Thursday, July 31, 2014

Court Order Creates Sovereign Default

It is the first time I have heard of an involuntary sovereign default. Argentina set aside the money to make its bond interest payments today, but a U.S. court ordered it not to make the payments and ordered its bank to return the money. The court also ordered Argentina to find a way to pay everything it owed from its last sovereign default, but that was rather like ordering a stone to bleed. A court can make the decree but the material world cannot make it happen.

There is much in this case that is worthy of a Shakespearean drama, with unsavory characters on all sides, but there are other considerations that are perfectly prosaic. The implications are absolutely appalling when you trace them through to their logical conclusion. First, there is the question of how successful a Wall Street hedge fund might be in seizing the U.S. assets of Argentina. I don’t know what U.S. assets Argentina has, so I don’t know how significant a point this might be. In past cases of judgements against foreign countries, plaintiffs have succeeded in freezing the unrelated assets of a country’s citizens. If such a rule applied in this case — and at this point, nothing this court might do would shock me — it could wipe out the checking accounts of Argentinian students studying at U.S. universities. That obviously would have real-world implications more severe than the funny-money at stake in the case.

Looking farther ahead, there is the question of whether the United States is still an appropriate venue for sovereign bonds. A U.S. court has asserted jurisdiction in this case because the bonds were originally issued in the United States. It is hard to imagine a country getting into this predicament if its bonds were issued anywhere else in the world. Bonds are disproportionately issued in the United States because of its history of evenhanded jurisprudence, a reputation that is being sorely tested right now. It is a bizarre ruling that goes against the interests of debtors and creditors alike, but it has stood up to appellate review. Any solution would involve changing U.S. law to allow for something resembling a sovereign bankruptcy, or reissuing the bonds in another jurisdiction outside the United States. Fundamentally, it is the U.S. legal and political system that is broken here. A law that allows a court to order a sovereign default is a problem in itself, and the lack of a response from Washington is worse. I can easily imagine the bond market moving from Wall Street to the European Union or even a minor offshore banking center such as Antigua as a way to avoid just this risk.

Speculating further, if bond markets do move to Europe, and the United States is the only country still auctioning its bonds on Wall Street, that becomes an awkward situation for the U.S. Treasury. Unless the U.S. economy can become strong enough to finance its own government, the Treasury could eventually be forced to follow the international bond market to its new home. That’s a scenario that in various ways drastically increases the risk of a U.S. sovereign default. If such a thing were to come about, we would be able to trace the sequence of events back to the precedent of today.

Wednesday, July 30, 2014

GDP Report Points to Weather

The high GDP report for the second quarter reinforces the thought that the slowdown in the first quarter was mostly caused by inclement weather and the risk of a government shutdown. U.S. GDP is estimated to have gone up 1.0 percent during the quarter, which is reported as an annualized rate of 4.0 percent. That’s faster than the U.S. economy in its current state can expand in a continuous way, so much of it must just be a recovery from the problems of the previous quarter.

The weather is favorable for the third quarter also, with few weather disasters so far and bumper crops expected unless the weather changes in a big way in the next 6 weeks. Agricultural production isn’t such a big component of the U.S. economy, but it is big enough that weather like this can boost the third quarter GDP measures when they come out.

Tuesday, July 29, 2014

OkCupid Experiments on People and Gets Away With It

OkCupid conducts experiments on its users all the time, it admitted in its latest blog post. The news media has reacted to one experiment in particular as if this was the same kind of “shocking!” revelation that we got recently from Facebook, but from what I can see, there has been hardly any outrage over OkCupid’s experiments. Just the title of OkCupid’s post gives you an idea of why OkCupid got away with it where Facebook didn’t:

These may be other reasons:

  • OkCupid is fully aware its users are real human beings and that its experiments had real consequence. That’s quite different from pressing some buttons, getting different financial results, and not seeming to notice that real people were affected.
  • People mostly know that online dating is experimental by nature.
  • OkCupid never particularly came across as a reliable, objective authority on who you should date. Just the opposite: it is continually trying to get people to take dating less seriously.

Monday, July 28, 2014

“Mission Statement”

If your mission statement sounds like this — if it has even one line in common with this new “Weird Al” Yankovic song — you should withdraw it and not make a new attempt until you discover what your mission is. It’s not that it is bad to sound like classic Crosby Stills Nash & Young, far from it, but if your mission statement doesn’t sound mainly like you — if it’s mostly copied from or in imitation of other sources — then it’s obviously not your unique mission, is it?

And one more thing, since it’s in the song: an honest mission statement does not contain the word “synergy.” This is not because “synergy” is an overused buzzword, but because synergy represents a way of going in two directions at once, which is not what a mission statement is about. Synergy may provide a quick buck along the way while you’re doing something more focused, if you’re thinking opportunistically. But opportunism is the opposite of having a mission. Taking advantage of situations that come up by accident can’t be your core mission — unless, I guess, your real mission is just to roll the dice well enough to stay in business.

Sunday, July 27, 2014

Corn and More Corn

Worries about last year’s damaged corn crop have vanished with a glance at this season’s cornfields. With favorable weather across most of the United States, experts and markets expect a crop about 30 percent larger than normal. Farmers that planted planning on selling into an extension of last year’s shortage could even lose money, as prices have fallen by almost half since last year. I hope that the corn ethanol factories that closed last fall because of high corn prices can reopen in the next few weeks — otherwise, much of this year’s outsized crop could go to waste. A plentiful supply of corn can also mean lower prices for milk and meat, not right away, but by the end of the year. Prices of meat and milk pushed up by the high corn prices of the past three years may return to levels that consumers won’t balk at. Gasoline prices also should decline with lower costs for corn ethanol, though the effect will not be large enough to notice.

The large corn crop is bad news for corn growers who have unusually high growing expenses, and for Brazil, which expects to export less ethanol this year with more ethanol production from U.S. corn.

Saturday, July 26, 2014

Summer Ice, Drifting Free

There is a problem with the last remaining remnants of the Arctic ice cap. It could all just float away someday. This first became evident about ten years ago when the ice broke loose from Severnaya Zemlya, islands along the Asian coast. Previously, the ice had always been fixed to land at at least three points. The resulting triangulation, on the same principle that keeps buildings standing up, had prevented large-scale movement in any direction. In the summers since, Arctic ice has been attached only at Greenland and Canada, on the North American side of the ocean.

But this month the ice has broken free from North America too. The crack separating the main ice pack from the coastline is up to ten kilometers wide and easy to find in the satellite pictures. Not tethered anywhere, the ice is free to drift off in any direction, to sunnier climates and warmer water where it can melt away. It is only by luck that this summer is the first summer in ages in which there has been barely a breeze across the Arctic Ocean, so the ice is still relatively in place.

This luck will not hold for long, of course. Any change in the weather will push the ice in some direction, and change is on the way. The weather forecasts hint at a persistent high pressure system, reaching north into the Pacific side of the Arctic Ocean with warm air and winds. The details of winds are harder to predict, but any movement at all will melt some of the ice involved. Someday, probably not this summer, a storm will push most of the strongest ice out of the central Arctic, probably either into the Atlantic or in the opposite direction, toward the Pacific. If that were to happen in April or May, there could be no sea ice left in the Northern Hemisphere by August.

Friday, July 25, 2014

This Week in Bank Failures

Manufacturing a crisis: Bond fund manager Pimco overestimated the amount of money needed to recapitalize banks in Cyprus last year. The exaggeration of the banks’ financial problems led to a run on the banks and was used to justify a hard line by European authorities, turning what might have been merely a capital shortfall into a full-blown sovereign debt crisis. Other outside analysts discovered the flaws in Pimco’s analysis, but that information was kept secret from the government by officials at the central bank until economists reconstructing the analysis found the same errors.

Raising capital: East Los Angeles-based Pan American Bank got $6 million in new capital from 16 California banks. The deal was structured to avoid disrupting the bank’s current governance, though the interim CEO concedes significant changes will be needed in operations. Regulators had ordered the bank to raise capital and replace its management.

Arrested: The former head of the troubled Banco EspĂ­rito Santo in Portugal had hoped to retire quietly this month after his family lost its controlling interest in the bank. Instead, yesterday he was arrested and taken into court as part of an international asset management investigation. He was released on €3 million bail. It is not clear how the investigation might be related to the financial scandals surrounding the bank.

Under investigation: The Fed says Deutsche Bank has a long list of accounting errors in its U.S. financial reporting, including many problems that have gone uncorrected for years, in a report cited by the Wall Street Journal. The bank is expected to restate some of its past financial statements.

Failed: The O.C.C. closed Chicago’s GreenChoice Bank. The three branches and $71 million in deposits are being transferred to Providence Bank. The failed bank had tied its identity to a mission of sustainability.

Wednesday, July 23, 2014

Costa Concordia vs. Fukushima Daiichi, Update One Week Later

I compared two disasters, the wreck of the cruise ship Costa Concordia and the Fukushima Daiichi nuclear power station, severely damaged by sea water. The scale of the two disasters can barely be compared, but a more decisive and vigorous cleanup effort has followed in the aftermath of the Costa Concordia, while Tepco, operator at Fukushima, seems paralyzed by comparison. Another week has gone by and the contrast has become that much more stark.

A dozen tug boats have removed the Costa Concordia from the site where it sank and are taking it to Genoa. The trip is expected to last four days. At BBC News:

It is a much quieter scene at Fukushima Daiichi. A worker, working alone, was surprised by a new nuclear leak in the “undamaged” reactor building 5. The operator, Tepco, considers it a worrying sign of deterioration and concedes it should keep a closer eye on the facility. At The Asahi Shimbun:

Monday, July 21, 2014

Escaping the Fog of War

News channels are overrun with war news this month, and it is easy to get caught up in the narrative of missiles, fires, machine guns, secret payments, show trials, dead bodies, and debris. Keeping up with the world’s news is good in principle, but it has become a problem if you are anxiously awaiting each day’s news hoping for a quick or clear resolution that may not be on the way anytime soon. The stress that goes with this level of emotional involvement in war news can match the stress of actually being directly involved in a war. You can feel helpless focusing so much energy on problems that are too far away for you to do anything about, with too little information for you to know with any confidence what is really going on.

The answer is to tear yourself away from the news and make up a simplistic story for the way it might all work out. I admit this is completely counterintuitive if you are in this situation. It sounds as if you are escaping from reality into fantasy. It is actually close to the opposite of this, though. The value of the made-up story about the distant news is that it makes it possible to return your focus to your work, your daily challenges, and things you have some control over. In other words, it helps you get back to reality, or at least the reality that matters in terms of the quality of your life and your ability to improve the world around you.

Don’t be afraid to completely tune out the news for days at a time if that’s what it takes. There is a very good chance that you won’t miss much. After all, a big part of the reason why war news is so dominant right now is that it is summer, people are on vacation, and news rooms are having trouble finding any news of real substance.

Friday, July 18, 2014

This Week in Bank Failures

Aside from the financial troubles I have written about and a predictable parade of litigation, banks have mostly managed to stay out of the news this summer. Most of the banking headlines have to do with giant banks hiring away each other’s senior managers and executives.

Unraveling: Espirito Santo International, indirectly the primary owner of Banco Espirito Santo in Portugal, filed for protection from creditors in Luxembourg. It revealed that an audit by the central bank of Portugal in May had found it desperately short of cash. It had raised money through the sale of assets, but this did not happen fast enough to meet its obligations to its creditors. Separately today, prosecutors in Portugal announced an ongoing investigation of possible accounting irregularities at Espirito Santo International and its related companies. Authorities in Angola stepped in to shore up BES Angola, in which Banco Espirito Santo has a majority ownership. The government has issued a guarantee good for 70 percent of loans in that country. Banco Espirito Santo appears to be reasonably well isolated from the problems surrounding it, but stock traders continue to bet against the bank.

Tonight in Panama, banking regulators took over ES Bank SA (Panama), which like Banco Espirito Santo is a subsidiary of Espirito Santo Financial Group. It is small in comparison to the financial questions at Espirito Santo International, but otherwise a medium-sized bank, with deposits and assets close to $1 billion. Regulators will manage the bank for the next 30 days in order to ensure stability and solvency. The bank has been operating in Panama for 13 years.

Raising capital: Synchrony Financial, the private-label credit card business of General Electric. It hopes to raise $3 billion in an offering of about 15 percent ownership, though Wall Street analysts are skeptical. Synchrony draws two thirds of its revenue from managing retail credit cards. Some of those retailers, especially JCPenney and Walmart, have stumbled in the last two years as shoppers tired of seeing the same old merchandise on the shelves.

State bank regulators in Georgia closed Eastside Commercial Bank, with two locations in the eastern suburbs of Atlanta. The failed bank had $162 million in deposits. Atlanta-based Community & Southern Bank is assuming the deposits and purchasing two thirds of the assets, including the branches. Separately, State Bank and Trust Company is purchasing part of the loan portfolio, equal to one fourth of the assets. The failed bank was founded in 2005 — unfortunate timing, just after the peak of the real estate boom in Georgia. It is the first Georgia bank failure in over a year, but the state still has more than its share of troubled banks. Only 6 out of 7 banks in Georgia are turning a profit.

Thursday, July 17, 2014

What Do the Microsoft Layoffs Mean?

I am sure I am not the only one surprised by the scale of the layoffs announced at Microsoft this morning in a letter to employees:

More than 1 in 7 employees will be let go. To be sure, some layoffs were expected. We had already heard that 1,000 Nokia-Microsoft workers in Finland would be laid off with the closing of R & D operations there, and it was assumed that about half of workers in Microsoft’s mobile initiatives would eventually have to go. The surprise is that the scale of layoffs extends far beyond this. A total of 18,000 layoffs were announced today, and they will be carried out quickly, half in August and September it sounds like, and “the vast majority” by January. The letter’s headline starts with the words “Starting to” which implies that there is more to come by the time the changes in this announcement are completed. Though most details have not been decided yet, the layoffs cut across organization divisions, with the one saving grace that there is no companywide hiring freeze.

Details are starting to trickle out, and they point to a declining interest in operating systems. Goodbye to original Xbox content, half of enterprise marketing, and most curiously, Windows testers. In the latter move, supposedly all testing for Microsoft Windows will now be conducted by product managers. That, of course, is probably unrealistic. At best, managers do checklist-based testing, in which the team’s own goals are met but anything not specifically on the list might be broken along the way. I foresee tense meetings and infighting as said managers try to arrange to cancel projects they suspect of breaking their own teams’ work, and a bunker mentality as teams try to keep their own work secret and away from this scrutiny for as long as possible.

The declining focus on operating systems is surprising at a company so identified with operating systems. Could it be a sign that Microsoft now sees itself primarily as an enterprise services provider, like Hewlett-Packard?

Besides the consequences of the layoffs themselves, people are talking about how awkward the series of announcements has been. Granted, Microsoft has hardly any experience with layoffs, but in the middle of all the intensely bad writing in today’s memos, Microsoft practically came out and said it has no expectation of ever making money in the mobile market — that Microsoft Phone and Surface are loss leaders intended to steer people toward the high-markup enterprise services department. To paraphrase, “Our division is counting on this incredibly lame loss leader theory to justify our existence within the company. Oh, and by the way, half of you are fired.” The actual memo was more awkward than this summary suggests. This kind of awkwardness in running a business comes when top managers are emotionally conflicted — they don’t see a way forward for the business, but they have to act as if they know what they’re doing. It is a surprising state to observe in a company with the earnings history of Microsoft.

Monday, July 14, 2014

Costa Concordia vs. Fukushima Daiichi

The Costa Concordia is floating again. It is, as far as I know, the largest marine salvage operation ever attempted. If all goes well, within another year the cruise ship will be at the scrapyard being taken apart. At NPR:

Meanwhile, The Fukushima Daiichi nuclear power station sits in essentially the same state it was in the day it was shut down by the weight of a tsunami 3 years ago. There is no credible plan in place for cleaning up the reactors or the fallout-damaged city and countryside. Workers, discouraged as much by the lack of progress as by the 20 percent pay cuts and the company’s dim future, are quitting in large numbers. The AP story at CNBC:

Why such different results in the cleanup of these two disasters? It is certainly not that the cruise ship presents a more urgent threat to its surroundings than the nuclear power station, or that there is more at stake financially. Nor is it that righting a cruise ship is technically easy.

There are a lot of differences you could point to, but my hunch is that the pay cuts at Tepco, the operator of Fukushima Daiichi, point to the difference that matters. Elsewhere we have seen stories about Tepco contractors hiring homeless people to do essential parts of the nuclear cleanup at Fukushima, failing to train them or to equip them with the proper safety gear, and paying them less than the law requires a worker to be paid — less than minimum wage.

By contrast, the reports from the Costa Concordia salvage operation give the impression that everything is being done very carefully by workers who have been thoughtfully selected as having the skills needed for the work to be done. Yes, the ship is moving in slow motion, a millimeter at a time, but nevertheless, in two years, it is halfway home.

I see it as a tale of two industries. The cruise industry can spend the money to correct its problems because cruises are fundamentally profitable. The nuclear industry is reluctant to spend the money that a cleanup will ultimately require because nuclear electricity is fundamentally a money-losing proposition, able to function only with a panoply of direct and indirect public subsidies, but even then, looking for every chance to cut corners.

Someday someone will take responsibility for the steps necessary to retrieve, salvage, and dispose of the materials that remain in and under the reactors at Fukushima Daiichi. There are reasons to doubt, though, whether this can happen during the lifetimes of the people who are currently in charge.

Sunday, July 13, 2014

Big Tobacco Makes Its Stand — in Uganda

Big Tobacco is still throwing its weight around. In the process, it is showing that it doesn’t have the weight it once did.

One sign of this is the place where Big Tobacco has chosen to make last stand. The new battleground, and likely the last chance to maintain its grip on any substantial part of the civilized world, is Uganda. Having conceded defeat in South America, Big Tobacco is using Uganda to make a point, to signal its intention to boycott countries in Africa that implement tobacco-control legislation. At The Guardian:

Yet the way that its financial clout and threatening rhetoric is falling on deaf ears tells you how much the numbers are stacked against tobacco even in one of the poorer countries in the world. Cigarettes kill 13,000 people a year in Uganda. There are 18,000 commercial tobacco farmers. Adding in political friends, the tobacco lobby may represent 1 percent of voters — a large enough special interest group to be heard politely, but not large enough to be remembered when the government faces tough budget questions such as the high cost of health care for smokers.

One way or another, Uganda will surely pass the familiar restrictions on tobacco that are already in place in half of the world. The current proposal is tame by U.S. standards, establishing limitations on marketing, creating smoke-free zones at public buildings, raising the smoking age to 21. Any successful legislation in Uganda will be imitated in other countries across central and eastern Africa, just as Ireland’s tobacco control initiatives provided a model for countries elsewhere a decade ago. This poses an obstacle to Big Tobacco’s plans. That’s why it is making a such an emphatic stand here, but it is plain to see that its scorched-earth strategy is falling short.

Friday, July 11, 2014

This Week in Bank Failures

Failed: Bulgaria cannot rehabilitate the country’s fourth largest bank, CorpBank, after a forensic audit revealed asset problems on a massive scale. The banking license is revoked, the bank will be put into bankruptcy, the investigation has been referred to prosecutors, and the bank’s largest stockholder is under arrest. Loan documents for around 65 percent of the bank’s portfolio cannot be found, and auditors believe the documents were destroyed late last month specifically to thwart their audit. The arrested stockholder is tied to many of the largest loans with documents missing, and he is also suspected of stealing $150 million from the bank during the recent bank run. Next week the good assets and deposits will be transferred to Credit Agricole, a bank that CorpBank purchased from the French bank of the same name just weeks ago. Credit Agricole was nationalized today, and it is being prepared to return to normal operation on Monday, July 21. The liquidation is expected to cost the country and central bank at least $1 billion, putting new pressure on an already strained national budget. The central bank will not restore deposits lost by associates of the arrested stockholder, but it intends to restore all other deposits.

It has been a rough few weeks for other banks in Bulgaria, with the bank run spreading briefly to at least one other bank, but things seem to have returned to normal at the other banks even as CorpBank has gone into wind-down mode.

Suspended: Early this week the word was “back to normal” for Banco Esperito Santo in Portugal, but it was not to be. There are fears that the bank’s ultimate parent company, Espirito Santo International (ESI), may be insolvent. ESI is based in Luxembourg where authorities are investigating and €1 billion is said to be missing. ESI is the 49 percent owner of Espirito Santo Financial Group (ESG), which in turn is 25 percent owner (before last month, the majority owner) of Banco Esperito Santo. ESG stock was withdrawn from trading because of the problems at ESI. The bank’s stock continued to trade but fell 17 percent yesterday and was suspended, then reinstated only to fall farther today in volatile trading after the stock was downgraded. In all, the bank’s stock has fallen by half in the past month. The financial problems at ESI have stoked fears about the state of the national economy in Portugal, though some of the business difficulties are centered farther south in Angola. The bank’s potential exposure to the problems at its parent and affiliate companies is said to be roughly €1 billion, most of that in loans to ESG. It is not, by itself, a large enough exposure to render the bank insolvent. The problems will not be resolved until there is a credible accounting at ESI, and that could take a couple of weeks. Today fears about the bank, Portugal, and the euro zone dampened stock markets worldwide.

Restructuring: Reform is on again at Vatican Bank with the appointment of a new CEO and new independent directors. One of the first changes will be the separation of investment banking from transaction processing. The previous pope had, as one of his last actions before retiring, appointed a caretaker CEO to suspend a previous program of reforms. Instead, the bank spent a year cleaning up its portfolio. As it revalued many questionable assets, it took charges roughly equal to one year of net income. Outside auditors and experts will be a regular part of Vatican Bank’s operations going forward.

Cost-cutting: New Jersey’s Sun Bancorp announced a series of drastic cuts. The bank holding company for Sun National Bank is cutting staff levels and operating expenses by 38 percent overall, closing its home mortgage subsidiary Sun Home Loans, closing its syndicated loan desk (for sharing business loans among multiple banks), and seeking buyers for most of its $96 million portfolio of problem loans. It is selling seven shore locations, most in Cape May County, to Sturdy Savings Bank, based in that county, in a deal to close in early 2015. The acquiring bank is paying an unusually high premium of 8.765 percent on deposits to acquire the branch operations. Sun Bancorp is seeking buyers for several more of its 25 remaining branches in the southern part of the state. In central New Jersey, it is closing four less-used locations, including one that closed in June. The headquarters is also moving north to its executive office building in Mount Laurel as the bank vacates its Vineland headquarters. The bank has a new CEO and plans a one-for-five reverse stock split one month from now. The holding company lost an eye-popping $50 million in 2012 and has lost nearly half as much since, but the announced cuts are on a scale that could possibly restore the bank to profitability.

Federal budget: The Export-Import Bank of the United States, a federal agency that acts as a lender of last resort and occasionally as dealmaker for U.S. exporters, is on the chopping block. It could close in September as House Republicans cannot agree on the agency’s future. Pro-coal senators are also creating a roadblock by attaching a novel form of coal subsidies to an alternate reauthorization bill, a move that would probably prevent that bill from passing the Senate. The Ex-Im Bank has been in operation since 1934 with many of its loans financed by private banks. Among its other accomplishments, it helped to finance U.S.-made construction equipment used to build the Pan-American Highway between 1936 and 1980. It was last reauthorized in 2012. The Ex-Im Bank is self-financing and the closing could cost the government about $1 billion in annual profits; however, the ending of its loan guarantees could theoretically reduce the risk to the U.S. Treasury.

Again, income is not collateral: Detroit used future casino revenue as collateral for some loans, but that arrangement ended when the city filed for bankruptcy, a federal court ruled today. Under U.S. bankruptcy law, a bankrupt entity cannot allocate income except according to a court-approved bankruptcy plan, and any prior contracts or arrangements that purport to do so are voided. The bond insurer Syncora had tried to seize the casino revenue, but has been blocked by a series of court rulings. Naturally, it will appeal again.

Failed: The NCUA yesterday liquidated IBEW Local 816 Federal Credit Union, which had close to 1,000 members, mainly trade union members in Paducah, Kentucky. Insured balances of member accounts will be paid directly to the account holders.

Wednesday, July 9, 2014

The Further Adventures of Rick From Downingtown

A story from ABC, related to the reality show New York Med, describes a nurse fired for an Instagram post:

The story is thorough enough for you to see that it misses the crux of the matter. The story focuses on the photo the nurse posted, but tells you enough to realize that the nurse was actually fired for the caption. The four-word caption was witty but came perilously close to criticizing the patient who had just been treated in the empty trauma room that the photo depicts. To someone who doesn’t know the context, the message is probably most easily understood as a veiled criticism of the patient for having become injured. Such a criticism coming from a hospital staffer would, at best, be based on hearsay. Even if accurate, it would obviously be better left unsaid at least as long as the ultimate fate of the patient remains uncertain.

But it is worse than that. The caption, quite unintentionally I believe, effectively identifies the patient. This is the real problem. It is one thing to lament the foibles of the human condition using a specific case from your workday. It is quite another if many of the people who read your commentary know exactly who you are talking about. Unfortunately, we don’t have a cultural history that prepares us for how easy it has become, in the last few years, to identify people based on a few scraps of information. To makes matters slightly worse, the caption is written as a hashtag. That too is witty but has the disadvantage of making it appear that the post is intended to identify the patient. A hashtag, after all, is a kind of a name; the entire purpose of a hashtag to allow people to put together information from one source with related information from another source. This hashtag was meant ironically, but only a reader who was savvy with social media could be expected to know that.

Obviously, a medical professional knows better than to leak any part of a patient’s name in public, but highly distinctive information of any kind can be as good as a name. The caption indicated that the cause of injury was a train. Even in New York, with trains everywhere, train-caused injuries are relatively rare; on a given day, there might be only one. The timing of posting provides the public with the approximate time of the incident, and the scattered trauma-room supplies shown in the photo allow even someone who has never been inside a hospital a general sense of the extent of injuries. Nothing that involves a train happens in private, so there probably would be hundreds of people who, given just this much information, would know instantly who the patient was. With the identity not a secret, the hospital photo gives away too much detail about the patient’s experience, and the caption becomes too pointed as a commentary.

This is the crux of this story as I see it and a challenge for this moment in history: it is harder than it seems to make a story anonymous, and it is also harder than it was a few years ago. A common technique, going back a couple of decades, was to obfuscate by providing only the first name and town of residence of a person — so, for example, I would be “Rick from Downingtown.” In the Internet era, this doesn’t even serve as a mask. Anyone who knows me can check off or look up one or two colorful details from the story to verify that “Rick from Downingtown” is referring specifically to me. Of course, if “Rick” is not anonymous, then “Dixie” or “Garth” is that much easier to recognize.

We now know to fully fictionalize names in stories, but many personal details are just as distinctive as first names. We all know that a date of birth is sensitive personal information, but not everyone realizes how distinctive it is. If you were born in the United States on a specific day, that information puts you in a group of roughly 10,000, so it is not that far away from identifying you. Some details are far more telling than others, even if they seem equivalent. You probably would guess, for example, that green is currently a more popular color of car paint than purple is, but it might not immediately occur to you that purple is 20 times as rare and therefore distinctive as green is. In some towns, then, if you tell a story that includes a purple car, you are identifying the person, because there is only one purple car in town. Social media makes a difference in this connection because anything you put into social media goes out and mixes with all the known information in the world. If you are just talking to your friends, they may not know who drives the one purple car in town, but someone within the broad reach of the Internet does know.

Twenty or thirty years from now I think we will have more common sense about keeping our stories anonymous. We’ll all have the experience of identifying people from disconnected scraps of information, so that when we see an old woman playing a blue tuba on the boardwalk who does something unexpected, we won’t tell the story quite that way. We’ll realize that there could be just one musician in the world who fits that description. Then we’ll either look up the name of the tuba player and add that to the story, or we’ll leave enough details out of the story to keep it anonymous. But in the meantime, until that kind of thinking becomes second nature, we’ll make a lot more mistakes, telling stories that we think are anonymous as we tell them, but that actually refer to a specific identifiable person.

Monday, July 7, 2014

Discover Card Thinks I’m a Millionaire

Discover Card now thinks I’m a millionaire.

That’s because I just completed a loyalty program that you almost had to be a millionaire to qualify for.

The setup sounded simple enough when the offer arrived. All it would take to qualify is $1,000 per month in credit card purchase transactions for five consecutive months. “I could do that!” you might say — but look more closely.

First of all, your biggest expenditures aren’t things you can pay for with a credit card. In many households, the two biggest payments every month are payments on a home loan and an auto loan. Maybe there are student loan payments too. Probably you can’t pay any of this with a credit card — but even if you could, as loan payments, they wouldn’t be considered purchases, so they wouldn’t qualify for this offer. Consider other major household categories. Taxes, insurance, rent, utilities — if you can pay these items with a credit card, the transaction comes with a surcharge added. The surcharge is just large enough to wipe away any advantage you could possibly get from a loyalty program. There are other forms of spending, including some like medical care that are not entirely predictable, that don’t fit the premise of paying with a credit card.

There is one other big catch with this loyalty program that may be a little less obvious. When you spend using a credit card, you don’t control the timing. Transactions clear in a pattern that as far as you are concerned is random. Many transactions post to your card the same day you make a purchase. Others, especially fuel purchases, take several days to clear. Charges for online purchases can be delayed for weeks if just one item is out of stock. To make up for this sloppy transactional timing, to be somewhat confident of reaching a specific threshold within each calendar month, month after month, you have to plan on spending about 30 percent extra. Remember that an incentive program isn’t a reward but an expense if you have to make extra purchases to meet the terms. To make sense as a reward to pursue, it has to come from the purchases you already have planned.

Of course, I hope you are not spending all the money you have coming in, but saving some of it for the future. Put all these household budget effects together, and the $1,000-a-month loyalty program only makes sense if you have gross household income of at least $7,000 a month. But if your income is at that level, you are earning $1 million every 12 years or less and are, at least, well on your way to becoming a millionaire if you so choose. If your income is less than $7,000 a month, it’s highly likely that you’ll fall short of $1,000 in total credit card spending in at least one of the five months.

If this loyalty program sounds so much easier than it is, that could be by design. The promotion would be terribly expensive for the bank if it had to pay out a reward for everyone who signed up. With a success rate below 20 percent, the cost of the actual rewards isn’t so high. In addition, the bank can be relatively confident that the customers who receive the reward money in the end are millionaires or people with a similar level of prosperity — and for a marketing organization, that is valuable information worth paying for.

The main purpose of the promotion, I guess, was to get prosperous shoppers to pay with Discover Card, so that merchants might be persuaded that Discover Card users are potential big-ticket shoppers, like American Express cardholders. A secondary and darker reason, I expect, was to squeeze more transactions out of middle-income shoppers who did not realize they would not qualify in the end, or perhaps even to induce them to overspend so that they would be paying interest for several months. The bank was aware of this latter possibility and was careful to caution program participants not to spend more than they would anyway.

For the record, I am not a millionaire. I mentioned a specific income level a moment ago, but there are also special cases where shoppers might spend a higher proportion of income on credit cards than you would expect. In my case, I knew I would be traveling on business during most of the months of the promotion. All of my travel could be paid with a credit card, and that more than covered my spending requirement for three of the months. In another month, an emergency home repair covered my spending requirement in a single transaction. That left just one month where I might fall short. In the end I made stock-up purchases of food and household items, spending several hundred dollars this way. For example, I bought enough paper towels, laundry detergent, and macaroni for the rest of the year. Doing this in just one month made my participation in the promotion financially dubious. I had a list of other purchases that I might have accelerated — roofing materials, gardening tools, and the like — but fortunately, it did not come to that.

I got my reward, but it wasn’t as easy as you might think.

To make a long story short, even this seemingly normal level of spending was something of a stretch for me as a non-millionaire. And my reward for spending like a millionaire for five months? A special cashback bonus of $150. Really? $150? Is that a large enough incentive for a program that’s designed to change the habits of millionaires? Apparently it is, and it is another example of the way the rich get richer. After you discount for the extra spending I did to qualify, I am not certain I got much of the benefit of the reward. The people who did well with this promotion are the real millionaires — and, of course, the bank.

Sunday, July 6, 2014

Facebook’s Lab Rats and Corporate Ethics

I am glad to discover that I am not the only one puzzled by the ethical arguments that followed the recent revelation that Facebook had conducted a one-week experiment in propaganda. “We should expect better behavior of our corporations,” people seem to be saying, quite evidently forgetting that corporations have different opinions of ethics than humans have. Fortunately, John Naughton breaks it down at The Guardian:

The lessons are obvious to those of us who have studied historiography or marketing. Your view of any document that purports to be factual — in this case, a Facebook news feed — is incomplete if you look only at the document itself. The minute you consider the source — in this case, Facebook, the corporation — you begin to discover what has been omitted, added, or changed around. A commercial document must be considered in connection to what is being offered for sale. As I write this, I realize that many people have never stopped to ask whether something they are reading is a commercial document. I would like to believe there is an intuition that will guide people. Is there an advertisement lurking in the corner, or beyond the next click? Are you only a few steps away from a sales representative, fund-raiser, product placement, retail store, or corporate logo? Does money change hands under the same roof? If any of this is the case, you must assume that you are looking at a commercial document. All of Facebook, it goes without saying, is a commercial document. Facebook is designed to create the vaguely unsettling backdrop of bad news to support the false reassurance that advertisers have to offer. The news should be as bad as can be (e.g. you too have body odor, people do die on visits to the zoo, your friends are gun nuts), but not so bad that it will drive you away. It is the same formula you find on commercial radio and television and most electronic media. This balance between diversion and confrontation is the tightrope that Facebook walks, and when you consider that its entire revenue stream derives from it (indirectly, but still, every single dollar), it would be more shocking if it were not tinkering with it every single week.

I suppose it is easy for me to say that all this media analysis should be obvious, but what really should be obvious is that Facebook is a corporation. We so depend on corporations that we don’t like to think about how alien they are, but they are not much like humans. A corporation struggles to carry on and grow larger. If it is also able to maximize its profits, then it is unusually ethical as corporations go, but even this is a stretch. Corporations are able to pay attention to little else beyond continuity and expansion. It is not a native ability for a corporation to appreciate the difference between people and numbers. I think it is this last quality that has people so upset about Facebook’s propaganda experiment. It picked a few thousand users at random and used them as lab rats, not quite seeming to understand that it was affecting real people’s lives. But this is what corporations do every day, and there is no answer to it until we are willing to do away with corporations as we know them today.

Thursday, July 3, 2014

This Week in Bank Failures

Guilty: BNP Paribas admitted laundering $9 billion in New York-based wire transfers for countries under U.S. economic sanctions. More than half of the acknowledged illicit transactions at the bank were done on behalf of criminal enterprises in Sudan, including customers believed to be involved in narcotics and arms smuggling and the slave trade. The actual amount of money laundering at the bank’s New York offices between 2004 and 2012 was a much larger sum, surely over $20 billion per year, much of it involving government-owned enterprises in Iran, but the bank negotiated a plea agreement in which it admitted only a tiny fraction of the alleged infractions and agreed to pay just $9 billion in penalties. The government of France, where BNP Paribas is based and is the largest bank in the country, had interceded in the case a month ago, complaining that the proposed penalties were too large. But the objections became much softer after officials in France had looked at the files. The bank had kept systematically false records and had worked through a bewildering array of front organizations to disguise the transactions in a scheme worthy of Enron.

The investigation went on for at least three years, mainly because the bank steadfastly refused to cooperate with officials. The bank continued its money laundering activities even after it was notified that it was the target of a criminal investigation. This lack of cooperation is part of the explanation for the size of the $9 billion penalty. The scale of the conduct at issue appears to be a larger factor, though. It is the largest single monetary penalty ever anywhere, as far as I can recall, but it does not look so large when you compare it to the sums of money involved, not to mention the actual lives affected. In addition to the monetary penalty, the bank has agreed not to conduct any wire transfers this year between the United States and any other country, and 30 employees are barred from working for the bank, including several who have left already. For their part, regulators have agreed not to revoke the bank’s licenses to conduct banking and securities trading in the United States, a result that would surely have come about had any of the cases resulted in a conviction at trial. The bank had already put in place, earlier this year, internal controls intended to catch its bankers when they conduct transfers for prohibited organizations.

It is a measure of the continued esteem of the banking sector that the severe penalties available under the law were never considered. A lesser-known non-bank enterprise facing similar charges would most likely face criminal forfeiture of the entire enterprise, with executives drawing multi-year jail sentences.

Astute readers will notice that while disguising the transactions of criminal enterprises is a crime in every country, and this particular case involved conduct in several countries, only one investigation was undertaken, it was strictly limited to sanctioned countries, and it happened only after a long delay. Banking regulators are mostly not inquiring too closely about banks’ black-market ties because they are afraid of what they will find.

Anonymous Internet messages and text messages led to a run on First Investment Bank (Fibank), Bulgaria’s third largest bank, last Friday. Depositors withdrew 5 percent of deposits from the bank in less than three hours, prompting the bank to close early for the day and authorities to step in. Several arrests were made over the weekend. Not much is known about the plot to discredit the bank, but traders in stock futures, currency, and swaps would stand to make millions of dollars in less than an hour with advance knowledge of this kind of campaign. Political insiders too might try to sway voters by concocting a crisis. Things seem to have returned relatively to normal this week for Bulgaria’s banks. The European Commission approved a $2 billion line of credit as a precaution.

Raising capital: Deutsche Bank is seeking a buyer for two North American cargo terminals. The two terminals are located in British Columbia and New Jersey. The bank spent $2.3 billion to buy the cargo terminals in 2007, borrowing half that amount. In seven years the cargo operation has recorded losses around $1.7 billion, much of that going to debt service. Now industry analysts think the two terminals may fetch around $1 billion. Separately, Deutsche Bank has sold its U.S. energy portfolio to Citibank.

Leak: Goldman Sachs showed how easy it is to leak customer data when a worker inadvertently directed an email message to a address instead of the intended internal address. The message contained “massive” amounts of identifiable customer data. Ever since, Goldman Sachs lawyers have been seeking a court order authorizing Google to delete the errant message. Pending that order, Google has sequestered the message in question so that the account holder will not see it.

Ailing: Jamie Dimon, CEO of JPMorgan Chase, has cancer. His condition is thought to be fully curable, but the illness is surely a sufficient excuse to get out of his job, if Dimon were looking for an exit strategy.

Holding the bag: Bank of New York Mellon is stuck with $500 million in money Argentina had intended for bondholders. The bank cannot forward the money to the intended recipients because a federal court has ordered Argentina to stop making payments on its international debts. The court is expected to direct the bank to return the funds to Argentina. U.S. courts have jurisdiction because the bonds were originally issued in the United States.

Wednesday, July 2, 2014

Corporations Are Gods Now

To put the new Supreme Court decision in context, it helps to remember how Elizabeth Warren became a folk hero. This was long before she was running for the Senate, when she was working essentially as a regulator with her focus on financial institutions. In her speeches and official recommendations, she called for corporations to be held accountable for their actions. She patiently spelled out the social consequences of the lack of accountability for corporate actions.

The Supreme Court’s approach, in its recent decision on corporations, is the exact opposite of this. The decision places corporations above the law by allowing them to consult their own religious beliefs when deciding whether to comply with laws regarding the treatment of workers. Corporations, in truth, don’t have religious beliefs, so the decision makes no sense whatsoever, but it is law regardless. And if you consider the consequences, something the Supreme Court clearly could not be bothered to do, the effect is deeply troubling.

Corporations do not have religions, but if corporations did have religious leanings, what would those be? To answer that question, consider this one: if a corporation built a shrine, a temple, a cathedral, or some similar religious edifice, what would it be? The answer is glaringly obvious if you walk around the center of any major city and look at the gleaming towers of glass and metal. Corporations build shrines to themselves. It is not a symbol of any human religion but a corporate logo that you see on the faces of these temples. Corporations have no religious beliefs that a human would recognize, but the belief they do have, more than any other, is a belief in their own overarching greatness. If a corporation were to pray, as it essentially does when it adopts a mission statement or a similar document, it would be praying to itself.

And now, the new Supreme Court decision has codified this into law. When a corporation prays to itself, that is now a protected religious expression. A corporation can appoint itself as god, and not only will the Supreme Court not object, it will all but insist on this arrangement. In essence, the Supreme Court has just declared that corporations are gods. It may not have used those exact words, but that is the principle that will be in play when future cases come before the courts that refer to this decision as a precedent.

This same court’s declaration that corporations are people has gone a long way toward upending democracy. This new declaration that corporations are gods is so mind-bending I can’t begin to draw a line around the possible consequences. But if elevating corporations to the status of people has caused trouble, elevating them to the status of gods will surely make things worse.

Even before the consequences are known, the decision has held the court up to ridicule. Actual religious institutions, ones founded on the religious beliefs of actual people, are deeply troubled at the way the court decision appears to put corporation above religious institutions in the religious sphere. Legal scholars complain that the court, given a chance to make a very clear and simple decision that would uphold the principles of law, elected to make a very complicated decision instead. And for ordinary workers, the bottom line is that the court has made a new law that is almost impossible to explain, but makes everyone’s everyday lives more complicated. Court-watchers described the day as a new low for the Roberts court, in terms of its reputation among legal scholars and the public. This was not just because of the “corporations are gods” decision — there was another equally awkward decision on the same day. When the word on the street is that you don’t have to be a legal scholar to do better than the Supreme Court, it is an indictment not just of the current court, but of the political system that created it.