This Week in Bank Failures

With a caretaker government in place, an audit still pending, and the former owner a fugitive from justice, Bulgaria does not know what to do with the failed CorpBank. Deposits are expected to stay frozen for at least two more months. However, the bank reopened its offices this week to accept loan payments.

For sale: Espirito Santo Bank, the Miami-based U.S. subsidiary of Banco Espírito Santo, is making plans for a sale or possibly a stock offering as part of the liquidation and recapitalization of the failed parent bank in Portugal. Two Espirito Santo family members resigned from the U.S. bank’s board last week to remove any doubt about the bank’s independence. Espirito Santo Bank doesn’t have any known exposure to the problems of the bankrupt Espírito Santo commercial empire.

Failed: In South Africa, African Bank Investments Ltd. or Abil has lined up support from the central bank for its plan to split into a good bank and bad bank. The bank was put in administration and trading in the stock was suspended on Monday, though by then it was already trading for pennies. Details of a stock offering for the good bank will follow.

When IBEW Local 816 Federal Credit Union failed a month ago, the NCUA had not worked out all the details of succession. That can now be told. Yesterday C-Plant Federal Credit Union purchased most of the failed credit union’s assets and assumed the member accounts.

Science as a High School Obstacle

Science is an obstacle for some high school students — there is no doubt about that. And now, a careful study has found that science requirements make a big difference in high school graduation. Enhanced science requirements led to high school completion rates that were nearly 1 percent lower. At Ars Technica:

The downside of high school science requirements: More dropouts

A quarter of the increase in high school dropouts was made up for with a higher college completion rate among high school graduates who went on to college. Science requirements are more common and more stringent in college than in high school, but those who have studied science in high school may be better prepared. The bottom line, though, is that increasing the requirements for science in high school is not enough. If students are to learn science, there has to be a corresponding increase in the quality of instruction, and that will come only when school authorities are prepared to spend the money that it takes.

Amazon’s Webmaster Thinking

Amazon is in the content business, but it thinks like a webmaster. It is an unworkable combination.

Amazon’s indifference to content has been highlighted in the headlines for two high-profile disputes. It has been squeezing two of the biggest hardcopy content providers, Hachette in books and now Disney in movies, refusing to provide key titles from these sources to its customers. Amazon says it wants improved trading terms that assure lower prices. In essence, Amazon doesn’t believe any information product should cost more than US$9.99.

To Amazon the webmaster, it doesn’t matter that popular products are missing from the store. Content to a webmaster is a fill-in-the-blank item. A newspaper, for example, may replace every single story between one day and the next, but the site stays the same. Similarly in an online catalog, if one product is absent, web surfers go on to the next product.

The problem with this attitude is that to the people with the money — the consumers shopping at Amazon — one product is not the same as another. A movie fan will not buy The Muppets Take Manhattan just because Muppets Most Wanted is not available. Most likely, the customer will go off to another retailer (for example, Best Buy), where Muppets Most Wanted is ready to order. When Amazon has less content to offer, it sells less, its revenue is lower, and the perennially money-losing holdover from the dot-com era is that much farther away from a sustainable business model.

It is not just that a smaller catalog cuts into Amazon’s revenue. Suppose Amazon got its way and all movies sold for $9.99 or less. Amazon has not gained a competitive advantage: if a Blu-ray sells for $9.99 at Amazon it will be $9.99 at Best Buy too. Worse, this means Hollywood has less money to spend to make its future movies. Suddenly there is no money for the camera assistant, the lighting assistant, the supporting cast, the special effects, or the original music soundtrack. There is no money for take 6 of a scene — take 5 will have to do. But the result is movies that are less impressive and less compelling for movie fans. These are movies that will sell fewer copies — yes, even at Amazon. With budget cuts, it goes without saying that some movies won’t be made at all. Again, a smaller catalog and lower revenue at Amazon. The same analysis holds if Amazon gets its way in book pricing. Lower royalties for book authors, who as a group are already starving, would mean fewer or lower-quality books, and sales could only go down.

It is understandable that Amazon might think lower prices are the key to its success. You have to look at where Amazon’s money comes from to see the source of this error. Amazon may have more than 100 million U.S. customers, but the big money, the money that allows Amazon to stay in business, comes from a small coterie of avid book readers. I say “small,” but this group is not small in a commercial sense. I would guess they number about half a million in the United States. They read two or more books every day. Some of them buy ten books a day, even though they must realize they will never be able to read them all. You might know someone like this. Or maybe not — a person who reads multiple books per day doesn’t have much time left to talk to even their close friends. I am reluctant to imagine the experience of people so determined to escape from the real world, but at least books are a harmless habit when compared to other forms of escapism such as watching television all day, to name just one.

The more books a customer buys, the more they influence Amazon’s view of the book-buying public, and so, in a way, Amazon imagines we all think like its ten-book-a-day customers. It is this group that feels most strongly that $2.99 books are better than $9.99 books. It is an understandable opinion if you consider that this price difference might save someone $20,000 on their annual book-buying habit. It would be the height of irony if this group, which buys so many books but takes so little interest in the ways of the world, were to determine the way the rest of us buy books.

Yet this is already the case. If avid book readers were to decide, all at once, to read the books they already had before they bought more, none of us would be able to go on buying books quite so easily. It would be the end of the book business as we know it. The layoffs at Amazon would start the very next day. Amazon would go under by the end of the quarter. Publishers, for their part, would cut back drastically. Thousands of novelists, no longer able to maintain the pretense of making a living, would retire from writing to take on other work. As a book author myself, I have no doubt that my own livelihood would suffer in this scenario — not that people buy books on information technology and economics as escapism, but that Amazon’s replacement might not go to so much trouble to make my books easy to buy. It makes me wish my status and income as an author did not so depend on a book distribution infrastructure paid for by other people’s unhealthy habits and bad decisions — remembering that every purchased book that goes unread is a miscalculation on someone’s part. I wish we could do better.

Amazon has no such vision. It is scrambling to survive, and if it shoots itself in the foot as it does so, that is just the risk it must take.

Wall Street analysts see Amazon as the heavyweight in its battle with Disney, but I don’t see it that way. Amazon makes a legitimate profit in only one area of its business, which ironically is printed books. It doesn’t mind pillaging its profitable business in the hope that its ebook platform (and other initiatives) will someday be profitable. But it has been years and years, the losses are piling up, and in the meantime, from everything I can see, Amazon’s share of the printed book business is now declining. Suppose Disney and Hachette held their ground and decided to respond to Amazon’s threats by cutting off Amazon. Hachette would be, if anything, slightly more profitable freed from the low prices and steep discounts that Amazon insists on. Disney would still be a stable, profitable business. Amazon, I am afraid, would be finished.

Escaping the Mobile Social War Experience

I have a hunch that people are not feeling quite so happy with mobile devices and social media these days. This technology which keeps people so well connected is, this summer, connecting them to a parade of war news from all sides of the planet. The news is as tragic as it is impossible to avoid. And the media makes it worse than it might have been in decades past by making the mayhem and death seem more local than it is. It is the historically unprecedented experience of having five or more simultaneous wars in your own backyard.

The technology by itself doesn’t provide a way to scale back your online war experience. It is no help to ask your online friends not to emphasize the war news so much, because just mentioning the topic furthers that conversation. Everyone sees these topics differently anyway. Some take the violence of war as an imperative to organize politically and may be angry at those who are not as outraged as they are. Others, needless to say, are offended by that approach and see it as heartless opportunism, taking political advantage of people who are already the victims of violence. Of course, there are also those who view war almost as a sport and root for one side or the other. It is a point of view that is unfathomable to the two I mentioned previously. One way or another, it is an argument waiting to happen. Of course, it is better for all if this argument does not take place directly on someone’s news feed or blog comments.

It is not just the war news itself, as bad as that is, that makes social media and mobile communications unhappy. The stress of non-stop war can put people in a irritable mood, so that they may react sharply on unrelated topics. To cope you may have to lower your expectations. Don’t lean on social media and mobile so much when they are in a bad mood. Don’t expect it to be as pleasant as it might be in happier times. Don’t try quite so hard to stay connected. Spend more time offline with the people who are physically there where you are. Go to the beach if you can. Most of all, don’t hold your breath. When one or two wars are going on, you can hope that they will be resolved somehow in the coming days. When it is five or ten wars, it is a good thing to pray for peace, but not a realistic thing to expect in the short term. If history is a guide, the war news will be around at least for the rest of this year. If it is becoming all too much, you just have to stay away from it as much as it takes to keep your emotional balance. And for those on the other side of it, if you are getting all too wrapped up in a war that is not really your own, make sure you are not suffering from it yourself (if you are losing sleep, it is a sign you have taken it a step too far) or alienating your friends by identifying so closely with the culture of war and the distressing news that it brings.

This Week in Bank Failures

Calm has returned in Portugal after the government took over the regular banking assets of Banco Espírito Santo on Sunday. Political observers in Europe are pointing to the result as evidence that the bank rescue, done vaguely along the lines of the new European rules, shows that the new rules are more practical than the supposedly investor-friendly approach of the previous European bank resolution regime.

Bank stocks in Portugal are suffering somewhat from worry about how much money banks will have to put in to restore the bank rescue fund. It could be another €500 million in addition to the €500 million the banks paid this week. The fund was more than wiped out by the resolution of Banco Espírito Santo. The Bank of Portugal says there could be an IPO within months for the new Banco Espírito Santo. The new bank, though operating as Banco Espírito Santo, is officially Novo Banco and will surely take on a new name after it is under new ownership. Funds raised in an IPO would likely fall short of the amount needed to replenish the bank rescue fund.

Bondholders in the old bank will not be protected by credit default swaps. The ISDA Determinations Committee, which decides these things, has determined that the bank resolution was a succession event, so the credit default swaps transfer to Novo Banco.

Regulators say the failure of the old Banco Espírito Santo was a direct result of improper loans made at the beginning of July. If regulators had taken over the bank in the middle of June when a breakdown in governance became obvious, the failure could have been avoided. In retrospect it is a costly miscalculation that has even the business press moaning about lax banking supervision.

There was some initial confusion about the division of assets between the good bank and the bad bank in the bank resolution. The bank’s overseas banking subsidiaries in Angola, Cabo Verde, and Macau were transferred to the good bank, since they were not related to the bank’s troubled loans to its parent companies.

All is not well at Banco Espírito Santo Angola (also known as BESA). Regulators in Angola responded to the bank rescue in Portugal by putting the local subsidiary into administration. The state guarantee of $6 billion of the bank’s loans has been revoked. Regulators say the bank may have made too many loans in the last two years, and many of them are performing poorly because of the state of the national economy. “Extraordinary measures” will probably be sufficient to restore the bank to normal operation, regulators believe.

In South Africa, African Bank Investments, also known as Abil, is looking for $800 million in new capital. It made this announcement on Wednesday, a day before its furniture retail subsidiary filed for protection from creditors. The bank had gone into the furniture business hoping to make furniture loans to low-income consumers, but this plan went badly, and the problems were compounded by a weak economy and rising energy prices. Abil estimates it has about $4 billion in viable loans on its books, of a total of $6 billion, compared to about $4 billion in long-term debt. The bank’s stock market value has shrunk to $100 million, so it has no realistic prospect of raising capital by issuing stock in its current form. Instead, it may attempt to spin off a good bank with a new stock offering.

Comeback: Bank of America has been limited to paying a 1¢ dividend to stockholders for the last 7 years because of the bank’s financial weakness and accounting problems. After years of attempts, this week it finally received approval to raise the dividend to 5¢ per share.

Guilty: A senior manager at Wilmington Trust in Delaware pleaded guilty to two counts of conspiracy in connection with fraudulent transactions designed to make the failing bank look financially stronger than it was. The indictment in February mentioned a reciprocal loan scheme between the bank and MidCoast Community Bank. The latter bank was acquired by another bank last year, and its top executive then pleaded guilty to fraud and related charges. Any secret agreement to trade capital between two banks is considered fraud because it makes the banks appear financially stronger while actually making them weaker. Wilmington Trust was rescued by M&T Bank, which bought the bank at a steep discount in a stock-swap deal that closed in 2011. Banking regulators and the SEC are investigating the collapse of Wilmington Trust, and there have been indictments of other officers and customers on more serious charges related to real estate loans.

In the hot seat: HSBC this week declared “war” against regulators and their strictness about accurate accounting, while Standard Chartered complained that bankers are being treated “like criminals” when they commit money laundering offenses (apparently meant as an exaggeration, as there is no indication of anyone at Standard Chartered going to jail). According to reports, both banks have new reasons to complain, as their conduct may subject them to further U.S. fines. Also, both are hurting financially in the economic slowdown in East Asia, where there is a sudden increase in impaired loans across all banks.