Friday, February 28, 2014

This Week in Bank Failures

Bitcoin is quite possibly dead after a criminal group nullified the largest bitcoin exchange and drove it into bankruptcy. Analysts who talk about this event as one of the growing pains for bitcoin are mistaken, I believe. If the technical flaws in bitcoin are large enough that criminals can wipe out arguably the most sophisticated bitcoin operation in the world, then ordinary bitcoin holders don’t stand a very good chance of success with bitcoin transactions either. Possibly bitcoin could be recalled and reissued, but it is hard to understand how that could happen, and even if the technical and legal hurdles could be overcome, the replacement currency would not be the old bitcoin but something new.

And if bitcoin is so easily targeted, then another cryptocurrency of sorts, the card transaction network, is equally at risk. Though highly sophisticated, it has many of the same weaknesses, and has many more players and more weak points for criminals to exploit. No one should be shocked if one evening a major card processing operation is wiped out in a few hours in similar fashion.

The former president of Ukraine, who abandoned his post under mysterious circumstances last weekend and is now considered a fugitive, is being investigated for money laundering among other offenses. Viktor Yanukovych and his son Aleksander Yanukovych have had assets frozen in several countries and prosecutors in Geneva seized documents from a company owned by Aleksander Yanukovych.

A U.S. Senate report describes a startling degree of subterfuge used by Credit Suisse to help U.S. taxpayers hide money from the IRS, including a secret elevator and hidden offices in an airport. The bank says it put a stop to these practices and is exercising more vigorous oversight over its employees. So far the U.S. Justice Department has indicted 108 employees and customers at Credit Suisse, and more indictments are expected.

A coordinated “boiler room” sweep has yielded 110 arrests in Europe and the United States today. Equipment, money, and luxury items were seized by police at more than 30 locations. The criminal organizations involved are said to have sold fake and nonexistent securities by telephone. They also are said to have laundered money and smuggled guns and narcotics. Relatively few specifics have been released as the police operation is apparently continuing at this hour.

February almost went by without any U.S. bank failures, but there were two as the month draws to a close. These were small, and came in states that haven’t seen a lot of bank failures.

  • Sterling, Virginia (near Dulles Airport): Millennium Bank, NA, 2 branches, $122 million in deposits. Successor WashingtonFirst Bank plans to eventually close the Sterling branch, but will keep the branch in Herndon. The failed bank opened in 1999.
  • Horsham, Pennsylvania (a suburb north of Philadelphia): Vantage Point Bank, $63 million in deposits. Successor is New Jersey-based First Choice Bank. The failed bank opened in December 2007 and had problem real estate loans from day one.

In both cases the acquiring banks paid a premium to the FDIC for the deposits.

Wednesday, February 26, 2014

Seeing and Doing in the Withdrawal From Afghanistan

Officially the Pentagon is only preparing a plan for a U.S. troop withdrawal from Afghanistan. There isn’t anything that says it has to carry out the plan in the second half of this year. Some policy analysts are referring to it as a bluff on President Obama’s part. Yet as the military sees itself moving out in all the specific operational detail that such a move requires, the act of seeing it gives the action an impetus that soon becomes hard to avoid. Already military groups in Afghanistan are changing their tactics based on the expectation of a U.S. move within the next year. If later it turns out that the withdrawal is delayed by more than the few months of slack that everyone assumes in such a large plan, there will be resistance to the delay. Bluffing on your own behalf is one thing, if this move is indeed a bluff. Having thousands of people bluff in a coordinated fashion is not such a realistic plan. Bluffing requires a kind of active timing, the ability to change direction quickly, that isn’t easy to pull off when so many people are involved.

Tuesday, February 25, 2014

Electric Car Is “Best Overall”

Tesla Motors’ all-electric sedan was picked best overall car by Consumer Reports today. The Model S was praised for design, quality of construction, and ease of use. The selection is a measure of how quickly electric cars could spread once there is an engineering solution for the price of batteries. For now, with a price tag above $80,000, mostly a reflection of the cost of the battery, the Model S is no more than a nice idea as far as the average driver is concerned.

Monday, February 24, 2014

Songwriting Slows for Weather

FAWM is going slower this year — especially in Pennsylvania.

FAWM is an online challenge to songwriters to write 14 new songs in the month of February. So far this year, participants have written 7,434 songs, an impressive tally, but a little short of last year’s pace when you consider that all four of the month’s weekends have gone by. Song production is especially down in the Pennsylvania region. I have written 6 songs, half of what I should have at this point in the month, and that is better than most Pennsylvania “fawmers” have fared.

It is severe weather, I think, that has slowed us down. Power at my house was out for four days, and that was a typical experience for the Philadelphia suburbs and neighboring counties that hold about half of the state’s residents. I spent days clearing snow and attending to the tree clearing and electrical and plumbing repairs that were needed after this month’s two epic storms. And I didn’t miss a day of work or any assignments in the online courses I am taking. If other songwriters’ experience of this month is similar, it is understandable if they haven’t written their usual number of songs.

If songwriters fall short of the ambitious 14-song pace FAWM sets for this month, or for that matter, if my blog is missing a few days of posts, there is little lasting consequence. But the same effect surely slowed people working on things that matter in the bigger picture. It was just as difficult a month to write a business plan as it was to write an album’s worth of songs. In my case, income tax forms have been delayed, and now may have to be completed next month in place of whatever else I might have done then. I’m sure you get the idea — there was real work that didn’t get done because the weather threw people off.

In Pennsylvania, we can’t expect better weather to finish off the month in more productive fashion. Rather, the forecast indicates a new cold snap and possibly two more days of snow before the month is over. When circumstances are unfavorable, you may have to do what you can, even if it is less than you planned for, and go on from there.

Saturday, February 22, 2014

Too Big to Jail

Sometimes it pays to be the owner. The owner of a Philadelphia restaurant chain was routinely taking more than one fifth of employees’ tips, totaling $4.5 million over three years. The story at

An employee who got caught embezzling that kind of money would be behind bars before the day was over, but in the settlement with the U.S. Department of Labor, the restaurant owner won’t face a criminal indictment. He also got caught paying less than the $2.13/hour federal minimum wage, but he won’t bear any real punishment for that either. Why? Because the laws and the justice system are designed to protect the powerful.

If you run the numbers and adjust for realistic interest rates, it looks like the restaurant owner took a profit of half a million dollars in tip money, so you might say he broke the law and got away with it. But looking at it another way, he probably did take a loss on this illegal scheme. The half-million might not be enough to pay his lawyers for the legal cases, and if the reputation of the restaurant also took a hit from the story, he might be starting all over in a few years, as happens so often in the restaurant business. But that remains to be seen. For now, this is a story of someone in a position of power thumbing his nose at the law, and the law winking in response.

This Week in Bank Failures

An Ally Financial IPO could happen in March, according to a Reuters report. Ally Financial is what remains from the rescued GMAC. The U.S. Treasury owns nearly half of the company but hopes to sell all or most of its share at a slight profit in the IPO. The Treasury is recording a modest profit on its TARP bailout program, but the profit is essentially an accounting fiction that doesn’t reflect many of the government costs for the bailout, nor the immense cost to the larger economy.

Update: A credit union was liquidated last weekend. St. Francis Campus Credit Union in Minnesota had 3,400 members. Member accounts were transferred to Central Minnesota Credit Union.

Thursday, February 20, 2014

Email Is Faster Than Fax

We all know that email is faster than fax, but you might not notice how much faster until there are thousands of faxes to send. I saw a case in point when one book wholesaler that orders books from my company converted its purchase orders from fax to email this month. Its old system had the overnight crew send thousands of faxes (well, a thousand, anyway) every Wednesday and Thursday night, taking about 12 hours — and that’s not counting the faxes that had to be sent a second time, after the end of the queue, because the machine jammed and pages were dropped. The new system sends the same volume of purchase orders by email. This takes the email server, I estimate based on my company’s position in the alphabet, about 7 minutes. The speed-up is roughly a factor of 100.

Monday, February 17, 2014

Missing Flowers and Valentine’s Day Optimization

The four-day period leading up to Valentine’s Day is the busiest time of the year for the flower business. This year this period also brought the heaviest snowfall of the winter season. Everyone I know has stories of flowers that didn’t get delivered last Thursday and Friday.

Some flowers will get delivered late, though that somewhat misses the point of Valentine’s Day flowers. But many won’t get delivered at all, and will go bad sitting around warehouses and depots. The worst estimate I came across was that 50 percent of Valentine’s Day flowers would arrive late or not at all. More likely the rate of non-delivery is lower than that, maybe between 20 and 25 percent, but that is still a huge loss for the merchants involved. Worse, for the customers, it turns what was supposed to be a kind gesture into an aggravation.

The weather is being blamed, but the rate of missing flowers is so high that it hard to believe they all could have been delivered on schedule even with perfect weather. Recall how many Christmas deliveries were late in spite of relatively benign weather in the middle of December. I believe this is a case of optimization gone awry. There are customers who want to mark a holiday with a minimum of effort and attention. Combine that with florists and delivery services that want to minimize costs while delivering the maximum number of products and packages possible. With so many unrelated players pushing at the same narrow window of opportunity, any little problem will result in failures and lapses.

Optimization is one of the marvels of the late 20th century, but the cost of so much optimization is a general loss of robustness. Push optimization too far, and you find that little things go wrong and cascade out of control. We’re just discovering this in the last few years because of the economic squeeze brought on by recession. The financial pressure leads businesses to try to dial things a little tighter than they can reasonably go. This leads to an increased risk of catastrophic failure. That, I believe, probably happened here. The reputation of the flower business is damaged not just for the people whose flowers went missing, but for a much larger number of people who heard about the problems. After Valentine’s Day 2014, anyone who heard the same stories that I heard will think twice about leaving Valentine’s Day flower delivery as a task for someone else to do. With the compounding effect of word of mouth, future years’ business could decline by more than the 20 percent of orders that went missing this year.

Sunday, February 16, 2014

Snow Shock

People around here are snow-shocked. After a winter of more cold and snow than any previous winter anyone can remember, people don’t want to see any more snow. The snow is unavoidable if you look out the window or step out the door, so people are trying to avoid windows and doors when they can.

This is more easily done now than at any time in the past. E-commerce makes it possible to avoid shopping trips. With modern communications we can stay in touch and be entertained without any need for windows or doors. Some of us can even work that way.

I can tell the Narnia-style winter is taking its toll on people because of the reaction to yesterday’s storm. This came after two epic storms in two weeks. First, there was an overnight snow and ice storm in which everyone lost power for an average of two days. Then, a week later, a 27-hour snowstorm that left us with an additional foot of snow. For the most part, people took those two storms in stride. Yesterday afternoon, by contrast, was only a light snowstorm, and it was something of a surprise. Forecasters were able to predict it only a few hours in advance. It left one inch of snow on some towns and three inches on others. Somehow that was the snowflake that broke the camel’s back. Mostly people did not shovel this new snow from the sidewalks. The forecast suggested it would melt away when the weather changed on Tuesday anyway. Never mind that the forecast has changed and the thaw is now expected on Wednesday after a new snowfall on Tuesday.

After three months of colder-than-normal weather reports, what difference is one more day of snow? Let me know when the sun is shining and the flowers are blooming. In the meantime, I have to get back to my Brazilian Portuguese vocabulary exercises — you know, just in case I actually make it to Rio someday.

Friday, February 14, 2014

This Week in Bank Failures

After struggling for months to craft a plan, House Republicans still could not agree on a plan to shut down the U.S. government through the elections, so they allowed a vote on keeping the government going. The measure passed easily.

The euro zone’s banking supervisor took a stand against zombie banks this week, saying the banking sector as a whole would gain credibility if the most hapless banks were allowed to fail.

Higher salaries and bonuses for giant banks’ most highly compensated employees has become a high-profile trend this year. The oversized compensation gets more attention because of the tens of thousands of staffers being laid off to pay for the increases.

No banks failed tonight. A severe winter storm that passed through Washington, DC and closed the city for a day may have slowed down some of the deals and actions regulators are working on.

Tuesday, February 11, 2014

Two Sides to the Storm

It’s natural to think a problem is solved when your problem is solved. For instance, when you get a new job, “the recession is over!” I got to observe this pattern in myself when I got my power restored after a 4-day outage that followed the most damaging ice storm in my county’s history. With power on, I had to turn my attention to getting my house working again. At that point 1/8 of the county was still without power. As of this morning, the outage rate had fallen to 1 in 250, but that is a lot of people. It took 6 days to restore the electric lines to the level of trouble that people gripe about after a more typical severe summer thunderstorm.

There is a big difference among people in the way they view a crisis depending on the random chance of their own experience. If you talk to those who were most affected and those who were least affected, you hear the two sides of the story. People who never lost power may already have forgotten that the storm happened. Those still waiting for the lights to come back may understandably see the storm as one of the defining events of the year.

Friday, February 7, 2014

This Week in Bank Failures

A German court worries that the European Central Bank’s Outright Monetary Transactions (OMT) program may not be permitted under the bank’s charter. The Constitutional Court worries about the selectivity of bond purchases under the program, though the bank has yet to make any such purchases. The Constitutional Court has referred the matter to the European Court, which is now obliged to take up its own review of the legal questions involved.

In China, an insolvent bank-sponsored hedge fund, Credit Equals Gold No. 1, was rescued somehow. An investor, who has not been identified, bought the problem coal-mining debts that had provided the starting point for the hedge fund. The investor is thought to have been financed by the banks involved in the fund, along with government authorities wanting to save both the shadow banking system and the coal industry from collapse. The coal executive behind the loans was removed and charged with securities fraud in 2012.

First S&P, then Moody’s, downgraded Puerto Rico, so that its bonds are no longer considered investment-grade. Puerto Rico has faced public financing troubles for about eight years. Its financial situation has been compared to Detroit and Greece. Political difficulties and policy stagnation have prevented obvious partial solutions from being implemented. The heart of Puerto Rico’s problems, though, is the weak U.S. economy.

Thursday, February 6, 2014

Ice Storm

A snowstorm turned to ice early yesterday and by sunrise, with the weight of the ice, I could hear trees and large branches falling in all directions, one after another. Several fell onto my street; one hit the roof of my house and bounced off. It did no damage but had to be cut in four places to restore access to my back door. When so many branches fall, some are sure to hit power lines, and a day later, most of the county and large parts of about eight nearby counties are without electricity. Trees fell onto expressways, and stretches of highways remain closed today because of downed trees. But there aren’t always alternate routes; some side streets and back roads are too icy to drive on.

I had heard about this kind of damaging ice storm, particularly the one that had shut down Quebec for two weeks some years ago, but this was my first time being in the middle of one. Facing the prospect of being without electricity, heat, running water, and Internet for five days, my best option was to evacuate to another county, less hard hit, where I could keep working. Others staying home have had to find places where they can wash, recharge cell phones, connect to the Internet, or warm up — actions that on better days are more or less automatic at home.

The sudden loss of electricity offers an abrupt change in perspective. You don’t realize how much you rely on electricity until it is not there. Even then it can be confusing. At a supermarket running on backup power, I saw one customer who didn’t understand why the conveyor belt at the checkout wasn’t running. Others were perplexed that stores and restaurants closed their doors when the power went out. The inaccessibility of transportation and communication have their own effects. I saw firsthand how the difficulty of driving and walking on tree-strewn streets leads to a risk-averse mentality, in which even a three-block shopping trip is avoided if possible. Similarly, after a day of not being able to make cell phone calls because of declining batteries and limited network capacity, I found that I stopped thinking in terms of voice calls. The resulting changes in habits won’t reverse immediately when the crisis is over.

Tuesday, February 4, 2014

European Commission Measures Culture of Corruption

How widespread is corruption across Europe? The European Commission released a report on the subject, and the English-language electronic title of the report includes the prefix “Microsoft Word,” as if to say, “Even naming rights for our official reports are for sale!” Of course, it is also possible that the inappropriate product placement was the result of a questionable government software purchase followed by a series of editorial errors and omissions, but I am not sure that is the more charitable interpretation.

The substance of the report is itself cause for concern, with the overwhelming majority of citizens surveyed across every EU country saying that official corruption is widespread and getting worse. Only 4 percent said corruption was “very rare.” One likely indication that corruption is indeed getting worse is that respondents between 15 and 24 years of age and students were far more likely to see corrupt practices as an everyday part of government operations, when compared to respondents 55 years of age and older and retirees.

But the electronic form of the report is perhaps the most stark reminder of how widespread government corruption has become. How could the signs of corruption go unnoticed on the government’s own report on the subject, but that government officials see these signs so often that they have stopped noticing?

Monday, February 3, 2014

NFL Beats Storm Front

The NFL’s big cold-weather outdoor game was last night, and the big snowstorm also arrived during the night. There wasn’t time to take a deep breath between getting the cars out of the parking lots and watching the first snowflakes hit the ground. The NFL may have avoided having its biggest television event of the year fouled by winter weather, but it was a close call.

Everyone knows that when you plan on the weather, you take your chances. The NFL had a range of contingency plans, but it must be happy it did not have to use them. My guess is that the NFL won’t worry so much about what might have happened if the storm front had arrived a few hours earlier as it will about the lopsided halftime score. I happened to be out in the early minutes of the third quarter last night, and the traffic jams were not formed by people trying to beat the storm. They were fans who had seen the part of the game that mattered, and with the party breaking up, were making their way home.