This Week in Bank Failures

If Greece is delayed in making payments on its foreign debt, it won’t affect Greece much, but the liquidity of some of the foreign creditors could be significantly affected. That probably includes some of the largest banks in New York, but no one seems to know exactly which ones.

To no one’s surprise, the civil action filed against Goldman Sachs has been followed by a criminal investigation. The investigation will surely run for at least a couple of years.

There were reports of mysterious bankers hanging around San Juan all week, and tonight, several Puerto Rico banks were seized by regulators. The largest of these was the largest bank failure so far this year. Westernbank Puerto Rico had $8.6 billion in deposits and nearly $12 billion in assets.

Banco Popular, the largest Puerto Rico bank, is taking over the deposits and is purchasing 79 percent of the assets. Banco Popular has been facing losses of its own, but is in a much stronger capital position.

Puerto Rico has been in a recession since 2006, and high unemployment and a lack of economic growth are at the root of the problems banks are having there.

Two other banks were closed in Puerto Rico. These were midsized banks that, combined, were about the same size as Westernbank Puerto Rico. R-G Premier Bank of Puerto Rico had $4.3 billion in deposits and $5.6 billion in assets. Eurobank had $2 billion in deposits and $2.6 billion in assets. All three banks were closed by Puerto Rico banking regulators.

Scotiabank de Puerto Rico is taking over the deposits and purchasing the assets of R-G Premier Bank of Puerto Rico. Scotiabank de Puerto Rico is the local subsidiary of Scotiabank, which is based in Canada but has a strong presence in the Caribbean dating back to 1889. Scotiabank de Puerto Rico was not as large as R-G Premier Bank of Puerto Rico, but Scotiabank as a whole is a large bank operating in 50 countries.

Locally based bank Oriental Bank and Trust is taking over the deposits and purchasing the assets of Eurobank.

The three Puerto Rico bank failures are estimated to cost the FDIC $5.3 billion.

On the mainland, there were bank failures in Washington, Michigan, and Missouri. In Washington, state banking regulators closed Frontier Bank, a move that had been anticipated for some time. The bank had $3.1 billion in deposits and 51 locations concentrated on the West Coast.

The turmoil surrounding the bank included the abrupt resignation of its president at the end of last month, supposedly following a dispute about his vacation schedule. The head of California operations was promoted to president, though as of last week, he was still working in California and had not yet made a trip to headquarters. Also last month, the FDIC issued a prompt corrective action order against the bank. This week, the bank was forced to deny a rumor of a buyout, which was based on an Internet message claiming an investment group had collected $135 million to buy the bank and another bank. The message was hard to take seriously, as a buyer for Frontier Bank would seemingly need more than $1 billion, but the subsequent rumors may have driven the bank’s stock up by more than 100 percent. That degree of volatility, though, is not unexpected in a stock that has declined 99 percent from its peak.

San Francisco-based Union Bank is taking over the deposits and purchasing the assets.

Bank regulators in Michigan closed Citizens First Savings Bank, which had 22 locations in the eastern part of the state, and $1.4 billion in deposits. First Michigan Bank is taking over the deposits and purchasing half of the assets.

Citizens First was several quarters late with its financial statements, and had been cut off by Freddie Mac two weeks ago. Freddie Mac said it would no longer guarantee the bank’s mortgage loans, citing accounting failures as one of several reasons.

Two small banks in Missouri were closed.

• Champion Bank, with $154 million in deposits and one location in Creve Coeur, Missouri. BankLiberty is taking over the deposits and purchasing most of the assets.
• BC National Banks, with $55 million in deposits and four locations near the Kansas state line. Local bank Community First Bank is taking over the deposits and purchasing the assets.

The cost to the FDIC for the four mainland bank closings is estimated at $1 billion.

Last weekend, the NCUA placed a credit union in conservatorship. St. Paul Croatian Federal Credit Union serves 5,000 members in northeastern Ohio. The credit union continues to operate under NCUA management.

Spill, Baby, Spill

On Twitter today, there was a rush of action on the #spillbabyspill hashtag. That’s after this morning’s NOAA report with a list of bad news about the BP oil spill in the Gulf of Mexico:

1. After looking at the amount of oil floating on the surface, experts decided the rate of oil flow is around 5,000 barrels a day — 5 to 6 times the previous estimates.
2. Engineers say a second leak point has formed on the sea floor.
3. The new estimate for containing the oil leak is 3–6 months. That would make this event the largest oil spill ever.
4. At this point, the best hope for containing the spill is to drill a new well just like the one that failed.
5. Surface winds are forecast to change direction tonight and blow the oil spill toward shore for the next four days.

Some of the latest tweets are quoting Bill Maher, who today offered the suggestion that it was time for the “Drill, baby, drill” team “to report to the Gulf coast for cleanup duty.”

That’s a quote that gets at the point of this exercise in virtual political chanting. There is an economic policy question in play, which has to do with how much collective risk we want to take to deliver energy. The “Drill, baby, drill” slogan sought to sidestep this question by pretending that nothing bad could happen if we drill for oil anywhere we find it — and if we build some new-technology nuclear power stations, for that matter.

The BP oil spill serves as a reminder that everything that can go wrong eventually will — just in case the Eyjafjallajökull eruption wasn’t reminder enough. Much of this deep-water oil could cost $100–150 a barrel to extract and bring to shore, but this proposition isn’t as simple as paying the money and collecting the oil. We could spend the money and end up spilling the oil, and if it happens that way, we can’t ask for our money back. That’s what risk means.

There are risks involved in every source of energy — even solar panels can be damaged by hailstones — so the way that the United States and most of Europe are living so close to the edge when it comes to energy supply is also a risk. The answer cannot be merely to generate all the energy we know how to, because that maximizes our oil spills, nuclear accidents, and similar events. The appeal of that approach is the promise that we won’t have to change our lifestyles — but that’s a false promise. If the BP oil spill is as bad as forecast, it will mean closing the beaches in the Florida panhandle for the summer — not what we asked for when we said we didn’t want to change anything. It will also mean some Louisiana marsh lands lost — permanently — after oil kills the trees that are holding the land in place. That’s not what we meant by not wanting to change either.

The fact is, we have to change. The message of “Drill, baby, drill” was that we wouldn’t have to change, and it’s a message that looks less than convincing on a night when people in Louisiana are watching for signs of the first oil washing ashore. The message of “Spill, baby, spill” is that we have to decide how we want to change and stop just letting things happen to us, as if we’re the victims of our place in history. Given the way the political process works, though, we can’t collectively face a decision like this in a meaningful way until more than half of people are willing to set their denial aside long enough to engage in the question.

That, in essence, is the message contained in the #spillbabyspill hashtag. It’s a message to whoever will hear it, saying, “Stop pretending there isn’t anything going on. There are some real decisions to be made, as soon as enough people are ready to talk about it.”

The New Wall Street

In lieu of today’s blog post, I’m posting a newspaper clipping that resulted, quite unexpectedly, from yesterday’s post.

Financial Crisis Solution: Move Wall St. to Las Vegas

LAS VEGAS—A solution to the country’s financial crisis has been found in an unlikely place. Hidden in the fine print of a PowerPoint graphic created by the U.S. military to explain Nato strategy in Afghanistan, an economist discovered a strategy for ending the recession, recapitalizing all the banks, and solving the vexing problem of the government deficit.

“It’s time to move Wall Street to Las Vegas,” exclaims economist Rick Aster. “I’m pretty sure Vegas has already built a life-size replica of Wall Street somewhere, so it’s really just a matter of moving the ticker-tape machines.”

An enthusiastic Aster reels off one bullet point after another of the advantages that Las Vegas could offer: Synthetic poker chips. Investment-grade slot machines. Mortgage-backed playing cards. A gambling commission that’s far more airtight than the Securities and Exchange Commission. And it’s in the Pacific time zone, so after the trading floor closes at 1 o’clock, you can go see Barry Manilow or Cirque du Soleil.”

Aster, who worked for two years in New York’s financial district, scoffs at the financial reform drama current playing out in Washington. “It’s not about who works in what office in Washington, it’s about who sweeps the casino, uh, or trading, floor at night,” insists Aster. “The people in Las Vegas know how to get it done.”

Aster is also calling for tougher licensing and education requirements for traders. “We could require derivatives traders to have roulette training,” he suggests. “It would have prevented trillions in losses if we had required this before the financial meltdown.”

Britney Fleur, a prominent Las Vegas investor who also works as a waitress at the 24-hour Bar at Times Square in the New York, New York casino, says investors would profit from the high-rolling atmosphere that Las Vegas has to offer. “The odds are about the same in either place, but in Vegas, you can drink on the trading floor,” said Fleur.

There’s No Pow in PowerPoint

The PowerPoint slide seen below has been floating around the Internet for a year, but got people’s attention when it popped up on the front page of the New York Times this morning. It was used there as an example of how hard it can be to understand the PowerPoint presentations that are used every day in the U.S. military — and many other places, for that matter.

I’m showing the slide again here to make a point. This particular diagram, as it was originally created for the U.S. military, might serve to explain the complexity of the Nato military strategy in Afghanistan — but not if it is seen as part of a PowerPoint presentation. In that context, most people say it looks like spaghetti. It is so bewildering to look at that, to the average reader, it may make just as much sense in the version I show here as it did in its original form — even though I have changed almost all the words on it.

If the diagram seems like it makes some sense in this form (particularly if you click through to the larger version of it so you can read the text) it is because I overlaid the original diagram with a U.S. map, a visual arrangement that you may be familiar with, and used that as a guide in filling in much of the text. But this is only a trick. The parody diagram is no more meaningful than the original. It attempts to show degrees of connections between ideas beyond what is possible to set forth in this kind of medium.

A properly designed slide is limited to about seven featured lines of text. You add more that this at your peril, because a person of average eyesight and attention span cannot necessarily pull together more than seven lines projected on a wall or displayed on a standard-definition video screen. This diagram has 50 lines of text. If you displayed it on a television screen, the small letters would be about 5 pixels tall — too small to read even without the anti-aliasing feature that blurs small type on the screen.

The additional level of information, beyond the 7 lines or so that can reasonably be conveyed, is there not to inform, but to confuse and distract. I studied the original diagram and found that the arrows connecting one point to another were quite arbitrary, at least from an outsider’s perspective. They could have been chosen at random, for all I know, and that also means that the diagram would be just as meaningful without them. The selection of points for inclusion was also arbitrary. I would argue, for example, that road building is the one key strategy that could lead to success in Afghanistan, and in fact, it is a significant part of the Nato plan, but the diagram did not include it. There is no point of accountability in presenting information this way, because no one seeing it can understand what is being said clearly enough to challenge or question any particular point.

But if putting too much detail on a slide is a strategy to confuse and mislead people, using slides correctly is not much better. If you are limited to showing about seven lines of text, all you can show is dimensionless information, a rigid hierarchy, or a simple progression (including what is called a storyboard). Very little useful information actually fits into one of these formats. Worse, the slide asserts the arrangement of information through typography rather than logic. PowerPoint makes it possible to make any assertion of fact subservient to any other, without any requirement for rhyme or reason. There is no accountability in this either.

This is why there is no “pow” in PowerPoint. PowerPoint presentations lack impact because they present information through a lens that filters out most of the meaning. The New York Times story recounts how some of the most successful U.S. military initiatives of the past decade were completed after a commanding officer imposed a ban on PowerPoint. Other initiatives, managed by PowerPoint presentation, have arrived where they are today. There is, I believe, a lesson in that.

Word of the Year: Conflate

My pick for word of the year is conflate. According to Wiktionary, it means “to bring things together and fuse them into a single entity.” It’s derived from a Latin word that means much the same thing.

Conflating is something people are doing more than ever these days, by accident, out of haste. People want to jump to conclusions because they feel they can’t take the time to check the facts. It takes only a moment to hope you made the right distinctions. Actually getting things right could take several minutes.

Taking an example from the weekend’s headlines, some people have started to talk about Goldman Sachs as a repeat of the Enron story. Enron never made a profit, in its later configuration, but created the appearance of a profit by manipulating its financial statements. Goldman Sachs actually made a profit, though there are questions about the propriety of its deals by which it did so. But to some observers, the difference disappears in a cloud of “Whatever.” That’s an example of the kind of conflating that people are doing this days.

This trend toward mixing stories up haphazardly shouldn’t be taken as an indication of the declining character of people these days, but rather an indication of the increasing time pressure affecting almost everyone. I don’t believe time pressure can simply increase forever, but the time pressure trend shows no sign of slowing down.

Making distinctions is the opposite of conflating — at least of the new kind of conflating. The more people mix things up, the more there is to be gained by making distinctions. If most people keep rushing and hoping they’re getting things right, but not taking the time to check, conflating could be a marker for profit opportunities. Where everyone else is conflating, stop and make a distinction, and you may find a competitive advantage.