Monday, December 31, 2012

Friday, December 28, 2012

This Week in Bank Failures

In 2012 U.S. bank failures slowed down and made a decided move to the eastern half of the country. Most of this year’s 51 bank failures occurred in Georgia, Florida, Illinois, Minnesota, Missouri, and Tennessee. Even in these states bank failures came at a slower pace than in prior years. But by contrast, there was only one bank failure west of the Rockies this year. Aside from Missouri, bank failures in the western half of the United States have virtually come to a stop.

The leading cause of bank failure in 2012 continued to be commercial real estate development projects on the edges of metro areas. Despite all the talk about banking crime, it wasn’t more of a factor in bank failures than in the three previous years.

Changes are in store for 2013. Most notably, emergency deposit insurance, after being extended several times, is finally expiring now. The main implication of this is that payroll accounts will no longer be insured. This usually won’t affect workers who get paid by direct deposit, but those who take paychecks to the bank on Friday might find that the checks have bounced after the bank they were drawn on fails on a Friday night. The loss ultimately falls on the employer, and it is a risk that could lead employers to move payroll accounts to other banks, or even multiple banks, to get the maximum benefit of deposit insurance. If employers get worried about the financial condition of a bank and pull their payroll money out, the deposit flight would tend to accelerate the failure of that bank. Employers who worried could move paychecks from Thursday night to Wednesday or Tuesday to reduce the amount lost in bank failures, which usually occur on Friday night, or they might encourage more employees to sign up for direct deposit.

Also as 2013 starts, we can keep an eye on the previously scheduled federal budget cuts. These translate into 2 million direct job losses, similar in scale to federal government layoffs in 1981 that led to a prolonged recession. Among other adjustments, the Treasury may no longer be guaranteeing some bonds for local governments and institutions participating in federal programs. This change, to the extent that it takes place, will affect the creditworthiness of some borrowers, weakening the risked-based capital position of many banks. All this could change if Congress acts, but those expecting the House to agree on a budget plan have been disappointed before.

Thursday, December 27, 2012

Synthesized Voices Join the Dialect Mix

Before this year, most mechanical voices were constructed from recordings of a person speaking, with sentences formed as combinations of recorded phrases and names. Now phonetically synthesized voices are becoming more common. These voices are not recordings of people, but are constructed digitally to sound like a person speaking. They are so convincing, you might not notice that you are listening to a synthesized voice rather than one assembled from recordings.

Voice designers have to choose a dialect for each voice they synthesize, though they likely wish they didn’t have to. A dialect serves mainly to help establish the individual identity of a person, but mechanical voices have identity enough just by virtue of being mechanical in rhythm. The purpose of a mechanical voice is to convey information, so voice designers try for a version of a broadcasting dialect, meant to be clear and understandable to the broadest possible audience, including non-native speakers of the language.

The synthesized version of a broadcasting dialect is a dialect nonetheless, and just as people influence each others’ dialects, people can’t help being influenced by synthesized dialects (and vice versa — voice designers are inevitably influenced by the human dialects around them). People tend to pronounce words consistent with the way they have heard them, and now, synthesized pronunciations are part of that mix. This, I am guessing, will tend to reduce dialectical variations. It especially could help standardize specific words that are correctly pronounced in several different ways. This effect is similar to the way spell-checking dictionaries have standardized the spelling of some words that before 2002 had multiple spellings. I have a feeling, though, that the influence of synthesized dialects will not be so simple as this.

This post originally appeared in Rick Aster’s World.

Wednesday, December 26, 2012

Dodging Disaster

Dodging disaster was one of the recurring themes of 2012. This was nowhere more apparent than in New Orleans. A major hurricane with the potential to flatten half the city came by, but passed by downstream, missing New Orleans by five miles. Something similar could be said two months later in New York City, which took major damage in the aftermath of Hurricane Sandy, but it could have been much worse if the hurricane had turned toward land four hours later. Loss of life in New Jersey could have been much worse but for a well-coordinated evacuation. When this storm passed by my own house, there were frightening winds, but the trees that might have damaged the house had they fallen had been cut down three months earlier.

Dry weather in the middle of North America cut corn production by about one fifth, but that came within a couple of thunderstorms of wiping out twice as much of the crop and creating spot food shortages. In all, more than half of U.S. counties were official disaster areas at some point during the year, something that had never happened before.

And that was just the weather. We started out the year worried about whether Iran might blow up the Persian Gulf. That didn’t come to pass, and throughout the year, there were more reasons to thank our lucky stars for political disasters in the making that either passed by harmlessly or stayed more contained than seemed possible.

On top of all that, of course, there was the Hollywood prediction that the world would end in a fiery planetary collision on December 21. That was the last date in an ancient Mayan calendar, and though there were credible prophecies of lasting changes occurring around this time, the end of the world was not one of them. It was just something for people to worry about, and to an extent, people did.

Obviously, dodging disasters one after another is not a healthy long-term strategy. It is a sign of a weak foundation. When we put our faith in low-lying roads, glitchy mail servers, uninspected food supplies, and everything else that is just good enough to stand up, we can only expect that things have to go wrong, and often. It is a kind of wardrobe malfunction: too much of the fancy hats and not enough of the sturdy shoes.

Changing that, though, is easier said than done, and in the meantime, the more times we can steer clear of the damage, the more easily we may get to the point where we don’t have to be so frequently concerned about unexpected events.

Monday, December 24, 2012

Shoppers Spending Less Time Browsing

As the 2012 Christmas shopping season winds down, my general impression is that sales were good, up slightly from last year roughly along the lines predicted at the beginning of the season. Traffic, however, was distinctly down from past years, particularly later in the weekend. Also, it seemed to me that fewer people were waiting in line at the post office to mail presents.

If traffic was down while sales were up, it suggests that shoppers are making up their minds more quickly, or they are deciding on purchases before they arrive at the store. This makes sense in an era of search engines and the dozens of other Internet shopping tools. This slight trend may presage a larger shift in the way people shop, with the very time-intensive process of in-store browsing becoming less important.

One example of this comes from my local supermarket. Its web site allows you to pick a store, and then it will tell you the approximate shelf location of product you are searching for. This feature alone can reduce the time of a shopping trip from 25 minutes to 15. The time saving results in a reduction in traffic, but there is no corresponding reduction in sales.

Friday, December 21, 2012

This Week in Bank Failures

There was talk about the “death of Wall Street” when the news came out that the New York Stock Exchange (NYSE) was being bought by ICE. The indignity of the defining Wall Street company being bought out by a relatively new competitor from out of town is compounded by the fact that the stock exchange itself is considered a secondary part of the acquisition, which has more to do with making a quick buck on interest rate derivatives.

It is not just the sale of the stock exchange, along with the almost simultaneous sale of Knight Capital, financially hobbled by a software glitch, that diminished Wall Street and the world of high finance. If last week set new records in banking crime with penalties and indictments, the news this week was even bigger. Every day brought new bombshells, too many to run through them all, but I must mention UBS admitting guilt in falsifying its Libor reports after an investigation that showed a remarkable degree of coordination among regulators and prosecutors in at least four countries. The $1.5 billion in penalties is reason enough to mention the case, but what had Wall Street buzzing was the scale of the documentary evidence. Thousands of internal messages referred specifically to falsifying the Libor reports, and some mentioned improper payments that would appear to meet the legal definition of bribery. The succession of documents makes clear that Libor fraud was essentially a daily occurrence at UBS and deeply ingrained in the company culture.

The wave of legal trouble is most evident in banking in the United States but can also be seen in other countries, such as the former bank executive hauled into court in Ireland, and in other industries, such as the new facts and rumors about Wal-Mart’s bribery practices in Mexico. The wave of indictments can hardly be described as a crackdown, though. Bank regulation is nearly as lax as ever, and prosecutors are still highly reluctant to do anything that might impede a successful large business. It is more that much of the corporate world lost its legal and moral bearings when the global recession arrived about five years ago, to the point where authorities were forced to act.

When the story of the death of Wall Street is written, history will not trace it back to the events of this week, but to a culture of corruption that slowly began to take over the world of finance in the 1980s. It picked up steam in 2001 with the hands-off attitude of the Justice Department toward big business under the Bush and Obama administrations, and unless that policy changes, the wave of corruption will be checked only by the eventual financial undoing of the companies where it has taken root.

Thursday, December 20, 2012

Lessons from the New Instagram

The decisiveness of the mass reaction to the changes at Instagram has puzzled more than a few people. How can anyone get excited by a terms-of-service change? some ask. For others, the question is, Doesn’t the company have a right to make money somehow? The discussion has revealed deep splits between people in assumptions about the way Instagram works, and these differing points of view may also hold lessons for the Internet and business in more general terms.

First, it is clear that some people see Instagram as an activity, almost like an evening at a bar. Viewed this way, the photos people post are mere artifacts, like the napkins at the bar. In this view, if there is any work or creativity embodied in the online photos, it is there by accident. Others, though, see Instagram primarily as content. That is, for them, the photos come first, and the fact that there is a social structure of people looking at them is secondary. In this view, some photos are much more important and valuable than others. Creative people, such as photographers, musicians, and authors, seem to fall almost entirely in the second group. Amid their protests there is an element of shock that the company hosting their creative work sees it as being devoid of both creativity and work.

The second major split in perspective probably falls along the same lines. There are some who see Instagram as a freebie, a free service Instagram provides to its users, who pay nothing in return. In this view, there has to be a way that the users can provide some value to the company. Others see Instagram as an exchange, with some people providing the platform that makes it all work while others provide the entertainment value that makes it all interesting. In this view, Instagram would be nothing if it were an empty window with no photos to show, or even if it merely showed a random assortment of photos. It depends utterly, then, on the contributors who provide the relatively few highly interesting photos that give users a favorable impression of the site, and it ought to have a strategy for retaining and encouraging the users who contribute these photos.

It is hardly new or shocking that media people have little respect for content. Radio stations, after all, have never cared what records they play. If all their records disappeared, they would get different ones next week, and no one (they imagine) would notice the difference. It is the same with television networks and programs, cinemas and movies, bookstores and books. If people thought Instagram was different, they might stop to consider that it was originally created by computer programmers rather than photographers. It has always been about the medium, not the message.

It is the people who are trying to persuade the old Instagram’s users not to be shocked by the new Instagram who are the most clueless. It is a human instinct to avoid being exploited, almost the same as the instinct that tells us to get out of the way of a falling tree. People who see themselves as the targets of thoughtless exploitation run first and ask questions later. Telling people in this state to calm down and allow themselves to be exploited, which is the way this advice comes across, goes way beyond missing the point. It may be logical advice within a certain narrow point of view, but it fails to show compassion or common sense.

If there is a business lesson in all this, it is a lesson in branding. If a business makes a change that is shocking to its core constituency, that means it had brand assets it didn’t realize it had. Unfortunately, this information comes only after the value of the brand has already been liquidated. By then it is too late to be of any use.

Wednesday, December 19, 2012

Instagram’s New Moral Dilemma

If you went by the online comments, you would think Instagram had died. It didn’t, but the photo-sharing site’s announcement that it would start selling users’ photographs for use in advertisements next month was almost like a death notice. This change met with a decisive reaction from everyone I talked to who had an account with the service. They would not be posting any more photos on Instagram. They would be deleting their accounts before the changes went into effect.

It was unanimous. There wasn’t anyone who said, “You know what, I don’t care if that photo of my baby niece’s toes ends up on a billboard for a resort.” No matter who you were taking photos of, it didn’t seem proper to subject them to that kind of risk, however theoretical.

This doesn’t mean that Instagram is about to lose all its users, any more than AOL did when it floated the idea of charging senders 2¢ per message to deliver email reliably. AOL still exists, and there isn’t anything to say that Instagram will go away anytime soon. The people I talk to are pretty aware, tech-savvy, creative, and active online. Most Instagram users, surely, are more passive. It would be a surprise if more than 10 percent of Instagram’s users actually canceled their accounts.

Still, the number of canceled accounts is already alarming in business terms — large enough that by last night Instagram started to walk back its plans. Its reassurances, though, were perhaps too late and too vague to matter to its most active customers. I didn’t heard any of my friends saying, “Oops, false alarm.”

It might be losing only a small fraction of its users, but that doesn’t mean Instagram is going to be okay. The people who care what happens to the photos they take are the same people who care to take interesting photos. With them out of the picture, Instagram loses maybe 80 percent of its interesting photos — or in other words, it is about to get as interesting as a photo album from a family reunion.

Some people expressed a sense of unfairness about the new policy: how can a huge, faceless corporation take your photos and sell them without even telling you? But it is the new need for self-censorship that is the larger issue. Before you can post a photo on the new Instagram, you have to ask yourself: how would everyone feel if this photo were to show up completely out of context somewhere publicly prominent at any point in the indefinite future? That’s a hard question to answer, and that’s why people are now finding it hard to post photos on Instagram.

The easy answer, in fact, is to copy off all the photos and delete the account. A Wired story says that process takes only a few minutes — less time than it takes to sort out the moral dilemmas of even a single photo. So if a few million people have canceled their Instagram accounts this week, it isn’t really a boycott. It’s more the easy way around a difficult moral question that people don’t have time to address.

Tuesday, December 18, 2012

HTML 5, a Step Closer

HTML 5, the next big web standard, has been declared feature complete. This means there is a limited amount of work remaining before HTML 5 is an officially recommended standard.

We all have already been using features of HTML 5 for three years on sites like YouTube and in mobile versions of web sites, so it is easy to forget that HTML 5 has only been a work in progress all this time. It has been slow to arrive on purpose, the committee wanting to allow plenty of time to discover flaws and unintended consequences in the new web page features before committing to a lasting standard. This is not the usual approach to publishing a standard — usually a standard is published before it is ready, with obvious flaws that have to be corrected after the fact — but perhaps it is the right approach for this situation. There is no great urgency in replacing the latest two HTML standards, HTML 4 and XHTML 1.1, both of which work nicely. It makes sense, then, to take the time to make sure that HTML 5 really is a major step forward.

The development of HTML 5 has been an orderly process. It was early in 2010 that the work of defining the elements of HTML 5 was starting to wind down, and it appeared then that HTML 5 would go final around the middle of 2013. That was when I started to use HTML 5 in my own work. I adopted the pending standard knowing there was a risk that I would have to redo some of my work if the definitions changed along the way. Now there is hardly any risk in adopting HTML 5, and it will probably be used in most redesigns going forward, so that by the time the standard is formally published, it will already have been adopted by a plurality of major web sites.

Monday, December 17, 2012

At Retail, Don’t Shoot the Messenger

“Everyone I know in retail is feeling stressed out.” That’s the assessment of one retail worker I know, and it fits with everything else I have heard locally. It is not that business is frightfully slow — in total so far, retail foot traffic seems to be slightly stronger than last year — but this season’s promotions and initiatives have not been going well, accountants and managers are pushing for more, and the workers on the retail floor can push the customers only so far. For their part, customers simply lack the buying power that retail strategists had planned on for this season. You can hardly blame the customers, but sooner or later it puts everyone in retail in the stressful position encapsulated in the phrase “Don’t shoot the messenger.”

There is more at stake, it seems, this year. Best Buy in particular is facing a hostile takeover, or at least it must seem so to the electronics chain’s employees. If the deal goes through, the new owner, who is out of touch with the current marketplace, could easily run the whole chain into the ground forcing a January 2014 liquidation. That scenario or some other upheaval is likely unless the customers come through this season, yet with the chain’s financial squeeze, product selection has been dialed back aggressively, and customer response has been understandably tepid.

Early this weekend, I saw the kind of heavy turnout you would hope for in the mid-December weekend, but it did not last long. Sunset came on Saturday, and by 5:00 I was asking, “Where did everybody go?” On Sunday, traffic at retail wasn’t much. This early-weekend pattern is something I observed during the last two Christmas seasons. The early weekend makes sense if you picture people shopping with debit cards and cash. When the paychecks come in, they can go shopping. When the money runs out, they must go home.

Retailers should not blame themselves. No amount of glitz and star power can persuade cash-limited consumers to borrow money to finance the retail sector’s next expansion plans. That spending will arrive only when consumer income rises and consumer debt falls — only when the deleveraging is done and the national economy is righted. The level of stress at retail this season tells you that that will come too late to save some of the retail operations that have been struggling this year.

Friday, December 14, 2012

This Week in Bank Failures

As 2012 winds down, it may be summed up as a year of larger changes in banking than the preceding years. Occupy Wall Street, Move Your Money, and Bank Transfer Day might have persuaded a few banking customers of the need to change their approach to banking in 2011, but 2012 was the year that saw the beginning of a large-scale shift in opinions and preferences.

That shift continued this week as the phrase “too big to jail” was invoked in describing HSBC’s role in financing international drug-running and terrorist groups — and that was just part of the troubling conduct covered by a $2 billion settlement with U.S. prosecutors and regulators. As part of that deal, bonuses for some of the bank’s executives will be delayed by up to five years — but there will be no criminal charges for the bank or any of its employees. Prosecutors argued in court that a criminal prosecution of the bank could lead to the collapse of the banking system; therefore, they said, such a prosecution could not be undertaken. It is almost the identical argument that prevented the prosecution of pirates ten centuries ago (that was when pirates were economically more important than they are now). The seedy side of the government exposed in this deal, and others like it this year, has not escaped the attention of the public, or of The New York Times, which wrote:

But this case is the opposite of an anomaly. That the most powerful actors should be immunized from the rule of law — not merely treated better, but fully immunized — is a constant, widely affirmed precept in US justice.

The HSBC deal is widely viewed as having been the subject of an agreement between U.S. and U.K. authorities. In this light, it has been described as a new kind of international bailout, rescuing a business by protecting it from the financial burden of the penalty of law.

And HSBC was hardly alone in the banking crime headlines this week.

  • Court papers revealed that Bank of America’s mortgage repurchasing is being investigated by the SEC. The bank this week filed a countersuit against an insurance company that guaranteed some of Bank of America’s fraudulent mortgages. The insurance company had already asked a court to force the bank to honor the terms of its insurance contracts.
  • Deutsche Bank, previously thought to be mostly above the fray, was dragged down into it this week as five employees were arrested, and four held in jail, in connection with what investigators believe is a web of tax evasion, money laundering, and destruction of records in connection with the carbon trade. The bank has already revised and refiled its 2009 income tax statement as a result of the problems with these transactions, and it may face a further penalty for the delay in correcting its tax report. Prosecutors have not said much, but the case appears to center around ill-formed or fabricated carbon permit transactions or related derivatives.
  • UBS is said to be prepared to enter guilty pleas and pay penalties around $1 billion for its part in falsifying the Libor base rate. The bank has been under regulatory scrutiny in the United Kingdom and United States along with its home base in Switzerland, and several former employees have been arrested.
  • Japan’s largest bank, Mitsubishi UFJ Financial Group, announced a settlement with U.S. authorities over transactions it conducted in 2006 and 2007 for countries blacklisted by the United States. Some of those transactions took place in part in the United States and ran afoul of U.S. trade restrictions.
  • Standard Chartered Bank settled money-laundering charges in much the way that reports from last week had indicated.

It is not just banks’ alliances with criminal organizations that hurt the industry’s reputation. This year will also be remembered as the year when student loan debt began to overshadow credit card debt, and what more profound way could you highlight the way banks seem to prey on the most vulnerable people than by thinking of the 17- or 18-year-old who took out a student loan in 2012 that may not be repaid until 2052?

The one area where banks in general have made progress this year is in becoming less intrusive when it comes to routine transactions. You don’t stop to think of how this represents a step forward when a bank shortens its contract language from 40 pages to 28, or keeps you waiting for a gasoline-pump card approval for three seconds instead of five, but it is this kind of scaled-down obstacle that moves banks along the continuum from “necessary evil” status toward where they would prefer to be, a necessary part of the background of life. Still, it seems it will be a long time before people think of the banks they deal with with the kind of free-wheeling pride that the phrase “money in the bank” used to imply.

There was one bank failure tonight, surely the last of 2012. State banking regulators closed Community Bank of the Ozarks, which had $42 million in deposits and two locations in the southwestern part of Missouri. Bank of Sullivan is taking over the deposits and purchasing the assets.

Thursday, December 13, 2012

2012: Warmer Than Ever

In late winter the weather was so warm it was called Summer in March. When the actual summer came around, it was one for the record books. Now that the end of the year is rolling around, it is no surprise that 2012 will rank as the warmest calendar year ever for the contiguous United States (along with various other geographical zones).

It is not that the entire year has been warm, but it is warm again now, with November-like weather in the middle of December. Not far away in Greenland, above-freezing temperatures in December are another sign of a shifting climate. Realistically, the climate will change almost detectably from year to year for the next two generations before human patterns of activity have a chance to change enough to permit climate to settle into a new, relatively stable pattern.

Wednesday, December 12, 2012

Choice, Peace, Coherence on 12/12/12

Today is the “12/12/12” date that people have been talking about for several years. The form of the number, if you look just at the digits, could symbolize the kind of pondering that goes into a decision between one choice and another. The the alternation between 1 and 2 could be a way to highlight the comparison that goes into a decision.

If today is a day to think about decisions, many have taken today as a day to focus on the most important decision of our time, between violence and peace. Peace comes not merely from a reluctance to clash, as some suppose, but also from a kind of clarity of thought often described as coherence. This is sometimes also referred to as harmony. If you tune in to the chatter surrounding 12/12/12, you will come upon mentions of all these words. Look deep enough and you will see that they are all pointing toward the same thing.

Tuesday, December 11, 2012

It Pays to Consider Your Options

A study finding that gay people do better than average in financial matters has had some people wondering how that could be. The lesson certainly is not that it is better to be gay, and the results didn’t correlate to number of children or other obvious household metrics that might be used as an explanation.

My guess is that what this result tells us is that it pays to consider your options, that is, to decide what kind of person you want to be and where you think you will fit in. People who do this are likely to be better off than those who just follow the crowd. In a culture that points everyone in the same direction, it takes a degree of personal initiative and introspection to decide on something different for yourself. Entrepreneurial stories often tell us that the kind of self-awareness that leads to personal change can also lead to success in business, so it makes sense that it might also lead to financial success in more general terms.

Monday, December 10, 2012

Apple’s Plans for U.S. Manufacturing

Apple is saying it will build some of its future computers in the United States. To people who only know the recent history of Apple and the computer business, this might seem a radical new innovation. In fact, though, Apple’s products were predominantly made in the United States until about a decade ago, and trends suggest that U.S. manufacturing will become important again in the future. China might be dominant in high-volume high-tech manufacturing right now, but economists are saying that wage trends and transportation cost trends will probably return an enormous amount of manufacturing work to North America and Europe within the next decade. Apple has a history of getting ahead of trends that it sees as an advantage to its products and operations, so it shouldn’t be a surprise if Apple is ahead of the pack on this trend too. Given the importance of transportation expenses, it makes sense that the new U.S. factories would start with the larger and heavier products that are sold in the United States, that is, with computers and video displays rather than iPods.

Sunday, December 9, 2012

The Exact Same Christmas Tree

Imagine if every house had the exact same cut Christmas tree.

That’s the dream, apparently, of some Christmas tree growers and sellers. I’ve seen Christmas tree lots where all the trees are essentially the same — not just the same variety and age, but with no discernible variation in height or weight either, and of course, all offered at the same price. This seems to be a trend of the last twenty years or so. The advantage to the retailer is supposed to be that the more uniform trees are easier to sell. As a customer, you will buy the very next tree that comes off the assembly line or you won’t buy at all — a quick decision that won’t waste the retailer’s time. Those who insist on the tradition of picking a tree can pore through a row of identical trees until a trick of the light makes them prefer one over the others, again, a relatively quick process.

The savings in retail labor, though, results in a loss in value for the consumer. The experience of picking a Christmas tree is part of the experience of the Christmas tree, and when that is taken away, some of the iconic value of the tree is lost. More fundamentally, though, a Christmas tree is a decoration, to be placed in rooms of various sizes and styles, and therefore, the one-size-fits-all approach results in trees that fit poorly in the rooms where they are placed.

The most vexing problem I hear with Christmas trees is the difficulty in finding one that is small enough. This is a particularly ironic problem for the growers, as it is easier to grow a small tree than a large one. Growers have worked so hard to efficiently deliver a tree that reaches the ceiling and towers over the largest suburban living room that they have failed to deliver the smaller trees that people with smaller rooms (or shorter arms or a smaller car) are likely to need. The suggested work-around of removing the bottom branches and cutting off the bottom of the trunk is not only inefficient but awkward and an unwelcome chore. There is a demand for smaller trees, and it is a market segment that nearly half of Christmas tree sellers are simply brushing off.

Friday, December 7, 2012

This Week in Bank Failures

If it seems that high finance and scandal go hand in hand, this is not by accident. If you follow the money that passes through the financial sector, you might reasonably come to see it as a game of hot potato. Everyone who wants to make a killing in finance will try to go into the high-risk transactions because that is where the high rates of return are. The trick, though, is to hold on to the risky transaction just long enough to skim off your share of the proceeds, before passing the risk off on to someone else. This is fundamentally the reason that derivatives exist, but it goes way beyond derivatives. It is the reason so many companies end up getting involved in even very simple financial transactions.

A simple credit card purchase can’t take place without about ten companies getting involved. For a home mortgage, the number might be closer to twenty. It is all about passing the risk along to someone else.

In many cases, the actual risk is not shifted at all, but this does not necessarily matter. If the accounting measures of risk can be manipulated, that may be good enough, especially for a bank, for which risk is one of the critical financial measures. This explains how AIG, an insurance company, came to be the most important company in Wall Street banking five years ago. AIG issued derivatives that allowed it to take colossal amounts of risk, quadrillions of dollars worth, off the hands of the banks. The fact that AIG’s own solvency became something a fiction along the way did not matter for accounting purposes, as long as AIG could manage to stay out of bankruptcy, as so far it has. AIG eventually became a company with no net worth to speak of, but it nevertheless (with government help) was able to deliver the accounting magic that would keep transactions from being listed on a bank’s balance sheet.

When so much is riding on arcane accounting designations, controversy and scandal are all but unavoidable. These stories came up on a daily basis this week. Deutsche Bank hid $12 billion in losses, former employees told the Financial Times. The bank, though, insists its accounting designations of assets were done by the book. UBS was said to be preparing to pay $450 million in fines to settle charges that it falsified its Libor reports. That would be similar to the amount that Barclays paid previously. In a story that sounded like an echo, Standard Chartered was said to be close to settling charges related to its money-laundering past for $330 million, in addition to the $340 million it has already agreed to pay for keeping false records in connection with the same transactions. Standard Chartered apparently created fictional owners for bank accounts to get around money laundering rules in much the same way that a bank might create fictional owners to get around loan underwriting rules.

Banks’ hot-potato treatment of risk could not exist without insurance companies, and there was a similar story this week in insurance, in which Aetna agreed to pay $120 million to settle claims that it systematically underpaid insurance claims.

The size of the fines might seem enormous until you look at the scale of the transactions at issue. Aetna and Standard Chartered both have said that the payments won’t make a dent in their profitability for the quarter, and UBS has already set aside more than enough money to cover its reported settlement.

When even record-large fines are something a bank can take in stride, it tells you something about the relationship between the business and law enforcement. That is, questions of legality may not rise to the level of strategic importance that would make them a concern for the executives, but are often instead a detail to be worked out by the lawyers.

Overlapping Disasters

I woke this morning to news of a damaging earthquake and tsunami in northeast Japan. The tsunami struck so quickly there was no time to evacuate the damaged nuclear power station in Fukushima, though in practice, workers only needed to climb one flight of stairs from the basement to get out of harm’s way.

Today’s earthquake will probably count as only a minor disaster after pavement and bridges are checked, but still, it seems that disaster news has become so frequent it is overlapping. The death toll exceeds 500 in a Philippines typhoon, and there is continuing news from a dozen other disasters of recent weeks.

There is always talk about doing better in the physical preparations for known disasters, and we may also need a more effective approach in recovering from the news of disasters. For many people, the report of a disaster casts a shadow over the whole day, and if this happens on more days than not, that is a problem in itself.

Thursday, December 6, 2012

The New Discount Grocery

Big box supermarkets are not going anywhere, and are, in fact, getting larger in floor area, but most of the growth in the grocery business is in small-format stores. These include liquidators, farmers’ markets, produce markets, natural and health food stores, and discount grocers with limited product selection.

store exterior
Aldi is opening new stores like this one every month.
snack aisle
The Aldi store entrance leads into the snack aisle, which takes up one fourth of the total product display area.

It is this last category that is hardest to understand. Is there really a place for the Aldi store that opened near here today? Aldi’s specialty is impressively low prices on a broad selection of snacks, but it requires grocery shoppers to make compromises in almost all other areas of the shopping experience. You won’t find your favorite brands, there are only token selections in canned food (40 cans to choose from) and frozen food (just two freezer chests, pushed together, with a scant selection of frozen entrees), bread and bakery items are truly awful, and most of the other categories you would expect to find in a grocery store are missing entirely. Aldi only grudgingly permits shopping carts, takes payment in cash, and expects you to bring your own bags. Is this what people want in a grocery shopping experience?

Well, perhaps so, based on the turnout at the grand opening this morning, and the fact that it is something other than a big-box supermarket may be the biggest factor in Aldi’s favor. The enormous selection you find in the traditional large supermarket is something of an illusion. Only a small fraction of the products are things you actually want; the rest are placed there at the behest of the food manufacturers, who hope to eventually persuade you to select their products instead. By contrast, at a discount grocer, you don’t find shelf on top of shelf filled with ill-conceived and unpopular products, and there is a fair chance that you will find something resembling what you actually want, and in only five minutes or so.

The trend away from big-box grocery stores may represent the same cultural forces that are taking their toll on big-box stores in other categories. Among them: big box stores rely heavily on sales circulars delivered inside local newspapers, and the under-45 crowd, hardly an insignificant part of the economy, isn’t as easily impressed either by the newspaper format or by the temporary price manipulations that the sales circulars represent. Sales circulars aside, supermarkets tend to have the highest prices you can imagine for most of the products they sell, so it is easy for a shopper to suspect that there must be better deals somewhere else.

Aldi takes pains to confirm those suspicions. Prices are especially good on high-profile items such as potato chips, American cheese, carrots, and Christmas candy. If you look for low prices, you can find them. But if you are trying to put together food you could live on for the week, Aldi is an exercise in frustration, and it may not be much cheaper than the supermarket across the street. I saved about $5 on a grocery bag of snacks and produce — not necessarily worth the trip if you have to go on to another store for the rest of your food. Other discount grocers specialize in different product areas, but the shopping experience is not very different. My feeling is that it is just a matter of time before shoppers recognize that discount grocers are ultimately offering another version of the same illusions that bothered them in the supermarkets.

Wednesday, December 5, 2012

Denmark Repeals “Coconut Oil Tax”

Denmark is canceling its fat tax, also known as the “coconut oil tax” because the tax was levied most heavily on coconut oil. The sales tax was supposed to discourage the kind of overeating that leads to obesity, yet it was levied on all food products without making any distinction between healthy and unhealthy foods. It was based, quite arbitrarily, on estimates of each product’s saturated fat content. Half a century ago, it was thought that people gained body fat by eating food high in saturated fat, but new evidence says the more harmful form of fat is polyunsaturated fat, which was perversely exempt from Denmark’s tax.

It was a bad idea for a tax to begin with. Compliance costs were the highest of any tax I can recall, as they required a complicated computation of saturated fat content for every food package. It was, as I mentioned, targeted arbitrarily. Like all food taxes, it was heavily regressive, as people who have the least money to spend spend the highest proportion of their income on food. On top of all this, which was known when the tax was first implemented, the experience with the tax was disappointing. There was little indication that people changed their eating habits, and when they did, it was not in the direction of healthier food. People got around the tax, at considerable inconvenience and expense, by eating in other counties when possible and smuggling in coconut oil and other high-fat foods from other countries. The expense of these foreign trips led people to spend less on all products sold in Denmark, making the tax a drag on the national economy.

The experience is almost the opposite of New York City’s restaurant trans fat ban, which forced people to eat healthier substitutes — any natural fat is healthier than trans fat — and which had no indications of people looking for ways to get around the ban by eating in other jurisdictions. I am sure there are lessons in these comparisons for people who propose future health- and food-related taxes and rules.

Tuesday, December 4, 2012

Planning for a Post-Nuclear Japan

Two years haven’t done anything to improve the look of the nuclear power industry in Japan. Safety inspections that were supposed to reassure the public instead revealed a culture of lax standards and complacency in nuclear operations, and there continue to be revelations about the nuclear disaster at Fukushima that show it to be worse than previously thought. For example, we now know that huge amounts of radioactive water leaked into the ocean almost from the moment the tsunami hit and that substantial leaks continue up to the present. Meanwhile, popular support for nuclear power has proved to be much less than what the industry thought it had. And so, Japan finds itself making plans for a transition to a post-nuclear future.

The transition is hesitant at first, with no obvious path forward, but that does not mean the nuclear plants continue to operate while people figure things out. A premature proposal to restart reactors this year brought 100,000 middle-aged anti-nuclear protestors to the streets to call for a different solution in a rare show of mass public sentiment. So instead, Japan is importing as much natural gas as it can and is looking for other short-term measures to take. Energy sources for a post-nuclear Japan may be a big problem for many years to come, but in Japan, no one disputes that nuclear power has also become a big problem.

Monday, December 3, 2012

Cigarettes Become Less Prominent in Australia Stores

Australia’s ban on cigarette logos has gone into effect, after tobacco companies’ legal maneuvers were exhausted. Brightly colored cigarette packs were replaced on Saturday with standardized packaging in muted colors, showing pictures that illustrate the health consequences of cigarettes. The cigarette brands are the same as before, but are shown only in plain text.

The logo ban has had one immediate effect at least. The prominent cigarette displays in many stores are no longer so prominent. That is because the bright colors and strong contrast of the previous packaging is replaced by something that doesn’t call attention to itself from a few steps away. From the other side of the store, the new cigarette display might be mistaken for wood paneling or cardboard boxes. It is only when you get close enough to see the medical pictures that you see how repulsive the packages are. The combined effect — nondescript from far away, repulsive up close — creates the impression that the store is displaying the cigarette packages by mistake, and in a way, that is correct.

My hunch is that it won’t be long before retailers go to the next step of hiding the cigarette displays, a step that other retailers took as long as 20 years ago. Moving cigarettes to a less prominent location is an easy way to make a store look more welcoming and friendly to the majority of customers, all the more so now that the packaging colors have been taken away. Stores aren’t likely to stop selling cigarettes in large numbers, though — not until the number of cigarette smokers falls quite a bit more.

Sunday, December 2, 2012

An Illustration of Data Size and Storage Costs

I participated this year in National Novel Writing Month (NaNoWriMo), a loosely organized effort in which writers worldwide try to write the first draft of a novel during the month of November. The specific goal is 50,000 words written during the month. I wrote a 50,000-word first draft of the science fiction novel The Only Band in Town. In total this year, participants logged 3,288,976,325 words, and this sum provides a nice lesson in proportion when it comes to work and data storage.

A novel is a lot of work. The point of the gimmick of putting this effort into the single month of November is to keep people from fretting over so many details that it takes years to write a first draft. When you talk about 3 billion words of fiction, that represents lifetimes of work.

Yet the cost of storing all this work? Fuhgeddaboudit. Obviously, novels from all over the world aren’t all collected in one place, but if they were, this year’s 3.3 billion words would not quite fill the USB flash drive shown here that weighs less than 10 grams and sells, today, for $16.

Just eight years ago, the costs of data storage were significant. Just last year, the cost of a 32-gigabyte flash drive was twice the current price. Even the heartless cost-cutting that cash-strapped corporations engage in can’t keep up with the decline in cost of data storage. They could squeeze another 15 percent out of this year’s already inadequate storage budget, and that would still mean more than enough storage for all of next year’s work, just taking into account price cuts that have already taken place.

Work is expensive. Data storage is not, not anymore. Our thinking has not entirely caught up with this shift in proportions. Here are three more comparisons to make this point:

  • The annual electric bill for the file server room (including cooling) may be greater than the cost of all the hardware.
  • The time you spend making a backup of your computer files is more valuable than the storage space you use. (You might as well make a backup whenever you can spare the time.)
  • The world spends more money on data security than on data storage.

Think about this way. Buying a USB flash drive is easy. Keeping track of it so that you don’t lose it takes real work. Finding one of your files among all the files you have saved can take minutes, hours even. Data storage is no longer the major cost in storing your work.