks peaked around $33 in 2005 but fell below $1 late in 2008.

The cost to the FDIC for the two California bank closings is estimated at nearly $1 billion.

Earlier tonight, two small banks failures occurred east of the Rockies.

Georgia shut down yet another bank in the Atlanta metro area at closing time tonight. The bank was First Piedmont Bank of Winder, Georgia, on the fringes of the eastern suburbs of Atlanta. It had been in business for 11 years. Like many other banks in Georgia and in outer suburban areas, it had heavy losses in real estate construction loans, especially ones issued between 2004 and 2008 when the bank was rapidly expanding its lending.

First American Bank and Trust Company, a larger community bank based a half-hour drive to the east in Athens, Georgia, is taking over the bank’s $109 million in deposits and two offices and is buying 97 percent of the assets.

Meanwhile, South Dakota was shutting down BankFirst, a small bank based in Sioux Falls, with a second office in Minneapolis, Minnesota. BankFirst made loans nationwide, concentrating on real estate loans in high-growth areas. The problem with that strategy is that the areas that were growing the fastest before 2006 have seen the fastest declines in real estate values since then. BankFirst had $254 million in deposits.

Alerus Financial has assumed the deposits of BankFirst, but will be keeping only the Minneapolis office. It has agreed to sell the Sioux Falls office to First Dakota National Bank. Initially, Alerus Financial will operate this office as a branch of First Dakota National Bank, and presumably the formal control of the branch will be transferred to First Dakota in the very near future.

Alerus Financial is a North Dakota bank with its offices around Fargo and Grand Forks. It also has a Minneapolis office. First Dakota National Bank has offices throughout South Dakota.

The FDIC estimates its costs for these two closings at $120 million.

The Wall Street Bailout Was Never About the Banks or the Economy

When the Wall Street bailout was first proposed, and then-president George W. Bush was talking about the possibility of “blood on the streets” and martial law if it didn’t pass Congress, the Treasury trotted out a story about a payday loan. Quotes from an anonymous, probably fictional business owner described how their “small” business would probably not be able to get a payday loan to pay its workers and might be forced to shut down if the Wall Street bailout did not pass.

I don’t know if anyone believed that story, but it is now safe to say that the Wall Street bailout was never about jobs and the economy. If it had been, then CIT Group, which does more of these short-term “small business” loans than any other lender, would be the perfect candidate for the bailout. Instead, last night Washington told CIT to go ahead and file for bankruptcy if things get worse.

The CIT saga also casts doubt on the premise that the Wall Street bailout was intended to protect the banking sector from systemic risk. CIT’s experience is all about systemic risk. It is no accident that the run on CIT happened just weeks after Advanta, which had provided credit cards to many of the same borrowers, shut down its operations. Customers (mostly small corporations) that couldn’t buy supplies on their Advanta card anymore, or that wanted to pay off their final Advanta card balance, borrowed from their CIT credit lines. Then other borrowers, worried about CIT’s financial condition, took extra money out of their credit lines. It is not the exact pattern of a classic run on a bank, but it is not different in any important way.

A bank closure, ripple effect, a run on another bank. If a third of the banks in the United States are going to topple, this is exactly how it will happen.

The ripple effect certainly will not stop at CIT, which now may be forced to suspend most lending so it can have the cash to pay its bills. If CIT files for bankruptcy, the bankruptcy court may have no choice but to order many of its borrowers to repay immediately. This could drag a few thousand of those borrowers, including several retailers you have heard of, into bankruptcy, which in turn will affect other lenders. Meanwhile, businesses that can no longer borrow from CIT will rush to get loans elsewhere, probably leading to an increase in business loan interest rates everywhere. With the higher interest payments, there are more defaults, more problems for more banks, and it goes on from there.

If the Wall Street bailout was not about the economy and was not about saving the banks, then what was it about? It could just have been someone’s crazy idea. But if you start to draw a diagram of all the people involved, with lines to indicate who knows who, you have to start wondering if the whole idea was just money for Wall Street all along.

2012: Blinking Lights

I’m looking for big changes in indoor lighting in 2012, changes so big they’ll be a threshold event for the economy. It seems like everything that’s coming down in lighting is about to hit around the same time.

First, of course, there is the U.S. government mandate for higher efficiency in indoor lighting. All the news people are saying this will be the end of the incandescent light bulb, but that’s not likely at all. Engineers are already showing prototypes of incandescent bulbs that meet the new standards. The high-efficiency incandescent bulbs will cost more than traditional light bulbs, but they’ll work anywhere, and that’s a claim that the much-hyped fluorescent lights can’t make. Manufacturers are working on several other ways to make incandescent lights more efficient, and you can be sure they will be rushing to get them to market in time for the 2012 U.S. deadline.

Compact fluorescent lighting (CFL) is more stable than traditional fluorescent tubes, but it’s still annoyingly unstable, producing a subliminal flicker that changes whenever the electric power gets the slightest bit flaky. No one is expecting any sudden breakthroughs in this area, but in the next three years, CFLs are likely to improve enough that people will look at them and say, “Okay, I can live with that.”

LED, though, is the lighting technology that is changing fastest and will make the biggest difference. Manufacturing costs for LED lights have improved enough in the past five years to make them the unquestioned leader in colored lights, something you may have noticed if you have looked at traffic lights and turn signals recently. LEDs form the huge display screens that U2 and others have taken along on music tours, and around 2012 high-powered LEDs are likely to become efficient enough that they can serve as stage lights. Expensive to buy, but much more efficient than filtered incandescent stage lights, LED stage lights will eliminate half the equipment that’s currently needed to light a stage. And while that might sound like an obscure technical change, it is a really big deal.

First, it will change what happens on stage. The experience of the stage for the last 75 years has been centered on the hot lights. If you have never been a stage performer, you would be amazed at how hot the stage gets as soon as the lights go on. LED lights, though, are 10 times as efficient, producing relatively little waste heat. That makes them lukewarm instead of hot. With less heat to disperse, lamps can shrink to half their current size and a tenth of the weight, the huge steel lighting rig that holds up stage lights can be replaced with a comparative flimsy plastic structure, and for a touring band, the size of the whole stage show will be a good deal smaller.

LEDs also turn on and off more easily than any other light source, so stage lighting can rely more on quick flashes of light and blinking lights than before. When you see this, you may think it is amazingly cool.

You might even want to take the stage lights home. And from everything I’ve heard, you’ll be able to. Regular LED accent lights for home should, in principle, work just fine with a simple, cheap lighting controller. And while this might sound like a big waste of energy, it isn’t. Instead, it saves energy. Flashing colored LED lights use less energy than white room lighting — of any technology — that stays on. The LEDs, which last for generations anyway, apparently last longer if you turn them off and on than if you just leave them on. When we can have stage lighting at home, at a lower energy cost than regular white room lighting, some people will want to do it. In 2012, LED lights will still be expensive, but they’ll be below the psychologically important $100 level, and they’ll be easy to justify financially, for anyone who wants to buy them, as an investment in energy savings.

I’m not saying the blinking-light fad will make quick inroads in the respectable suburban home or corporate office, but certainly in a dorm room and a downtown loft, at a party, and in a clothing store, you are going to see blinking and moving colored lights. For nearly a century we’ve worked with the assumption that room lighting is supposed to be stable and motionless, but by 2012, three years from now, stable room lighting will go from being a universal assumption to being a lifestyle choice. I believe stable room lighting will be a style that implies an air of class and luxury — class, because it is the old-fashioned way of doing things, and luxury, because it costs extra.

Blinking lights have been a fixture at dance clubs for 40 years. They make people want to move. Dance clubs take this to extremes, but even subtle variations in lighting, on the same scale that you see when a breeze shifts the leaves on a tree overhead, can energize or relax people. Think of it as mood lighting that actually works. Some people will find that adding dynamic lighting will improve their productivity by 10 percent or more; others will just find the more intrusive lighting styles annoying. Still, a 10 percent improvement in productivity for just some people will be a transformative event for an economy that struggles to eke out 3 percent growth in consecutive years. People haven’t started thinking about this yet because you can’t really do it with incandescent or fluorescent lighting, but it should be a simple thing with LED lights and a tiny bit of electronics.

Even in places where you want a steady light, the ability of LED lights to turn on and off or go dim and bright at a moment’s notice can save energy. An average suburban supermarket could cut its lighting bill in half by automatically dimming the lights in aisles where no customers were looking. When you sit down at a desk in an office, the lights over the rest of the room could go dim, while the desk light automatically brightens. A hallway could be lit with dim blue lights located near the floor, with white lights turned on only for sections where people are actually walking. I am sure this kind of thing will be unnerving at first, but the energy savings will be nothing to sneeze at. We are so focused this year on ways to make light bulbs brighter that we haven’t stopped to think of better ways to turn them on and off.

And these are just some of the changes that are coming around 2012. You’ve seen those shoes that light up, right? Well, why just shoes?

More efficient indoor lighting. Lower lighting bills. Colored lights. Blinking lights. Party lights 24/7. Automatic dimmers. 2012. The world will never be the same.

How to Do a Stimulus Package Right

Today the Wall Street Journal has an op-ed explaining how the U.S. job market is worse than it looks. It talks about such details as the work week, now just 33 hours on average and shrinking month by month. Around October, the headline may read “The Part-Time Economy” after we wake up to find that we have more part-time workers than full-time workers.

It’s all basically on point, but then it calls for a “second-act stimulus” — a stimulus bill that doesn’t repeat the mistakes of the stimulus bill Washington gave us at the beginning of the year. Realistically, though, an attempt to repeat the stimulus bill would lead to a repeat of the same mistakes. A well-crafted stimulus bill would do some good for the economy, but to accomplish that, Washington would have to give up most of its preconceptions. Here are some rules I would suggest for a second stimulus bill:

1. Stop thinking stimulus. In a average recession, economic stimulus can get the economy going again. In the current depression-like recession, stimulus has no such effect. It maybe shouldn’t even be called stimulus this year, because the whole objective is just to get some productive work out of people who would otherwise go unemployed.
2. Think small. Well, okay, not “small” in the sense of “eating a small lunch,” but not “risking national bankruptcy” either. An economic stimulus package with a price tag so high that it produces reactions like shock and awe does not exactly generate confidence in the economy. The first stimulus bill was said to cost $787 billion, which is kind of like learning that the doctors in the hospital have injected your grandpa with 5 kilograms of stimulants. When you see that, you don’t say, “That’ll bring him back for sure!” It’s more like, “Good lord! Will he survive that?” To minimize the shock and awe effect, no single stimulus bill should go much over $100 billion.
3. Make it labor-intensive. To qualify for a stimulus package, at least 75 percent of a project’s spending should end up in payroll to pay the wages of workers who otherwise might have been unemployed. You don’t get the economic benefit of the spending if you don’t move people from unemployment to employment.
4. Speed up spending, but don’t buy anything extra. The purpose of a stimulus package is not to expand the role of government, but to spend on things that people can agree are governmental responsibilities. The biggest category for this is going to be transportation. We all know where the bridges are, and approximately when they are going to fall down. If we don’t replace them before they fall down, we will still have to replace them after they fall down, and then, the costs are likely to be greater. Replacing at-risk bridges now instead of next year is not buying anything extra. It is just meeting a governmental responsibility sooner.
5. Be strict about returns on investments. Every legislator says all their spending proposals are investments. For stimulus purposes, a good investment is one that improves the government’s bottom line, usually by reducing future expenses. The prime example of this is improving the energy efficiency of buildings. Seal cracks and add insulation to a building, and future energy bill will be lower, and some such projects offer impressive returns on investment. But to qualify, it has to be a government-owned building — a courthouse, school, barracks, etc.
6. Make the stimulus pay for itself. About one fourth of the stimulus spending comes right back to the government in the form of income taxes and lower unemployment compensation. Then, use the energy cost savings and reductions in future transportation infrastructure spending (because you are doing some of that spending in advance) to pay off the stimulus debt.

With this kind of approach we would see a stimulus bill that would have little resemblance to the so-called stimulus we saw at the beginning of the year. It would create more jobs, and do so with no net cost to government. It still would not make the recession end sooner, but that does not mean it would not have an effect. The impact would be huge for the people who spent their time working instead of worrying, and all the work they would accomplish would be real work with real consequences.

Look at it this way: what kind of country lets its bridges collapse while 25 million of its workers are sitting at home doing nothing? Quite obviously, the only reason the United States finds itself in this situation is fear. But really, when we can put people to work, doing work that we know has to be done soon, there is nothing to fear about that. Can Washington put together a second stimulus bill that doesn’t repeat the mistakes of the first? Politically speaking, probably not. But if it wants to try, these are the rules I believe it should follow.

Toward More Conscious Drug Use

Is there a safe pain reliever?

Aspirin puts your stomach at risk. Acetaminophen can destroy your liver. Anything that alters the pain response more directly is potentially addictive. There is no completely safe drug you can take to relieve pain. Any pain-relieving drug is a calculated risk.

It’s something people are talking about after a drug safety panel concluded that millions of people are putting themselves at risk by taking too much acetaminophen — and this is occurring mainly because people don’t realize how much acetaminophen is in the drugs they take. The biggest damage comes from Percocet and Vicodin, prescription drugs marketed with a mystique meant to obscure the fact that acetaminophen is their main ingredient. To add to the confusion, discussions of these drugs often do not specifically mention the acetaminophen, referring to the exotic-sounding “paracetamol” or the very cryptic “APAP” instead. If you are an organic chemist, you might recognize these as synonyms for acetaminophen, but the rest of us may not immediately make that connection. It is an important connection to make, because anyone taking Percocet or Vicodin on the same day as an acetaminophen-based over-the-counter cold remedy (and these are some of the most popular drugs on the market) is probably getting too much acetaminophen. About one person per day dies in the United States from acetaminophen, and it is this combination of prescription and over-the-counter drugs that seems to be at fault in most of those cases.

Part of the solution is to stop using all drugs that, like Percocet and Vicodin, combine acetaminophen with narcotics. A patient can use these drug combinations more consciously by taking the two drugs in separate tablets.

Physically separating the two drugs does nothing to affect the way they function, but by leading to more conscious drug use, it permits people to be aware of the risks they are taking and make good decisions about those risks. Drug manufacturers have mixed feelings about this: they want to avoid having patients die as the immediate result of bad drug decisions, but they lose revenue if patients and physicians avoid risky drugs in situations where there is little to be gained by using them.

Johnson & Johnson, the largest U.S. acetaminophen manufacturer, is trying to walk a fine line with its advertising campaign that seeks to reassure drug users that its acetaminophen-based drugs, the various forms of Tylenol in particular, are safe if used as directed. This, of course, is not entirely true; not everyone who is hospitalized for acetaminophen-related liver damage took more than the recommended doses. But that aside, the conflicted message from J&J does not really help their case. They seem to be trying to say, “Go ahead and take Tylenol, it’s safe,” and at the same time, “If you get sick from taking Tylenol, don’t blame us.”

It’s a mixed message that has a jarring dissonance with the popular assumptions of the commercial drug culture. For half a century, people in the United States have, for the most part, taken acetaminophen whenever they felt like it, within the limits of the frequency schedule suggested on the drug’s packaging. The idea was that the drug was basically safe, “safer than aspirin.” Aspirin, of course, has dangers of its own, and now we are learning that acetaminophen is not necessarily safer than aspirin. Which pill is better depends on your individual situation, and is something you should stop and think about, and perhaps even seek medical advice. Recent polls are suggesting that the popular view of acetaminophen has changed abruptly in the week since the J&J advertising campaign began. People no longer think of Tylenol as “basically safe.”

Likely, this episode is also changing perceptions of drugs in general. If the drug that for years was marketed as the safest drug on the market is killing people every day, then every drug you take must be a calculated risk — as, of course, it is. As people pay more attention to the risks associated with drugs, they will use them better — but this also means they will use them less.

Can the U.S. Military Ban Smoking?

The U.S. military has been a walking, talking cigarette advertisement going back to World War II, when the army started distributing free cigarettes to the troops. Ever since, smoking rates in the military have been much higher than in the general population. You could almost say the tobacco companies owned the military.

But now, after a new report that tallies some of the costs of smoking to the military, the Pentagon says it has no choice but to eliminate smoking from its ranks. According to the report, it may take 20 years to do. The report says 30 percent of U.S. military personnel are smokers, probably intentionally lowballing this number to make the prospect of phasing out smoking seem more achievable.

Besides the obvious medical costs that result from smoking, the limited physical capacity of smokers is of special concern to the military. Smokers have less muscular strength and worse night vision, and they take more sick days and heal slower from injuries than non-smokers.

I think the military can eliminate smoking, maybe not in 20 years but surely in 25 or 30. If they want an example to follow, they might look at what has happened in radio over the last 30 years.

Walking into a U.S. radio station in 1979 was like walking into an ashtray. There was smoke everywhere and, by the end of the day, literally thousands of cigarettes filling ashtrays on almost every desk. It never made much sense, as the most important people in radio, the on-air personalities, news reporters, and sales representatives, all depended on the quality of their voices to do their work. For that matter, the tobacco smoke got into the grooves of the phonograph records that radio stations played at that time, adding a sort of nicotine static to every song you heard on the radio.

But all that changed in the 1980s and 1990s. Radio managers and executives started to think of radio stations as workplaces and cigarettes as a dangerous distraction from work. Gradually they banned cigarettes from studios and offices, and then from the entire facility. A few radio personalities who were caught smoking inside the building were suspended or fired. By now, the reputation of radio has been cleaned up enough that most people who smoke wouldn’t even think of trying to get a job in radio.

The military should be able to follow a similar path. There are steps it can take immediately to make cigarettes harder to get and reduce the smoking zones in military facilities. Over time, it can change the place that cigarettes occupy in military culture. And the ultimate result will be a healthier military with the kind of cost savings that are being found across society as people everywhere phase out the cigarette habit.

GM Tries to Make It As a Startup

The new General Motors Company now owns all the old General Motors businesses. It has billions of dollars in startup money. It employs thousands of the top designers and engineers in the automobile industry. And it has to get up to speed quickly before its money runs out.

That’s why the new company’s first big promotional push — for the 2010 Camaro — has drawn such a massive groan from observers. It’s not that the throwback “muscle car” isn’t a good move for GM. It’s a design with a history, and GM dealers are taking thousands of advance orders from drivers jumping at the chance to replace their aging Camaros from years past. It will be good for dealers’ cash flow. But once you get past the initial rush, Camaro is a niche car that will never appeal to the broader public. With a price typically around $30,000 and fuel efficiency between 16 and 29 mpg, for a car only big enough to carry two average-sized adults, it is pretty far removed from the car that people buy because they have to. In a time when most car buyers are buying cars only if they have to, and this will get worse before it gets better, GM has to start staking out a position with “the car you need” if is to have any hope of generating the volume of sales it needs to break even and stay in business.

Fritz Henderson, the president at the new General Motors Company, assures us this is something they think about every day, but thinking is not enough. The company probably has less than two years to actually introduce those cars, and sell millions of them, to keep its factories open. Most auto startups have just one factory to keep busy. GM has set the stakes much higher than that. It’s a lot like the game of double or nothing that killed off its predecessor.

This time, though, it is not GM’s fault. Politics is to blame. Senators and representatives want to keep the factories open in their states. Heck, they want to keep all the dealers open. It’s the same way they fight to keep military bases, not because the bases matter to the military, but because they matter to the cities they represent. GM, having painted itself into a corner, had to go along with these political compromises to get the political support it needed to fund its new post-bankruptcy startup.

My fear, though, is that in the process of helping to set up the new GM, the new owners have set the bar too high for a startup company. Usually, a new company is doing spectacularly well if it brings in $1 billion in revenue in its first year, but GM may need 100 times that just to keep operating. No new company has ever recorded anywhere near $100 billion in revenue even in the best of times, and 2010, when the new GM has to deliver, is likely to be one of the worst economic years in living memory. And so, unless the new GM can pull off a miracle, it is not this recently completed bankruptcy, but the next one, that will determine GM’s future.

This Week in Bank Failures

Printing money doesn’t help if people won’t accept the money you print. That’s the new problem in my ancestral homeland of California. Banks have been accepting the state’s promissory notes, essentially a form of money backed by nothing but political will, as a convenience to customers, but only until today. Really, banks have no business accepting promissory notes as money, and the strategy could come back to bite them if they can’t cash out the notes before their next balance sheet September 30. On a bank’s books, at this point, California promissory notes probably have to be recorded as illiquid bonds, with implications for the bank’s financial condition that are quite different from those of cash.

California is issuing promissory notes, or IOUs, to employees, retirees, college students, suppliers, contractors, and others it should be paying money to because its financial squeeze has made it impossible for legislators to come up with a budget for the fiscal year. The deadline was June 30, and at this point, there is still no resolution in sight. California, by some measures the richest state in the United States, has done this before, but that was so long ago that no one is quite sure what rules ought to apply. The state is not even sure it is legally permitted to accept its own notes as tax payments. The Securities and Exchange Commission (SEC) is trying to help out by issuing a ruling last night that classifies the California promissory notes as municipal debt securities. This could lead to an orderly market in which Californians can sell the promissory notes to investors. Banks could participate in order to help their customers cash out the notes at market rates. Just don’t expect banks to be the buyers in that market.

Where I live in Pennsylvania, there is a buzz about another June 30 deadline. Harleysville National Bank, one of the oldest and largest banks in the state, is undercapitalized and missed the OCC deadline to shore up its capital. The bank says it is working on this, is making good progress, and does not expect any immediate regulatory action — but that is what a bank would say. In an unscientific survey of people I know who are the bank’s customers, there is more amazement at the bank’s financial decline (reflected by a stock price down 85 percent since its peak in 2003) than concern about their own deposits. It says a lot about how well people understand and trust the deposit insurance system. But one longtime Harleysville customer I talked to turned out to be a former customer, after getting “a better offer from another bank” last month.

Remember AIG? This secretive company was the key to the world’s financial system barely a year ago, but now might worry about being forgotten as Wall Street has moved on. AIG has made headlines again this month. A 1:20 reverse stock split on Jul 1, as the stock was falling below $1 per share, might as well have been 1:100, as the stock has fallen by half just since then. According to an analyst this week, recent prices mean Wall Street gives AIG a 70 percent chance of bankruptcy. Meanwhile, AIG is asking the U.S. Treasury to review its new round of bonuses. The last bonuses it paid sparked one of the defining political controversies of the year.

In the United Kingdom, authorities promised a more intrusive style of bank supervision. For the first time, the Financial Services Authority will have some say in the compensation of bank executives and may curtail some of the riskiest lending practices at banks.

Does it make sense to get private equity involved in buying out failed banks? The FDIC is proposing rules that won’t make it easy for private equity players to bid on failed banks, and for good reason. The culture of private equity involves pie in the sky, secret owners, huge debts, and a high failure rate, and none of that will fly in the banking business. Private investors wouldn’t mind buying up a portfolio of failed banks and having four out of five fail again within a couple of years, but if they took that approach, they would be abusing the deposit insurance system. The FDIC’s rules are meant to warn private equity investors that they have to play by the rules of the banking business, and of course, most private equity money won’t go along with that.

Other banking regulators have said that the FDIC’s proposed rules on private equity are too restrictive, and they may have a point. Nevertheless, it is hard to bridge the gap between the “try anything” attitude of Wall Street and the insistence on integrity and stability that makes the banking system tick. It simply isn’t possible for the FDIC to adopt the kind of rules that Wall Street’s billionaire-investor class will be happy with. Besides, it would be a systemic risk if the bank failure process created a loophole by which unqualified people could become owners and managers of banks. As much as the FDIC needs private investors in the bank failure process, all that goes for naught if the same bank fails again.

On Wall Street, the root causes of the financial meltdown are still going on. According to reports, Morgan Stanley is about to unveil a new scheme to issue investment-grade bonds based on junk CDOs. This kind of scam, in which derivatives are promoted as being safer than their underlying assets, should have been stopped last year when it caused the financial system to seize up, but no such statutory reforms have even been considered so far. Worse, the main reason Wall Street is so intent on creating these supposedly investment-grade derivatives is to sell them to banks. These phantom securities allow banks to pad their balance sheets, making the banks look like they are more solvent than they are until just a short time before they collapse. The fact that Wall Street is still adding fuel to the fire suggests that we may have years to go before the financial sector begins to rebuild.

On Monday the NCUA liquidated a very small credit union in California. Watts United Credit Union, in Los Angeles, was put into liquidation by California after it became insolvent. According to the NCUA, the credit union at the end had less than $1 million in deposits. The NCUA is sending checks to the credit union’s depositors.

Tonight bank failure hit Wyoming for the first time in 18 years. The bank that was closed is Bank of Wyoming. The bank was not as big as the name makes it sound. Based in Thermopolis, a relatively isolated town of 3,000 in the mountains of central Wyoming, it had one office and $67 million in deposits, which will be taken over by Central Bank & Trust, also based in the central part of the state. Central Bank & Trust is also buying most of the assets of the failed bank. The FDIC estimates its costs at $27 million.