This Week in Bank Failures

Greece is still seeking bridge financing from its current bondholders after being turned down by the IMF and others. The prospect of a default by Greece rattled stock markets in Europe and the United States today. Greece probably needs about $10 billion for about one year, and credit market spreads suggest that traders increasingly see that level of financing as unlikely.

Add another headache to HSBC’s long list of problems: a data leak affecting apparently about half of its U.S. legacy mortgage customers. The data leak included Social Security numbers along with account numbers and email addresses, so it is the kind of data loss that provides a foundation for fraud by criminal enterprises that purchase the leaked data. HSBC is running off its U.S. mortgage business, and this might make it look like a soft target to data thieves, based on the assumption that businesses can be reluctant to make new investments in data security for legacy operations.

Fallout continues from the long pattern of embezzlement that brought down Brazilian oil company Petrobras, with the indictment and resignation of a political party’s national treasurer. Investigators in Brazil believe that much of the stolen money was laundered through HSBC in Europe and are seeking bank records to try to identify other high officials who might have been involved. Separately, a Petrobras supplier, Grupo Schahin, has filed for bankruptcy protection and suspended offshore oil operations after being affected by the Petrobras investigation, falling oil prices, and the loss of overseas financing.

Giant banks in North America and Europe are reporting improved profits from the first quarter of 2015, based mainly on gains in currency and bond trading.

During the height of the financial crisis, BNY Mellon served as custodian for £1.5 trillion in assets for U.K. customers, and it was failing to properly account for them, raising the risk that customers could lose much of this money if the bank were to fail. The bank has agreed to pay a £126 million fine to the U.K.’s Financial Conduct Authority (FCA) and broadly improve its internal controls.

Deutsche Bank is paying yet another money laundering fine. What makes this one significant is not the size of the fine, $8 million, nor the extent of the wrongdoing, but the venue, Dubai, a place not known for vigorous investigations of banks. The fine covers not just the money-laundering activities themselves but also a multi-year cover-up by the bank, which initially ignored inquiries, then made false statements and provided fabricated reports to mislead regulators. Analysts note that bank executives failed to get involved, leaving the overseas branch to handle the problem itself even after it was clear that something criminal had gone on there. It is hardly an isolated case and seems to show that the international banks of the world have become too large to manage effectively.

Two Reversals

Food

CNNMoney reacts to news that for one month, for the first time ever, U.S. consumers spent more in restaurants than at supermarkets. Their reaction is puzzling:

It's noteworthy that consumers are willing to indulge a little bit by going out to eat ... but it also suggests that the cold weather is being used too often as an excuse for weak overall spending. Wouldn't people be more likely to stay home if the frigid temperatures were really that bad?

Of course, obviously, people forced to stay home because of weather are not buying food anywhere, but are eating whatever they have at home. And if the weather improves and they can just barely get out? Then there are, on average, about ten restaurants closer than the nearest grocery. If snow and ice make the roads too dangerous for driving, would you rather walk four blocks to the nearest restaurant or thirty blocks to the nearest supermarket?

Another point to consider when looking at this comparison is the price disparity between groceries and restaurant entrees. If people are spending nearly equal amounts at restaurants and groceries, that still means they are getting four times as much food at groceries than at restaurants.

Energy

In the energy sector, Bloomberg notes, “Fossil Fuels Just Lost the Race Against Renewables.” The subtitle, “This is the beginning of the end,” might be a bit of an exaggeration, but the essential point is sound: fossil fuels are now legacy technology in the energy business.

The shift occurred in 2013, when the world added 143 gigawatts of renewable electricity capacity, compared with 141 gigawatts in new plants that burn fossil fuels, according to an analysis presented Tuesday at the Bloomberg New Energy Finance annual summit in New York. The shift will continue to accelerate, and by 2030 more than four times as much renewable capacity will be added.

The Bloomberg analysis exaggerates the potential for nuclear power, an industry already facing the limits of available uranium. Still, solar alone could eclipse fossil fuels in incremental generating capacity around five years from now.

The shift in energy generation has more to do with the declining cost of newer technologies than with the various problems of fossil fuels:

The price of wind and solar power continues to plummet, and is now on par or cheaper than grid electricity in many areas of the world.

It is easy to look at the installation numbers and think that this transition is well on its way. In fact, new energy installations each year are small compared to already installed capacity, so the transition is not so sudden as you might imagine. It could take a century or two if you extrapolate current trends. The rate of the last five years is not nearly fast enough to ultimately meet the 2-degrees-Celsius guidelines for avoiding the most expensive consequences of carbon-based global warming. Still, it is fast enough to conclude that in a commercial sense, fossil fuels are losing the race and will only decline in importance from here.

In Atlantic City, Bankrupt Casinos Try to Get Ready for Summer

Maybe Atlantic City just had too many casinos, yet that is a problem that may linger with casinos preparing to reopen. The financial fortunes of the city and its remaining casinos have improved since the wave of casino closings last year. This makes sense with customers not spread so thin. Strangely, the Trump Taj Mahal remains open in bankruptcy, and it has managed so far to block a plan to convert the neighboring Showboat casino into a college campus. The college plan probably has enough political support to go forward in the end. For its part, the Trump Taj Mahal may manage to limp through the summer season (presumably under a new name) before closing for good in October.

At Revel, a new owner who bought the casino for 4 percent of its construction price is racing against time to get electricity restored to the complex so that it can be cleaned up and ready to reopen for the summer. The new owner plans to expand the casino with a second tower, the one part of the original design that was never built, at a cost of $500 million or more. In an already overbuilt Atlantic City, the drive to expand will surely lead to more closings in the near future.

China Trade Decline Points to Changing Role of Manufacturing

A surprising 15 percent decline in exports from China and a similar decline in imports has analysts rethinking the conventional thinking that says manufacturing can only increase. The broader trends are still relatively rosy, with 7 percent annual growth in output expected, but that pace of growth cannot hold up in the long run if manufacturing is no longer booming.

Manufactured goods continue to occupy a prominent place in everyday life, but manufacturing can retreat in other ways, as products become more durable, versatile, mobile, and efficient. For example, if phones last for four years instead of just one, while at the same time becoming 20 percent smaller, that translates to an 80 percent decline in manufacturing for that category. The textiles category is declining with clothing increasingly seen as a durable good. With improved portability, a single machine can be put to work in more places. Increased recycling reduces the demand for new base materials such as paper and aluminum, while better repair techniques delay replacements for cars, printers, and other machines. None of these trends take away from the prominence of manufactured products, but they reduce the amount of manufacturing work.

The conventional view is that the rapid expansion of the global middle class during the first half of this century will lead to a corresponding increase in manufacturing, but if that were the case, activity in the largest manufacturing country should only be going up. A pair of metrics that say there is a 15 percent decline tell us there must be a flaw in this view.

This Week in Bank Failures

HSBC confirms it faces a formal criminal investigation in France. The bank anticipates a laundry list of criminal charges for its role in tax fraud schemes, and says it is innocent of any charges that might be forthcoming.

The bankrupt parent company of the failed Doral Bank in Puerto Rico has received court approval to sell its insurance unit in an auction.