Saturday, April 29, 2017

Bank Failure: First NBC Bank

In the first large bank failure in years, state regulators in Louisiana closed New Orleans-based First NBC Bank, which also had five branches in Florida. The bank had $5 billion in assets at the end of 2016 but in January sold $1 billion of its assets including nine branches in Louisiana to Whitney Bank, which is based across the state line in Gulfport, Mississippi. Now Whitney Bank is taking over the branches and “transactional” deposits of the failed bank. The deposits Whitney Bank is assuming are essentially the checking and savings accounts based in the bank’s branches, but these are estimated to be $1.6 billion, less than half of the bank’s deposits.

The FDIC will send checks on Monday for certificates of deposit, retirement accounts, and other investment-style deposits, covering an estimated $2 billion in deposits belonging to a large number of investors. I imagine this will be the largest check-writing effort to date at FDIC; it is, at least, unusual for the FDIC to have to write $2 billion in checks to bank depositors after a bank failure. This is also one of the most costly bank failures in U.S. history, with the FDIC estimating the cost to the Deposit Insurance Fund to be nearly $1 billion. That figure must be taken as a rough estimate, as the values of many of the bank’s assets are not known with precision.

The bank was obviously troubled in recent years, during which its record was a series of missed deadlines and regulatory actions. The failed bank had appointed a new CEO in February. Subsequently, the president resigned and the bank reported accounting lapses going back at least two years. The bank’s write-down of previously overstated assets was apparently large enough to prompt regulators to close the bank.

First NBC Bank was founded in 2006, in the aftermath of Hurricane Katrina, and expanded rapidly. The timing would have been bad anywhere in the United States as real estate values dropped, but was especially unlucky in coastal Louisiana as it faced further tropical weather disasters. If the bank’s founder was betting on New Orleans bouncing back after the hurricane damage, that also was a bad guess. Ten years later, only the neighborhoods not affected by flooding have returned to their previous levels of population and economic activity.

Bank regulators are lenient with banks in areas affected by natural disasters but must be more strict with banks that draw most of their deposits from investors. A disaster can hurt the prospects of any business, but history shows that a well-managed business can often recover in time. Investor deposits are worrisome to regulators for two reasons. Banks usually pay higher interest rates on these types of accounts, leaving the bank with a thin profit margin. At the same time, investors can move their money out faster than other depositors. Such a turn of events can deplete what appeared to be a well-capitalized bank in a matter of weeks.

There is a theory in 20th-century management thinking that holds that the easiest time to grow a business is when competitors are cutting back. First NBC Bank is the latest in a series of hundreds of banks, retailers, and other businesses that tried to expand into tough times and ended up shutting down instead, suggesting that the management truism may not be so.

Wednesday, April 26, 2017

Banks Sneak Out of London

The same banks that said “don’t panic” about Britain’s withdrawal from the EU a year ago are now preparing to make adjustments in their location strategy. Deutsche Bank today was said to be preparing to move around 4,000 jobs from London — or possibly almost half of its staff there. The timing is not known, but it seems a good guess that the peak of the banking exodus from London will be reached in 2019. Other banks are planning similar moves. It is not a situation that calls for moving an entire office from London to another city, though there may be some of that, especially as banks move operations to Ireland. It is more that London has lost its magnetic power to centralize international banking operations. Places as far-flung as Cyprus and Singapore are picking up some of the work that previously might have been squeezed into a London tower. Thousands of jobs, of course, will not move anywhere, but will just disappear.

There is no chance that London could retain its past financial glory, just as New York after the evacuations of 2001 has never regained its weight as a center of finance. New York maintains its reputation as a money center largely by associating itself more closely with Jersey City, across the river, than it had to previously. Similarly, London will in all probability remain a deal-making center, but that will not make it a power center the way it is now. Dealmakers will have to depend on — and answer to — providers in other cities who will conduct the transactions signed in London.

Saturday, April 22, 2017

Easter Enough

Last weekend was Easter weekend, and friends in retail tell me that customers acted far more stressed than on a normal holiday weekend. Part of it, I am sure, is that we have gotten used to three-day holiday weekends, so that the two-day weekend many of us had for Easter seemed too short. Part of it, too, must have been the tax deadline, which fell on Easter week for the first time in years. The Internal Revenue Service says that taxpayers were filing later than ever this year, and that is easy for me to believe, as I was later than ever with my own tax filings. With more people working toward deadlines, the stress of the last weekend before tax deadline must have been greater than usual.

Still the fact remains that people were stressed out about Easter. That isn’t in keeping with the meaning of the holiday, which is about the victory of light over darkness or of life over death. Based on that, it should be a happy time. At the same time, the cultural traditions of Easter are not hard to live up to. Despite the profound meaning of the holiday, there is not much to it in practice. It is a holiday observed with brief morning ceremonies, meals featuring boiled eggs, and spring colors. Even these simple details may be seen as optional, as I can attest after seeing how sparsely attended an Easter sunrise service tends to be. Granting that we are no longer a nation of chefs and that eggs annually see their highest prices with the boosted demand on the week before Easter, people still cannot be stressing out about boiled eggs. If Easter weekend is hard to do, it is the result of putting more on the holiday than is really there.

There are two cultural struggles that may weigh on Easter. There is the commercial push since 1950 to turn Easter into a commercial holiday featuring packaged candy, decorative baskets, and baked ham. Separately there is a continuing effort to turn Easter into a family holiday on a level with Thanksgiving and Mother’s Day. The foil-wrapped chocolate eggs are here to stay, I think. The family holiday angle will never get much traction, but it may be a source of angst for those who feel they are supposed to be doing more than they are.

The bigger factor, though, I think, is a sort of holiday inflation in which people try to make this year’s holiday a little bigger than last year. Mathematically, that means holidays like Easter tend to expand exponentially until something breaks. Obviously, that’s not a good strategy for everyone’s peace of mind. There is never enough time to do exponentially more. I think we need to learn to chill out and enjoy holidays again. If Easter is this much of a problem, how will people ever cope with the 4th of July or Valentine’s Day?

The answer is to approach a holiday with a sense of being good enough. If you start out feeling that you are good enough as you are and that the holiday is good enough the way you have seen it in the past, then simply meeting that tradition is good enough. Then there is no need to add extra bells and whistles to make up for whatever the imagined shortcoming of the situation is. Imagine, for example, an Easter on which merely getting a couple of decorated boiled eggs, or the egg-shaped candy substitutes, means you have arrived at the right place. If it is the traditional thing for the holiday, then it is Easter enough.

Monday, April 10, 2017

Executive Forfeitures at Wells Fargo

The Wells Fargo scandal has turned into one of the largest “claw back” cases ever, as the bank will recover another $73 million in bonuses and salary paid to executives held responsible for misconduct in the ghost account scandal during the years when the compensation was paid. The scale of the forfeiture is not excessive. The executives will still be wealthier than most of us can dream of. Their scheme resulted in the bank exaggerating its operating success for many years. It is too soon to say whether the bank will ultimately survive the scandal, in which employees were directed to open fake accounts on behalf of millions of customers.