This Week in Bank Failures

The indictment of former Speaker of the House Dennis Hastert highlights the way money laundering rules can affect anyone who deals in under-the-table cash transactions. Hastert was withdrawing millions of dollars in cash, which is exactly the kind of pattern that makes law enforcement officials ask questions. It was surely not money laundering, but Hastert was systematically taking the money out in small amounts that he apparently combined to form larger cash payments. If any of the combined cash payments exceeded $10,000, and if Hastert then failed to report the nature of the cash transactions to bank regulators, that is a violation known (informally) as structuring. The indictment of Hastert says he subsequently made false statements to investigators about the money, which would be a second crime. A retired politician ordinarily would not be indicted just for moving money around, so the indictment is not really just about the money. Wording in the indictment suggests that investigators think Hastert was paying hush money to victims of his earlier misconduct. The episode provides an example of the way investigators try to uncover crime by following the movement of money.

Metropolitan Savings Bank in Pittsburgh failed almost immediately after the real estate boom began to falter in 2005, and the main reason was that a bank executive was secretly taking out loans for houses his construction business was renovating. At the time of the bank failure in February 2007, loans to the executive equaled more than half of the bank’s capital, but bank directors didn’t know because of false accounting records for most of the loans. The executive was sentenced to 12 years for his part in the bank failure. Another officer pleaded guilty and is serving a 6 year sentence for her role in the false accounting. The two were ordered to pay nearly $10 million in restitution.

Two More Brands Join Ingredients Trend

There are two additions to the ingredients trend that I wrote about last week.

Subway is planning to drop all preservatives and artificial colors and flavors from its menu within two years. The change will start with roast beef — the restaurant chain says roast beef really doesn‘t require chemicals. Subway had already been systematically reviewing its ingredients since dropping the bubble chemical azodicarbonamide from its bread a year ago, and more recently it started to phase out caramel color.

Kellogg’s plans to dabble in products that aren’t based on chemicals. If the first four semi-natural cereals are a success, I’m sure more will follow. In addition, Kellogg’s says it will make its ingredient panels easier to read so consumers won’t have to guess about the ingredients in the products.

Beijing Smoking Ban

A new ban on smoking in most public places in Beijing went into effect today, and while it will be difficult to enforce, it will change public perceptions in the city that probably has the second greatest number of smokers in the world, after Shanghai. The new law bans smoking in commercial buildings and almost anywhere a smoker might be seen. Violators are subject to a $32 fine, with much higher fines for businesses that permit smoking inside a building. It is the latter measure that may ultimately be effective in ending the practice of smoking in schools and restaurants.

The new smoking ban could change the cultural view of smoking just enough to allow the further measures that could be broadly effective at getting people to smoke less. One reform that is desperately needed is an increase in the cigarette tax. A pack of cigarettes can cost about $1 in China, and a tax increase that sent the price up to $2 would make an obvious difference. However, tax increases cannot be enforced without a crackdown on counterfeiting and smuggling, and that degree of reform will be possible in China only after a change in smoking culture.

This Week in Bank Failures

Outflows have picked up again at most banks in Greece as depositors withdraw more money than they deposit. Net outflows were estimated at €5.6 billion in April. Outflows then nearly stopped, but picked up again in the second half of May. Depositors worry about whether the European Central Bank can go any farther to maintain liquidity in Greece. Outflows for May could reach €3 billion. Total deposits have retreated to the levels of 2004. Banks will need to find ways to sell some assets.

Dozens of banks must have handled money transfers of a million dollars and up to deliver the bribes that influenced decisions at international football association FIFA. Law enforcement officials are looking at the conduct of banks in New York and Qatar especially. So far there is no indication that banks understood the purpose of the transactions involved. A bank could have committed a crime if employees knew of improper payments and the bank failed to report the transactions to regulators. Bank employees might be criminals themselves if they advised or participated in the process of disguising criminal transactions. It is a safe guess that at least 20 banks are conducting quiet internal investigations into these questions. New York became the main focus of the investigation after investigators in other countries uncovered evidence of FIFA corruption that pointed to meetings and payoffs conducted in the United States.

Regulators in Turkey took charge of Bank Asya tonight. It is a politically charged move in a country that has been cracking down on political and social reformers, but the bank has been in perilous financial condition since last year. Customers withdrew 20 percent of deposits last year and the bank posted a loss of $300 million. It reduced its staffing by a third and reported a first quarter profit, but was withholding documents from bank regulators and was facing a stock delisting warning. The bank will continue to operate and will be managed temporarily by the national deposit insurance fund.

Bank of America will pay a $30 million fine for preying on active duty military families in violation of federal consumer protections for military personnel. The bank will overhaul its debt collection processes and pay restitution to an estimated 73,000 customers. The settlement with the O.C.C. does not cover the bank’s mortgage business, which exhibited a similar pattern of misconduct.

Moving Away From Chemical Food

Integrity in food ingredients is becoming a trend, with even Taco Bell saying the reliance on chemicals has gone too far. Taco Bell says it will remove artificial colors and some trans fats this year and will take out some other chemical ingredients over the next two years. Pizza Hut says it can make the same transition a little faster. These announcements follow similar announcements last month from processed-food manufacturers Nestlé and Kraft, which will remove artificial colors and flavors from high-profile products first. Hershey, Panera, and Dunkin’ Donuts are part of this trend too. For Hershey’s this is a change in direction after investing heavily in synthetic fat PGPR as a key ingredient in its chocolate during the last three years. Chipotle is already ahead of this entire pack, but now says it does not need to rely on ingredients from animals fed genetically modified food.

Pizza Hut, Taco Bell to remove artificial colors, flavors from foods

Nestlé USA Commits to Removing Artificial Flavors and FDA-Certified Colors from All Nestlé Chocolate Candy by the End of 2015

All these food names are trying to catch up with the changing tastes of the U.S. consumer, which started on a long-term move away from chemical-based foods a generation ago. We have seen this kind of trend before, with the low-fat fad that changed all of processed food in the 1980s, so it is easy to imagine that the move away from purified chemicals could sweep over the whole processed-food industry.