Longer Car Service Life Isn’t Frugality

The story about lower car sales is that it is the result of a financial squeeze on consumers. People have to run their cars longer because they can’t afford to buy a new car right now. If that were the case, though, we should be seeing higher revenue at auto parts dealers as people push cars farther into their useful lives. I went looking for that this morning, and I couldn’t find much sign of it. Auto parts sales are up, but only slightly.

What this means is that people are driving cars farther mainly because cars are better made than in the past. The improvements in engineering are making cars more expensive, but also making them more reliable, so that they can run longer.

Put this together with the reduction in vehicle miles as fuel prices increase, and it points to a pace of vehicle sales that could be much lower than current levels.

The Debt Ceiling and Bankruptcy

People today are talking about the possibility of the U.S. government going bankrupt. It might sound like a great exaggeration, but it isn’t. Strictly speaking, a national government can’t go into bankruptcy, but that is a technical legal distinction that we can leave to the lawyers. All that distinction really means is this: the federal government’s “bankruptcy,” if it were to happen, won’t be decided by a bankruptcy judge, but by the White House and Treasury and, to the extent that it chooses to get involved, Congress.

When is the federal government effectively bankrupt? It has never happened, but if it were to happen, it would happen the day the government hit the statutory debt ceiling. The way things are going, this would happen six to eight weeks from now. Congress can, of course, intervene by raising the debt ceiling, but not everyone in Congress wants to keep the federal government out of bankruptcy.

You see, if the government is in bankruptcy, it will force the White House to cut government spending, and not just by a little, but by about a third, instantly. Some people think it’s the only way to stop the government’s spending spree. Suddenly there wouldn’t be so much money for health care, unemployment compensation, workplace safety, Social Security, border security, public employee salaries, and all the other things that small-government conservatives have been trying to chip away at.

But it wouldn’t stop there. Interest payments on government debt would stop immediately. That’s the part that has Wall Street calling the scenario “Armageddon.” Treasury bonds would be junk bonds, insurance companies, pension funds, money market funds, banks, and individual retirees would be wiped out left and right, the stock market would crash, there would be a run on the largest banks, and the barter economy would make a comeback among people who suddenly had no access to money in any form. With no money for fuel, the military would at least have to park its submarines and airplanes. City buses and subways might have to park too. “Armageddon” is an exaggeration, but a fitting one.

And it is not that the country can completely avoid these consequences if Congress raises the debt ceiling at the last minute. Just by getting as close to the edge as we have already come, the United States has lost some of its financial credibility, which means more of the budget will go to interest payments and less to government services. Treasury bonds could turn into junk bonds a week or two before the debt ceiling deadline — and if they do, their previous investment-grade status may not come bank for years. And there is still the problem of the federal budget, which has to be brought back down to some semblance of sustainability by next year, regardless of debt ceiling or interest rates.

You are sure to hear from a majority of experts along the way that it isn’t possible for the United States to go bankrupt. What they’re really saying is that it’s unthinkable for the federal government to put itself into the painful financial state of not being able to meet its obligations. But as we have seen many times in the last five years, “unthinkable” doesn’t mean that something won’t happen.

Troubled Banks and Poker Money Laundering

There is a connection between the new crackdown on online poker sites and the troubled U.S. banking sector. It is easier for a criminal organization such as a poker web site to trick banks into laundering money for them when the banks’ internal controls are frayed by financial stress. And it is easier for a multi-millionaire to make a deal with a bank that involves shady financial transactions when the bank is short on capital and has nowhere else to turn.

Yesterday morning a senior executive at a Utah bank was one of the people arrested and charged in an online poker money-laundering scheme. Two of the poker sites, working together, made a deal with the officer which involved “purchasing” the bank (actually just an ownership share) for $10 million and paying a private fee (one wonders whether it could be characterized as a bribe) to the officer. In return, the bank looked the other way as it processed transactions destined for the illegal web sites.

No one else at the bank has been charged, but I have to wonder how much of a future the bank has. In the past, banking authorities have sometimes shut down financially troubled banks almost as soon as criminal investigations became public. But in other cases banks have remained open after their corrupt executives were removed by regulators.

There is little doubt that some of the defendants in the case will cooperate with the authorities, and as a result, this investigation is likely to go much further. The U.S. executives of the illegal poker sites are in obvious trouble, but don’t be too surprised if it turns out that executives of some of the apparently legal sites operating in other countries were also involved in the same money laundering schemes, and end up in U.S. jails. It has happened before.

This Week in Bank Failures

Federal banking regulators are ordering changes after the preliminary phase of the investigation into foreclosure fraud. The key reform that will be required immediately will be that banks (or mortgage servicers) provide a point of contact for mortgage borrowers.

There are far-reaching consequences for the point-of-contact rule for both borrowers and regulators. For borrowers, it ensures that there is someone at the bank they can talk to about the status of their mortgage and any pending actions related to it. Currently, large mortgage servicers route borrowers’ inquiries to call centers where representatives may not have current or accurate information on the loans, but that approach will no longer be permitted. The change also provides a new kind of leverage for regulators. If a person serving as a point of contact for mortgages repeatedly handles mortgages improperly, he or she can be fined or banned from the banking industry.

A criminal investigation into foreclosure fraud is continuing, and the Fed has hinted at regulatory penalties for lenders that participated in foreclosure fraud.

Iceland voters again turned down a plan to have their government pay back deposits from failed banks with a punitive interest rate. The case will now go to an international court, where the depositors are likely to recover only about two thirds of their deposits.

Portugal met its debt payments today, defying expectations that it would need new financing at this point. Portugal is attempting a bond auction next week to cover its payments due in May and June. The Portugal bailout is now in doubt, with European Union countries now thought to be unlikely to approve it. This could be the end of the financial attack on Europe, as investors try to squeeze higher interest payments from the financially weaker European countries one by one. Instead of agreeing to pay ever-increasing interest rates, countries under attack from here forward may simply stop paying interest on their debts. If Europe turns out to be out of reach for financial attack, the United States may very well be the next target.

For anyone who was beginning to hope that the large bank failures were behind us, there were two unsettling reports this week. The quarterly report from Bank of America showed that the United States’ largest bank is still not making a profit on operations and its legal fees are inching up toward $1 billion per quarter, while Wall Street is gossiping about its latest panicky executive changes. Meanwhile, an almost-large Alabama bank, Superior Bank, failed tonight, in the largest bank failure of the year so far.

By most measures, Superior Bank would be considered a large bank. It had 73 locations, 45 in Alabama and 28 in Florida, along with 24 lending offices. But by 2010, it was no longer large in financial terms, with $2.7 billion in deposits at the end of the year. A cease-and-desist order had given Superior Bank until the end of March to shore up its capital and fix its broken business model. It was late with its financial reports and faced a Nasdaq delisting next month after its market capitalization fell below $10 million, 99 percent below its 2006 peak. Its CEO left last month.

By most accounts, the problem at Superior Bank was a sloppy approach to home mortgage lending, with its eye on the number of loans it was writing rather than the quality of loans. Nearly all bank failures in the last year or so have been driven by problems in commercial real estate and real estate development lending, but Superior Bank’s problems point more toward home mortgages.

Community Bancorp, a Houston-based bank holding company that had accumulated capital to purchase distressed banks, is taking over the deposits and purchasing the assets, keeping the Superior Bank name for its newly-chartered subsidiary bank. Community Bancorp had previously purchased Mississippi-based Cadence Bank.

A second medium-sized bank failed in Alabama tonight. Nexity Bank had $638 million in deposits. Its headquarters was in Birmingham, Alabama, and it had two other offices, in Atlanta, Georgia, and Myrtle Beach, South Carolina, but it billed itself as an Internet-based bank. A new bank created by two banking executives, AloStar Bank of Commerce, is taking over the deposits and purchasing the assets.

Nexity’s holding company had been in bankruptcy for nearly a year. Its creditors, the largest of which is Bank of America, aren’t likely to get much from the bankruptcy court now that the FDIC has seized the bank. The holding company filed for bankruptcy after discovering that a quarter of the bank’s loans were in default.

Nexity’s loans were mostly shares in real estate development loans written by other banks nationwide. In theory, the geographical dispersion of loans should have provided some protection from risk, but instead, real estate troubles hit the whole country essentially all at once.

Two banks failed in Georgia. The larger was Bartow County Bank, with four locations just north of the Atlanta metro area. It is fair to say that Bartow County Bank was financially exhausted. It reported $330 million in assets at the end of last year, compared to $304 million in deposits, but the quality of the assets was conspicuously less than you would expect to see in an operating bank.

Hamilton State Bank is taking over the deposits and purchasing the assets.

Also in Georgia, New Horizons Bank was closed. North Carolina-based Citizens South Bank is taking over the deposits and purchasing the assets.

Small banks also failed in Mississippi and Minnesota. Heritage Banking Group had almost $200 million in deposits and eight branch locations, with its headquarters in Carthage, Mississippi, in the central part of the state. Trustmark National Bank, based nearby in Jackson, is taking over the deposits and purchasing the assets.

In Rosemount, Minnesota, a suburb of Minneapolis, Rosemount National Bank was closed. Central Bank is taking over the deposits and purchasing the assets.

The NCUA put two credit unions in conservatorship tonight: Texans Credit Union, in Texas, with 133,000 members, and Vensure Federal Credit Union, in Arizona, with 144 members, mostly employees of Vensure Employer Services. The credit unions will continue to operate under NCUA management.

Slower Replacement for PCs

PC sales are down from last year, but it doesn’t mean that computers are becoming less important or that people are using them less. It is just that computers last longer than they used to.

More businesses are starting to adopt a consumer-like approach to computer hardware, replacing it only when it is well down the road to breakdown or obsolescence. Businesses still have the idea of replacing a desktop computer every three years and a portable computer after two years, but they are making more exceptions. About three fourths of computer sales are replacements for existing business PCs, so it doesn’t take much of a change in that category to bring the total sales numbers down by 3 percent.

Sales of desktop computers are down the most. That makes sense, as a computer that sits on a desk doesn’t get the wear and tear of one that is carried regularly from place to place. Wear and tear is declining slightly as computer designs become more durable, but obsolescence is declining rapidly as the computing becomes a more mature industry.

I believe business computing could start to shift to a component-replacement pattern, with a regular cycle of replacing disk drives in existing computers. The main reason a whole computer has to be replaced is to provide faster bus speeds, but in desktop computers at least, bus speeds are probably fast enough and have virtually come to a stop in the last three years. If many businesses start replacing computer components instead of whole computers, the sales figures for computers could fall significantly.