This Week in Bank Failures

Italy might be spending €6.6 billion or €8.8 billion to rescue Monte dei Paschi, according to two official estimates. The bank plans to issue €15 billion in new bonds in 2017.

The currency crisis in India could turn into a food crisis. The country is not expected to have a normal amount of currency in circulation until late 2017. In the meantime, rural farmers who have money in the bank may not be able to get the cash they need to buy seeds and pay farm laborers for planting. With currency in desperately short supply, bank customers wait in line for days to withdraw $30, the largest cash withdrawal available.

Venezuela will soon be recalling most of its paper money, but that deadline has been extended until January 20. New coins began circulating on Wednesday but could initially be found only in the capital Caracas.

Toshiba Nuclear Writedown Raises Questions About Nuclear Sector

A Toshiba writedown on its U.S. nuclear business will be several times the nearly $1 billion charge that analysts expected. The loss is large enough that investors now have reason to wonder about the solvency of the company, a sprawling conglomerate mainly known for its computer memory chips. A bigger concern is what the Toshiba loss might say about the health of the U.S. nuclear sector. A few U.S. nuclear power stations announced shutdowns this year because they were unable to operate without fuel subsidies. You have to wonder if nuclear operators are wealthy enough to pay for the decommissioning of power plants, most of which will reach the end of their useful lives in the next 40 years, along with the long-term storage of the spent nuclear fuel. The public might be left to pay much of the cost of winding down the nuclear experiment at the same time it is paying to clean up hundreds of sites contaminated by coal.

Lease Expiration, Taxes, Vacant Retail Space

Expect thousands of store closings in the next eight months. Ten-year leases signed in preparation for the 2007 Christmas shopping season expire in 2017. The recession began around December 6, 2007, and many of the store locations that opened that year were never profitable. The list of ten-year lease locations includes more than 500 belonging to just two retail chains, American Eagle Outfitters and Abercrombie & Fitch. Those are two slowly fading chains that surely can’t wait for the chance to close most of their locations, and of course, there are other, smaller examples. At the same time, the risk of tax increases in 2017 will make retailers reluctant to make long-term commitments on stores that show anything less than a consistent healthy profit. Combine these factors and a down 2016 holiday season with the many other uncertainties that retailers face, and the U.S. is likely to end 2017 with a record-setting amount of vacant retail space, exceeding what we saw in 2009.

Late Christmas Shoppers Arrive

I heard of local stores opening at 7 a.m. starting on Tuesday. That day the stores were sadly empty in the early morning, but by Wednesday the late Christmas shoppers started to arrive. Since 5 p.m. Wednesday it has been easy to see that it is the holiday shopping season. Today is Friday, many people are taking the day off, and stores have been busy since early this morning. The 50%-off sales mean that purchases don’t count for quite so much revenue this week, but retailers are still happy to see shoppers in the stores. Everything seems to point to a healthy shopping season just slightly below last year’s numbers. Retailers (other than Walmart) held back on their seasonal purchases this year, so they should come out well enough. Struggling apparel and specialty chains that were counting on a blowout Christmas season to lift them over the top, though, may find that this shopping season was not quite enough.

This Week in Bank Failures

Ukraine took over its largest bank, ironically named PrivatBank, which was suffering from a $5 billion capital shortfall. Other insolvent banks in Ukraine have been liquidated, but PrivatBank was considered too big to fail.

We were waiting most of the week for news of the fate of Italy’s oldest and third largest bank, Monte dei Paschi. There was no further progress in the final days of the stock sale. A sovereign wealth fund that the bank had hoped would be its anchor investor decided early in the week, perhaps actually last week, that the whole deal was too risky. There did not seem a way to structure a capital arrangement that properly protected the interests of the new investors. Around the same time, the bank acknowledged that it was not as liquid as previously thought, and it could run out of money as soon as April. The bank’s future was in doubt for a few days. The bank faced a December 31 regulatory deadline to raise capital, but the clock ran out on its stock offering at 2 p.m. today. According to published reports, the bank raised a small fraction of the money it needed, between one tenth and one fourth of the €5 billion it was seeking. The board met this afternoon and formally requested government assistance. Then the cabinet met late in the evening and around midnight, approved a state rescue of the bank. Exact terms of the rescue have not been spelled out and it seems that some decisions will be postponed until a new audit of the bank is underway in January. There is a plan to convert the junior bonds held by bank customers into senior bonds in order to protect those investors from large losses at this stage. Government officials have said, though, that all investors would have to take some kind of loss in any government rescue of a bank.

In New York, law enforcement officials say two Platinum Partners hedge funds worth more than $1 billion had been run like a Ponzi scheme since 2012, with secret accounting, phantom assets, and exaggerated earnings. The scheme was uncovered after an officer of the company tried to bribe a government official. Weeks later, Cayman Islands regulators ordered the funds liquidated. Six executives have been arrested and charged after an investigation that included the FBI, the SEC, and others.

Update, Friday: Deutsche Bank will pay $7 billion, and Credit Suisse, $5 billion to settle charges of misrepresenting mortgage-backed securities sold in the United States between 2005 and 2007. For Deutsche Bank, the settlement is larger than the amount the bank had set aside, but the bank has assured investors that it will not need to seek government support as a result of the penalty. A similar case pending against Barclays will apparently be decided in court.

This Week in Bank Failures

Venezuela recalled 46 percent of its currency. The result is a cash crisis reminiscent of the ongoing crisis in India. The Venezuelan government estimates that half of its national currency is held by speculators overseas, and it says it is attempting to invalidate the overseas currency without having to redeem much of it.

Wells Fargo’s practice of creating ghost accounts for its customers may not have been limited to banking. Prudential Financial on Monday said it had suspended the sale of a specific life insurance policy by Wells Fargo pending an investigation. California insurance regulators will be conducting a formal investigation, the regulators confirmed later on Monday. Regulators worry that the bank opened life insurance policies fraudulently, taking money and personal data from customers’ bank accounts and forging signatures on the insurance applications.

A rescue for Monte dei Paschi will wait until private investors have had every opportunity to fund the bank’s stock offering. The board yesterday extended the stock offering until December 21, but issued an amendment to the prospectus to reflect €2 billion in deposit flight that has occurred in the last two weeks and another €1 billion in deposits expected to be withdrawn before the end of the month. The deposit flight means the €5 billion capital plan, even if investors can somehow be found, may not be enough to meet capital requirements. Given the extent of the problems, some insiders think that a rescue package could come tomorrow rather than next week. On the other hand, action on Monte dei Paschi might have been delayed just to clear the decks for Italy’s largest bank, UniCredit, to shore up its finances by raising €13 billion and cutting 14,000 jobs.

It was a slow year for bank failures in the United States. The FDIC resolved just five failed banks in 2016 with a combined $267 million in deposits. The FDIC budget for 2017 is half of what it was at its peak in 2010, reflecting a steady improvement in the stability and outlook of the banking sector. The NCUA liquidated 11 credit unions that served about 3,000 members, and even that is not as bad as it sounds. Six of the failed credit unions shared the same back office and were resolved on the same day.

DeVry Settles, Agrees to Use Real Statistics

DeVry has now settled its false-advertising case. [ https://www.washingtonpost.com/news/grade-point/wp/2016/12/15/devry-agrees-to-100-million-settlement-with-the-ftc/?utm_term=.99c81a96d1eb ] The university had used made-up employment outcome statistics in advertising. It has agreed to use only real statistics in future advertising. In the settlement with the FTC, DeVry will pay $49 million in a penalty and forgive $51 million in outstanding tuition and student loans. The cost of the settlement is not much more than the $49 million penalty, since it would have had difficulty collecting on loans from its unemployed graduates. In sum, the story adds to evidence that the quality of education at for-profit colleges was never as good as people previously thought.

Shopping Around Inclement Weather

The weather map doesn’t look favorable for the key final weekend of Christmas shopping, with unpleasant or dangerous weather occurring in most places in the United States between now and Sunday night. In my area most Saturday shopping will be preempted by snow followed by sleet and rain. The weather should be bad news for retailers, but it depends on shoppers’ intentions. There was heavy shopping traffic tonight locally, with shoppers deciding to get to the stores ahead of the storm. You can’t tell from traffic how much people are spending, but at least it seems shoppers are willing to make an extra effort to reach their holiday purchasing goals.

The Shopping Mood Two Weeks Before Christmas

Don’t look now, but we’ve made it halfway from Cyber Monday to Christmas. What’s going on in retail?

According to the calendar, we are in the traditional early December lull. Not much happens in the stores between Cyber Monday and the last two weekends before Christmas. There is a problem with the calendar this year, though. With Christmas Eve and Christmas falling on a weekend, next weekend is the last shopping weekend before Christmas. People who want to avoid the mad rush at the end of the shopping season should be getting their shopping done this weekend. If this is not happening, it is hardly a surprise.

I haven’t had a chance to see shopping districts first-hand this season, at least not to my usual extent. To fill in the gaps, I’ve asked friends, some who work in retail and some who have just been out shopping, to tell me what they’ve seen. Through yesterday everyone agreed it was is still the early December lull. The lull might not have been quite as deep this year as the last four, but it lasted longer than usual. Today you could see the change. Compared to yesterday, there was a distinct step up in store traffic and longer checkout lines, but still only half the level of a peak shopping day.

After a quiet Black Friday, online orders picked up some of the slack, but now, the balance of the shopping season rests on what people decide to buy next weekend and on their lunch-hour and after-work shopping excursions. If shoppers cast off the cautious mood of the season so far, there is still a chance that the shopping season could recover to the level of last year.

This Week in Bank Failures

The European Central Bank today turned down a request from Monte dei Paschi for more time to meet capital requirements. With few options for closing its €5 billion capital shortfall, the bank requires decisive action before the ECB’s December 31 deadline. Italy might use the current political vacuum as an opportunity to close or drastically scale back the bank. It is an in-between period in which no prominent politician could be stuck with the blame for the bank’s failure.

The European Commission fined three international banks a combined €0.5 billion for their roles in manipulating the Euribor benchmark between 2005 and 2008.

U.S. banks are overextended in the energy sector, and the problem is not limited to coal mines and oil exploration. Bank of America and SunTrust Bank might end up owning the bankrupt La Paloma natural gas power plant in California after the plant found itself operating at a loss with unusually low energy prices. The power plant filed bankruptcy papers on Tuesday.

The economy of India is in crisis, facing a desperate shortage of cash after a government recall of 85 percent of the country’s currency a month ago. India today is seeing a run on the banks in a form the world has rarely seen, as depositors and holders of recalled currency wait in long lines to compete for the limited supply of new currency. Many workers have not been paid in weeks because there is no currency to pay them with. Small shops, with few shoppers, have furloughed their workers. In theory, the situation should improve over time as new currency is printed and put into circulation. On the other hand, as long as cash remains scarce, the need to hoard cash will discourage spending, and this can form a vicious circle that persists long after the level of cash is restored to a theoretically sufficient quantity. A month in, the lines at banks are no shorter and living conditions in India’s cities and villages continue to deteriorate.

A Squeezed Design for Galaxy Note 7

A teardown by Instrumental of the Galaxy Note 7 raises questions about who designed the phone. The often-exploding phone was designed with no headroom for its battery. Some expansion space is required for any chemical battery. Without it, normal heat or minor pressure could cause a catastrophic battery failure even for a well-formed battery. The elimination of the margin of safety to make the phone 0.5 millimeter thinner according to Instrumental’s estimate, or to extend battery life by approximately 1 hour, is, at the very least, a strange decision. At worst, it gives the impression of a corporate decision in which the marketing point of view, wanting an attractive, salable product, overruled the engineering point of view, wanting the product to be safe. If so, it is not just the phone design that was being squeezed. Marketing can overrule engineering only in a company that feels it is having a very difficult time producing a competitive product and selling it at a profit. That is not the state of Samsung from what we’ve seen previously, but the company must be under more financial and market pressure than it appears.

Two Victories for Collective Action

The whole idea of citizenry might be under attack, but it won’t be all bad news, as we found out late today. Voters in Italy rejected by a decisive margin a mess-up of a constitution rewrite. Around the same time, the U.S. government announced that it had screwed up when deciding to allow an oil pipeline to pass through a lake that supplied drinking water to a community. Both victories came at enormous cost. In Italy, most of the country turned out to vote down the government’s power grab. Millions of people across the United States, even including the MTV television network, participated in one way or another in the stand at Standing Rock. The involvement of so many people could make the decision at Standing Rock a turning point, as some have suggested, but future victories will have to have to fought for with just as much vigor and perhaps over a longer period of time.

While that is going on, even bigger victories, I believe, will result from individual action, “wizardry” as I have called it. In an era when collective action is not enough by itself, we must remember to look for the possibility of individual action that changes not only ourselves but the world around us. The cumulative effect of individual successes day after day could eventually overtake the effects of collective action, but there are a great many things we all have to do for that to happen.

This Week in Bank Failures

U.S. regulators are concerned about millions of non-performing auto loans. The usually reliable lending segment has become one of the most troubled since last year. I have not yet seen a plausible explanation for why so many drivers in 2014 and 2015 bought SUVs they couldn’t afford.

President-elect Donald Trump’s appointments of Wall Street figures at Treasury and Commerce reflect his long history as a Wall Street insider, but may also hint at worries about a financial crisis within the next two years. The two appointees’ career histories are built on default, bankruptcy, and foreclosure.

The future of Italy’s troubled banks may hinge on a sketchy constitutional amendment that voters will decide on Sunday. Voters are expected to vote no on a package of hastily drafted reforms that would rewrite one third of the constitution to concentrate power in the prime minister’s office, taking away most powers of governors and the senate. The prime minister has said he will resign in the event of a no vote. That could create a power vacuum lasting several months and scuttle bank bailout plans. Financial Times has published a list of 8 Italian banks that are likely to fail in that scenario. Bank stocks have helped drag down stocks generally, with major stock indexes in Italy down 20 percent this year. This week, concern for Italian banks has contributed to a decline in stocks across the euro zone.

Royal Bank of Scotland (RBS) failed a U.K. stress test and says it will need to raise an additional £2 billion in capital. Some of that is expected to come from cost-cutting measures to be announced early next year. The bank is 77% state-owned.

Standard Chartered also did poorly in its stress test. According to published reports, it plans to cut 10 percent of jobs in its big-money business segments.

The NCUA liquidated First African Baptist Church Federal Credit Union, a church-affiliated credit union with 261 members in Sharon Hill, Pennsylvania. Member accounts were transferred to American Heritage Federal Credit Union.

Seasonal Hiring Reshuffles Job Numbers

Today’s strong U.S. employment numbers aren’t too surprising given the late start in seasonal retail and logistics hiring this year. With so many seasonal workers starting in November instead of October, it made October look worse and November, better than it really was in terms of employment trends. Regardless, the decline in the unemployment rate is real, and it hints that workers may have an easier time in the job market while employers will have to look harder than they have during the past decade.