Friday, September 30, 2016

This Week in Bank Failures

Cuts: Commerzbank is cutting 9,600 jobs or 20 percent of its staff, a much larger move than the 2,000 job cuts rumored a week ago. The bank, the second largest in Germany, is suspending its dividend and revamping operations as loan demand falls sharply in Germany.

Reports of a bailout of the country’s largest bank are greatly exaggerated according to Germany and Deutsche Bank. The bank, facing a financial shortfall of at least €4 billion, has not requested assistance and the government is looking only at hypothetical scenarios. Published bailout scenarios appear to directly violate EU laws, suggesting that government officials may be looking only at the comparative budget impact of a bailout or bank failure.

Wells Fargo has launched an internal investigation into its marketing practices, a first step toward badly needed changes in policy and personnel. Perhaps alarmed at the lack of movement at the bank, states and cities are re-examining their accounts at Wells Fargo. The state of California has announced it will suspend most of its business with the bank for the next 12 months. Among other moves, the state is asking the bank to launch an anonymous ethics reporting hotline. That suggestion comes after revelations that the bank’s current ethics hotline, though supposedly anonymous, identifies employees who report problems and has them fired. The U.S. Department of Labor says it is looking into possible whistleblower violations in the bank’s labor practices. Workers who were fired after reporting violations have sued the bank. The bank seems surprised by the scale of the reaction to its marketing fraud and only yesterday decided to end the sales quota incentive program at the heart of the scheme. The incentives remain in effect today but are being discontinued soon, possibly tomorrow.

Wednesday, September 28, 2016

3 Horse Meat Indictments

The horse meat scandal of four years ago faded with surprisingly little known about what happened. All over Europe and in the United States, horse meat was being sold as beef and other forms of meat, usually in a mixture of meat in processed food. There were months of disclosures in Europe as retailers, factories, and authorities looked into the matter. It is anyone’s guess how much mislabeled horse meat was sold in the United States because the USDA denied that such a thing was possible and never looked into it.

Hundreds of people in at least a dozen countries had to have been involved in the misselling of horse meat, but it is only now that three people (yes, only three) have been indicted. At The Guardian:

Monday, September 26, 2016

A Cup of Tea for the Debate

I’m not recommending that anyone watch the presidential debate tonight, nor the other debates to follow. It can’t be good for the soul to listen to a politician point fingers, particularly when inevitably some of the fingers are pointed in your direction. However, I realize that millions of people will watch the debate, and if that number includes you, how do you protect yourself from the damaging effects of the radioactive rhetoric?

There are many things you can do, but the simple thing I can recommend for many people is a cup of tea. Why tea? Tea is widely held to be comforting and familiar, and at the same time, it is made by the efforts of people who work outside the imaginary line that defines the borders of the United States. When you drink tea, you are drinking a beverage that the protectionist candidate in tonight’s debate would have you no longer drink simply because it is not domestically produced. Tea is grown in and imported from countries like, well, China. Imagine how smug and defiant you can feel listening to a hothead talking about bringing China to its knees while you sip on a beverage that comes from that country. Reflect on your kinship with the men of the American Revolution and the famous Boston Tea Party — you are drinking your cup of tea months before Congress has any chance of enacting the proposed new tax that could double the price of tea along with the other goods of the world. If you are letting your thoughts stretch that far, you might as well take that next step and think about the way drinking tea demonstrates one way in which you are the same as anyone else who ever drank tea, or coffee or wine, or water or any other beverage. We all need to drink something when we can because it is our nature, reflecting the way we are all descendants of the same ocean.

When you start to think of it this way, drinking a cup of tea during a political debate can be a revolutionary act. It connects you not just to a physical product of the larger world, but also to the more abstract world of possibilities that gave rise to the physical product. That may serve as a reminder of something that no politician on a stage will ever tell you — that the changes that matter don’t come from institutions of power like those that a candidate represents, but from almost everywhere else but. Think about that long enough and you might even decide not to watch the rest of the debate.

Friday, September 23, 2016

This Week in Bank Failures

Cuts: Commerzbank, the second largest bank in Germany, is planning job cuts. The board next week will consider a plan to cut 2,000 jobs as the bank scales back its offerings to business customers. Deutsche Bank is making plans to close its loss-leader Australian wealth management business. It will serve Australia and New Zealand clients from Singapore.

CNN spoke to employees of giant banks and what they found could be trouble for the industry. Current and former Wells Fargo employees said the bank routinely identified and fired workers who reported improper marketing practices to the bank’s supposedly anonymous ethics hotline. Employees of other major banks said the marketing practices at Wells Fargo are not far removed from the rest of the industry. 

Wells Fargo’s CEO has resigned his Fed position, obviously needing to focus on the continuing crisis at Wells Fargo.

The SocGen trader convicted of forgery for his high-risk trading won’t owe €4.9 billion in damages to the bank. The bank’s own management failures were the primary cause of the subsequent losses, an appeals court ruled in reducing the damages amount to €1 million.

Tonight’s bank failure was Allied Bank, with five locations in the general area of Fort Smith, Arkansas. The failed bank had $65 million in deposits. After state regulators closed the bank, the FDIC turned the deposits and assets over to almost-local competitor Today’s Bank. Allied Bank was founded in 1902 in Mulberry and was known as Bank of Mulberry before 2002. The bank’s holding company filed for bankruptcy reorganization in 2014, but was ordered liquidated in 2015. The bank had a high level of bad loans but also had higher than average expenses, making it more difficult to recover from financial setbacks. This is only the fifth bank failure of the year.

Thursday, September 22, 2016

Yahoo Discovers Biggest Data Breach Ever

Yahoo says 500 million accounts had user data stolen in 2014. In terms of the number of accounts, this may be the biggest data theft ever. On the other hand, it is easier to acquire a Yahoo account than almost any other Internet account, so the magnitude of the problem is not as big as the raw numbers would suggest. I ended up with at least five Yahoo accounts over the years, mostly through Yahoo’s acquisition of other services, though I had the good fortune to close all of them before the massive data breach in 2014. Yahoo itself closed hundreds of millions of inactive accounts in what, in retrospect, looks like a sensible precaution.

Hashed passwords were among the data stolen, so if you had a Yahoo password in 2014 and are still using the same password, you should change that password soon. If you use the same password anywhere else, change it there too. If you have several Yahoo accounts that you have kept open even though you no longer use them, consider whether you will be more secure if you close them now. It was only because I closed my Yahoo accounts years ago that I don’t have to worry about the current data breach.

The Yahoo data theft is believed to be the work of a national government, though Yahoo either doesn’t know or can’t say what country was involved. Multiple countries in recent years have been collecting user passwords wherever they can find them because half of Internet users reuse passwords at multiple sites, potentially giving spies access to highly sensitive information. The systematic theft of passwords is one of the reasons why it is safer to use a new password at every domain where you have an account.

Sunday, September 18, 2016

A Messy Bankruptcy for a For-Profit College

A week ago, for-profit college ITT Technical Institute closed. At the time it appeared the company had simply run out of money. Now that is confirmed. ITT Technical Institute is in bankruptcy.

The bankruptcy is as problematic as the shutdown. In bankruptcy the college will sell off its assets and pay as much as it can to its creditors. The largest group of creditors are the roughly 30,000 students who paid for fall courses that the college wasn’t able to deliver. This group includes, at a guess, 5,000 students who planned to start their studies this fall. They paid their tuition, bought their textbooks, in many cases quit their jobs, only to have the rug pulled out from under them just as their studies were supposed to get going. At the same time almost the only substantial assets in the bankruptcy are the loans due from students, including this new group of students and also including at least 10,000 graduates who can’t get jobs and have no means of repaying their college loans. One hopes the bankruptcy court has a keen sense of fairness about this and doesn’t use money from students who were tricked into handing over their life savings and then some to pay off Wall Street investors. Even if that goes well, we will be left with investors trying to collect student loans from graduates who are unemployed, unqualified, and broke — not to mention what happens to the students who were a few courses short of graduating. It paints an unflattering picture of what American higher education has turned into.

In filing for bankruptcy, ITT Technical Institute says it went broke because it had fewer new students this fall. Total enrollment fell only slightly, but new students had a disproportionate impact on the college’s finances. In this respect, the college may be seen as the equivalent of a Ponzi scheme. It depended on a steady stream of new customers to meet its obligations to its existing customers. If that were not the case, it could have continued to serve its existing customer base using the money its existing customers were providing.

The business plan of higher education is not a mystery. Students pay tuition, and that money goes to pay the hourly wages for instructors and the rent for the classroom. It’s a highly scalable business model — it works for schools that have ten students and for those that have 100,000. ITT Technical Institute charged some of the highest tuition rates in the world. That it could not simply scale back by 5 percent and keep operating, even for a few days, shows that its finances did not follow the normal financial model of a school. It was using borrowed money to pay its operating costs while using its revenue to defend its ability to borrow more. That’s technically not a Ponzi scheme but doesn’t differ financially from one in any important respect.

When a Ponzi scheme is discovered, the only solution is to shut it down as soon as possible. The longer it operates, the greater the financial pain when it eventually collapses. I believe the same logic applies to ITT Technical Institute, and perhaps this was the logic that the board of directors applied. As long as its continued operation depended on proving it can expand its customer base, there was no reason to hope it could wind down gently. Had it succeeded in enrolling more students this year only to collapse next year, the cost of the collapse would have been that much greater. Conversely, had it been shut down ten years ago, the cost of the shutdown would have been smaller.

If the closure came 10 or 20 years later than it ideally should have, tallying the cost of the delay is only a theoretical objection. In practice, institutions never stop the day they start doing more harm than good. Instead, that decision comes long after, and the delay in this case is no different. When a board of directors says it’s time to shut down a corporation, it is almost always too late to second-guess the decision.

Friday, September 16, 2016

This Week in Bank Failures

Deutsche Bank worried publicly about how much it might have to pay to settle deceptive U.S. marketing of mortgage-backed securities. The bank’s worried tone cast a shadow over global stock markets.

A fire suppression system caused extensive damage in ING Bulgaria’s main data center last Saturday, effectively shutting the bank down for most of the day. It was supposed to be a routine test and the bank was caught off guard by the damage, but engineers say the inert gases released by the system can create sounds loud enough to destroy hard disk drives if they are set up in metal racks.

After Wells Fargo got caught padding its numbers with ghost accounts created behind customers’ backs, it will have to explain itself to its customers, the SEC, the Senate and House, and possibly in federal court. The bank has suspended its cross-selling scripts at call centers in order to avoid adding further upset to customers calling to close accounts they never knew existed. However, underlining the bank’s difficulties in coming to grips with the situation, nothing has changed at branches, where insane cross-selling quotas remain in place and staff members who fall short are still being fired. More details of the bank’s actions might come out in a class-action suit filed by account holders seeking compensation under identity theft laws.

UniCredit, the largest bank in Italy, is negotiating with buyers over the sale of operating units and other assets. The bank made a poor impression in recent stress tests and now hopes to raise enough capital to avoid intervention by regulators.

Fifth Third is closing 44 branches in addition to 130 branch and facility closings previously announced.

Tuesday, September 13, 2016

Congress in Brazil Expels Cunha

Brazil took the obvious next step against corruption last night, expelling former Speaker Eduardo Cunha from Congress not for bribery, but for the simpler charge of failing to declare Swiss bank accounts that appear to hold the proceeds of bribes. The outcome is the same: Cunha is no longer in public office and faces an eight-year ban from any government position. The timing shows how hesitant the country is to address corruption. The expulsion was put off almost until the last possible moment, and Cunha now goes off to face the first of what could be dozens of criminal charges. Cunha has said all along that if expelled, he was prepared to testify against half of Congress in the ongoing corruption probe, and it appears he will now have that opportunity.

Sunday, September 11, 2016

The Still-Icy Arctic Ocean

Years ago I predicted this would be the month that Arctic Ocean would have so little ice that ordinary cargo ships could pass through the middle of it. That didn’t happen, but this summer’s melting shows that favorable weather won’t save the sea ice from the effects of global warming.

Arctic sea ice is a fraction of what it was when detailed record-keeping started in 1979, and that is what led me to predict a substantially ice-free late summer. At the same time, it seemed there was reason to hope that a run of good luck with the weather might allow Arctic ice to hang on in a semblance of its current form for another decade. That would require quiet spring weather, clouds in June and July, and light winds so that there is hardly any outflow. That last point seemed the most important. Surely, with less and less ice as the years go by, it would get harder and harder for winds to push the ice out of the Arctic and into the Atlantic.

This year was a good test of that idea. April through mid-August provided almost the best weather patterns we could imagine for the ice. Outflow virtually stopped from April until the end of August. Ice nevertheless tracked near record lows all year long. It is now lower than the September lows of every year but 2012. The answer, then, is that near-ideal summer weather might prevent a new record low for Arctic ice, but it won’t stop the downward trend.

How is this possible? Global temperatures seem the most likely culprit. July was the warmest month on record globally, and for the last three years, more months than not have set new high temperature records for the world. Though we can’t pin down how it happens, it seems that some of the warmth is making its way from the Pacific Ocean to the Arctic Ocean. Some observers think the Atlantic Ocean must be warmer than before and transporting more heat into the areas where it borders on the Arctic Ocean. There aren’t thermometers all over the Arctic region, so these are just guesses, but they seem more likely than not.

The weaker, more fragmented Arctic ice is also a problem. So far this month, winds have been pushing ice not into the Atlantic, but into Canada. But instead of jamming up in the narrow straits as in past years, the ice is flowing through freely and melting before it reaches the mainland. In floes mostly smaller than a kilometer, the broken ice looks and acts like a fluid when observed from satellites. When the wind blows in other directions, ice may end up moving in the general direction of the Bering Strait and the Pacific Ocean. This area too used to be a safe haven where ice could survive for years, but on today’s map, only a few rapidly shrinking ice islands remain. As one observer put it, no matter which way the wind blows, it is bad for the ice.

The only weather that will save the ice in summer, it seems, is light winds and lots of clouds, but that’s a lot to ask for. Those are conditions that result from low pressure, but the pressure can’t get so low that it creates a storm and the winds start blowing. Persistent conditions of medium-low pressure don’t happen often. Nevertheless, those were the weather conditions of June and July this summer in the central Arctic, and the ice kept melting. Good weather is not enough. Only a cooler planet will save the Arctic sea ice from its downward spiral, and realistically, there are no plans to stop the current global warming trend.

If I were on an ordinary cargo ship crossing the Arctic Ocean, I wouldn’t want to see ice. I would want an ice-free passage 100 kilometers wide to travel through. But to a ship with a reinforced hull, thin ice is almost the same as open water. Early in the summer, two U.S. military ships on research missions approached the North Pole without any special difficulty — and that was when the ice was twice as thick as it is now. An Arctic-class cargo ship probably could pass through the weakest ice of the central Arctic, roughly along the 45° and 165° East meridians. I hope no ship is attempting this, though. The Northwest Passage and Northern Sea Route have both been open for cargo for the past month. Weeks ago, a large cruise ship traversed the Northwest Passage without incident, the first time that’s been attempted. With two routes offering logistical support, who would be the first to attempt a shortcut through an unsupported route that is almost 50 percent ice?

Still, this month is the first time that the phrase “probably possible” has been applied to the Central Arctic Route. That puts the Central Arctic Route barely a decade behind the Northern Sea Route, a route that the cargo industry now takes for granted. If the world keeps warming, it may take little more than a mild winter and a sunny summer to open the Central Arctic Route to shipping.

Friday, September 9, 2016

This Week in Bank Failures

For at least five years, Wells Fargo was quietly making off with customers’ money and using it to open new accounts in the customers’ names. The bank didn’t seek customers’ permission, and many customers had no access to the new accounts they supposedly owned. It was all a hare-brained scheme to create ghost accounts to make the bank look more successful than it is. An estimated 2 million unauthorized accounts were created, but the money involved was smaller than that makes it sound. Most accounts were created without balances, and some were funded for only one day, after which the money was returned. The bank has agreed to stop this practice and pay restitution to customers whose money was taken either for the new accounts or in subsequent fees. Based on the bank’s public statements, the restitution required could be around $5 million. The $5 million figure might be too low because of customers who were charged overdraft fees after money was taken from their checking accounts. The bank will also pay $185 million in fines, or close to $100 for each unauthorized account. The bank has fired 5,300 employees, or 2 percent of its total work force, but has not taken any action against the executives who set up this scheme. It will have to advise all consumer and small business customers to visit their local branches to review their accounts and close any unrecognized or unwanted accounts. Workers and managers will be retrained. Conspicuously absent from the settlement is the requirement of any specific change in the bank’s incentive program which requires aggressive cross-selling by customer-contact employees. The bank in its business plan set an impossible goal of eight accounts per customer and fired branch employees who did not meet monthly quotas. Those policies apparently remain in place as of this writing, and though the bank has promised to review them, it has not committed to changes. Few consumers have so many bank accounts, so that business goal will have to be reconsidered along with the incentive program that is based on it.

The previous story is reason enough to repeat the most important advice I can offer to banking customers, which is not to have all your accounts at one bank. It is easy enough to think of scenarios in which you might have 8 or more personal accounts, as suggested by Wells Fargo’s business plan — think of credit cards, a savings account, a checking account, CDs, and loans — but you put your financial future on the line in a completely unnecessary way by having all or nearly all of the accounts at the same bank. That would be a form of putting all your eggs in one basket, or to say it another way, concentration of risk. Concentration of risk is the same error you might remember seeing ten years ago in banks that put 90 percent or more of their portfolios in real estate loans. In case anyone has forgotten, when times got tough, most of those banks failed.

Monte dei Paschi, the oldest bank in Italy, saw its CEO resign. This might have been a cost-cutting move, or it might reflect a sense of desperation about finding buyers for the €5 billion in new stock needed to keep the bank going through next year. The bank hopes to announce a new CEO within days.

A lawsuit claims that Mastercard improperly charged international transaction fees on substantially all U.K. in-store purchases it processed over a 14-year period.

The FDIC’s Deposit Insurance Fund, the fund that guarantees U.S. bank deposits and pays the costs of bank failures, has nearly recovered to its statutory level after going negative for a few years. It passed a statutory threshold of 1.15 percent in June. This triggers a change in risk-based assessment levels, which means all but the most risky banks will be paying less for deposit insurance. Another change in rates will take place when the fund reaches its statutory minimum level of 1.35 percent.

Thursday, September 8, 2016

The Water-Resistant iPhone

The iPhone 7 announced yesterday is water-resistant. This is a big deal. More mobile phones reach the end of their useful lives because of water than by exhausting the battery or being run over by a truck. A water-resistant iPhone means that the number of iPhones that have to be manufactured will be smaller by almost half. Looking at it this way, this is the biggest savings in manufacturing costs in the history of the smart phone. Apple itself will enjoy much of the savings — its protection plans often oblige it to replace a water-damaged phone. Apple customers will benefit too, saving hours of inconvenience and perhaps $500 every time an iPhone falls in a puddle and isn’t damaged.

This will look like a negative event for Apple. By making the iPhone more durable, it’s giving up the chance to sell 50 million replacement iPhones per year. To make a water-resistant product Apple had to streamline its design in ways that are sure to draw complaints at first. But that is the short-sighted way of looking at it. An iPhone that is not so easily damaged is a “stickier” product, staying with a customer for a longer period of time. That’s more of a negative for Apple’s competitors than for Apple itself. The phone manufacturer that sells its customers three phones in five years does not come out looking good if Apple customers need only one during that same period of time. Meanwhile, when customers are using an Apple phone for five years in a row, that will end up being an advantage for Apple in other ways that may prove to be just as important as the initial hardware sale.

When products are more durable without being harder to make, that is a boost for sustainability in some obvious ways. It is just one of many ways that manufacturing is become less central to the functioning of the world economy.

Wednesday, September 7, 2016

Another For-Profit College Runs Dry

ITT, considered one of the most stodgy and reliable of for-profit colleges, closed yesterday. The company apparently just ran out of money. If ITT generally lived up to the modest promises it made in the educational programs themselves, the same might not have been true in other parts of the company, with investigations ongoing related to the company’s marketing, lending, and securities disclosures. Most students at ITT will have to start their training all over again at a regular college, but those who took out loans will also have to spend the next few years working through the details of what happens to those debts. The case illustrates how much risk students take on when they attend for-profit schools, especially when seeking a four-year degree, which in practice may take five to eight years to complete. Students start out expecting the kind of institutional stability that a for-profit college may not be able to provide. In practical terms, the only way to reduce the risk of attending for-profit colleges to a responsible level would be to have lending terms that provide automatic loan forgiveness in the event that the college fails. Lenders would object, of course, but such an arrangement may not be as far-fetched as it sounds. As it is, anyone who invested in loans to ITT students will lose most of their capital, as there are few avenues to collect quickly on those debts. Even before ITT closed, the default rate on its student loans was alarmingly high. Requiring debt forgiveness when a college fails would not increase the risks to lenders by very much. The abrupt closure of ITT will make students a little more wary of all for-profit colleges. If ITT, which had been open for 50 years, was secretly on the edge of collapse, then how are the newer and smaller competitors doing? Smaller enrollment, in turn, could hasten the closure of most of the remaining for-profit colleges.

Thursday, September 1, 2016

As Motorcycle Sales Slump, Layoffs at Harley-Davidson

More layoffs at Harley-Davidson are a sign that motorcycle sales continue to slump.

The Local 175 president told the York Daily Record the plant [near York, PA] now employs about 950 union members, down from 2,000 in 2009.

An additional 200 job cuts are planned for October, probably resulting in slightly more than 100 layoffs. Harley-Davidson expects to sell 10,000 fewer motorcycles than forecast as the year began. While sales of motorcycles as basic transportation are booming in parts of Asia, U.S. sales have been sagging for the last five years as motorcycles are increasingly seen as an extravagance.