This Week in Bank Failures

The three top executives at Barclays have resigned in the aftermath of the bank’s involvement in manipulating base rates. Staff at Barclays believed that officials at Bank of England were encouraging the bank to misuse the base rate mechanisms, so investigators are trying to find who among the bank’s management might have spread that information, or misinformation, within the company. Some of the email messages that implicate Barclays have been released to the public, and they paint a picture of an organization in which base rate manipulation was a routinely discussed strategy. Investigations of base rate fixing have popped up left and right. The Barclays board of directors, the Bank of England, and the British Parliament have each started their own separate investigations.

Base rate fraud is obviously not limited to Barclays. This week, Royal Bank of Scotland fired several traders who were tied to the scheme to manipulate base rates.

The European Commission proposed tighter rules for custodians of investment funds. The new rules, if ratified, will make it difficult for a large-scale ponzi scheme to sell investment plans in the European market.

Finland has floated the possibility of exiting the euro zone to avoid the high costs of bailing out banks in Spain and elsewhere.

In the United States, we shouldn’t expect bank failures to be prominent or frequent during the next seven months because of the risk of political wrangling over bank regulation during the political season. The one bank failure reported tonight was small but costly.

State regulators closed Montgomery Bank & Trust, based in Ailey, Georgia. It had two branches, $164 million in deposits, and $174 million in assets. Ameris Bank is taking over the deposits but will not be purchasing the assets, aside from $12 million in cash and other highly liquid assets. The FDIC estimates costs of $75 million from the closing, an extraordinarily high cost compared to the amount of insured deposits.

One member of the bank’s board of directors has been charged with fraud and embezzlement of $17 million in bank funds and $40 million in funds from more than 100 investors. The director has been missing for several days and it is speculated that he may be in Venezuela.

Montgomery Bank & Trust attempted to expand into the shore town of St. Simon’s Island about seven years ago around the peak of the real estate boom in Georgia. It was an ill-conceived and ill-timed plan that the bank never recovered from.

Cultural Factors and Nuclear Dangers

Japan’s parliamentary inquiry into the causes of the Fukushima nuclear disaster has produced a report that blames a wide range of factors, including several that could apply just as easily to the United States.

Japan’s nuclear plants are regulated by the same government agency charged with promoting nuclear power. There is a culture of secrecy and collusion between the industry and the government that allows real dangers to be covered up. Essentially the same setup found in the United States.

And broadly in Japan, the report said, there is a cultural resistance to questioning authority. This is similar in effect to the American resistance to question convention and tradition. In both countries, these cultural norms, applied to nuclear power, allow unsafe practices to carry on for generations.

Seeking Sympathy in Strange Times

Everyone I know, it seems, has been through a series of strange and unlikely events in the last few weeks. I have not escaped this trend myself. As I write this, I am sitting with a dog who is recovering from surgery. The sequence of events that brought about the dog’s illness is hard to explain and hard to believe. By itself, this would be just one of the random events in life, but it comes on top of unexpected turns in other areas of my life leaving me in doubt about which way things will go next around my home, in the printing of my next book, and in other areas of my life that are too important to ignore.

Yet I cannot expect too much immediate sympathy from my friends about the sudden uncertainties in my life. At least ten of my closest friends have even stranger and more vexing stories to tell from the same time period. When one friend has a medical emergency, another works for a company whose future is suddenly in doubt, and two others may unexpectedly have to move this month, the uncertainties of my own life are not so serious. For example, if the current problems prevent my latest book from being printed this month, then most likely that just means it will be printed next month. This is the kind of uncertainty that could form the subject of a group discussion in normal times, but it won’t rise to that level of attention right now.

Based on my unscientific read of headlines and Twitter, this trend is not limited to my immediate social circle. A lot of strange things are happening in a lot of different places. Quite possibly, these are strange times in some general sense.

Everyone has a different set of strategies for seeking social recognition, and times like these hit some people harder than others. Surely for some people, the level of sympathy and attention they get from the people around them when strange things happen is their key gauge of their personal social value. Surely somewhere in the world this week there is an author whose new e-book is a big hit on an e-book site and is then withdrawn by the site without explanation. That anguished moment for the author may become twice as anguishing when friends and family members are not able to offer much immediate sympathy because someone’s airplane flight was canceled leaving them stuck in Mexico City and someone else’s irrigation system is broken, putting the whole year of crops at risk. And this is a story that may be repeated a million times in a million different forms. If the unbelievable things that are happening to you don’t seem to rate much attention right now, it’s not you. It’s the times.

The $3 Billion Footnote

Three billion dollars is a lot of money. But it depends.

You get an idea of how big big pharma is by looking at the reaction to yesterday’s report of a $3 billion settlement between GlaxoSmithKline and U.S. prosecutors.

Last month, JPMorgan was staggered by the news that it had lost $2 billion, or probably more, in a bad trading bet. Wall Street is big, but not big enough to just absorb a $2 billion hit.

But big pharma is big enough that a $3 billion settlement is all in a day’s work. News of the settlement didn’t weigh on GlaxoSmithKline’s stock. Instead, the stock was up 2 percent, near its 52-week high, during a mostly blah day in the stock market.

In other words, if the stock market reacted to the $3 billion settlement at all, its reaction was that GlaxoSmithKline got off easy.

The $3 billion settlement is being described as the largest pharma settlement ever, but it depends on how you look it. GlaxoSmithKline was settling three separate infractions, related to three separate products, all at once. This included pushing one drug to children, hiding data about the dangers of a second drug, and selling a third drug as a rapid weight loss scheme. And this is along with a laundry list of “minor” legal issues such as a pattern of illegally overcharging states for drugs. In its deal with prosecutors, it will plead guilty to three lesser infractions and pay $3 billion in a combination of penalties and restitution, so that’s less than $1 billion each. Looked at that way, it is perhaps not the largest pharma settlement ever.

Large corporations are eager to settle cases such as these so they can remove the corresponding footnotes from their financial statements. Every potential penalty or liability has to be noted in the fine print following the tables of financial results. With this settlement, GlaxoSmithKline can surely erase a dozen such footnotes.

A dozen footnotes. Three billion dollars. And that’s cheap, according to the stock market. How big is big pharma? Yeah. It’s that big.

Facebook Email and the Built-In Spoofing

When I wrote that social networking could be used to make email more secure, I wasn’t thinking of the man-in-the-middle attack over the weekend that has Facebook users cringing this morning. For those who missed the story, the latest change at Facebook makes it hard to find users’ email addresses (going so far as to delete address books on some users’ phones) and impossible to determine the true origin of an email message sent to a Facebook account. This is the opposite of what I was talking about.

I am not on Facebook myself, but based on what I am hearing, it is now ludicrously easy to send an email message to a Facebook user’s account and have it appear to be from one of the user’s friends. You do this by spoofing a return email address the friend has registered with Facebook. The new Facebook email system, installed in stages since Friday, strips out both the actual origin of the message and its spoofed return address and presents the message to the recipient as if it had been sent by the friend from inside Facebook. I have not heard any stories of criminal organizations actually exploiting this feature of the Facebook email system yet, but surely it is just a matter of a day or two before that starts happening. Facebook has literally built spoofing into its new email system, and by doing so, Facebook is making spoofing an unavoidable part of the user experience. From now on, whenever you get any message on Facebook, you will have to stop to ask whether it really comes from your friend, or whether it might be from a criminal organization instead.

Meanwhile, users say real email messages have gone missing. The objective of social network email done correctly is not to make email more open than Internet email, but to make it more of a closed system, so that recipients can have greater confidence in the origin of messages. Facebook is doing it all wrong.