Cap Holds in California Gas Storage Disaster

One of the largest artificial disasters of 2015 is under control now, with infrared and radar images showing that the Aliso Canyon natural gas storage facility in California is holding after a series of patches since last week. More than 10,000 people were evacuated for four months and it is hard to estimate the medical consequences of the gas leak. A no-fly zone was declared around the area because of the risk of the leaking gas to aircraft. The greenhouse gas impact of the leak was large enough to be compared to the normal greenhouse gas impact of the entire United States.

The natural gas storage facility was built more than 60 years ago in an abandoned oil field, and the natural deterioration of equipment over time made this kind of leak inevitable. The residual oil from the former oil wells acts as a contaminant in the natural gas, making it more harmful than natural gas would be on its own. The disaster got sparse news coverage, in part because there are risks involved in every form of large-scale energy storage and news outlets are loath to emphasize the social risks inherent in the conventional lifestyle that news advertisers represent.

The lack of news coverage shouldn’t lead anyone to underestimate the impact of this kind of disaster, however. Whether covered in the news or not, an event like this does show that we are all living beyond our means, hoping that disaster doesn’t strike but knowing that, realistically, things will continue to break down at a rate similar to what we’ve seen.

This Week in Bank Failures

Bank stocks, which had already retreated to 1996 levels as the week began, continued their decline. The selloff was especially evident on Thursday when many U.S. banks fell 5 percent, after many European banks had already retreated by 8 percent. On Friday Bank of America cut its one-year outlook for the S&P 500 by 9 percent, a move that could almost be attributed to the ongoing decline in the banking sector alone.

Bank stocks have been closely tied to the fate of oil in recent weeks, with investors worried about the scale of banks’ involvement in the oil industry. Most oil companies are expected to fail if the price of oil does not rise above $50 by the middle of 2017. The current price of oil, though, is $29 and shows little sign of a large-scale near-term recovery. When oil companies go bankrupt, many of their loans will go unpaid, possibly rendering banks insolvent if their exposure is too large.

Deutsche Bank sought to reassure investors of its capital strength after last year’s steep losses. It then announced a €5 billion bond buyback plan to be funded by a small part of the bank’s pending asset sales. The bank will need to reduce its debt load as it scales down.

Morgan Stanley agreed to pay $3.2 billion in penalties and restitution to settle charges of misrepresenting the mortgage loans backing some of the securities it issued around 2008. The bank reduced the quality of the mortgages it included in securities but told buyers it had not done so. The settlement was not unexpected and the bank said it had already set aside the funds involved.

The Financial Conduct Authority (FCA) fined a senior manager at JPMorgan £792,900 for failing to cooperate with regulators. The manager failed to disclose problems with the bank’s synthetic risk derivatives portfolio and told regulators in a March 2012 meeting that the problems were resolved even as the bank’s liabilities had by that time ballooned to $6 billion and the bank was holding daily crisis meetings.

Sources for The Wall Street Journal say U.S. and U.K. authorities are in the late stages of their Libor-rigging investigation and are likely to charge several banks in the two countries. Misconduct in other countries might lead to separate charges.

MetLife is formally challenging its “systemically important” status in court. The insurer is seeking to overturn the part of the Dodd-Frank Act that defines “systemically important” financial institutions. In court it argues that issuing life insurance policies should make it exempt.

The Federal Election Commission wants to know if Citibank and Goldman Sachs were secretly bankrolling the Ted Cruz presidential campaign. Loans totaling $1 million weren’t disclosed in the candidate’s electoral filings. Cruz is one of several presidential candidates with close ties to Wall Street, but apparently the only candidate to receive this kind of secret funding. Besides the loans, Cruz’s wife is an employee of Goldman Sachs.

History Repeats As Time Buys Myspace

Myspace is not exactly a social media platform anymore. It’s more like a web site for watching music videos. But it is Myspace’s social media past that got Time Inc. interested in purchasing it — for data mining of the user data, if you believe the official announcement.

Time Inc. has purchased Myspace in what is not a repeat of the AOL Time Warner deal, described as “the biggest mistake in corporate history.” Or is it? Is the following quote from a Time Warner executive describing the AOL deal from 2000 or a Time executive describing the Myspace deal this week?

Marketers are selecting media partners that have either data-driven capabilities or premium content; we will be able to deliver both in a single platform, and will stand apart from those that offer just one or the other.

I know, I couldn’t tell either. It might just as well describe either deal. It seems the myth of marrying access and content is just as easily believed today as it was 16 years ago.

But wait. Didn’t Time Inc. just get done unloading Time Warner Cable and before that, AOL, exactly because the marriage of access and content didn’t make sense? Well, yes, but . . .

Negative Interest Rates: Technical Readiness

The Fed has told banks to be prepared for negative interest rates, at the same time saying that it’s not a likely scenario. The most likely scenario would seem to be a copy of Japan, where banks are being charged an annual rate of 0.10 percent for excess reserves on deposit with the central bank. It’s a way of discouraging banks from keeping cash. The hope is that banks will be more eager to make loans, but for banks that don’t want to make loans, there are plenty of other places they could put their money. A small amount of it could be in gold, for example. Banks may need to keep excess reserves on deposit for short periods of time while large transactions clear, and the negative interest rates could lead banks to charge higher transaction fees, but not so large that they would deter the large business deals the payments are part of.

There has been confusion this week about the Fed’s plans. As I understood it, the Fed only meant to caution banks to be ready in a technical sense for interest rates that could go below zero. The United States has never had negative interest rates, so it’s not likely that many of the old-line banks are technically prepared to record the negative interest rates in their transaction systems. In clarifying its position, the Fed said it had no plans to lower interest rates. That compounded the confusion, though, and today the Fed had to clarify that it could adopt negative rates in the future and banks really did need to prepare. That’s the bottom line, I think: bank managers need to go to their computer system architects to ask, “If we tried to put in a negative interest rate tomorrow, what would happen?” Someday bank stress tests may be more than just back-of-the-envelope calculations and banks may be formally obliged to test their operational readiness for scenarios such as these.

Update, February 12: CNBC just published a roundup of negative interest rates: Next country with negative rates could be… Canada?

Twitter’s Tinkering

At some point during the blizzard two weekends ago, Twitter stopped showing me advertisements. Maybe I should have been flattered. A Fast Company story, “Twitter Has Stopped Showing Ads To Its Most Valuable Users,” said an ad-free timeline is now the ultimate Twitter status symbol. The risk of being flattered would be that I might feel insulted the following weekend when the ads started to trickle back in.

“Most valuable” would be an exaggeration in my case, but Twitter has enough statistics to show that I am more valuable to it for the content I provide than for the advertisements I view — not really a surprise for a professional writer who has taken considerable trouble to master the 140-character format. You could make a case for not showing me any advertisements on Twitter. Some advertisements are irritating enough to push me off the service for a day at a time. But what would be better for Twitter is if it can get the content I provide and have me take in hundreds of advertising impressions. So Twitter is experimenting on me. If it perseveres, it will discover the kinds of advertisements that drive me away and will reserve those for other users (or perhaps start turning down those advertising placements if most users find them equally irritating). It will also find that I read and remember everything it puts in front of me and have a lower tolerance for repetition than the advertising industry would normally expect. Eventually I may have an effectively personalized advertising feed on Twitter.

Assuming Twitter succeeds at this, it is good news and bad news. Twitter needs advertising to survive and prosper, but effective marketing in any form is a double-edged sword. The goal of advertising is to control the mind of its target, yet if it accomplishes this consistently, it leads to avoidance in one form or another. To cite one of the most extreme examples of this, the charitable fundraising industry has learned to target retirees whose mental functioning has declined enough that they are highly suggestible in phone calls. These prime targets may make reliable donors, but if they go too far, a court may step in and takes their checking accounts away from them for their own protection, and then the charitable fundraisers get nothing. To look at a more pragmatic example, some of the retailers that were most effective at selling clothing in-store five years ago are now out of business. After spending a small fortune in these stores just two or three times, the best customers feel a twinge of guilt or fear when they think of going back. Customers then condition themselves to walk past the store without going in. For the store, this leads to bankruptcy. The issues with the advertisements in my Twitter feed are more subtle. If Twitter persuades me to take on the point of view of their advertisers, that takes away the distinctive point of view that makes my content valuable, and that in turn makes Twitter less compelling for those users who follow Twitter in part to see what I am saying. It matter little whether I start writing dull tweets that echo what the advertising on Twitter is already saying or censor myself, realizing that my thoughts are not so interesting, and write fewer tweets. Either way, the result is less content to discover on Twitter. Multiply this by a few million net content providers, and a breakthrough in advertising effectiveness could lead to a burst of revenue for one year, followed by a collapse as users abandon the suddenly stale platform.

The need to strike this balance between content value and advertising influence is nothing new. Newspapers know if they try to go past 10 percent advertising space on the front page and 80 percent inside, readers will learn not to open the paper. Commercial television has yet to find a way to push past 23 percent advertising time without losing the mass audience. Twitter is something new in the advertising world and no one really knows how far Twitter can push advertising without eclipsing the essential value of the service. That’s why it is important for Twitter to experiment at this point.