Wednesday, June 30, 2010

The Tesla Factory and the Purpose of the Stock Market

Tesla Motors’ stock offering on Monday raised more than $1 billion that the automaker will use to purchase a factory and set up manufacturing for its next car models.

Critics of the stock have complained that Tesla is not a real company — “it doesn’t even have a factory yet,” never mind a track record. I believe these critics have forgotten how capitalism works.

The point of capitalism is not to gamble by buying and selling pieces of companies. It is supposed to create companies by putting all the resources that are needed together to set up something new.

Tesla has had car designs sitting around for years because it hasn’t had a place to build them. Now that will change, and if the designs are half as good as Tesla thinks, it will be a profitable company. And, if its designs are twice as good as anyone expects, the other auto makers will be rushing to catch up. The whole idea of a stock market is supposed to be that a company like Tesla can set up a factory and start making cars.

It depends, more than anything else, on the quality of the engineering work. But none of Tesla’s detractors on Wall Street are offering any criticisms of the engineering. They don’t seem to know the first thing about the engineering that goes into a design of a car. This may be why they are criticizing the company’s limited track record instead.

A track record doesn’t mean as much when the world is changing so rapidly. Investing in a track record is investing in the past — which is to say, it isn’t really investing at all, but more like a faint hope of cleaning up somehow after the real investors have already left the room.

Tuesday, June 29, 2010

Hurricane Track: No Sigh of Relief for Central Gulf Coast

A hurricane is forming today in the Gulf of Mexico, but modern weather forecasting is so advanced that the oil industry is breathing a sigh of relief at the forecast track of the hurricane. The forecast takes the hurricane toward the Rio Grande valley, well away from the Mississippi and most of the offshore oil industry. Not many oil platforms will have to shut down for this first hurricane of the season.

There is no such sigh of relief for the salt marshes in the Mississippi delta, however. The hurricane will pass by a short distance away, and waves from the hurricane will easily splash over the booms that, on calm days, have been keeping the oil spill out of the marshes. Three or four days of choppy surf could, depending on the currents, wash tons of oil into marsh areas, potentially destroying some of them. At the same time, the hurricane track is to the left of the oil spill area, which will cause minor coastal flooding. Ordinarily this kind of flooding would not bother anyone, but in the presence of an oil spill and waves, it could carry oil miles from the outer shorelines into the swamps.

These effects are speculation at this point — the significant waves haven’t arrived in the spill area yet — but these are people who know what they’re talking about:

Tommy Stevenson, Tropical Storm Alex’s path is NOT good news

Reuters: Hurricane Alex to hamper BP's oil spill containment

The Weather Channel: Hurricane Update

Monday, June 28, 2010

Supreme Court Strikes Down Secret Accounting Board

Sometimes it helps to have a corporate lawyer on the Supreme Court. The ruling today strikes down a sort of secret society created by the Sarbanes-Oxley law to govern corporate accounting. The Public Company Accounting Oversight Board was intended to be slightly beyond the control of the government, but it wields the power of the government. It has the authority to conduct surprise inspections of essentially any C.P.A. and assess fines. Congress envisioned it as almost a private organization of the accounting business, with the idea that the industry could police itself. That is almost never a successful formula. Usually what happens is that the more powerful providers or organizations in an industry use such a governing body to squeeze out smaller companies and potential new competitors. This is a particularly egregious situation when the whole purpose of a board is to protect the public from the unscrupulous side of the accounting business. In case anyone has forgotten, the Sarbanes-Oxley law was passed in the first place largely in response to misconduct at what was then one of the largest accounting firms.

The Supreme Court has corrected this, partially anyway, by placing the Public Company Accounting Oversight Board more firmly under government control. My hope is that, as a result of this change, the board will pay more attention to protecting the public, and will not be so easily used as a tool of the accounting establishment to protect itself from competition.

Sunday, June 27, 2010

Recruiting When Workers Have Choices

The recession has seen a striking decline in the field of recruiting as the glut of workers has made employers overconfident. With so many workers to choose from, many employers seem to think that recruiting consists mainly of going through a stack of resumes and throwing away 97 percent of them, a tedious task that can be assigned to a secretary or intern. Recruiting companies have largely been reduced to finding workers already employed in a field and promising them higher salaries. These strategies may work now, with the job market hopelessly out of balance, but they are not likely to measure up two years from now when some movement returns to the job market.

I had an occasion to talk with one employer this week, who complained of getting “just” a few dozen applications for two minimum-wage openings that had been posted only for three weeks, and only on the employer’s own web site. If this is a measure of employers’ overconfidence, then they are not ready for what is likely to hit them as the economy recovers.

Workers have more options outside of employment than ever, and the tight job market is forcing many workers to explore their options. When you consider that less than 3 out of 4 workers are fully employed, this will be creating the equivalent of a generation of workers who are not so easy to employ. These are not the subsistence farmers and dropouts of 1969 (though there is some of that going on now too), but skilled workers with real business models. Some will be so successful that they won’t consider working for another company; others, though, will be happy to consider offers, but won’t be as eager as before to jump through hoops for a chance at a job interview. To employers that have always taken a passive or even a hostile approach to recruiting, the latter group is just as inaccessible as the former.

Some of the big-box retailers know what is coming and are already experimenting with ways to automate a small part of their work so they can get by with a smaller or less reliable work force. But many employers, particularly in the hospitality sector, will be staggered by the coming sequence of events, as their best employees go away just as their customers are starting to come back. Any employer, though, still has time to adjust its approach to recruiting and employee relations, taking a more active and more positive approach to workers.

Friday, June 25, 2010

This Week in Bank Failures

The final form of the financial system reform measure in Congress isn’t known, but large bank stocks rallied today on the belief that the reform measure will allow banks to continue to bet against their customers with up to 3 percent of their assets in securities markets and hedge funds. The 3 percent limit would appear to affect only Goldman Sachs, which presumably would be forced to spin off its banking business. The ability to place bets in securities markets is important to large banks, which have collectively lost money from banking operations over the past year, but have made a profit in the stock market.

The banking bust in southwest Florida continues, with Peninsula Bank failing tonight, and perhaps four more banks in the area that are considered financially empty at this point. Peninsula Bank was based in Englewood, Florida, and had six locations along the southwest coast of Florida, though it also had seven locations along the state’s southeast coast. It had $580 million in deposits.

Premier American Bank is taking over the deposits and purchasing the assets.

Banks also failed tonight in Georgia and New Mexico. In Georgia, Savannah-based First National Bank failed. It had four locations and $232 million in deposits. The Savannah Bank is taking over the deposits and purchasing the assets. It is paying a token premium for the deposits.

In New Mexico, the failed bank was High Desert State Bank, with its two locations in Albuquerque and Rio Rancho. It had $81 million in deposits and a similar amount in assets. The successor is First American Bank.

Thursday, June 24, 2010

Marketing Messages As Reflexes

As a followup to my last post, I want to comment on how many simple marketing messages have reached the status of a reflex in some people — and how extreme some of these messages are. These are formulaic messages I’m talking about, but they are often stated in stark terms, almost like an ultimatum. For example, “You can’t afford to keep paying this expense month after month,” as an argument for an alternative that requires only a single payment. Or, “You can’t afford to take that risk.” Both of these marketing messages tell you that you are on the verge of insolvency, and that making the wrong decision could push you over the edge.

It’s a rather extreme assertion when you look at it in literal terms, yet it becomes a reflex in some people, an automatic, unthinking part of their decision-making and their criticisms of their friends and family members.

Any such message can be turned on its head easily enough, to make a case against a purchase. To say, “You can’t afford to keep buying the money-saving equipment that advertisers are always telling you about,” is at least as rational as any other form you might have heard for this formula.

The fact that a reflexive thought can so easily be directed in completely opposite directions shows that it is not rational at all. Of course, a reflex can’t be rational, but it could be based on a rational idea. Perhaps turning an idea into a reflex like this takes away all the rationality.

The most dangerous marketing message of this kind that I can think of right now is the “You don’t have time” message. The ultimate point of it, I am afraid, is, “You don’t have time to make a rational decision.” The answer for this, for someone who has internalized this formula and made it a reflex, is to make a game out of making a rational decision about something, such as a purchase decision. If it’s a game, then you can spend several minutes at it, looking at it from several different points of view and enjoying the whole process. After that experience, the next time you hear, “You don’t have time,” it won’t mean quite the same thing as before.

Tuesday, June 22, 2010

The Dogma Reflex and Time Pressure

In the 20th century, dogma was mostly understood as a form of intellectual resistance to new ideas. Thanks to new discoveries, we understand dogma better. There is very little that is intellectual about it. The nature of dogma is to form a reflex, an ability to react without thinking. Dogma works its way into the reptilian brain, the rapid and simplistic part of the brain where routine responses occur but no recognizable thinking takes place. There is some essential value in this, so we do not want to do away with dogma completely, but most dogma in pure manipulation.

Dogma has been described as an emotional reaction, but this too turns out to be a misconception. Emotions do come out of the reptilian brain, just as words do, but the reptilian brain itself is too simple to hold emotions, just as it is too simple to hold words. The emotions that occur in a reflexive response occur, like the thoughts, after the fact — after the actions have already taken place.

One of the scary things about dogma is how convincingly it can mimic the full range of human responses. It creates “emotional” reactions, “Like hell,” “Oh, shit,” and so on, that may or may not be accompanied by the emotions that they supposedly express. The next time you find yourself saying something like “Like hell” or “Oh, shit,” stop yourself in the middle of the process. You’ll discover that there is a moment between the reptilian-brain reaction and the emotion, roughly the moment when the echoes of those words are dying away. In this moment, the emotion that supposedly has just been expressed does not yet exist. Freeze this moment, and you have the opportunity to choose a different reaction.

Dogma is even more convincing in the way it simulates an intellectual response: “I know that’s not true because . . .”

Imagine that the video cuts off so that you can see and hear only the words, “I know that’s not true because.” Can you judge the intellectual soundness of the assertions that will follow based on only this much video? You can, because the reptilian brain has its own rhythm, which is distinct from the mental rhythm of a thinking person. The dogma reflex spouts out a series of assertions that appear to be logically connected in the manner of an argument or a proof, but the connections cannot necessarily be demonstrated. It is the rhythm, not the logic, that makes the argument convincing to a susceptible person.

Most dogma is created intentionally. Ideas are selected, planted, and justified without regard for whether they are true or false, then converted to dogma through a process that very few people outside of politics, advertising, and art understand. And the whole purpose of this is to program people to react to a selected stimulus without thinking, using the dogma reflex.

This new understanding has profound implications for science and religion. Most of the “thinking” in both fields is dogma. The dogma in religion ranges from “theology” to “What would Jesus do?” In science, references to “laws” and “settled science” point to dogma. To be fair, there is a great deal in science and religion that can be demonstrated at the drop of a hat. But most of it cannot be. The role of dogma could be reduced by finding more direct ways to demonstrate principles, but most people who work in science and religion are not interested in the problem of creating better demonstrations of “known” principles. Part of the reluctance comes from a fear that some “known facts” will turn out to be inconveniently false under closer inspection.

This fear must be part of what keeps dogma in place. Yet we also know that dogma can dissipate in moments in the face of the right kind of demonstration of contrary information.

Dogma seats faster in people who are under time pressure. This also means that people who are under time pressure are more easily manipulated. They are the ready victims of advertisers, politicians, artists, scientists, and others. It almost makes you wonder if the fast pace of modern life is itself a form of manipulation, created to make us all easier to program. Of course, I know that’s not true because . . . No, I won’t say it. Almost everything we know about the fast pace of modern life is dogma. In reality, we know almost nothing about why life moves so fast.

Monday, June 21, 2010

The Case Against Gross Negligence at BP

BP’s claim to solvency is based in part on the assumption that a silent partner in its out-of-control oil well will pay 25% of the costs and damages from the well. The partner‘s liability hinges, though, on BP proving that there was no gross negligence on its part. Here, collected from news reports, are some of the points that BP can make in defense of its oil well management.

  • The well had a blowout protector in place. This was a valve that, theoretically at least, might have stopped the flow of oil. The blowout protector design had been tested and shown to work in lesser depths. Tests conducted days before the explosion appeared to show that the blowout protector was partially functional at that point.
  • Within days after the explosion, BP recovered records that showed that some of the hardware on the blowout protector had been disabled prior to the explosion, enabling it to focus its efforts on the hardware that was still in place at that point.
  • Even though plugging a blown-out well at this depth was a situation that its engineers had ever tested, BP, after the explosion, quickly came up with a list of technologies that it intended to try.
  • BP had a disaster response plan which it had filed with federal regulators. Experts who have looked at the plan say it is mostly not blank, and many of the people and companies it refers to actually exist.
  • BP executives were on the platform at the time of the initial explosion. They were holding a party to celebrate the success of the well, but still, the fact that they were there at all shows that they were paying attention.
  • BP had noted that the well was producing an unusually high proportion of methane to oil. They didn’t do anything to adjust their strategy to prevent an explosion from the methane, but again, the fact they they noticed it and logged it shows that they were paying attention.
  • The well-known tendency for methane to expand explosively when rising to the surface from the depths at which the well was located had never before destroyed an oil well.
  • After a long series of safety violations in the company, including disasters and fatalities, BP executives had declared that safety would be their top priority, and had repeated that statement of policy at regular intervals.

Does BP have a case against its partner? I’m not qualified to comment on the legal fine points that form the distinction between ordinary negligence and gross negligence, but I would not be surprised if BP’s case is eventually heard by a jury, which would get to consider these points, along with other information that BP has not, to this point, released to the press.

Sunday, June 20, 2010

The Problem With Proportions

Much of economic theory depends on the idea that people’s economic behavior is rational. We know no one is purely rational, but economic theories are so much easier to make if we imagine that people make decisions that are roughly in proportion to their understanding of their best interests.

But decisions can hardly be in proportion if people aren’t even aware the proportions of their actions. For example, how well can people really be spending their money if they don’t even know where the money goes?

A BBC News Magazine study that focused on alcoholic beverages asked people to keep diaries of their alcohol consumption for seven days, to see if their actual alcohol consumption was what they thought it was. The result: the majority of participants, 67 percent, drank more than they thought they did. Often, their preliminary estimates were off by a more than a factor of 2.

This study focused on alcohol, but I imagine you could find similar results in many other areas of consumption spending. Some people know what they are spending in a particular area, but others are just guessing. And if you ask people how they spend their time, a matter that has more fundamental importance than money, the estimates they will offer are even farther off.

Here’s the problem: if we are not aware of the proportions that make up our economic lives, not even necessarily within a factor of 2, then what are the chances that we are balancing these proportions correctly, in accordance with our personal priorities? It hardly seems possible that we are. But if we are not, then the majority of economic theories, even the ones that look very precise with mathematical equations and indexes, are no more than mushy approximations.

Saturday, June 19, 2010

News Media Catches Government Job Cuts

The story of government job cuts has finally made it into the mainstream media now that official budget actions are taking place. “But now that they are into their third year of tax revenue declines, states have little choice but to shed workers.” Endangered species: Government worker.

From Kansas City Business Journal: Nixon will cut additional $300M, 250 jobs from Missouri budget. “The cuts are in addition to the $650 million in spending reductions and 1,000 job cuts Nixon and the General Assembly already have made . . .”

Las Animas County, Colorado, balanced its budget the hard way. From the Trinidad Times: County makes cuts in budget; Multiple county jobs eliminated.

It was the same story on a larger scale in Sacramento County, California. The Sacramento Bee: Budget ax to strike another 700-plus Sacramento County workers.

In New York State, “School library media specialists are being let go in droves in response to state budget cutbacks.” New York Teacher: School librarians feel pain of budget cuts.

Of course, the story is bigger in other countries. From WalesOnline, Tensions surface over the question of cuts.“The conference [of local councils] took place against a backdrop of thousands of threatened public sector job cuts in Wales and ahead of Chancellor George Osborne’s emergency budget on Tuesday, which is being awaited with trepidation.”

Large-scale teacher layoffs are likely across Alberta. From 660 News: “Tuesday night Calgary’s public school board announced it’s looking at letting go as many as 200 instructors this fall as part of efforts to offset a budget shortfall.” More money troubles for Calgary school boards. From the Calgary Herald: Alberta teachers bracing for larger class sizes as job cuts loom; 500 Alberta teachers may lose their jobs

Dow Jones Newswires, from London: UK Government Deficit Reduction Plan Could Mean 725,000 Job Cuts.

Friday, June 18, 2010

This Week in Bank Failures

With banks making less of a profit from loans, it is inevitable that they should increase their fees for routine services. This is likely to include account maintenance fees for routine checking accounts. Many of use are likely to pay a monthly fee just for the privilege of making deposits, writing checks, and paying with a debit card. The fee may be high enough to cover banks’ costs in providing those services.

There are indications, however, that Bank of America, and perhaps several other very large banks, are planning to charge maintenance fees that are several times the cost of providing basic services to consumers. It makes sense from the banks’ point of view, as they are continuing to take enormous losses on bad loans on commercial real estate, and need to make up the money somehow. But it may not make much sense from the customer’s point of view, and the likely result is an acceleration of the move-your-money movement, with consumers willing to to undertake some inconvenience in order to save themselves several hundred dollars a year in monthly fees. This, then, may be followed by mass branch closings at banks that have the highest operating costs.

This isn’t anything for Bank of America to worry about. It has managed its consumer offerings so poorly that it would barely notice if it shuttered its branches and its consumer operations entirely. But some other large banks that try to follow Bank of America’s lead might find themselves insolvent from the loss of deposits if customers depart too quickly.

Tonight’s one bank failure was Nevada Security Bank, with four locations in the Reno-Carson City area. Another office, in Sacramento, California, operated under the name Silverado Bank. The bank had $480 million in deposits and a similar amount in assets. Most of the bank’s loan portfolio was in real estate loans, many of them in the Sacramento area. The bank had been operating since 2001.

Umpqua Bank is taking over the deposits and purchasing the assets. Umpqua Bank has many outstanding real estate development loans in Nevada, and will now have its first branch locations in the state.

Thursday, June 17, 2010

Management vs. Habits at BP

The news that BP would be suspending its dividend to fund its oil spill liabilities came as a relief to stockholders, who sent the stock up 7 percent after the announcement. Partly this was because the suspension of dividends increases the company’s chances of survival, or of arriving at liquidation with some value left, but partly it was because the decision shows that there is, in fact, someone home at BP.

Paying a dividend becomes a habit for a company like BP, but corporate executives are not paid to rubber-stamp the same actions quarter after quarter. They’re paid to manage the company, which means making decisions to adapt to new circumstances. For BP to continue to pay the dividend now would be to show that it is oblivious to the crisis it faces. It would mean no one is charge and the company is carrying on only on momentum. It would be like a household that continues to pay the cable bill even though it is facing foreclosure.

Unfortunately, large corporations often fall short of the level of intelligence of the average household. I am sure Citigroup and Bank of America wish they could take back the dividends they paid in 2005 and 2006. They knew they were in trouble at that point, but kept paying dividends with the thought that if they acted like everything was normal, they could cover up their problems — and of course, that strategy worked for only a short time. And for BP, it was a near thing. It came within days of rubber-stamping one more dividend payment which, if it had been paid, would surely have been its last ever.

I have already explained why liquidation, as early as the courts will permit, is the best course of action for BP stockholders. For the United States, the best course of action is to undertake the research and investments that will create a stable energy footing for the country, so that it can approach energy-related decisions in an even-handed way. The decision to authorize deep-water oil wells before the technology existed to operate them safely was not exactly forced on the Bush administration, but the United States’ desperate trade imbalance, the result of the largest energy imports of any nation ever, weighed heavily on that decision.

This morning, it is hard to escape the irony of a fleet of petroleum-powered boats sent out to the Gulf of Mexico to do what they can to clean up the spilled oil. The story of oil chasing more oil owns us at this point. We need to discover something new that will give us a greater ability to respond.

Wednesday, June 16, 2010

Slowing Drug Violence — by Limiting Bank Deposits

Mexico’s new initiative to limit bank deposits of U.S. currency shows how difficult it is to single out criminal enterprises.

Under the rules, announced yesterday by Finance Minister Ernesto Cordero, bank deposits in U.S. dollars would be limited to $4,000 per month per household. The idea is to limit the flow of illegal drug money, and to limit banks’ ability to participate in money laundering.

Yet the same rules will also stifle the flow of U.S. tourism money into Mexico. Credit card transactions won’t be affected, but tourists may have some difficulty exchanging U.S. currency for Mexican currency or spending the U.S. currency directly. Inevitably, faced with a strict cash limit, some tourists will end up spending less freely.

Businesses that depend on U.S. customers may be forced to pay employees partly in cash — in U.S. currency. This will add further distortions to the flow of money in Mexico.

Yet the new rules may be necessary to limit the role of banks in funding drug cartels. Drug cartels are an especially serious problem in Mexico, where they, collectively, are better armed than the government and are involved in a hit-and-run campaign to weaken and overthrow the government. The violence associated with the drug business’s war on the government results in firearm deaths in every region of Mexico on a almost a daily basis.

Slowing the flow of money in the illegal drug business may force it to slow down its operations or reduce the size of its footprint in Mexico. That could give the government some breathing room in its efforts to restore law and order to the country.

Monday, June 14, 2010

A Counter-Trend: Paying Attention

One of the hidden trends of the past three centuries has been a movement away from attention. Paying attention to the work we do slows things down, so we strategize, specialize, delegate, automate, and plan, all with an eye toward getting work done faster with less effort and less attention.

The extent of this trend struck me over the weekend as I spent an hour reading about BP’s emergency response plan for its deep-water oil drilling in the Gulf of Mexico. I was not reading the plan itself, mind you, because that would be too much work. The plan document is said to be 150 pages long, tedious, technical, and ugly. Rather, I was reading summaries and impressions from people who had read the plan, and who knew enough about the oil business to know what it meant. In some cases, I may have been reading summaries by people who had not read the plan themselves, but knew enough of the subject to create an impression of the document from the comments of others who had taken the time to read it.

You see the pattern of delegation, specialization, and indirectness already, I hope. It is everywhere.

The BP plan had significant blank sections, sections on wildlife obviously copied from an earlier plan created for Alaska, and references to experts that were 10 or 20 years out of date, among various other shortcomings. In short, instead of spending $150,000 developing a real plan on how it would respond in the event of a disaster, an investment that would have made sense considering the magnitude and novelty of the operation it was planning, BP cobbled a plan together in a couple of weeks at a cost of perhaps $5,000.

The omissions and errors in the plan are glaring enough that it could have been routinely rejected by any civil servant who looked it over, even one who had no previous knowledge of oil operations. It is safe to assume, then, that it was not reviewed before being approved.

Again, the theme is getting things done with a minimum of attention. An emergency response plan was put together without any thought of what a real emergency would imply, and approved without any thought of what the result of an inability to respond in an emergency could mean.

But this trend away from attention is much bigger than the oil business. Half the lifestyle innovations of the past half century are geared toward paying less attention: answering machines, fast food, gas grills, wholesale clubs, mobile phones, search engines, Blogger. The objective of the whole time management field is to get you to pay less attention to everything you do so you can squeeze a little more work into your schedule. The most successful Internet companies are the ones that can sell to you without knowing who you are. Test prep programs are designed to let you prove your knowledge and skill after you put just a few hours of time into the field you are being tested in. A significant fraction of new product introductions promise to be quicker, easier, or more convenient than what came before.

The trend away from attention might seem as if it will continue forever, and in some ways, I suppose it must, but there are also signs of a counter-trend. Meditation, yoga, memory systems, soundproofing, and high-definition video are examples of changes that help people pay more attention. More than this, though, you have to ask what people end up paying attention to, after they manage to free up so much of the attention that would otherwise go to their work, studies, and friends. Perhaps emblematic of this, when I checked the news this morning, the first headline I came upon was “Brad Pitt Trims His Beard.” Much of what occupies people’s time and attention, in the end, is trivia and commercial manipulation.

There is an enormous advantage that comes to people who become more conscious about choosing what they pay attention to. This is most immediately obvious in business. BP, for example, will probably be liquidated to overcome the damage the ongoing disaster has done to its brand. Competitors that have been more careful about keeping track of the most important things will carry on.

Wherever there is a decisive economic advantage, a social trend will follow. I believe the broad long-term trend toward paying less and less attention to everything will end within the next 10 years, replaced by a new trend of people paying more attention to the most basic things in life.

Sunday, June 13, 2010

Record Decline in Arctic Sea Ice

The widespread Arctic sea ice of April, with sea ice extent barely below the long-term average, gave way to the fastest May melt ever recorded, with ice extent declining at a June-like pace. Now that June is here, the rapid rate of melting continues in almost a straight line on the graph. One reason is warm weather over most of the Arctic Ocean, 1 to 5 degrees above the average for May, according to NOAA. But another reason, more significant in terms of what may happen this summer, is unusually thin ice. By most indications, the ice on the Arctic is the thinnest it has ever been, but it is certainly thinner than it was before 2007.

If you’ve seen pictures of the ice in Greenland, it is hard to understand how thin the ice on the Arctic Ocean is. The area of the Arctic Ocean is several times that of Greenland, but it holds about 1/200 as much ice as there is in Greenland.

At the same time, there are factors that ought to be slowing down the ice melt. For example, weather has been relatively calm, with few storms to break up the ice.

I’ve been looking for any indication that the volcanic ash that fell across areas of the Arctic Ocean last month is accelerating ice melt, but there is nothing so far to indicate that. The ice along the Siberian coast where the heaviest ash probably fell is melting through in areas, but in a pattern that is not obviously different from the past three years.

One other marker I look for is a path of clear water north of Svalbard, previously a rare occurrence. From the satellite picture, the ice north of Svalbard is significantly broken up already, and it could open up with little warning.

Saturday, June 12, 2010

No Answers in Iran

A year after the sham elections in Iran, it is startling and sobering to see how far the country has declined. Iran has gone from being on the brink of functioning democracy to being an undisputed autocracy, where the government no longer makes a pretense of taking any direction from the people. No one in Iran trusts the government any longer, and people have become highly skilled at giving the appearance of cooperating with the government while doing the exact opposite behind closed doors. It is fair to say that the current regime will never get a second chance to hold a credible election. The organized crime groups affiliated with the central government may have declined in influence somewhat, but if so, it is only because of internal feuding and preemptive criminal campaigns that the central government is conducting on its own. The economy is in obvious decline, with unemployment continuing to trend higher, alongside indications that productivity is declining.

The nuclear power issue continues to be a dangerous distraction, one that the United Nations and United States are actively participating in. Meanwhile, there are far more immediate dangers in Iran that the world is ignoring.

Friday, June 11, 2010

This Week in Bank Failures

No one should imagine the United States is over the hump when it comes to bank failures. Various official counts and unofficial lists of problem banks were revised this week, and by anyone’s measure, it seems, the number of problem banks continues to grow.

There was a failure of a bank in Seattle that specialized in its connections to East Asia, but the problems of the bank were strictly local. Washington First International Bank, based in Seattle, took losses in ill-advised real estate schemes in coastal Washington, including loans of its own making and lending programs led by other banks.

California-based East West Bank paid a 0.5 percent premium for the $441 million in deposits and is also acquiring 96 percent of the assets.

Thursday, June 10, 2010

Ending the Corporate Card Subsidy

The current system of card transaction fees is not just a big mess — it is a hidden tax on consumers and a subsidy for the big corporations.

It isn’t something you’ll hear much about, but there is a back-room deal between the banks and the big corporations that allows the banks to take some of your money and pass it along to the corporations.

Whenever you buy anything and pay with a credit or debit card, the merchant you’re buying from doesn’t get all the money. The banks keep a share of it, typically about 2.5 percent, more than enough to cover their costs in processing the transaction.

Here’s the trick, though. The banks’ share of the transaction is different for different cardholders. Sometimes the bank pays a little bit more to the merchant, and sometimes it pays a little bit less.

And the bank doesn’t keep all the money it collects in transaction fees. It pays some of the money back to the cardholder, in a payment that might be called a rebate, though really it’s a kind of a kickback.

Now, guess which cardholders get the biggest kickbacks?

If you guessed the biggest, richest business enterprises in the world, you would be right. Rebates aren’t just gimmicks for corporate card accounts — they’re a serious amount of money. As one bank puts it in an advertisement for its corporate card, “Turn everyday corporate expenses into maximum corporate savings.”

That advertising phrase isn’t exactly accurate. It isn’t really just the corporate expenses that are being turned into “maximum corporate savings.” It is everyone’s expenses that are producing this effect.

That’s because banks don’t pay merchants as much for corporate card purchases as they do for any other card purchases. For corporate card purchases, the bank pays about 1 percent less, taking a fee from the merchant of about 3.5 percent instead of about 2.5 percent.

But the bank doesn’t necessarily keep that extra 1 percent for itself. The money goes directly to the big corporations in the form of rebates, or kickbacks, on their corporate card accounts.

What this means to you, if you don’t qualify for a corporate card, is that you’re paying extra.

Banks are paying out billions of dollars every day to big corporations, and to cover the cost of this, consumers have to pay a little bit more every time they buy anything. It’s not exactly a fair system, is it?

In a fair system, banks would charge the same transaction fees for all card transactions, regardless of who the cardholder is. They wouldn’t be using the card transaction fees to rob ordinary consumers in order to pay kickbacks to the richest business organizations in the world.

The good news, though, is that Congress may actually be doing something about this. The Senate version of the Financial Regulatory Reform Bill would put a damper on this kind of abuse within the banking industry. It’s not a big enough move to end it entirely, but it’s a step in the right direction. It remains to be seen whether a final bill will include this provision and what form the resulting regulations would take.

If the bill passes with this provision, though, it will help to establish the principle that banks cannot merely take whatever money they want just because they happen to be involved in a transaction. And it will help to bring an end to the use of card transaction fees as a hidden subsidy for big corporations and a hidden tax on everyone else.

Wednesday, June 9, 2010

Sleepy Times in Car Sales

I was expecting a summertime bounce in new car sales this year, but now I‘m not so sure.

My newfound doubt developed after I placed a telephone call to a local car dealer. This was not a sleepy little small-town car dealer, either, but one that has about 200 cars in stock. No one answered. I called back later and there was still no answer. On my fifth try, I finally got through. When I arrived at the dealership in the early afternoon, there was hardly anyone around.

A sales organization that can’t afford to answer the phone all day long is one that has given up hope of finding any customers at certain times of day. I have a hard time imagining a sales manager who would tell the staff, “Don’t even show up till 3:15, because the chance of a customer walking in during the workday is just about zip,” and who would then give the receptionist the morning off too, but maybe it has come to that.

Tuesday, June 8, 2010

What Apple’s $1 Billion in App Royalties Say About the Nature of Work

One of the smaller headlines yesterday was the report that Apple has passed $1 billion in royalties paid to iPhone app developers.

This represents a sea change in the business of software development. This is a business where, ten years ago, you needed millions of dollars in venture capital to have any hope of make it big. Some of the top books in the field at the time were the books that offered competing management theories for development teams of 5 to 20 engineers. The elite software development tools — mandatory if you were trying to make world-class software — cost thousands of dollars per programmer. And it was not just a matter of paying for the programming tools and the programmers. The word on the street was that you should have about five people in sales and marketing for every person working in development.

By contrast, iPhone apps are created using free software development tools. The tools are built on standard programming languages and open-source compilers. These compilers have become the unchallenged leaders in a crowded field of software development tools. If the number of iPhone apps is staggering, unprecedented in the history of computing, it is mostly because the development tools are stable enough that it doesn’t take a big team of developers, testers, and managers to get anything done.

Most iPhone apps are the work of individual programmers — individuals paying next to nothing for development tools and marketing. The cost structure is so low that it works out if the revenue is low too. If a traditional commercial software project made a profit of $1,000,000, it was a failure, and you knew at least a few layoff notices had to be on the way. If an iPhone app makes a profit of $10,000, that’s enough to pay the rent and throw a party.

And no one should imagine that this trend will stop at the iPhone, or the iPad, or the software development field. What other work could people do more easily, with a lower cost of entry, if better tools existed? And then, where could those tools come from? One thing is certain: the nature of work is changing.

Monday, June 7, 2010

More Part-Time and Short-Term Jobs

This could be a tough time for high school students to find a summer job. More than ever before, they’ll be competing with their parents and grandparents for whatever jobs are available this summer.

In the U.S. job market, the proportion of long-term full-time jobs is the lowest it has ever been. Only about two out of three workers who want a permanent full-time job have one. Others are working at temporary or part-time jobs, or are trying to start new business (which usually means freelancing), or are unemployed.

One of the hidden trends in the job market is the trend toward short-term jobs. In the past, many of the jobs categorized as temporary were expected to last two or three years, or as long as many workers stay at one job anyway. Temporary jobs now have a shorter life span, with few of the employers making plans beyond three months. Temporary work is a big deal in this spring’s employment statistics, with the decennial census accounting for virtually all of the growth in employment. Some observers think that short-term and part-time jobs are a long-term trend, and that within five years, less than half of workers will be able to get permanent full-time jobs.

My own history is proof that relying on a combination of short-term and freelance work doesn’t have to slow down a career, and indeed, this has long been the norm in some sectors, such as construction and entertainment. But people who have had their minds set on the stability of a permanent full-time job can find working at a series of short-term jobs unsettling, at least for the first three to five years. And the irregular nature of the income forces people to take a different approach to their finances. Paying off debts and saving 6 months of living expenses have to become higher spending priorities than dessert or cable TV.

In economic terms, the trend toward short-term jobs means more consumer deleveraging is on the way. You can add this effect to a long list of reasons why consumers aren’t prepared to lead an economic recovery.

Sunday, June 6, 2010

Shopping Information vs. the Supermarket

Yesterday I looked into the reasons why the financial supermarket concept failed, and why the world is moving away from that model now. Some of the same reasons explain the recent decline in the supermarket — and suggest that this decline could accelerate in the years to come.

The appeal of the supermarket used to be that a shopper would know a single place to get most routine purchases. But supermarkets have become so large, and categories so blurred, that merely knowing that something is in the supermarket no longer means you know where it is. And the supermarkets that haven’t grown large are missing lots of familiar everyday products.

Plenty of people still very much enjoy supermarket shopping. But it has come to rub many shoppers the wrong way. The shopping carts are too large, and the half-mile stroll around the aisles can end in frustration, when it turns out the store no longer sells a product that shoppers used to take for granted — yeast, perhaps, or frozen yogurt, or oatmeal cookies, or shaving cream that isn’t gooey.

This leads to the question, “Where do you find that product?” That is the scariest question consumers can be asking, from the supermarkets’ point of view, because when they get the answers, there isn’t much need for the supermarket any more.

Think about this way: you could drive all over town in the time it takes to walk around a modern supermarket with a shopping cart. The only thing that stops you is that you don’t know exactly where to go. But what it to stop the Internet, in another couple of years, from providing that information?

Imagine a mobile phone application that finds all the products you want to buy, then maps out your shopping trip and talks you through the whole process. To the consumer, this isn’t so different from the old experience of going around the supermarket, but to the supermarket, it changes everything. Supermarkets make their money from impulse purchases, and from the heavy foot traffic that leads to those purchases. Consumers who can find exactly what they want don’t make so many impulse purchases — and they especially won’t be making them at the supermarket.

Saturday, June 5, 2010

Why It’s Too Late to Save the Financial Supermarket

Those with a sense of history will remember that the idea of a financial supermarket was an essential part of the setup for the recent collapse of Wall Street. It’s one of the ironies of the current crisis, because the financial supermarket never got off the ground.

The dismantling of Citigroup is the best evidence that the financial supermarket concept didn’t work out. The people I’ve met at Citigroup are among the most astute and dedicated workers I’ve seen in the financial world. If they couldn’t get the financial supermarket concept to make a profit, there isn’t much of a chance that anyone else could do it.

The idea of a financial supermarket was supposed to be that a company that could offer a wide range of financial services could create more impulse purchases, the way a supermarket, and therefore, it would be more profitable. People who came in for an auto loan would buy health insurance and a retirement plan on whim, just because they happened to be in the office. Like fun. It turns out people never made their major financial decisions that way, and can’t be persuaded to start doing it now. I used a consumer example here, but businesses are even more particular about dividing up their financial services so that no one institution can hold them over a barrel later.

Citigroup was formed in a merger of Citibank and insurance company Travelers Group in 1998, and the idea all along was to create the ultimate financial supermarket. Intead, the trouble began almost immediately. The higher costs of operating the combined company forced both the bank and the insurance company to change the way they ran their businesses. That was when Citibank stopped being the friendly giant of banking and started to look for more aggressive ways to squeeze revenue out of its business customers and cardholders. It was also the last time Travelers’ insurance rates were really competitive. Citigroup was forced to sell off its insurance units in 2002 and 2005, but continues to sell insurance, apparently at a loss. The two resulting Travelers units have all but disappeared from the public eye.

But it is the large scale of Citigroup subsequent to the initial merger that has put it at such a competitive disadvantage. Citi has taken some losses from subprime mortgages, mortgage-backed securities, and commercial real estate loans, along with the rest of the industry, but its fundamental problem is its weight. It is too large to manage effectively, which means that problems can become extremely costly before senior managers learn of them and are able to react.

Citigroup may ultimately survive, though at this point, it does not appear to be shrinking fast enough to ever again be able to compete with other large banks or return to operating profits (as distinct from stock-trading profits). And few of the other giant banks in the United States or Europe are doing much better.

If you want more proof that the financial supermarket will never happen, just read between the lines in the recent story by Heather Landry of American Banker, Financial “Supermarket” Idea Re-Emerges, in Humbler Form. The reason it has a second chance, she says, is:

With the quest for new sources of earnings getting all the more urgent, banks are still looking for ways to squeeze more business out of every customer they can.

Seriously? Yes, if you read on through the rest of the article, that’s the whole rationale, with quotes from analysts to back it up. The quotes from actual banking executives demur, however. The way they see it, banks’ needs to squeeze their customers, however urgent it may have become, is hardly a reason to believe that a failed business model will suddenly start working now.

And there is every reason to think that the financial supermarket model is the completely wrong direction right now. Consider that the biggest trend on the Internet this year is people’s worry that Facebook knows too much about them. Then, consider that people trust their insurance companies and banks even less than they trust Facebook. By next year, people will be asking, “Do you really want any one company to know so much about your financial habits?” They will worry about this for a couple of years, and then there will be a sea change as consumers and business managers look for ways to be more financially anonymous.

At the same time, the Internet is providing people, consumers especially, with better information about their financial options. Sick of doing business with the megabanks? Late last year, a web site sprang up to tell you how to take all your banking business elsewhere. Think you’re paying too much in service fees? You know longer have to spend the day making phone calls to find out where you can pay less. This information may be scattershot now, but within a couple of years, it will form into a coherent picture of financial customer options and alternatives. Banks that, for the last 25 years, have been pushing their customers to think of banking as a commodity may come to regret it when customers can easily get together and compare notes.

The truth is that there was never any customer benefit in the financial supermarket concept — it was always all about upsell. If you’re going to be paying thousands of dollars in interest or banking fees, it really isn’t any trouble to go visit the right business to provide those services (or its web site). You’re a victim of the system if you make that kind of decision on a whim, or out of a sense of impatience, the way people might buy a bag of potato chips in a supermarket. And in the future, the suckers will not be so easy to find. Upsell depends on customers who are confused or poorly informed. Customers who know exactly where they can get a better deal won’t be so willing to sit still and discuss the other things you wish you could sell them.

The early attempts at the financial supermarket model sank under their own weight. And current trends in consumer information suggest that it is too late for the banking industry to try it again.

Friday, June 4, 2010

This Week in Bank Failures

So far, there is no indication that the financial reform bill currently in Congress will do anything about banks that are considered too big to fail. The bill would seem to make future bailouts more difficult, but would seem to encourage the largest banks to grow to as much twice their current size. Richard Fisher, a Fed president, commented this week on the market distortions that result when any business is so large that the government feels compelled to help it out when it gets in trouble, and urged a limit on bank size that would be smaller than the five largest banks. Economist Nouriel Roubini warned that the largest banks in the United States and Europe have now become “too big to save” — they are so large that there is not enough government money to keep them afloat if they falter badly. Roubini believes a $2 trillion business of any kind is too large for any board of directors and management team to keep track of, virtually ensuring that further financial mishaps will come to light only after it is already too late for the bank to adjust its strategy and avoid disaster.

CitiFinancial is shrinking by more than 10 percent and will be taking on a new name before the end of the year, according to a Citigroup announcement this week. Citigroup hopes to sell or spin off the lending division, and is restructuring it to make it more attractive to possible buyers or investors.

Prudential PLC couldn’t round up the votes to approve the purchase of AIA from AIG, so that deal is off. Now AIG will probably plan a stock offering to sell AIA to the public early next year. The stock offering might raise only $10–15 billion, though, less than half of the amount that AIG was hoping to get from Prudential. In light of the news, some observers are now saying there is no reason to hope that AIG will be able to pay back the money it got from the U.S. Treasury.

Ireland has committed to keeping Anglo Irish Bank going for at least the rest of this year. This is costing the government about $27 billion, but banking officials think it would have cost more than $60 billion to shut the bank down when it became insolvent last year. The bank still may be wound down next year.

One of the largest banks in Nebraska failed tonight. TierOne Bank had 69 locations, most in Nebraska, with a few in Kansas and Iowa. It had $2.2 billion in deposits and $2.8 billion in assets. It opened in 1907 and took on the TierOne name in 2002, only to see its fortunes turn for the worse just three years later. Its problems snowballed this year. A series of deals to sell the bank, or large parts of it, fell through — the last, a deal to sell nearly half the bank’s branch locations and deposits, rejected in April because regulators believed it would leave the bank insolvent. On April 23, the bank’s auditor resigned, complaining that the bank was withholding information about loan losses. This prevented the bank from filing its already delayed financial statements and led to at least 7 investor lawsuits in May and, at the end of the month, a delisting action from Nasdaq. At the same time, it missed a regulatory deadline for raising new capital.

Some in the news media seem to believe, mistakenly, that all bank problems stem from subprime mortgages. TierOne appears to be the rare case where that is actually true. The bank specialized in home mortgages in a region that has been hit hard by defaults on subprime mortgages. In addition, it operated loan offices in other states, notably including Nevada, Arizona, and Florida. Loans originating in these offices had unusually high foreclosure rates, blamed on lapses in underwriting and management supervision. The loan offices were closed only in 2008 after the bank had begun to report a series of quarterly losses. The bank has also had problems with its loans to builders, but the losses on construction loans appear to be fewer and smaller than those seen at other banks.

Regional bank Great Western Bank, based in South Dakota and already one of the largest banks operating in Nebraska, paid a 1.5 percent premium for the deposits and is also purchasing the assets.

These small bank failures also occurred tonight:

  • First National Bank, with its one office on Main Street in Rosedale, Mississippi, along the Mississippi River. Deposits have been transferred to local bank Jefferson Bank, which is also purchasing the assets.
  • Arcola Homestead Savings Bank, located in Arcola, Illinois. Demand deposits (checking account balances) are being placed temporarily at the First Mid-Illinois Bank & Trust office 6 blocks away. Depositors who want to get these deposits quickly can go there in person next week to claim the deposits. Otherwise, the FDIC will send checks to depositors. The failed bank had been operating since 1883. It lost $3.3 million last year, leaving it in a negative capital position. It reported another loss in the first quarter of this year, and at that point had $1 million more in deposits than it had in assets.

Thursday, June 3, 2010

Crowdsourcing in Action

BBC News this afternoon looked at the public suggestions for sealing the BP oil well as an example of crowdsourcing. It includes a quote from Crowdsourcing author Jeff Howe on why crowdsourcing is sometimes essential:

But one time out of a hundred the problem seems intractable. Crowdsourcing has revealed — in those intractable cases — you need someone who is not trained. All the steps the experts have thought to do haven't worked. You need the unexpected.

Wednesday, June 2, 2010

All-You-Can-Eat is More Now

I am seeing signs of financial stress related to food costs at all-you-can-eat buffets. There have been some price increases, but mostly restaurants are changing the physical arrangement of the buffet or the signs around it to try to find ways to get people to eat a little less.

It is not that the cost of food has gone up. Prices for most food ingredients are less than at the 2007-2008 peak. Rather, it is that customers are eating more. This is apparently the result of financial pressure on consumers from the malaise of the job market. At the buffet, what this means is that more people arrive hungry — and this is not merely the social hunger of being emotionally ready to eat a full meal, but the kind of hunger that economists talk about, in which people are feeling the physical effects of eating less than usual for a couple of days. People may also be affected by the fear of a shortage of food in the near future well before the shortage actually materializes. Given the chance to eat as much as they want, hungry people eat more at a meal, as much as 25 percent more.

If I am seeing this in the prosperous suburbs of southeastern Pennsylvania, seemingly unaffected by the recession, I have to imagine the effect is larger in other areas. It is a tricky problem for the buffets to address. With revenue already down because of the recession, they don’t want to lose any more customers — the hungriest customers are still more profitable than an empty table. This means they don’t want to raise prices or make obvious cutbacks or compromises. Nevertheless, they may need to find ways to spend less on the food they are providing.

Tuesday, June 1, 2010

Lid Trouble

I stopped by Starbucks over the weekend, and they were having trouble with their new lids. Unlike the old lids, which would snap in place and hold tight, the new lids come loose at random times, potentially spilling hot and cold drinks on people. It makes coffee more of a high-risk experience than people were used to.

I am sure Starbucks will get its lid problem sorted out quickly, but still: If they are going to change the shape of the lid, wouldn’t they test the new design to make sure it works satisfactorily before they introduce it? If the objective was to save money, hasn’t Starbucks lost more money in spilled coffee than it might have saved in the manufacture of the new lids?

It made me think, of course, of the troubles BP is having with its out-of-control oil well. The problem there too is a lid that won’t fit. The lid, actually a valve, apparently wasn’t tried to see how well it would work. Before the explosion, it was said to be partly functional, but an equally plausible explanation after the fact is that it wasn’t functioning at all. If BP thought it was saving money, it was being lid wise and barrel foolish. It has lost far more money in spilled oil alone.