Thursday, June 29, 2017

Staples Goes Private

Staples has agreed to a $7 billion buyout. The paper-and-toner retail giant will be privately owned after shareholders approve and the deal closes. The buyout is not bad news in itself for the retailer, but the deal is a measure of the troubles at Staples and across the office-supply sector. Down the road, private ownership could pave the way for a rapid shutdown, bankruptcy, or more rapid store closings if the new owners cannot find a profitable niche for the company in a post-paper world.

Sunday, June 25, 2017

Italy Liquidates 2 Veneto Banks

Authorities in Italy have spent the weekend working out how to liquidate the two insolvent banks in Veneto that observers have been worrying about all year. The failed banks are Banca Popolare di Vicenza and Veneto Banca. Though not affiliated, the two banks are being liquidated together because they are facing the same regional economic problems and are in about the same financial condition.

“Good” assets — which are not quite so good as that term usually implies — are being transferred today to Intesa Sanpaolo. Having committed to liquidate the two Veneto banks while protecting depositors and keeping branches open, the government had few good options. A proposal by a hedge fund consortium was widely reported earlier in the month but rightly ignored. The hedge funds were seeking a controlling interest in the two banks but were willing to cover only a tenth of the capital shortfall. Such a plan would have postponed today’s liquidation by a few months at best, and it ran the risk of degenerating into litigation and chaos. Intesa Sanpaolo will apparently act as the government’s agent in managing and liquidating some of the assets it is not purchasing.

In retrospect, it would have been better if the two banks had been wound down five years ago. As it is, the bank liquidation will cost taxpayers an estimated €17 billion, of which €5 billion is being paid today. It was only two years ago, though, that auditors discovered problems in the loan portfolios and misselling of bonds, and not until last Friday that the European Central Bank referred the two banks for liquidation. Government lawyers then spent the weekend drafting a decree for the liquidation and transfer.

Ultimately not all of the branches will be able to stay open, but Italian regulators would prefer to have them close more quietly at another time rather than during such a visible crisis. Intesa is chipping in an estimated €60 million to protect bondholders, funds that would have been legally difficult for the government to provide. The fate of bondholders was an important political consideration because the banks fraudulently sold bonds to thousands of retail depositors, telling them that the bonds were certificates of deposit.

Tuesday, June 20, 2017

At Subway, Kiosks Over Ingredients

Embattled fast-food giant Subway had a plan to reverse its five-year decline by boosting the quality of its ingredients. Food quality has declined since the chain’s peak in the 1990s while the market has been moving in the opposite direction, and regular customers have been going elsewhere in search of a healthier lunch. As of a year ago, the plan at Subway was for the rollout of new ingredients to start this summer.

Well, forget it. Subway faces other problems that include the death of its founder and the jailing of its spokesmodel, and executives decided better food was more than the restaurant chain could take on right now. Instead, Subway’s major initiative this year will be in-store kiosks where customers can tap out orders on a touch-screen, copying the success of this approach at Panera. Subway is also rolling out a mobile app that provides the same functionality. You’ll get the same dull fare, but faster than before.

Maybe it’s the right move. The digital ordering platform should cut in-store operating costs, eventually providing the financial wiggle room needed to address the bigger issue of food quality.

Tuesday, June 13, 2017

After EU Bank Deals, Overconfidence

Santander bought out the failing Banco Popular, one of the largest banks in Spain and Portugal. Santander will spend €5-7 billion to recapitalize the bank, but that budget is in line with many of its other expansion deals. A few days later, officials agreed on the outline of a scheme to rescue Monte dei Paschi. The deal protects retail investors who were sold bonds thinking they were getting certificates of deposit. That was the Italian government’s top priority, so the deal may be seen as a success even if the bank goes on to fail in the next recession, a prospect that seems almost as likely as not. 

With these deals, there is more than a sense of relief about European banks. Europe and observers have become overconfident about the banking system. While it’s good that stockholders and bondholders took the biggest loss in the Banco Popular resolution, more work needs to be done to untangle the banking system so that the sudden closing of one of the banking giants doesn’t pose such a hazard to all the other banks around.

Tuesday, June 6, 2017

How Bad Could It Get?

I do realize that many voters voted for Donald Trump as a joke or with the intention of blowing up the system or destroying the Republican Party. It was a calculated risk, but I am not sure everyone’s calculations took into account the magnitude of what could go wrong. The Trump presidency might be unprecedented in U.S. political history, but to get an idea of what can happen when a country is run by a corrupt fossil-fuel administration, one need only look at the current examples of Syria, Venezuela, and especially Brazil.

Brazil removed its president a year ago for illegal budget manipulations leading into the last presidential election. It was a curious move, as she was replaced by the seemingly even more corrupt vice president. New evidence has emerged about both, so that now it is hard to be so sure which way the comparison points, but there is little room for doubt that Brazil’s current president is in the middle of a coordinated bribery ring on a scale that would shock even Brazilians. He too will likely be removed from office by impeachment, if courts do not annul the last election result first. Hundreds of political figures in Brazil appear to have been involved in an expanding list of illicit schemes that drained public funds, distorted the political process beyond recognition, and moved billions of dollars out of the country to offshore accounts, helping to push the country into an economic depression. As terrible as the situation has become, it is important to remember that it was oil money that originally funded this systemic corruption.

Oil and coal money both are involved in political corruption in the United States, and in some ways the U.S. situation looks more gloomy than that of Brazil. Brazil is making a major effort to root out corruption even as the United States moves in the opposite direction. Corruption will not ruin the U.S. economy in a year, probably not in two years, but history tells us that no national economy can stand up under the weight of large-scale systemic corruption for very long.

So how bad could it get? Historically, every empire crumbles, and usually in little more than one lifetime. Some observers are already looking at the events of last week and worrying that this could be the United States’ time.

Sunday, June 4, 2017

The White House Is Still Standing, But There Is No One Home

The state of international politics can be summed up by looking at the most prominent statements of the last week from the leaders of countries, as measured by U.S. news coverage, with the key lines listed here by country. You can’t help noticing that one of these is not like the others.

  • Canada: Canada is unwavering in our commitment to fight climate change and support clean economic growth.
  • France: If we do nothing, our children will know a world of migrations, of wars, of shortage. A dangerous world.
  • United Kingdom: While we have made significant progress in recent years there is, to be frank, far too much tolerance of extremism in our country.
  • United States: Despite the constant negative press covfefe

“Covfefe” might be thought to be an attempt by a man’s fingers to tap out “coverage” on a touch screen while his brain, in a half-asleep stupor, is screaming “coffee!!” but the White House added fuel by insisting the next morning that the tweet was complete as posted. What happened? Everyone who tweets live, tweets in error sometimes, but this is not a case of an isolated misstatement. Trump’s only significant policy statement of the week, a Rose Garden announcement on climate policy, was nonsense of a different kind. It might have been stated in known Earth-language words, but there was no logic or sense to be found behind the words. Maybe, one might think, the message was just badly formed or badly delivered on this occasion, but follow-up comments from White House and diplomatic officials contradicted each other as widely as one could imagine possible, as if senior officials had not been briefed at all and were left to just make stuff up. It leaves little leeway to imagine that the White House, in fact, has a climate policy. This came just a week after, at a major summit meeting, Trump barely participated and seemed not to quite understand where he was.

This state of incoherence is a hole in the world, which had fallen into the habit of looking to the United States for leadership. The late Zbigniew Brzezinski noticed this predicament before most of us and had commented on it a month ago:

Sophisticated US leadership is the sine qua non of a stable world order. However, we lack the former while the latter is getting worse.

Brzezinski made a career of world order, but obviously, there is more at risk than that. In U.S. politics, this could be the end of the Republican Party. Everywhere, if global energy policy cannot be reformed, the land that half of the world’s human population lives on could be converted to ocean in one or two lifetimes. In the world order, the status of the United States has been knocked down a peg in each of the last two weeks, and it could easily fall much farther in the weeks to come.

The White House staff has tried to find ways to make its mercurial leader less of a daily threat. World leaders now seem to realize they must do the same when it comes to the challenges facing the world. Trump’s call to renegotiate has fallen to the ground, barely noticed. One can hardly negotiate with a man who cannot state a position. The White House is still standing, but there is no one home. What do we do now? Of course, the answers are there to be found. I am sure what we will find is that there is a great deal of work for all of us to do.