This Week in Bank Failures

If Greece is delayed in making payments on its foreign debt, it won’t affect Greece much, but the liquidity of some of the foreign creditors could be significantly affected. That probably includes some of the largest banks in New York, but no one seems to know exactly which ones.

To no one’s surprise, the civil action filed against Goldman Sachs has been followed by a criminal investigation. The investigation will surely run for at least a couple of years.

There were reports of mysterious bankers hanging around San Juan all week, and tonight, several Puerto Rico banks were seized by regulators. The largest of these was the largest bank failure so far this year. Westernbank Puerto Rico had $8.6 billion in deposits and nearly $12 billion in assets.

Banco Popular, the largest Puerto Rico bank, is taking over the deposits and is purchasing 79 percent of the assets. Banco Popular has been facing losses of its own, but is in a much stronger capital position.

Puerto Rico has been in a recession since 2006, and high unemployment and a lack of economic growth are at the root of the problems banks are having there.

Two other banks were closed in Puerto Rico. These were midsized banks that, combined, were about the same size as Westernbank Puerto Rico. R-G Premier Bank of Puerto Rico had $4.3 billion in deposits and $5.6 billion in assets. Eurobank had $2 billion in deposits and $2.6 billion in assets. All three banks were closed by Puerto Rico banking regulators.

Scotiabank de Puerto Rico is taking over the deposits and purchasing the assets of R-G Premier Bank of Puerto Rico. Scotiabank de Puerto Rico is the local subsidiary of Scotiabank, which is based in Canada but has a strong presence in the Caribbean dating back to 1889. Scotiabank de Puerto Rico was not as large as R-G Premier Bank of Puerto Rico, but Scotiabank as a whole is a large bank operating in 50 countries.

Locally based bank Oriental Bank and Trust is taking over the deposits and purchasing the assets of Eurobank.

The three Puerto Rico bank failures are estimated to cost the FDIC $5.3 billion.

On the mainland, there were bank failures in Washington, Michigan, and Missouri. In Washington, state banking regulators closed Frontier Bank, a move that had been anticipated for some time. The bank had $3.1 billion in deposits and 51 locations concentrated on the West Coast.

The turmoil surrounding the bank included the abrupt resignation of its president at the end of last month, supposedly following a dispute about his vacation schedule. The head of California operations was promoted to president, though as of last week, he was still working in California and had not yet made a trip to headquarters. Also last month, the FDIC issued a prompt corrective action order against the bank. This week, the bank was forced to deny a rumor of a buyout, which was based on an Internet message claiming an investment group had collected $135 million to buy the bank and another bank. The message was hard to take seriously, as a buyer for Frontier Bank would seemingly need more than $1 billion, but the subsequent rumors may have driven the bank’s stock up by more than 100 percent. That degree of volatility, though, is not unexpected in a stock that has declined 99 percent from its peak.

San Francisco-based Union Bank is taking over the deposits and purchasing the assets.

Bank regulators in Michigan closed Citizens First Savings Bank, which had 22 locations in the eastern part of the state, and $1.4 billion in deposits. First Michigan Bank is taking over the deposits and purchasing half of the assets.

Citizens First was several quarters late with its financial statements, and had been cut off by Freddie Mac two weeks ago. Freddie Mac said it would no longer guarantee the bank’s mortgage loans, citing accounting failures as one of several reasons.

Two small banks in Missouri were closed.

• Champion Bank, with $154 million in deposits and one location in Creve Coeur, Missouri. BankLiberty is taking over the deposits and purchasing most of the assets.
• BC National Banks, with $55 million in deposits and four locations near the Kansas state line. Local bank Community First Bank is taking over the deposits and purchasing the assets.

The cost to the FDIC for the four mainland bank closings is estimated at $1 billion.

Last weekend, the NCUA placed a credit union in conservatorship. St. Paul Croatian Federal Credit Union serves 5,000 members in northeastern Ohio. The credit union continues to operate under NCUA management.

Spill, Baby, Spill

On Twitter today, there was a rush of action on the #spillbabyspill hashtag. That’s after this morning’s NOAA report with a list of bad news about the BP oil spill in the Gulf of Mexico:

1. After looking at the amount of oil floating on the surface, experts decided the rate of oil flow is around 5,000 barrels a day — 5 to 6 times the previous estimates.
2. Engineers say a second leak point has formed on the sea floor.
3. The new estimate for containing the oil leak is 3–6 months. That would make this event the largest oil spill ever.
4. At this point, the best hope for containing the spill is to drill a new well just like the one that failed.
5. Surface winds are forecast to change direction tonight and blow the oil spill toward shore for the next four days.

Some of the latest tweets are quoting Bill Maher, who today offered the suggestion that it was time for the “Drill, baby, drill” team “to report to the Gulf coast for cleanup duty.”

That’s a quote that gets at the point of this exercise in virtual political chanting. There is an economic policy question in play, which has to do with how much collective risk we want to take to deliver energy. The “Drill, baby, drill” slogan sought to sidestep this question by pretending that nothing bad could happen if we drill for oil anywhere we find it — and if we build some new-technology nuclear power stations, for that matter.

The BP oil spill serves as a reminder that everything that can go wrong eventually will — just in case the Eyjafjallajökull eruption wasn’t reminder enough. Much of this deep-water oil could cost $100–150 a barrel to extract and bring to shore, but this proposition isn’t as simple as paying the money and collecting the oil. We could spend the money and end up spilling the oil, and if it happens that way, we can’t ask for our money back. That’s what risk means.

There are risks involved in every source of energy — even solar panels can be damaged by hailstones — so the way that the United States and most of Europe are living so close to the edge when it comes to energy supply is also a risk. The answer cannot be merely to generate all the energy we know how to, because that maximizes our oil spills, nuclear accidents, and similar events. The appeal of that approach is the promise that we won’t have to change our lifestyles — but that’s a false promise. If the BP oil spill is as bad as forecast, it will mean closing the beaches in the Florida panhandle for the summer — not what we asked for when we said we didn’t want to change anything. It will also mean some Louisiana marsh lands lost — permanently — after oil kills the trees that are holding the land in place. That’s not what we meant by not wanting to change either.

The fact is, we have to change. The message of “Drill, baby, drill” was that we wouldn’t have to change, and it’s a message that looks less than convincing on a night when people in Louisiana are watching for signs of the first oil washing ashore. The message of “Spill, baby, spill” is that we have to decide how we want to change and stop just letting things happen to us, as if we’re the victims of our place in history. Given the way the political process works, though, we can’t collectively face a decision like this in a meaningful way until more than half of people are willing to set their denial aside long enough to engage in the question.

That, in essence, is the message contained in the #spillbabyspill hashtag. It’s a message to whoever will hear it, saying, “Stop pretending there isn’t anything going on. There are some real decisions to be made, as soon as enough people are ready to talk about it.”

The New Wall Street

In lieu of today’s blog post, I’m posting a newspaper clipping that resulted, quite unexpectedly, from yesterday’s post.

Financial Crisis Solution: Move Wall St. to Las Vegas

LAS VEGAS—A solution to the country’s financial crisis has been found in an unlikely place. Hidden in the fine print of a PowerPoint graphic created by the U.S. military to explain Nato strategy in Afghanistan, an economist discovered a strategy for ending the recession, recapitalizing all the banks, and solving the vexing problem of the government deficit.

“It’s time to move Wall Street to Las Vegas,” exclaims economist Rick Aster. “I’m pretty sure Vegas has already built a life-size replica of Wall Street somewhere, so it’s really just a matter of moving the ticker-tape machines.”

An enthusiastic Aster reels off one bullet point after another of the advantages that Las Vegas could offer: Synthetic poker chips. Investment-grade slot machines. Mortgage-backed playing cards. A gambling commission that’s far more airtight than the Securities and Exchange Commission. And it’s in the Pacific time zone, so after the trading floor closes at 1 o’clock, you can go see Barry Manilow or Cirque du Soleil.”

Aster, who worked for two years in New York’s financial district, scoffs at the financial reform drama current playing out in Washington. “It’s not about who works in what office in Washington, it’s about who sweeps the casino, uh, or trading, floor at night,” insists Aster. “The people in Las Vegas know how to get it done.”

Aster is also calling for tougher licensing and education requirements for traders. “We could require derivatives traders to have roulette training,” he suggests. “It would have prevented trillions in losses if we had required this before the financial meltdown.”

Britney Fleur, a prominent Las Vegas investor who also works as a waitress at the 24-hour Bar at Times Square in the New York, New York casino, says investors would profit from the high-rolling atmosphere that Las Vegas has to offer. “The odds are about the same in either place, but in Vegas, you can drink on the trading floor,” said Fleur.

There’s No Pow in PowerPoint

The PowerPoint slide seen below has been floating around the Internet for a year, but got people’s attention when it popped up on the front page of the New York Times this morning. It was used there as an example of how hard it can be to understand the PowerPoint presentations that are used every day in the U.S. military — and many other places, for that matter.

I’m showing the slide again here to make a point. This particular diagram, as it was originally created for the U.S. military, might serve to explain the complexity of the Nato military strategy in Afghanistan — but not if it is seen as part of a PowerPoint presentation. In that context, most people say it looks like spaghetti. It is so bewildering to look at that, to the average reader, it may make just as much sense in the version I show here as it did in its original form — even though I have changed almost all the words on it.

If the diagram seems like it makes some sense in this form (particularly if you click through to the larger version of it so you can read the text) it is because I overlaid the original diagram with a U.S. map, a visual arrangement that you may be familiar with, and used that as a guide in filling in much of the text. But this is only a trick. The parody diagram is no more meaningful than the original. It attempts to show degrees of connections between ideas beyond what is possible to set forth in this kind of medium.

A properly designed slide is limited to about seven featured lines of text. You add more that this at your peril, because a person of average eyesight and attention span cannot necessarily pull together more than seven lines projected on a wall or displayed on a standard-definition video screen. This diagram has 50 lines of text. If you displayed it on a television screen, the small letters would be about 5 pixels tall — too small to read even without the anti-aliasing feature that blurs small type on the screen.

The additional level of information, beyond the 7 lines or so that can reasonably be conveyed, is there not to inform, but to confuse and distract. I studied the original diagram and found that the arrows connecting one point to another were quite arbitrary, at least from an outsider’s perspective. They could have been chosen at random, for all I know, and that also means that the diagram would be just as meaningful without them. The selection of points for inclusion was also arbitrary. I would argue, for example, that road building is the one key strategy that could lead to success in Afghanistan, and in fact, it is a significant part of the Nato plan, but the diagram did not include it. There is no point of accountability in presenting information this way, because no one seeing it can understand what is being said clearly enough to challenge or question any particular point.

But if putting too much detail on a slide is a strategy to confuse and mislead people, using slides correctly is not much better. If you are limited to showing about seven lines of text, all you can show is dimensionless information, a rigid hierarchy, or a simple progression (including what is called a storyboard). Very little useful information actually fits into one of these formats. Worse, the slide asserts the arrangement of information through typography rather than logic. PowerPoint makes it possible to make any assertion of fact subservient to any other, without any requirement for rhyme or reason. There is no accountability in this either.

This is why there is no “pow” in PowerPoint. PowerPoint presentations lack impact because they present information through a lens that filters out most of the meaning. The New York Times story recounts how some of the most successful U.S. military initiatives of the past decade were completed after a commanding officer imposed a ban on PowerPoint. Other initiatives, managed by PowerPoint presentation, have arrived where they are today. There is, I believe, a lesson in that.

Word of the Year: Conflate

My pick for word of the year is conflate. According to Wiktionary, it means “to bring things together and fuse them into a single entity.” It’s derived from a Latin word that means much the same thing.

Conflating is something people are doing more than ever these days, by accident, out of haste. People want to jump to conclusions because they feel they can’t take the time to check the facts. It takes only a moment to hope you made the right distinctions. Actually getting things right could take several minutes.

Taking an example from the weekend’s headlines, some people have started to talk about Goldman Sachs as a repeat of the Enron story. Enron never made a profit, in its later configuration, but created the appearance of a profit by manipulating its financial statements. Goldman Sachs actually made a profit, though there are questions about the propriety of its deals by which it did so. But to some observers, the difference disappears in a cloud of “Whatever.” That’s an example of the kind of conflating that people are doing this days.

This trend toward mixing stories up haphazardly shouldn’t be taken as an indication of the declining character of people these days, but rather an indication of the increasing time pressure affecting almost everyone. I don’t believe time pressure can simply increase forever, but the time pressure trend shows no sign of slowing down.

Making distinctions is the opposite of conflating — at least of the new kind of conflating. The more people mix things up, the more there is to be gained by making distinctions. If most people keep rushing and hoping they’re getting things right, but not taking the time to check, conflating could be a marker for profit opportunities. Where everyone else is conflating, stop and make a distinction, and you may find a competitive advantage.

George Will on Republicans’ Decline

George Will this week in Newsweek offers a survey of the decline of mainstream Republicans. Republican candidates already too conservative to be relevant in a newly cautious Washington are being ousted in primary fights by local party activists in Utah, Indiana, Florida, and possibly Kentucky and Colorado. Will can’t decide whether this shift represents the end of the Republican party as a serious political force, or just a new political seriousness among Republicans.

The “higher-octane” conservatives that Will says the Republicans’ current leanings favor are not really conservatives at all, unfortunately, but social reformers who want to use the federal government’s military and police power to overthrow American culture and replace it with a new nation most Americans would scarcely recognize. In the new Republican America, individual freedom and responsibility would be a distant memory, and the police would be called in, as in China, to shut down small or startup businesses that seemed to pose a threat to established big businesses.

If George Will is alarmed by what the social activism trend among Republicans is doing to the Republican party, then there is little hope of pulling the party together in the near term. The idea of overthrowing the government might play well to one half of Republicans, but it is important to remember that the Republican party now holds between one fifth and one fourth of likely voters, not enough to do much on their own. The “new American revolution” rhetoric will not do much to get the other half of the Republican party out to the polls, and is more likely to frighten than rally independent voters. In actual conservative states, such as Kentucky and Indiana, voters approach the idea of change cautiously and independents outnumber Republicans. The “my way or the highway” attitude among the social activist wing of the Republican party virtually guarantees sweeping losses among Republicans in those states.

All this is happening at the same time that long-term demographic trends work against Republicans in every state, to the extent of about 1/2 percent every two years. Half a percent doesn’t seem like much till you look at the number of races decided by a half-percent margin. The members-only approach of the McCain-Palin campaign rallies did nothing to broaden the party’s appeal, and the indifference to public opinion shown by the new wave of Republican candidates will probably not do much better.

Comparing Hulu to Cable

Will people start comparing Hulu’s subscription service, rumored to be launching in about a month, to the subscription fees of cable television? At first glance, this might seem like a stretch. Hulu offers roughly 30 hours a programming a day. Compare that to a standard cable service delivering nearly 1,000 hours of programming a day, and Hulu can seem a little thin. Yet Hulu still offers more programming than it is possible for a person to watch, and it includes about half of the most-talked-about programs on television.

Other current video content — news, sports highlights, and of course music — are easily found free on the Internet. Families that are squeezed for cash, or people who subscribe to cable but hardly ever find time to watch it, might find Hulu’s rumored $10 a month subscription fee appealing — providing a semblance of the television experience, but at a fraction of the cost and inconvenience of television.

This Week in Bank Failures

Did securities fraud at Goldman Sachs contribute to the collapse of AIG? AIG is said to be mulling over a civil suit against Goldman Sachs, which it believes misled it about the nature of many of the securities that it agreed to guarantee. The money AIG might recover from Goldman Sachs would surely not be enough to save AIG, but it would make a big difference to AIG’s creditors, and it could be enough to drag Goldman Sachs into the bankruptcy pit. As has been pointed out by various observers over the last year, without the U.S. Treasury money funneled to it by way of AIG, Goldman Sachs would have closed its doors already.

Broadway Bank faced a regulatory deadline tomorrow, or effectively tonight, to raise capital, a deadline no one expected it to meet — and the bank’s troubles could affect the political story of the state of Illinois. Alexi Giannoulias, a candidate for U.S. Senate, worked for the bank for a few years early in his career, and it was founded by his father, so it is easy for the local papers to depict the bank as a key part of the candidate’s personal history. The bank’s expected failure was bad enough, but to make it worse, the bank took losses on bad loans to unpopular figures in Illinois politics. Another candidate, Mark Kirk, has made Giannoulias’s connection to Broadway Bank the centerpiece of his campaign, but Kirk has Wall Street connections of his own, with the largest block of his out-of-state campaign money coming from Goldman Sachs.

If Giannoulias was hoping the bank failure would come quickly and quietly so that voters would have time to forget the whole story before the November election, he got part of his wish. As it turns out, it was Illinois week at the FDIC, and Broadway Bank was one of several high-profile Illinois banks seized tonight. Broadway Bank’s failure was tied to its heavy involvement in commercial real estate projects. Loans to real estate developers for commercial projects, mostly around Chicago, made up half of its loan portfolio. To be fair, the problems at Broadway Bank developed years after Giannoulias had left banking for politics. The bank had less than a fourth of its loan portfolio in commercial real estate in 2004, but that had more than doubled by 2007, and it was mostly loans made in 2007 that led to the bank’s huge losses in 2009.

Broadway Bank had $1.1 billion in deposits as of the end of last year. That number was probably considerably lower by the time the bank closed because of the heavy publicity locally this month, with the bank’s troubles mentioned in the political news every day. MB Financial is taking over the deposits and purchasing the assets.

MB Financial picks up four new locations from Broadway Bank and three from a smaller bank failure, New Century Bank. New Century Bank had perhaps the ugliest balance sheet of any bank to fail so far in the current cycle, with $492 million in deposits and $6 million less in assets as of the end of 2009. The bank’s financial condition was not as bad as that makes it sound — many of its Chicago real estate loans were required to be marked down on the books because the loans were underwater, even though the borrowers were still making payments. The bank’s exposure to Chicago real estate left it few options when the local real estate market collapsed.

One of New Century Bank’s problem loans was the mortgage on the world-famous Apollo Theater building. (That’s the one in Chicago, not to be confused with the more famous Apollo Theater in New York.) If that $2 million mortgage (on a building that might be worth $20 million) was four months past due, it shows how difficult things are in the Chicago real estate market right now.

MB Financial is taking over the deposits and purchasing the assets.

There were reports of Harris Bank bidding on several of tonight’s Illinois bank failures, but the one it got was the largest. Amcore Bank had 58 locations and $3.4 billion in deposits. Bank of Montreal, the fourth largest bank in Canada, bought out Harris Bank in 1984 for about $1 billion and had since spent more than $2 billion on other banks in the north central U.S. states.

Amcore was expanding rapidly and seemed to be at the peak of its success two years when it was stunned by loan losses. Its CEO retired, and the bank quickly found itself in financial disarray, downgraded by ratings agencies after it failed to keep up with its obligations to JPMorgan Chase. It sold off branches two by two throughout 2009, and another 12 just a few weeks ago. Separately, it sold one of its buildings to a credit union. Losses continued to mount, though, and in January, regulators rejected the bank’s plan for raising capital. Amcore’s largest losses were in commercial real estate development loans.

Harris Bank is paying a token premium for the deposits and is purchasing the assets of the bank.

The failure of Wheatland Bank, which had $438 million in deposits at a single location in Naperville, Illinois, was tied to the mixed fortunes of retail during the past two years. Falling revenue at retail meant that payments on construction loans were late, and one shopping center that the bank funded, and is now foreclosing on, is sitting empty, with no tenants to be found.

Wheaton Bank & Trust is paying a 0.4 percent premium for the deposits and is also purchasing the assets.

Three smaller Illinois banks, each with less than $200 million in deposits, were also part of tonight’s parade of bank failures.

• Peotone Bank and Trust Company, with two locations. First Midwest Bank is paying a 1 percent premium for the deposits and is purchasing the assets.
• Chicago-based Lincoln Park Savings Bank, with four locations. Northbrook Bank and Trust Company is paying a 0.4 percent premium for the deposits and is purchasing the assets.
• Citizens Bank & Trust Company of Chicago, with one location. Republic Bank of Chicago paid a $100 premium to purchase the deposits, but apparently will not be purchasing a significant part of the assets.

The FDIC had delayed several Illinois bank closings as it opened its new office in the area. With the seven closings tonight, there have been 10 bank failures in Illinois so far this year. That compares to 9 in Florida, 7 in Georgia, 5 in Washington, and 26 in other states. The FDIC estimates costs of nearly $1 billion for tonight’s bank failures.

Apple as a Counterexample

When President Barack Obama seized on the Apple story yesterday as an example of the purpose of capital markets in supporting innovation, he was responding to the excitement on Wall Street over Apple’s impressive earnings report, released the previous evening. Yet Apple is a telling example, and perhaps was meant as a subtle counterexample to the importance of Wall Street.

Unlike most big U.S. companies, Apple has been funded almost entirely by its customers. It never got a multi-billion-dollar check from Wall Street. Instead, Wall Street has poured billions of dollars into Apple’s competitors — companies that often did little more than copy Apple’s ideas and designs, including more than a few companies that are largely forgotten now.

The reason this example matters now is that one of the defenses of Wall Street, as it seeks to fight off some much-needed regulation, is that it provides a “capital market” that “fosters innovation.” Yet for every example of this, you can find a counterexample. For every Google or FaceBook, created with Wall Street money, there is a MySpace or Twitter, created without it.

In an era where “capital” is spent mainly on advertising for brand recognition, capital markets don’t have that much to do with innovation. To Wall Street, an innovation in advertising is as good as an innovation in circumventing securities laws, but this is not the kind of innovation that the public is looking for. In the history of Wall Street, the company that has drawn the most praise for innovation is Enron — yet its only innovation, we found out later, was the way the company lied about its business model.

There are arguments to be made against some of the new rules being considered for Wall Street, but innovation — that is not one of them. If the iPhone is an example of what can be made when Wall Street is kept out of the picture, most people are likely to say, “We should keep Wall Street out of the picture more often!”

On Consumers’ Minds, $3 a Gallon

I’m seeing opposing signs on consumer moods this month. The good news first: there is an increasing level of activity at retail, and an increasing number of consumers have paid off their credit card debts completely. Now the bad news: Employment prospects are not improving, and energy prices are increasing. The total number of people employed is going up, but the net number of new jobs is tiny compared to the number of new high school and college graduates entering the work force. More people than ever are working at jobs that are temporary and part-time. There are more discouraged workers, people who want to work but have given up trying, than ever.

Energy prices are creeping up slowly, but I think consumers have figured out that gasoline prices are being held in check by the dismal employment picture. If we had 10 million more people driving to work, the price of gasoline would be $5 a gallon again.

The catch, of course, is that if energy prices revisit their recent peak levels, that will be enough to bring the economy to a stop, the same way it did before. People can’t help having a “here we go again” feeling when they foresee gasoline prices inching up past $3 a gallon next month. After all, the last time gasoline went over $3 a gallon was May 2007, and within months, it had become obvious that the economy was falling apart.

Microspam and the Stuck-in-London Scam

If you get a frantic e-mail message from someone you know saying they got robbed and are stuck in London without phone or money, it’s a fake. It is a new trend in e-mail spam, which I have dubbed microspam because it breaks what we imagined to be one of the most basic rules of e-mail spam. That rule is that the objective of e-mail spam is to send the same message to as many e-mail accounts as possible. Microspam messages are apparently sent to just one e-mail account. We are used to looking for signs of mass indiscriminate distribution of spam messages, so the new form of spam is throwing people off.

I first learned of the stuck-in-London scam on April 14 when the clueless administrators of an e-mail group revoked the membership of one of the victims of this scheme. As I read the story about one group member receiving a stuck-in-London message from another group member, and the person apparently sending the message being permanently banned from the group, my immediate thought was, “How do I know I’m not the person who has just been banned?” An e-mail message can appear to come from anywhere, even from my e-mail account, so I might have just been banned because of something I had no information about.

Since then, I have come across two other instances of the stuck-in-London scam, and I’ve heard a bit of hearsay from friends, enough for me to piece together, with only a slight degree of confidence, the bare outlines of the scheme: A criminal group has gained access to a large number of e-mail accounts, possibly all on Google. A bot is breaking into individual accounts to send messages. In a compromised account, the bot sends apparently a single unique message (the text assembled by machine to make it unique) to a single e-mail address of a person who has previously sent messages to the e-mail account owner. So it’s a spam message, but only one copy of the message is being sent. My assumption is that the bot continues to access the e-mail account in order to intercept any message sent in response, which would then be read and responded to by an actual criminal person. For me to have heard about this pattern almost once per day means that several million of these messages must already have been sent.

This scenario, of course, raises more questions than answers. Are all the compromised accounts on Google? Is the account data the criminals are using derived from the information criminal organizations affiliated with the Chinese central government obtained when they broke into Google’s servers in January? Are they using account passwords, or have they compromised the security of the e-mail server or the e-mail network?

Stolen passwords could be involved, so it seems a sensible precaution for anyone who has a Google account (whether using Gmail or not) and is using the same password that they had in January, to select a new password. (It is a good practice to periodically change any password that you depend on even if there is no indication that anything is wrong.)

The other immediate suggestion I have is that we have to change our way of thinking about spam. We have gotten reasonably good at blocking out the scattershot form of spam, but equally harmful spam e-mail can also arrive in the form of a single message, sent only to you, that appears to come from someone you know. The fact that a message was sent only to one person should not, any longer, lend the message any credibility.

There is a reason that the microspam messages of the stuck-in-London scam are all frantic in tone. The jolting rhythms of a frantic writer are not that hard for a text-generating computer program to imitate.

But that too will change. Soon, with no advance warning, it will be possible for spam bots to start to imitate our individual writing styles, social behavior, and moods. This means it is simply no longer safe to act on information you receive in e-mail, however convincing it looks, without verifying the information in a more secure medium such as a social network, a known web site, or a voice conversation.

For the record, in case any of these messages appear to come from me, I am not stuck in London, and I don’t want you to wire me money. Please be skeptical of e-mail messages, even if they appear to come from someone you know. Your private e-mail account is scarcely more secure than a bulletin board in a hallway. The fact that people don’t mess with it all the time doesn’t mean it can be trusted. Don’t be misled, if you can help it, by the criminal element out there.

If you have a Google account, Charles Arthur at guardian.co.uk describes how to check account activity in Gmail. Please take a moment to check.

Volcano Influences Oil Prices

World oil prices have been between 2 and 3 percent lower this morning because of the possibility that the volcanic eruption in Iceland could lead to fewer airplane flights for some time to come.

Civilian aircraft use a small fraction of total world oil production, but it takes only a small change in oil demand to create a noticeable change in prices. That tends to be the case in any product for which the supply is hard to change on short notice.

Airplane flights have had to be canceled across half of Europe since the eruption because of the volcanic ash cloud, which can clog an airplane’s engines, eventually leading them to shut down.

European airlines have begun lobbying for a lifting of the restrictions, based on about 30 test flights that they have done, all successful, but that change in policy is unlikely to come until conditions change. Supposing that the volcanic ash causes only 0.1 percent of flights to crash, that is still, from a public policy point of view, too costly as a mode of transportation.

It’s Hard to Sell a Product With Fructose in the Name

Snapple is a soft drink with an image problem. It’s promoted with the trademark “Made from the Best Stuff on Earth,” yet the dominant ingredient that has gone into Snapple products over the years is an artificial sugar, which is allowed to be called high fructose corn syrup and identified as a natural food ingredient only as the result of energetic industry lobbying and the up-is-down world of Washington bureaucracy.

Not everyone understands how artificial high fructose corn syrup is, or how misleading its name is, but people are coming to understand how damaging fructose is. Fructose is metabolized like ethanol and causes liver toxicity in essentially the same way — meaning, if you’re drinking fructose, it is probably important to limit yourself to one drink per hour, the same rule of thumb that applies to alcoholic beverages. Some researchers now say flatly that fructose is the cause of metabolic syndrome, a progressive breakdown in metabolism that could be the main cause of the 20th-century increases in obesity, diabetes, heart disease, cancer, and a laundry list of dread diseases. According to theories of metabolism, high fructose corn syrup ought to be equivalent to white sugar, but studies of actual consumption of food, including a recent study at Princeton University, have found significant weight gain from eating high fructose corn syrup, in comparison to sugar. Scientists can only guess why. One theory is that white sugar is less completely digested because of its ability to form crystals. Even if the mechanism hasn’t been identified, though, you can’t ignore the science, which says that high fructose corn syrup causes the same kind of weight gain that seems to be associated with all other artificial sweeteners.

“The Best Stuff on Earth”? This glaring contradiction has finally led Snapple to stop taking deliveries of high fructose corn syrup, replacing it with white sugar. By summer, you won’t be able to find a bottle of Snapple that still contains the artificial sugar that the company has relied on for most of its history.

It’s not just Snapple. Similar moves are underway at Gatorade, and Whole Foods Market made the move almost a decade ago. The move away from high fructose corn syrup is now seen as an inevitable trend across the soft drink industry.

I think the advertising campaign by the Corn Refiners Association (that name alone tells you how artificial high fructose corn syrup is) that uses cherry-picked science to try to support high fructose corn syrup has backfired. After I first wrote about the problems with high fructose corn syrup last year, I was barraged with messages seeking to reassure me that high fructose corn syrup no longer contains mercury. I have a hard time imagining who would be reassured by those advertisements. People who are up on science would likely assume that the reason the high fructose corn syrup industry is ignoring the latest scientific research is because the research is unfavorable to its product. To those who don’t follow science, the message would surely reek of scandal and cover-up, and the prominent mention of high fructose corn syrup and mercury together would be hard to forget. But the main problem with that advertising is that it doesn’t mention the main issue, which is not mercury, but fructose. The level of mercury found in food products made from high fructose corn syrup is of concern only to people who have a special sensitivity to mercury, perhaps because they already have a high mercury load from eating a lot of fish — but everyone, we realize now, needs to be aware of fructose, the same way you need to know when you are drinking alcohol. In that context, the mercury issue looks like a red herring that the high fructose corn syrup industry is exploiting to distract the public from the real issue of fructose.

In the end, it’s a losing proposition. “High fructose corn syrup” may be a dishonest name, but at least it is up front about the fructose. You can’t mention high fructose corn syrup without saying the word fructose. The more the high fructose corn syrup industry talks about its product, the more people are going to be reminded of the problem of fructose. Even using the word “sweet” now can remind many people of that issue, after so many advertising messages that put “sweet” and “high fructose corn syrup” together.

Here’s my suggestion for the “corn refiners.” Get rid of the genetically modified corn and the chemical pesticides, get rid of the mercury, the acids, the enzymes, and most of the equipment in the chemical factories, and figure out how to make organic corn syrup using traditional cooking techniques such as steam and filtering. Yes, natural corn syrup is 10 percent less sweet than high fructose corn syrup, but if made correctly, it is 100 percent more natural, and in times like these, that could be a selling point.

The Eyjafjallajökull Volcano, Air Travel, and Arctic Ice

The eruption of the Eyjafjallajökull volcano in Iceland is spreading ash across much of northern Europe, and worse problems could occur. The volcano is located in the middle of the fourth largest glacier in Iceland (also called Eyjafjallajökull), and the first fear in connection with the volcano was that it would melt the glacier and cause flooding. Several hundred people were evacuated from the potential flood plain, and waters quickly rose high enough to close the main highway through the affected river delta.

A greater concern with the glacier, however, is that volcanic gases trapped under the ice are being released in explosions that also send huge amounts of volcanic grit and sand into the air. This is the most hazardous component of the volcanic ash for airplanes. As I’ve heard it described, flying an airplane through the volcanic ash would be like pouring sand into the engine. The unusual abrasion carries a high risk of equipment failure, the kind that could lead an airplane to crash. It is better if airplanes just don’t go near the cloud of ash.

This explains why the volcanic eruption led to a total ban on air travel in the United Kingdom for the first time since the invention of the aircraft, and only a few countries in the far corner of Europe have escaped the cascade of flight cancellations. Travelers stranded on both sides of the Atlantic may have a long wait. I am told that the last time Eyjafjallajökull erupted, it lasted for three years. If the situation does not change soon, travelers in London may have to take a train to Rome or a ferry to Lisbon to catch a flight to North America.

It would be better for air travelers if the wind were blowing in the opposite direction, but this would create a very different kind of problem. With winds over Iceland blowing away from Western Europe, the volcanic ash would be settle out over the Arctic Ocean north of Greenland and Canada. The ocean is covered with ice at this point, and a layer of very bright, reflective snow on top of most of the ice protects it from the sunlight that, at this time of year, would otherwise melt it. Volcanic ash is not terribly dark, but it is much darker than snow, and it could triple the rate of the top-down component of the ice melt. The result could easily be a near-total melt of all the ice in the Arctic Ocean for the first time in recorded history.

The loss of Arctic sea ice would be more than just a curiosity. It would allow the ocean waters to absorb sunlight in a way they never have before, permanently warming the Arctic Ocean and accelerating the ice loss that is occurring already. A warmer Arctic would eventually turn into a noticeable amount of warming worldwide, and it would create warmer and more volatile weather across most of North America. Warmer weather and storms would speed the melting of the Greenland ice sheet, leading to rising sea levels. These are effects that were already being seen, even without a volcanic eruption. If the Eyjafjallajökull eruption continues through the spring and summer — and no one knows whether this will happen or not — the winds eventually will have to change direction and send some of the volcanic ash onto the Arctic ice.

There is no direction that the winds could blow to disperse such a large amount of volcanic ash harmlessly. Iceland sits between Europe, North America, and the Arctic, and the wind from Iceland almost has to blow toward one of those targets on any given day. Volcanoes have had huge effects on the last 80,000 years of human history, and while it’s more likely that the impact of the current eruption will occur on a smaller scale, the truth is, we have no way to predict that.

This Week in Bank Failures

The stock market staggered today when the Securities and Exchange Commission (SEC) announced civil fraud charges against Goldman Sachs and one of its executives for misrepresenting mortgage-backed securities it sold early in the credit bust. The securities in question were being dumped by a hedge fund that thought they were likely to go bad, but Goldman Sachs described the source of the securities in quite different terms. Investors lost more than $1 billion on the securities.

The FDIC board is extending its expanded deposit insurance for non-interest-bearing transaction accounts, mainly business checking accounts, through the end of the year. Most likely, they will decide later to extend it through next year.

The FDIC is floating a draft of its scorecard for risk-based deposit insurance premiums. The risk-based premiums, as proposed, would apply only to the larger half of large banks. Banks with assets less than $10 billion would continue to pay simple deposit insurance premiums based mostly on the amount of deposits. Some version of the risk scorecard is likely to go into effect at the beginning of next year.

The Harleysville signs are gone forever. After nervous months of waiting, the Harleysville National Bank acquisition by First Niagara ultimately won regulatory approval, and closed last weekend. First, though, Harleysville National Bank spun off Cornerstone Companies, a wealth management company that was part of its mid-decade spree of acquisitions. It was the cost of those acquisitions that depleted the capital of Harleysville National Bank and led it to be sold in distress. Prior to that turn of events, Harleysville National Bank had been one of the survivors of the banking industry, expanding from its original 19th-century location in Harleysville, Pennsylvania, to become the largest bank based in the Philadelphia suburbs. First Niagara is eliminating about 300 jobs at the former Harleysville National Bank headquarters, but so far does not have any plans to eliminate banking locations.

TD Bank, which was mentioned as a potential bidder in two previous Florida bank failures, bought the assets of three failed Florida banks tonight. The largest was Riverside National Bank of Florida which had $2.76 billion in deposits. The other two banks, First Federal Bank of North Florida and American First Bank had combined deposits of about $400 million. TD Bank, though concentrated mainly in the Northeast, has long had a significant presence in Florida, and is expanding that presence with the new acquisitions.

Based on assets, Riverside National Bank of Florida was recently the 7th largest bank based in Florida. It had 58 locations mainly along the east coast of Florida, and its impending failure had been a subject of open discussion in Florida banking circles for months, with several large banks rumored to be considering the acquisition.

The bank was founded in 1982 and initially operated in a trailer. The founder resigned in January 2009, after a quarter in which the bank had seen the value of its assets decline sharply. Besides loan losses and real estate declines, the bank’s shares in Fannie Mae and Freddie Mac became worthless when those two mortgage financing companies collapsed. The founder then sold 4,000 shares of worthless stock in the bank to an insurance company that he controlled, netting $600,000, a transaction that was recently reversed by state insurance regulators.

First Federal Bank of North Florida had 8 locations concentrated in the northeast corner of the state. It faced loan losses related to the decline in real estate values, and had reported a loss of $23 million in 2009.

American First Bank had three locations in towns north of Orlando. Regulators last month had ordered it to raise capital immediately, after it reported an $8 million loss in the 4th quarter.

A bank that failed in Michigan tonight was probably the first bank failure in the current cycle to be directly tied to a population decline. The bank, Lakeside Community Bank, was based in Sterling Heights, Michigan, north of Detroit, in an industrial area that has seen perhaps the most rapid population decline of any place in the United States in the last decade. The bank had $52 million in deposits. It had experienced significant loan losses, but there was little indication that it had been mismanaged.

In a declining area, the FDIC could not find another bank interested in taking over the failed bank’s one location. Instead, it will send checks to the depositors beginning on Monday.

The first New England bank failure in nearly a decade occurred tonight. The bank, Butler Bank, had 4 locations and was based in Lowell, Massachusetts. It had $233 million in deposits. It had lost money in loans to poorly-located real estate development projects, and ended up owning 100 house lots from a planned residential development surrounding a golf course in Maine. Only a real estate investor could have saved the bank, which had more real estate assets than capital in the end. The failed bank was recently mentioned at the top of a very short list of troubled Massachusetts banks.

The deposits are being transferred to People’s United Bank, which is also purchasing the assets.

In Washington state, banks are failing at a rate of nearly one per month. The latest to fall is City Bank (no connection to the much larger Citibank), based in Lynnwood, Washington. It had 8 locations in the Puget Sound lowlands and $1 billion in deposits. On closing the bank, state regulators specifically blamed City Bank’s losses on construction loans.

Deposits are being transferred to another local bank, Whidbey Island Bank, which is also buying 62 percent of the assets.

California banking regulators closed Tamalpais Bank, which had seven locations in and around San Rafael, California, north of San Francisco. The bank had $488 million in deposits. San Francisco-based Union Bank, which previously had only a token presence in the North Bay area, paid a 2 percent premium for the deposits and is also purchasing the assets.

Tamalpais Bank had just this week filed its annual report for 2009, apparently in incomplete form, in which it noted that its capital levels were inadequate and it was in default on loans owed to other banks. The report also included a going-concern warning.

Across the bay in Oakland, regulators closed Innovative Bank. It had 4 locations and $225 million in deposits. Innovative Bank had raised some capital in recent months, but not enough to keep going. Los Angeles-based Center Bank is paying a 0.5 percent premium for the deposits and is also purchasing the assets. The failed bank had one location in Los Angeles in addition to its three locations in the Oakland area.

The FDIC estimates costs of $492 million for the Riverside National Bank of Florida closing and $323 million for the City Bank closing. The other six bank closings tonight are expected to cost it $169 million. With tonight’s closings, the tally of bank closings for the year has reached 50.

Don’t Expect a Big Splash From LED Television

LED television sets are readily available now, but don’t expect them to make a big splash. The difference between a LCD television display with an LED backlight and an LED television display is not so obvious that the average high-end TV buyer can pick it out in the store, and store displays are not necessarily very clear about the which is which. The difference in price is obvious, though, with a large-screen LED display costing about $1,000 extra.

The LED display uses less energy. That alone is more than enough to cover the extra initial cost over the 30-year life span of the unit, or perhaps in 10 years if energy prices continue to increase. An LED display can, at least in principle, be used as room lighting when you are not watching a television program. The real reason for someone to buy an LED television, though, is that it is about 1 inch thinner and weighs correspondingly less, so it takes up less space in the room.

In real estate terms, having a television that is one inch thinner is the equivalent of making the living room 1 inch longer. If the real estate value of the living room is $100,000 or more, it doesn’t make good sense to waste that valuable space on a television that is an inch thicker than it has to be. Currently, that would be the case only in the more expensive central neighborhoods of the largest cities. When the price premium for an LED television falls below $400, though, that would describe the average suburban home or apartment. And eventually, perhaps around 2016, LED television prices will fall enough that it will make financial sense for someone who already has a flat-screen television to replace it with a thinner unit that will take up less space in the room. Around the same time, the energy savings will also make the LED television a good choice for anyone buying a replacement television — unless, of course, something even more efficient comes along by then.

In the meantime, retailers will mainly use the LED televisions’ price tags to persuade us that the televisions we end up buying are not so expensive. This is the main reason that LED televisions are sure to find their way into the stores.

TV Viewers Moving From Cable to Internet

I might have been ahead of the curve when I canceled cable TV three years ago, but not so far ahead as I might have imagined. A story in TechCrunch pulls together data on TV viewers moving to the Internet, with a headline estimate of 800,000 households canceling cable in 2009. It’s easy to get an exaggerated idea of this — many of the cable cancellations were the result of foreclosures and evictions — yet it is still a 1 percent decline in the cable TV audience, and the estimate is that there may be a 2 percent decline in 2010.

The numbers are still relatively small, and yet not so small that the industry can ignore them. If the rate of households dropping cable goes to 2 percent this year as predicted, and then to 4 percent next year, it will no longer be a curiosity — it will be a hot lifestyle trend, with Hollywood celebrities talking about how they too are canceling their cable subscriptions. And when something gets to be a trend like that, it can be hard to stop. It didn’t take AOL long to go from a 5 percent rate of subscriber decline to a 35 percent rate, and in retrospect, there wasn’t anything AOL could have done to turn that around. It’s hard at this point to imagine that cable subscriptions will follow the same path, yet with subscription fees rising toward $200 a month, you can’t rule that scenario out, either.

Looking for Answers for Bees

Bees got through the winter reasonably well. In a normal year, you would expect about one in seven bee colonies to die during the winter. This year, the rate of bee colony deaths has been about twice that, but that’s no worse than the last five years. The weather across most of the northern states was unusually harsh during the late winter, so it may have been a contributing factor in the death of some bee colonies.

Bees across the United States have been having unusual problems in recent years, and scientists still have not figured out the cause. The consensus now is that bees are suffering from pesticides, fungi, parasites, and viruses, but the reason bees are so susceptible to these stresses remains a mystery. It could just be a matter of cumulative stress, or there could be a primary cause, a specific pesticide chemical or virus, that has not yet been identified.

Whatever the problem is, it seems to be spreading. Three years ago, commercial beekeepers were mystified when they found many of the bee colonies vacant for no apparent reason. Now it is clear that wild bees are also in decline, though there isn’t enough data on wild bees to say for sure that they are being killed by the same causes.

Most food crops depend on bees for pollination, all the more so now that pesticides have reduced the populations of other pollinating insects, such as butterflies. The fear is that if we run out of bees, yields of crops from tomatoes to walnuts could be significantly reduced, leading to shortages and higher prices. Beekeepers are trying to increase their bee populations by feeding the bees more and reducing their exposure to pesticides, with some success, but a more targeted solution might be found if the specific cause of the bees’ problems could be discovered.

No Cash, No Groceries

Perhaps it’s another sign of the decline of the credit card. I stopped by a supermarket this morning and saw that it was no longer accepting credit cards for payments. I paid with cash myself, but I had to wonder what all the other customers were doing.

Supermarkets and other retailers have been trying for two years to get people to pay for their purchases with debit cards. They’ve negotiated better payment terms for debit card transactions, saving them about $1 per transaction, so they’ve been trying to gently nudge their customers in that direction.

I have to imagine this supermarket decided that “nudge” was no longer its strategy. Credit card payments are no longer available, or at least no longer visible, at checkout. The supermarket may lose 5 percent of its customers this way, but with lower transaction costs, its earnings should come out about even.

To the supermarket, this change is no big deal, but if it becomes a trend, consumers will no longer be able to rely on a credit card for emergency money in the event that their bank fails. To be safe, consumers will need to have cash at home or deposit accounts in two unrelated banks. In addition, obviously, this could be a major blow to the credit card industry. It’s not just the lost transaction fees from the supermarkets. The smaller balances and interest payments that result are just as consequential. At the same time, the credit card industry depends on the meme of “I have my credit card. Let’s go shopping!” If that advertising message becomes a punch line, credit cards will lose most of their standing among consumers.

Lessons From the H1N1 Flu Hype

The flu has vanished from the public agenda. But flu, mainly from the H1N1 virus, is still happening. Based on my own informal measures, cases have fallen off by only about half from the lows of the last week of December. It’s important to note that the rate of H1N1 cases never bounced back from the steep drop-off that occurred that week with all the schools closed. To my mind, that nearly proves that we could stop worrying about flu epidemics if we would just do more aggressive cleaning of hand-contact surfaces in schools. Yes, the additional school cleaning staff that would be required could cost $5 billion a year across the United States, but that is nothing compared to the productivity that would be gained by having fewer people miss work (or school, for that matter) because of the flu.

Flu season is not considered over at the beginning of April, but it is not too soon to say that it was one of the mildest flu seasons in recent memory. Partly this was because people took more precautions after hearing the flu hype. I’m referring specifically to cleaning and social distancing — there is no evidence that the H1N1 vaccine arrived in time to have any effect on the spread of flu in the United States. It would have been needed in June to be useful, and by the time the vaccine had seen minimal testing on a few hundred healthy people, in September, the H1N1 pandemic had already passed its peak. And that is surely the main reason the flu season was so mild. Most people had already been infected with the dominant flu strain of the season, H1N1, during the summer.

The first lesson from the H1N1 pandemic, obviously, is this: Don’t believe the hype. Scientists hardly know anything about pandemics. When World Health Organization officials start talking about pandemic projections, the predictions are based more on politics than on science.

It’s not too soon to say that the H1N1 virus never went worldwide. Cases were found on every continent, but not in every country, and in only a small fraction of communities. I believe it must be recognized that something about modern health and hygiene creates resistance to the spread of a virus, making it impossible for a new virus to spread the way viruses did in centuries past.

The rush to create and distribute the H1N1 vaccine was a colossal failure, and not from lack of effort. In this failed mission, we may have been led astray by science fiction. In several Star Trek episodes, the vaccine or antidote arrives just in time to save the crew, or the planet. But apparently thousands of the best minds in medical technology working together can’t match the results of one Julian Bashir.

What did we get for an H1N1 vaccine? Estimates are that the vaccine that was delivered in quantity in October was about 70 percent effective in healthy adults; we are lucky if it was 45 percent effective in the elderly and ill populations that most need the protection of the vaccine. The FDA waived some standards of proper testing and good manufacturing practices to get the vaccine out quickly, and that resulted in a product far more variable than we expect from a vaccine. One batch of the rushed vaccine was recalled for ineffectiveness, but it’s highly likely that other doses were problematic in various ways that weren’t detected. And to add insult to injury, we know in retrospect, from the epidemiological record, that we would have needed the vaccine in June for it to stop the epidemic in the United States. It arrived in October, 100 days too late to matter. With that as a track record, we probably shouldn’t even try to rush the vaccine next time. To prevent the pandemic from occurring, scientists would have needed to go from virus identification to vaccine manufacture in a matter of days. That’s a risky gamble when they do it on Star Trek; it would be absolutely terrifying if health authorities were to attempt it in reality.

I have one other thought on the flu vaccine. We just had an extraordinarily mild flu season after an extraordinary spike in flu exposure that occurred in August and spilled over into September. Perhaps that is a sign that we ought to consider distributing flu vaccines in August and September, rather than the traditional November and December. This recent experience provides a reason to imagine that vaccines would be more effective in late summer than in late fall.

Finally, there is the effect of the H1N1 flu scare on the economy. Local governments and hospitals were extraordinarily tight with their budgets late last year because of the specter of the costs that could be associated with a massive flu outbreak. It turns out that was a good move even though the flu never materialized. Hospitals, for the most part, can breathe a little easier now, but they cannot exactly begin rehiring the staff they laid off. Rather, the current situation is probably just a respite before the next round of layoffs. Most local governments are running at a deficit because of the weak economy, in spite of budgets that were supposed to have a bit of slack in them. They will have to cut back further this year, and probably again next year.

Clutter-to-Riches — the Replacement for Rags-to-Riches

A century ago, rags-to-riches was a literal expression. Clothing wasn’t so durable then, physical labor was the rule rather than the exception, and people of average means hoped to be able to replace their one suit of clothing once a season. If financial hardship prevented this, in barely a year, a worker’s clothes could be in tatters. Yet through a series of small good fortunes, this circumstance could give way to something better, until the same person was seen in fine new clothing and other signs of material good fortune. That’s the rags-to-riches story.

The visible signs of financial struggle have changed in the past century. These days, people pay extra for shredded clothing as a fashion statement. The surest sign of financial hardship is not clothing, but clutter. Wherever material possessions pile up neglected, you will find a person whose life is too stressed to have a shot at prosperity.

Yet this can change just as surely as the rags of a century ago. What people these days need is a clutter-to-riches story. This is something I write about in “Graptitude and the Clutter-to-Riches Story” today in the Fear of Nothing blog (coining a new word while I am at it):

If you feel good about the physical objects that are around you already, it becomes easier for you to collect the material possessions you really want. . . . If you feel good about the junk and clutter that’s in your life, you will replace it faster with the possessions you imagine for yourself. And it is easy to feel good about the worst possessions if you realize that they are not permanent, that they will not simply sit inertly forever, but that they are in motion, like the rest of the universe.

This Week in Bank Failures

The SEC on Wednesday voted to go ahead with rules for the securitization business. The securities that have been the backbone of the home mortgage and credit card businesses for the past decade are effectively unregulated, but that will change with the new rules that the SEC will be putting together. Some of the rules that are taken for granted in stocks, bonds, and bank loans, having to do with transparency, disclosure, and accurate recording of transactions, will then begin to apply to the securities that result from bank loans.

At least two of the recent bank failures have been tied to problems with investment in mortgage-backed securities. More, though, are related to the parallel world of loan syndications, an area that falls entirely under the jurisdiction of banking regulators. Banking regulators would do well to check into the initiatives that the securities regulators take with securitizations to see if any of them would also help avoid problems with syndications.

After taking the first weekend of the quarter off for a holiday weekend, bank failures did not come roaring back tonight. We did, however, see the first bank to fail in South Carolina since the 1990s.

The failed bank is Beach First National Bank, which had seven locations in Myrtle Beach and nearby beach towns in South Carolina. It recently had $516 million in deposits. It was obviously a bank in trouble. It had been operating under an OCC consent decree since November. Its dwindling home mortgage division finally shut down two weeks ago. On Monday it announced a $14 million charge that would be appearing in its 2009 annual report, a report that, as of today, still had not been completed. Also on Monday, the bank received a delisting warning from Nasdaq. That’s more trouble than you expect any bank management team to overcome, and you have to wonder if the new interim CEO could really do much more than show a brave face and try to make things look good.

The loan problems at Beach First National Bank paralleled those at other banks in resort locations, such as the recent bank failure in Key West and some of the banks in Las Vegas. The bank had its share of losses in residential mortgages, but the real problem was the commercial real estate, including a $4 million dollar yacht club that ended up listed for sale on the bank’s web site.

The deposits have been moved to Bank of North Carolina, which is also purchasing the assets. It is a significant expansion for Bank of North Carolina, which previously had 17 locations, all in North Carolina.

Net Neutrality and Freedom of the Press

Much of the discussion of the recent net neutrality decision in the courts seems content to view the issue as something related to illegally copied movies. But net neutrality is not about that. It’s about preserving open communication on the Internet. And it is fundamentally about freedom of the press.

The importance of freedom of the press in a functioning democracy has been known for a long time. It was noted by the legislative group that drafted the U.S. constitution, and has long been a celebrated part of the American political process. But in an age when a significant number of people get their news over the Internet, how much freedom of the press is there really when any Internet access provider has the legal right to cut off any news source it chooses?

According to the court’s logic, there is no law that forces Comcast, or any other Internet service provider, to let you access, for example, the New York Times. If Comcast decides New York Times readers are using “too much” bandwidth, with no legal standard for how they can make that decision, they can limit the number of users who can access the New York Times web site at any one time. According to the court, there is no law that says they can’t do this. If they want to influence the census results, they can make the census web site crash in some states while allowing open access to it from other states. If they are unhappy with the course of the political discourse surrounding issues of corporate governance that affect their parent companies, they can delete email messages that contain points of view that are unfavorable to their interests.

I hope Internet providers will not start doing these things on a large scale — but according to the court, there is no law that prevents them from doing these things and more. And this is not just a hypothetical concern. AOL, back when it was still a significant player in Internet access, decided to cut off the email sent by certain political action committees that were taking a position that AOL thought went against the interests of its parent company at the time, Time Warner. There are dozens of other known actions by U.S. Internet providers against political communication, along with certainly others that have not come to light, and this is a pattern that is well-known in other countries.

There are arguments to be made on both sides of the net neutrality debate. However, there at least have to be enough rules to ensure that the political process can carry on without being distorted by the corporate interests that own the access points on the Internet. The courts have ruled that, the way things stand now, federal regulators do not have the authority to set these rules. Next, Congress must act to give the Federal Communications Commission the authority to keep the Internet working — to keep the country’s politics from being taken over by the powerful corporations that currently can control what people can and cannot see on the Internet.

Oil Prices Creeping Up

Oil and gasoline prices have been creeping up, not as much as they do in the average year, but enough to have politicians and oil companies fretting about the evils of speculation. With much of the world economy showing signs of recovery, it’s hard for me to see what will keep world oil prices from edging up another 25 percent to peak between $105 and $115 a barrel, probably in July rather than June.

The biggest variable in world oil demand is U.S. employment, as people drive their cars to work, and as soon as there is convincing evidence that the job market in the United States is growing, I expect oil prices will go back above $90 and stay there.

No one could be shocked by U.S. gasoline prices between $3 and $4 a gallon this summer, but the higher prices will still be a deterrent to shopping and other economic activity, putting a damper on any hopes for a steady recovery in the U.S. economy. There is no simple solution to this. Some experts are now saying that world oil production peaked five years ago, and the fact that we are looking for oil in deep water offshore is a testament to this. With higher energy prices, the pieces of the U.S. economy no longer fit together the way they used to, and it will take some ingenuity to reshuffle the economy to get it moving forward again.

Cutting Subsidies in Iran

A story in today’s New York Times tells of the efforts to cut government subsidies for a wide range of ordinary products in Iran. Iran’s president, Mahmoud Ahmadinejad, may take the role of hard-liner on other issues, but here he is the pragmatist, looking for the rational economic solution to the country’s chronic budget difficulties.

The most prominent subsidy in Iran is the state subsidy for gasoline. The government pays nearly three fourths of the cost of all the gasoline people buy. A subsidy like this seems to make sense when you look at the gasoline used by the average worker. The problem with subsidies, though, is that most of the benefit goes to the people with the most money. In Iran, this includes the criminal enterprises that are affiliated with the government — their enormous profits, which distort Iran’s economy in the first place, are padded by the government subsidies. The government, in turn, has come to lean on these criminal groups for their financial strength. Getting rid of the subsidies would go a long way toward reducing this unhealthy relationship between government and organized crime.

Caution is needed whenever economic policies are changed on such a massive scale — you don’t want to inadvertently push key groups of workers into poverty. But no one in Iran is suggesting to wipe the subsidies away all at once. Parliament seems to be prepared to cut them by 20 percent. The president, who in Iran is a highly visible figure but has little political authority, is campaigning for a 40 percent cut. That would be too big a change to do all at once, but put in place over the course of a year, it could be the start of a manageable phase-out of subsidies.

There is plenty of precedent for the elimination of state subsidies, and history shows that subsidy cuts rarely cause economic distortions on the same scale that the subsidies did. Recently China reduced its motor fuel subsidy, causing the price of gasoline to go up by about 80 percent in less than a year. There was a fair amount of hand-wringing about this, but the result was a more balanced economy at the end of the year. That is what Iran too is likely to find if lawmakers can be persuaded to take a less hesitant approach to phasing out the subsidies that keep the country’s economy — and its politics — perpetually out of balance.

Illegal Internships Are the New Illegal Aliens

There has been a flurry of discussion in the past three days about unpaid internships. The New York Times says it looks like unpaid internships have more than doubled in recent years, and the U.S. Department of Labor has issued a statement clarifying that if a business treat interns essentially as employees, as nearly all do, then the internships are not exempt from minimum wage laws. That is, according to the law, nearly all of those unpaid interns should be paid at least $7.25 per hour.

Employers have switched from employing illegal aliens to employing college students in illegal internships because the rules about illegal aliens have been more strictly enforced in the last two years or so, at the same time that many college students and recent college graduates have gone unemployed. If wage rules for internships are now to be enforced, though, it may not be the end of internships. Employers that are looking to keep costs to a minimum may have little alternative but to pay up. There is, after all, no less expensive pool of workers available. Interns put up with the meaningless work usually found in an internship because of its potential résumé value. With the job market as distressed as it is, that’s not likely to change just because the internship starts to pay a small amount of money.

Sprawling Retail Construction in India

Overbuilding of retail space is not limited to the North Atlantic countries. The situation is considerably worse in India. There, according to IndianExpress.com, mall vacancy is over 30 percent as of the end of 2009. (Also see Calculated Risk Blog’s take on this news story.) That is bad enough, but builders plan to nearly double the amount of retail space over the next four years, and this could lead to a vacancy rate over 50 percent, even with many projects being slowed down and delayed.

The reason retail vacancies are so high in India is apparently that owners have yet to cut rents. Unlike the United States, where effective retail rents have fallen by 30 percent in all but the choicest locations, retailers in India have to close stores to reduce their rent costs. Traffic jams are another issue unique to India leading to disappointing results.

The frustrating thing about this is watching the builders unable to stop their new building, even of projects that won’t start construction for another year or two, in the face of a faltering market. A few of the new projects are well-located and will succeed because of that, but more face such daunting obstacles that they many never open after they are built. Logically, these projects should be canceled, in spite of the loss that must be absorbed, yet in most cases, the building appears to be going ahead anyway.

The iPad Is the Real “Thin Client”

The “thin client” model of computing has seen a lot of hype over the years, particularly in the late 1990s from companies like Oracle and Sun Microsystems. The idea was that users would use a low-power, low-functionality computer to connect to server functionality over a network. The thin client model never caught on, largely because the thin client computers were not less expensive, easier to use, or more secure than an ordinary computer.

Now that I’ve seen the Apple iPad demonstrated, it strikes me that the software design of the iPad is based on much of the work that went into the thin-client model. But unlike the thin clients of the 1990s, the iPad is easier to use and more secure than an ordinary computer. It’s actually thin in a material sense, and I fully expect that after a few rounds of price cuts, it will also be less expensive than a desktop computer.

I don’t know if any serious engineers are still working on the thin-client model, but if they are, it is time for them to recompile their thin client applications as iPad apps to see what benefits they might gain from running on a real thin client.

This Week in Bank Failures

The rate of bankruptcies continues to edge upward, with consumer bankruptcies reaching essentially an all-time high for the last 12 months combined, discounting the rush that came before the consumer bankruptcy reform in 2005. Lenders became overconfident after the bankruptcy reform, believing that it would make consumer bankruptcies all but impossible. Instead, that lender overconfidence has led to a rate of consumer bankruptcy that is higher than it would have been without the reform measure. Bankruptcies force banks to recognize loan losses sooner than they would otherwise, and the rising rate of bankruptcies is likely to make some banks insolvent.

Consumer bankruptcies tend to be high when unemployment is high, and unemployment continues to increase. The new employment report shows total employment tracking with the growth in the labor force for the first time in more than two years. In a way, this is good news, but it also means that the total number of unemployed workers is still increasing.

The FDIC yesterday sold off a 50% stake in another loan portfolio. The portfolio, called Multibank Structured Transaction Single Family Residential 2010-1, contains almost $500 million in residential mortgages, over 3,000 of them, with half of them delinquent. The loans came from 19 banks that failed more than a year ago.

I do not expect any bank failures tonight during the Easter holiday weekend.

Health Care Cost Avoidance: New Incentives for Congress

Now that the U.S. government has a bigger stake in the health care system, a move toward a greater emphasis on disease prevention is unavoidable. A Congressional committee that needs to find a few billion dollars to make the budget line up isn’t going to balk at measures to keep people healthy just because of a political theory that prevention should be a private sector function, or something like that, if the move will generate the cost savings that the committee is looking for.

As an example, it’s just a matter of time before the high fructose corn syrup lobby’s free ride is over. The epidemiological evidence connecting high fructose corn syrup to obesity and disease is clear enough, and politicians who look at the budgetary benefits New York City is already reaping from its very limited crackdown on soda may think to imitate that success when the late-night budget meetings are looking for answers.

Some of the more embarrassing failures of the health care system, like last year’s H1N1 flu vaccine debacle, may come in for more scrutiny now that the government is on the hook for a greater fraction of the failures caused by medical misadventures. The Food and Drug Administration (or its successor for drug regulation) may come under more pressure not to approve prescription drugs that are a risk to create serious or long-term illness in the people who use them. All this is the consequence of new economic incentives on Congress: keep people healthy, and the budget may balance. This now overrides Congress’s previous incentive to allow corporate profits in the hope that the tax revenue will make the budget balance. If corporate profit comes at the expense of people’s health, that’s no longer a good tradeoff for Congress.