This Week in Bank Failures

How is it that base interest rates such as Libor are legal in the first place? Interest rates are prices, after all, and whenever an entire industry works together to set prices that they use in common, it is never far removed from price-fixing.

The reason a base rate may be considered legitimate is that base rates are intended as a neutral, transparent economic measure that doesn’t reflect the business plans or management decisions of any one business organization. Of course, this is possible only if the banks that have input into the base rate aren’t getting together to negotiate ways to manipulate the process based on their business objectives. That would be considered collusion, and the resulting base rate would be illegal to use.

As we now know, there was a lot of that going on between 2005 and 2012. Essentially every day, bankers exchanged messages with colleagues at other banks to decide on trading strategies and agree on false data to feed into base rates. Many of these messages were recovered from the banks’ email systems and reviewed by investigators. There is little room left to imagine that industry base rates were being created in a way that lived up to the spirit of the antitrust laws, which prohibit collusion in setting prices.

The result, this week, is one of the largest antitrust assessments in EU history, €1.7 billion against Deutsche Bank and four other banks. The banks were cited mainly for operating a Euribor cartel between 2005 and 2007. UBS and Barclays also participated in the cartel and might have been fined €3.2 billion but for their early cooperation in the investigation. The fines cover other offenses that continued almost up to the present.

A bankruptcy court approved the bankruptcy of Detroit, dismissing various challenges to the filing. The court ruled that protections for creditors didn’t create an ability to pay on the part of the city.

Winning Over the Skeptics

As I look back over Mandela’s life, one of his qualities that I especially want to remember is his compassion for those who are skeptical of change. That is, after all, all of us at times, depending on the circumstances and what we have heard before. As Mandela reminded us, the sweeping changes that seem simple and obvious in retrospect may appear impossible beforehand. It is our task, if we are to lead a change, to win over the skeptics as well as we can.

When I remember how South Africa fared, I must remember that there was a time when I was one of the skeptics. I remember hearing the musical line “I (I) — I (I) — I ain’t gonna play Sun City,” referring to one of the segregated institutions that might be particularly visible to a musician visiting South Africa, and agreeing with its sentiment of togetherness but not with its sense of hope. It was only when de Klerk ordered the beaches opened that I realized that there was no turning back — and though on that day I might have recognized what was taking place, there were still people around me who remained convinced that nothing was changing in South Africa.

There are those who are equally skeptical of the changes taking place today. It can be tempting to rail against the skeptics, but the better course of action, when we can manage it, is to find a way to win them over.

Justice for All — Landowners, That Is

People wonder why the courts work as slowly as they do, and such comments are often phrased in terms of “what’s wrong” with the justice system that it takes so long to decide some of the simplest things. The slow pace is designed into the system, though. In most of the world — essentially wherever the Roman and Cyrillic alphabets are used — we use versions of the post-Roman justice system. This is based on Roman law but adapted to the needs of Medieval Europe, when landowners were at the heart of society. The system was based on the assumption that the people involved in the disputes it settled would be landowners. It wasn’t a problem to take a long time deciding the disputes because a landowner wouldn’t be going anywhere.  But this system is adapted only with difficulty to a world run by workers, and this is especially evident when you look at corporations. When giant corporations are taken to task, the workers (mostly executives and officers) who got the company in trouble are likely to be long gone before the case comes to trial, never mind the five years of appeals that may follow. As for intentional criminal enterprises organized as corporations, they have rapid money movement written into their business plans, so they can arrange to be broke long before the prosecutors come around.

Heavier Shopping in First Two Weekends of November

With more retailers releasing data for November, it’s more clear that Christmas shopping is moving earlier in the month. The pre-Thanksgiving sales, mainly on the Tuesday and Wednesday of Thanksgiving week, had some impact. Store openings on Black Friday Eve, also known as Thanksgiving, might have been important to some shoppers, but remained tiny compared any other shopping day. 

It is the first two weekends of November that are getting the most buzz. Sales those weekends drew shoppers away from the Saturday and Sunday of Black Friday weekend, and that seems to be the big new trend this year. This is also something I observed in traffic patterns locally. The holiday shopping season is not over yet, and retail analysts are hoping for a strong December to make up for the shortfall in November.

Black Friday Weekend Pattern and the Declining Consumer Class

From my vantage point it looked like a robust Black Friday at retail, but Saturday and Sunday were a dud, with only a few places where retail traffic was stronger than a regular weekend. This also fits the early reports from the retail sector, which put Thanksgiving and Black Friday slightly above last year, but the next two days well below, looking at both sales volume and number of shoppers.

Another way of saying this is that by the time Black Friday was over, people had spent most of the money they had available to spend — and perhaps it goes without saying, shoppers are still not reaching for the credit card to finance their Black Friday deficits. This accounts for the largest drop ever between Black Friday and the day after. Part of the explanation for the revenue decline too is steeper discounting than last year. That especially hits after Black Friday. If someone is still shopping after Black Friday is over, it is to fill a specific gap in the Christmas list, not to spend a particular shopping budget. If they can get the same item for less money, that just means more money for next year.

You might ask, what’s the point of Black Friday, if the net effect is to get people to shop on Friday instead of Saturday and Sunday? But this makes perfect sense if you see the Christmas shopping season as a kind of auction, with many competing retailers and a limited number of shoppers. From the retailers’ point of view, they have to get shoppers’ money early in the season or risk not getting it at all. In a way, then, the early Christmas shopping season, which seems to get earlier every year, is a sign of the economic decline of the middle class, which no longer has the capacity to support its traditional place in the U.S. economy. The middle class has been in decline since the 1970s, the victim of tax policies that increasingly favor the billionaire-investor class. It is the latter who are financing so many retail stores, more stores than the middle-class shopper can possibly support.