Friday, October 30, 2015

This Week in Bank Failures

Reorganizing: Deutsche Bank said it wanted to focus on corporate finance and global transaction processing, and this week we learned the restructuring will cut deeper than the statements of two weeks ago suggested. The bank will sell off all retail banking operations and make an additional 15,000 job cuts on top of that. It will shut down all operations in ten countries: Argentina, Chile, Denmark, Finland, Malta, Mexico, New Zealand, Norway, Peru, and Uruguay. Russia did not make this list, but the bank said previously it would drastically scale back its operations in that country. Aside from everything that is closing, the bank says it will trim its customer list by half in the core businesses that remain. Deutsche Bank plans to complete these changes within five years.

Raising capital: Standard Chartered Bank plans a $4 billion stock issue. General Electric is said to have at least three bidders for its French bank. Lloyds wants to sell £2 billion in new shares in the spring to replace the government’s remaining post-bailout ownership share, but plans might not be realistic. Most Wall Street banks will need to raise capital, an estimated $200 billion in total, to meet proposed rules covering margin requirements for credit default swaps not cleared through exchanges and capital requirements for systemically important banks

Rescued: In one of the strangest buyouts in the post-recession era, First Niagara in 2010 bought out the holding company of Harleysville National Bank, which had spent itself into insolvency with ill-timed acquisitions in mortgage lending and weath management. It seemed a bit much for First Niagara to take on, but the deal was ultimately approved. Now it is First Niagara’s turn to be rescued. The acquiring bank this time is KeyBank. The deal values First Niagara at $11.40 per share or about 25 percent less than the stock was worth before the Harleysville National Bank acquisition. Ratings agency Moody’s has placed KeyCorp on review for downgrade because of the added credit risk the bank takes on from the deal.

Wednesday, October 28, 2015

Shell Cancels Oilsands Project

Shell is canceling another major oil project, this one the Carmon Creek oilsands project near Peace River in western Alberta. Shell announced the project in 2013 when oil prices were much higher, then slowed it down when oil prices fell last year. Now it is dropping the project from its investment list and taking a $2 billion accounting charge as a result of the canceled project. At CBC News:

It is surely the right decision for Shell. With no sign of an oil price rebound in the near term, and facing higher costs than originally expected in the oilsands extraction, Shell would be taking a big risk if it went forward with such a large dig. It is also good news for Alberta, providing some assurance that will still be some recoverable oil in the ground 25 years from now when rising prices for oil make the asset actually mean something.

The move also makes sense in terms of pipeline capacity. Existing pipelines can pump oil out of Alberta over the next century or so, and that is better management than the proposed expansions that could pump the region dry in 35 years or less.

There are new signs of softness in oil prices, with petroleum vessels taking the long route around the Cape of Good Hope because all available petroleum storage in Europe is already filled. The lack of storage for oil products suggests that prices of gasoline and diesel will have to decline between now and December, possibly setting up a new decline in crude oil.

Tuesday, October 27, 2015

Closed on Black Friday

I think it now qualifies as a countertrend: REI is joining a short list of U.S. retail chains that will be closing not just on Thanksgiving, but on Black Friday too. That major retailers are willing to forego Black Friday shows that the biggest shopping day of the year at U.S. retail, coming at the peak of the Christmas shopping season, isn’t all it’s cracked up to be. If the intense foot traffic is so bargain-focused, how can it translate into the kind of markup that can keep a retailer going? Best Buy is one retailer that has admitted to losing money on Black Friday, but just getting potential customers in the door one time each year is a win for the consumer electronics giant — maybe then it will be remembered and make its money the day the microwave or television breaks down. But not every retailer is so desperate to remind customers it still exists. REI stands as one of the most reliable sources for the outdoor recreation equipment it sells. Its customers won’t forget it’s there just because it takes a day off.

In a way, REI is showing off by closing on Black Friday. Its Black Friday strategy shows that it’s in a strong position in almost the same way that Best Buy shows that it is barely holding on. If closing on Black Friday works, other retailers might try the same thing. Those who want to make the same point on a smaller scale might postpone opening on Black Friday till noon, which is a sharp enough contrast to the stores that open at midnight or earlier. However, not just any retailer can try this. A day off has to be earned. Sears, for example, wouldn’t dare take Black Friday off. Shoppers who arrived to find a store like Sears closed would just assume the struggling department store had finally gone under, and that’s an impression no business wants to make.

Monday, October 26, 2015

WHO Finds Link Between Meat and Cancer

In a report published today, an expert panel at the World Health Organization made two findings about meat:

Red meat
After thoroughly reviewing the accumulated scientific literature, a Working Group of 22 experts from 10 countries convened by the IARC Monographs Programme classified the consumption of red meat as probably carcinogenic to humans (Group 2A), based on limited evidence that the consumption of red meat causes cancer in humans and strong mechanistic evidence supporting a carcinogenic effect.
This association was observed mainly for colorectal cancer, but associations were also seen for pancreatic cancer and prostate cancer.
Processed meat
Processed meat was classified as carcinogenic to humans (Group 1), based on sufficient evidence in humans that the consumption of processed meat causes colorectal cancer.

These findings probably surprised no one, since anyone who did a similar review of the science would come to similar conclusions. The magnitude of the effect of processed meat on intestinal illness became clear in a study published two years ago. Indeed, meat industry lobbying groups around the world were expecting the WHO announcement and had their rebuttals prepared in advance. With the huge amount of money spent advertising meat every week, it is hardly surprising that newspaper stories gave more space to the point of view of the meat industry than to that of nutritionists and cancer researchers.

I am not sure many people will be convinced by the p.r. blitz, though. When a butcher says meat is good for you, the conflict of interest is pretty obvious. When cancer researchers say at least half of cancer in and around the intestine appears to be caused by eating meat, there is no comparable conflict of interest.

The WHO report will have little immediate effect on consumers but will eventually lead to changes in institutional food. I am not about to tell people to stop eating meat any more than I would tell them not to eat Halloween candy. Just don’t try to live on that kind of food. All indications are, that’s an approach to food that won’t end well.

Sunday, October 25, 2015

Harleys, Leather Jackets, and Grandpas

I was in a thrift shop. Most of the shoppers were there to look for Halloween costumes. Two men in their thirties were shopping for more practical items. One commented that he wanted to take a minute to look for a leather jacket.

The other man chuckled at the stylistic choice. “Why? Are you a grandpa?” The way he saw it, a leather jacket was something you would wear if you wanted people to think of you as an old man.

Of course, this is probably not the way most people who wear leather jackets think of their look. The protective qualities of leather mean you’re ready for what happens when things start flying. That can translate to a sense of adventure. But that connotation doesn’t come across when you are just standing around, or worse, sitting on the sofa.

As a rock musician, I wear leather jackets sometimes, not just for their historical association with rock, but also because it’s a style I can easily afford. Most of my leather jackets cost me between $3 and $8 in places like the thrift shop where I was, even if it didn’t have any on the racks on this particular day. I feel sure I look a little more natural in a cotton fleece sweat jacket, but those cost more and don’t last nearly as long.

The price I pay for a leather jacket ought to tell me something. Something that costs more than $50 to make and sells for $6 is something that has fallen out of favor, even if it is something as durable as a leather jacket. You won’t see much leather on today’s rock musicians. When you do see a rocker wearing leather, the wearer is likely to be a heavy metal musician, an actual motorcycle rider, or a musician old enough to be working on his 15th album. In my case, I fall into that last group.

Leather sneaked into heavy metal mainly because Judas Priest singer Rob Halford saw an opportunity to introduce elements of S&M fashion into the band’s look, but it was also helped by the Easy Rider film from a decade before, which featured Harley-Davidson motorcycles, leather jackets, and the Steppenwolf song “Born to Be Wild.” Of course, the black leather jacket was a staple of rock ’n’ roll style from a decade before that. This jacket in turn was based on the bomber jacket pilots wore in the early decades of aviation. While the links are easy to trace, it is easy to see how the leather jacket has come to mean so many different things to different people.

If leather is out of fashion these days, Harley-Davidson, the motorcycle manufacturer, is dealing with the same issue. Benjamin Preston quotes Kelley Blue Book analyst Michelle Krebs in The Guardian:

The younger generation has no interest in Harley-Davidson as far as I can tell. Unless you ride a motorcycle or scooter in a city as your transportation, motorcycles are a splurge millennials can’t afford and have no interest in – especially Harley-Davidson, which seems like a old white-guy brand.

The “old white guy” is almost the same as the “grandpa” I started out with. The rest of the story in The Guardian’s business section is worth a look:

Leather jackets and Harley-Davidson are caught up in the inherent impracticality of the aging rebel persona. In the eastern United States in particular, they tie into stereotypes we’ve seen too much of. We have all seen people who seem to sincerely believe that ratty clothes, the “rebel flag,” dodging responsibility, beer, firearms, being ready to fight, and being as loud as humanly possible are the solutions to the world’s problems. That point of view might be laughable, but it is just common enough to be taken seriously. If you want to be cool, you can’t be seen as buying in to that point of view. The impractical side of the aging rebel is especially uncool these days.

Impracticality is, I must admit, a drawback of leather jackets. They’re good only in a narrow range of weather. I don’t like the sweaty, clammy feeling that goes with a leather jacket in warm weather, like September. I look foolish shivering in a leather jacket in freezing weather in December. Leather won’t last long if I wear it out in the rain. That leaves only about 30 days in the fall season on which a leather jacket makes any sense, basically in November. That’s too restrictive a season to allow a garment to be a staple of a wardrobe.

If leather jackets are not so practical, Harley-Davidson has worse problems. A Harley-Davidson motorcycle burns through just as much fossil fuel as a Toyota Prius. That’s not because it’s designed badly, but more an inherent limitation of the technology. The internal combustion engine loses efficiency when you scale it down to the level needed for a car or a motorcycle. That in itself is a hard sell to those of us who may be young enough to see the coastlines submerged by the sea level rise caused by burning fossil fuels. What makes it embarrassing is that the Harley costs about the same as the Prius. Seriously? You could have bought a car, but it wasn’t loud enough for you?

Adding to the practical difficulties, there are the stylistic difficulties, which also are hard to get around. Motorcycle safety requires the kind of leather jacket that is no longer cool as soon as you’re parked.

Harley-Davidson, I think, will have to come up with a new, more practical story to win over the under-45 crowd. As for the leather jacket, its run might be over. With modern materials that offer more design flexibility, it’s hard to make a case for making clothing out of leather except as a nod to another era.

Friday, October 23, 2015

This Week in Bank Failures

Banks in Greece are preparing their capital plans as the Greece bailout process focuses on recapitalizing banks during November.

Deutsche Bank now says it will focus mainly on its corporate finance and global transaction clearing and will sell, shut down, or minimize the other parts of its business.

The U.S. House is preparing for a vote to revive the Export-Import Bank. The bank was forced to stop conducting business earlier this year when the House leadership refused to allow a reauthorization vote. 

Thursday, October 22, 2015

YouTube’s Donation Bucket

YouTube is almost ready to launch its subscription service. YouTube Red is a lot less than YouTube had in mind when it started to experiment with music-oriented subscription services three years ago, but I think that is simply because the various experiments all failed. Will YouTube Red bring viewers or the music industry, scared off by years of aggressive tinkering, back to YouTube? Probably not, but that doesn’t seem to be the point. The new $10-per-month subscription offers so few extras, you could easily forget you are paying for a premium version of YouTube.

A few regular viewers might pay for YouTube Red or the forthcoming YouTube Music just to save the bandwidth that YouTube’s ads take up. Mostly, though, the subscription services seem to be meant as YouTube’s donation bucket. It’s the easy way for YouTube supporters to give Google something to help cover the cost of operating its 100,000 video servers. In return, YouTube will give you what it was going to give you anyway. For those who can spare the money, maybe that deal is fair enough.

Tuesday, October 20, 2015

Canada Votes Against Austerity

Canada was clearly tired of austerity budgets, government giveaways to business, and the damage to the economy that both caused. With the ruling party and the largest opposition party both pledging continuing austerity, voters turned out in large numbers to support the Liberal party, which had promised a more economically active government. The two leading parties when the campaign started lost almost half of their seats to the Liberal party.

Canada’s big bet on oil exports didn’t look so smart this year after two years of declines in the global price of oil, and concerns over global warming have dampened enthusiasm for fossil fuels. The shift from simplistic cost-cutting to economic reforms ought to help Canada’s flagging economy recover from the rout in oil. Aside from the obvious problems with the heavy reliance on oil, the larger lesson in the election is about the political risk of austerity budgets. Government austerity, most of the time, is a code word for shifting wealth from the majority of people to a wealthy minority, and that obviously does not provide a formula for broad-based prosperity. If you keep taking things away from taxpayers year after year without delivering results, it doesn’t take too many years before the story gets old.

Saturday, October 17, 2015

Frustrated Outburst Points to Alaska’s Post-Pipeline Future

One of the surest signs of an enterprise in long-term decline is when it starts to refer to its friends and supporters as enemies. A sociopath, of course, struggles perpetually to understand the distinction between friend and enemy, but most of us arrive at this confusion only after years of hard-fought disappointments. It happens, that is, when we are working against nature, trying to reach a goal dictated by ego but not easily found in the possibilities of the situation.

This is why it is so distressing to see the reactions of officials in Alaska yesterday to three minor procedural setbacks in offshore oil drilling in the Arctic Ocean. To put the day in context, it is important to understand how minor these setbacks are. Two of them were oil leases that will expire on schedule instead of being extended. The two oil companies in question had, in ten years, shown no inclination of drilling for oil in the leases they paid for. Three extra years would not have changed anything — the leases would still have expired without so much as a visit from the oil companies that nominally owned them. The third setback was the Interior Department canceling two years of oil lease auctions. The auctions would have failed anyway, after not a single oil company expressed interest in bidding. If the auctions had gone ahead and leases been purchased by speculators, it would have been a great deal of wasted motion that still wouldn’t have resulted in any drilling. For deeper context, see FuelFix:

These three non-events drew an alarmingly violent reaction from Alaskan officials. One characterized the White House as the sworn enemy of fossil fuels. In reality the White House is a staunch supporter of fossil fuels and has subsidized the sector more than any other corner of the economy. Another official yesterday hinted that Alaska might take over a national park that is at issue by military force. That is something that obviously won’t happen, but the fighting words are nevertheless a sign of something. Other comments were disturbing in similar ways — putting the blame for the oil industry’s failings on the native people of Alaska, on defeatist attitudes — on anything but the real problems, the lack of oil in the ground and the low market price for oil this year.

This kind of thinking is the work of ego. When you’re convinced that you’re right and nature is wrong, you can seize on anything as an obstacle. If you drill for oil and find none, then the oil must be beyond the coastline, or beyond the national park boundary. The coastline and the administrative line become the imaginary enemies. Now, it seems, the government that subsidizes the effort and the workers who operate the oilfields, or those who don’t want to work in the oilfields, are also the enemies. But this phase of lashing out can’t sustain itself. The only things that will keep Alaska going in its current form are more oil in the ground and higher market prices — forces of nature that Alaska, despite the bluster, has little ability to influence.

If the situation is as dire as yesterday’s outburst implies, we can expect the fundamental character of Alaska to evolve over the next ten years as unemployed and underpaid workers leave to seek opportunities in places where the economy is sunnier. Farther in the future, someday the pipeline will fail and with hardly any oil flowing, there won’t be the money to patch it up again. With a warming climate, my guess is that agriculture in the panhandle will at some point overshadow other economic activities in Alaska, with the capital Juneau becoming the center of the state again. These are changes that are almost unimaginable at this point, and there are few historical parallels that help explain what a post-pipeline Alaska will look like. It is important to remember, though, that there was an Alaska before the pipeline. The history of extraction, whether of oil or something else, is that it rarely lasts much longer than a lifetime before the underground resource is depleted, and there is nothing at this point to say that Alaska will be the exception.

Friday, October 16, 2015

This Week in Bank Failures

Arrested: David Drumm, the head of Anglo Irish Bank shortly before its collapse. He is wanted in Ireland on 33 counts including forgery related to a bizarre series of securities and banking transactions in 2008 while the bank was going down under his watch. Drumm is in custody in the United States and says he plans to contest extradition.

Wednesday, October 14, 2015

How Sea Level Disaster Could Affect Municipal Finances

A new study published in the Proceedings of the Natural Academy of Sciences (PDF) estimates the threat of sea level rise to coastal U.S. cities and towns. More than 400 municipalities but most notably Miami, New Orleans, and Boston will have substantial populations below sea level as a result of carbon emissions from existing energy infrastructure. That is, pollution from factories and power plants that are already operating worldwide is enough to put these cities mostly underwater. Before 2050, barring an extreme change in global energy policy, carbon emissions will be sufficient to make it inevitable that these places fall below sea level. After carbon emissions occur, sea level rise is delayed by half a century or longer because of the time it takes land-based ice to melt, but the actual flooding is not gradual. Flooding is most likely to occur suddenly in a catastrophic event such as a hurricane or tsunami.

In New Orleans, no more than 2 percent of the current city by population will remain above sea level a century from now. Realistically, the remaining land will be more like 10 percent of the city, but only because of fill brought in at considerable expense to raise the ground surface and keep the city alive for tourists. Levees and sea walls are on the drawing board for New Orleans, but they will protect the city only temporarily. Inevitably one day one section of sea wall will fail, perhaps in high winds, earthquake, or war, resulting in damage to the rest of the wall and permanently submerging virtually the entire city.

Besides the direct harm caused by such flooding events, it is worth planning ahead for the financial disasters they could cause. To greatly simplify the situation, imagine a 2065 hurricane or blizzard that puts 15 percent of Boston underwater and causes extensive damage to an additional 15 percent of the city, so that with extended evacuations the population and workplace infrastructure is abruptly reduced by 25 percent. Would the remaining 75 percent of the city be financially strong enough to meet the city’s financial commitments and also rebuild as needed? And if not, would rising taxes force more people to move out of the city until eventually the entire city is abandoned, or worse, taken over by outlaws and warlords?

This is the scenario of a science fiction writer, of course, and it takes a combination of bad legal, financial, and land use policy combined with a natural disaster to make such a financial disaster possible. The reason it is worth thinking about is that policies egregious enough to create such a disaster are currently in place in the majority of U.S. coastal states. In Pennsylvania, to cite one example, if a widespread disaster drove a city into insolvency, current law does not provide any possibility for the city to ever recover. Meanwhile in North Carolina, the law prohibits authorities from considering known future sea level rise in land use planning. Bad laws like these are not easy to correct, but the saving grace is that we may have half a lifetime to make policy corrections before a catastrophic coastal city failure occurs.

Besides the obvious corrections in state laws, cities that may be subject to predictable disasters should not borrow as much as U.S. cities currently tend to borrow. It is the debt load that turns a physical disaster into a financial disaster for the rest of a city. Limits on city debts are hard to enforce, but this year’s Boston Olympics experience shows a reason to hope that political activists can deter cities from making large-scale financial mistakes that politicians alone are unable to avoid.

Monday, October 12, 2015

Chip-and-PIN Arrives in U.S.

Chip-and-PIN is the biggest upgrade for credit cards since the magnetic stripe, and it can’t be expected to go smoothly or arrive on schedule. Nevertheless, the credit card transition has finally reached the United States in a big way. As of October 1, most retailers had terminals that can accept the new chip-and-PIN cards, or at least they had ordered the new terminals and were waiting for them to be manufactured, delivered, and installed. Banks started to mail the new-style credit cards to all cardholders in September, but the industry has never created and mailed so many cards all at once, so cardholders can expect delays of up to three months. Parts of the transaction processing network can handle the new chip-authorized credit card transactions, and others will be handling that capability in the coming weeks.

It helps that most of the world has already made this transition, and there is no question that the improved security could prevent an abrupt collapse of the transaction processing network someday. Nevertheless, the transition would be going even slower but for the high-profile network intrusions at Home Depot, Target, and other major retailers. Banks and retailers are hesitant to add any new obstacles to the shopping experience, and that is why they are being so cautious with the transition. No one will be happy if there are glitches that cause valid cards to be declined at stores, so the industry is bending over backward to minimize those occurrences. The October 1 deadline might have passed already, but we can expect the extreme caution to continue, at least until the next major transaction security breakdown.

As a cardholder, you mainly need to get used to the new terminals and replace your old cards with the new ones as they arrive. Don’t make the mistake of thinking a magnetic-stripe card will still work just because the expiration date says 2017 or 2018. In my own case, I started the month with only three cards that are EMV-compliant. Banks are prioritizing the cards that are used ten times a month over ones that are used only once or twice. The majority of cards haven’t been used at all in the last three months, and those are likely to be the last to arrive.

The new cards incorporate active ID logic that generates a new unique code for each transaction so that the card number itself doesn’t have to be stored along the way. Network intruders won’t be able to obtain as many card numbers as before, and that fraud opportunity will diminish in scale as more parts of the system are upgraded, eventually disappearing completely around 2019 when we are entering PINs for every credit card transaction. That will close the most glaring gap in transaction security, allowing banks and retailers to focus on other security gaps that also has to be closed.

Friday, October 9, 2015

This Week in Bank Failures

Deutsche Bank could suspend its dividend as it looks at €6 billion in losses and charges related to its global restructuring, which is still in its very early stages.

The stock of U.K.-Swiss commodities trader and miner Glencore has fallen by half since the start of the year. Traders and analysts worry about the company’s liquidity facing falling prices for metals, ores, oil, and other commodities. Bank of America warns that banks could have around $50 billion of exposure to Glencore mostly in the form of lines of credit, money that could be at risk if Glencore loses liquidity. Another analyst thinks that no U.S. bank has as much as $1 billion at stake in Glencore, focusing on Glencore’s largest credit facility with an estimated balance of $15 billion. This line of credit is said to have 34 lead banks. We might find out more about specific banks’ exposure in the footnotes to this month’s financial statements.

Layoffs are on the way at Standard Chartered Bank. The bank has told its staff it is preparing to cut 1,000 jobs. Besides its own operational problems, Standard Chartered is affected by the economic slowdown in East Asia.

BP will end up paying about $55 billion in claims from its 2010 oil spill in the Gulf of Mexico, which killed 11 workers on the drilling platform and spread oil over most of the Gulf. The liability covers only a small fraction of the damage done and is not a large enough sum of money to represent a threat to the company’s continuing operations.

In another major corporate liability case, Volkswagen has set aside €6.5 billion to cover costs related to its diesel software problems. Its ultimate costs could be several times higher if it has to buy back a large number of defective vehicles, and it is not known what banks might be affected by the liquidity problems that would result at Volkswagen in that scenario.

S&P has warned about economic impact on Australia in particular as a result of a predicted recession in China.

Milwaukee-area bank Securant Bank & Trust has issued $11 million in new stock, equal to about 6 percent of assets. It’s a move that the bank said was necessary to avoid bankruptcy. Securant had spent the last two years selling assets and cutting costs after the FDIC ordered the bank to raise capital and improve its operations.

Thursday, October 8, 2015

Drawing Lines for Ports on Hudson Bay

It is already a logistical challenge to build ports on Hudson Bay, which until recent times was frozen over most of the year. It is still a very cold place with limited resources and transportation. On top of the logistics, there is an administrative challenge. The borders of the provinces that have plans for northern ports, Quebec, Manitoba, and Ontario, are placed right on the waterline, so that while a port might be within a province, its piers would not be. It is an untenable situation for law enforcement at least.

With the first major ports just a few years away, it is a question for Ottawa to look at. Probably the borders should be redrawn at fixed points extending at least a few miles from shore. The borders have become a matter of urgency for Quebec as it tries to draw up a maritime strategy, facing border questions not just along Hudson Bay but on its northeast coast on Hudson Strait. That conundrum probably provides enough of a push to have the border question taken up in the near future.

Wednesday, October 7, 2015

Flat Seasonal Staffing at Retail

It is a difficult holiday shopping season to predict, with household income up but consumers showing signs of reining in spending, so it’s no surprise to find that U.S. holiday staffing plans are around the same level as last year. Some of the largest seasonal employers have said they plan to hire the same number as last year: Target, UPS, Walmart, Macy’s. Toys “R” Us is the largest retail chain reducing its seasonal staffing, but it is cutting back its plans only 11 percent. Amazon has not finalized its seasonal hiring plans, but with half a dozen new logistics locations opened this summer, it is fair to guess Amazon will be employing more people in total than last year. Retailers have 3 percent more permanent staffers than last year according to a Challenger, Gray & Christmas survey, so that may reduce the need for temporary workers during the holiday shopping season. Retailers are also investing in new technology that it is hoped will smooth the shopping experience, following a decade of limited investment at retail. If the new generation of apps helps shoppers find what they are looking for incrementally faster, that should reduce crowding in stores and reduce the peak staffing levels needed.

Sunday, October 4, 2015

The Random Center and the Gossip App

I just spent more than an hour being fascinated with the story of a forthcoming app that encourages people to write down their opinions of other people. When you rate someone with this app you provide a numeric score which can be averaged together with everyone else’s opinion of that person. The app presents itself as a sort of social-media popularity contest in which, if you possess many of the virtues that make up popularity, you may strive to achieve the lofty goal of a 4 rating on a scale that goes from one to five.

It won’t work, though, and not just because the app strikes most people who hear about it as a terrible idea. The 4 rating a user is encouraged to strive for is out of reach because of the mathematics of social networking. If everyone’s opinion of you is considered equally, then your rating is determined by people who barely know who you are. These are people whose opinion of you is based on superficialities, hearsay, and having confused you with someone else. It is the people who barely know you, or who think they know something about you but perhaps don’t, who determine your rating simply because there are so many more acquaintances than friends. If you have 100 friends while 10,000 people have met you or heard about you, it is the larger group that matters when everything is averaged together. Obviously there is a high degree of noise and randomness in opinions that come from people who don’t really know the first thing about you, and random values tends to fall near the center on average. To consider this question, imagine how you might rate all the people you have met over the past year. It would be hard to form meaningful opinions. In most cases you have nothing to go on. You would mostly be guessing. With so much randomness it may be impossible for anyone to remove themselves from the random center far enough to be ranked as low as a 3 or as high as a 4 when the scores are averaged together.

There is a more fundamental reason why the new popularity contest app I spent so much time reading about won’t work. It is not really a popularity app. Even if the network is the mobile Internet, the medium is writing, and writers are also asked to provide a numeric score, what the app is fundamentally all about is talking about people who aren’t there. In other words, it is a gossip app at heart. One of the problems with gossip is that you can spend long periods of time immersed in it and come away with no information of practical value. After all, isn’t that what I just did? Gossip makes itself seem important, but when you realize how much time you are wasting, time you could have put toward an activity that would better your situation, the appeal fades. An app rooted in gossip will inevitably meet the same fate.

Saturday, October 3, 2015

Tip-Shaving in the U.K.

The tip-shaving scandal that nearly brought down a Philadelphia restaurant chain a year ago has popped up in the U.K., where the public has learned of a dozen prominent restaurant chains systematically skimming off as much as two thirds of table servers’ tips. Some of this is legal under current U.K. laws if done correctly, but customers aren’t happy about any of it, and restaurants that get caught out are promising to mend their thieving ways. In the end, the laws will likely change, and at least one restaurant chain will collapse under the weight of customer disapproval, but there won’t be any prosecutions. As in previous tip-shaving cases, that’s because it’s hard for justice officials to imagine that the law is intended to prevent the powerful from preying on the weak.

Friday, October 2, 2015

This Week in Bank Failures

National Bank of Greece (NBG) may be selling its Turkish subsidiary Finansbank. The sale could bring in €3bn, enough to cover the estimated capital shortfall at NBG. NBG had previously been thinking of selling a 40 percent stake in Finansbank, but could get a better price selling its 99 percent stake to a single buyer.

Lawmakers in Greece are on track to complete legislative reforms this month to qualify for euro zone bank recapitalization funds in November.

In Russia, 1/6 of privately owned banks have closed in the last two years, with the national economy slowed by low oil prices and isolationist politics. B&N Bank, gambling that the economy turns around soon, has become the fifth largest bank by buying up seven of its competitors so far. With its latest acquisitions, B&N may now be large enough to be considered too big to fail.

The specter of bank failure returned to Georgia tonight with state regulators closing The Bank of Georgia, with 7 locations southwest of Atlanta and a quarter billion dollars in deposits. Fidelity Bank is taking over the deposits and purchasing all but a few of the assets. The failed bank had specialized in real estate loans.

In the opposite corner of the country a much smaller bank failed. Hometown National Bank in Longview, Washington had less than $5 million in deposits. Twin City Bank is taking over the deposits and purchasing most of the assets.

Thursday, October 1, 2015

A Narrow Window for Hits

Now that Apple Music’s 90-day free trial phase is winding down, can you name the big hit songs of the last few months?

If you’re like most music fans, you can’t name more than one or two new hits released during the last quarter. You probably recognize several of the new songs when you hear them, but don’t know them well enough to rattle off a list of titles. The well-publicized launch of Apple Music had a chilling effect on new releases, with many held back so they wouldn’t cross paths with the free trial period. This happened even though Apple decided at the last minute to pay royalties during the trial period. There may be a flurry of memorable songs in the next five weeks, as recording artists and record companies try to fit their potential hits in the narrow window between the Apple Music trial period and the Christmas music season. Timing of product releases has always been a tricky question, but it is rare that the timing of record releases becomes so constrained. It shows, at least, how much impact institutional changes can have on the publicity efforts of musicians.