MF Global Fails

Investors knew all was not well at MF Global. Its stock price tumbled last week, giving it a market capitalization of $200 million, not much when compared to $40 billion in assets. Headlines on Friday said customers were starting to walk. The company was in much worse shape than it appeared, and the first concrete evidence of trouble came this morning when the New York Fed and New York Stock Exchange suspended the company. Since then we have learned that buyout talks over the weekend did not progress far and after continuing late into the night, were called off at 5 a.m. so that the company could prepare its bankruptcy filing.

Though classified as a broker-dealer, MF Global was operating more in the manner of a hedge fund toward the end, with a startling $6.3 billion in exposure to European sovereign debt. Wall Street will try to shrug off its bankruptcy as the equivalent of a hedge fund liquidation. But it will be expensive for JPMorgan and Deutsche Bank, each of which are owed $1 billion, according to the bankruptcy filing.

The MF Global bankruptcy won’t completely undo Wall Street’s stock trading gains this month, but it is another reminder of how fragile the big-money financial web can be.

Look Mom, No Cards!

At the beginning of September I decided I wanted to try not to use my credit cards for point-of-purchase payments. I don’t have a debit card, so this meant paying mostly with cash. I had a handful of credit card purchases in September, but this month, there were hardly any. I went shopping less than ten times this month and paid in cash. I used my credit cards mainly at the gasoline pump. I also used them to buy postage, both online and at the post office.

I made only one online purchase this month, and I paid for it with a PayPal balance that came from a customer who made an online purchase from me. I am not a big fan of PayPal in its current form but I have to admit it is a very efficient system when used this way.

The latest quarterly reports from the credit card companies show a marked softness in transaction volume. Part of the reason is that people are making fewer shopping trips to save fuel. But part of it must also be that some shoppers are paying in cash more often. With banks planning substantial increases in fees for using debit and credit cards and transaction fees for checks, cash is showing a new advantage in transactional efficiency.

Leaving the Heat Off

Again this fall, I have kept the central heating in my house off, heating only the rooms I am actually using and only for as long as necessary. The weather has helped. Locally it has not been particularly warm or cold, and with wetter weather than usual there hasn’t been the usual October freeze.

I am not the only one taking this approach. A partial approach to home heating is still unconventional enough that people who do it don’t brag about it. But I have been relatively forthright in explaining to people that I spend the colder weather mostly in one room in my house, the office, leaving the rest of the house essentially unheated, and more people this year have been responding by telling me how they are doing variations of the same thing.

For some, the kitchen is the room they prefer, and that, of course, is the old way of doing it. It makes perfect sense if you have a supply of firewood (easy to come by in this neighborhood) and a wood-burning stove in the kitchen. A century ago, the average house did not have central heat, and huddling in the kitchen or around the fireplace was a necessity in colder weather.

For me as a writer and computer programmer, it is easiest to huddle at my desk. I can easily close the office door and focus on writing — something I would want to do soon enough anyway.

Measures of oil consumption in particular bear out the suspicion that people are leaving the heat off. This decline in energy consumption is one of the reasons the U.S. trade deficit has backed off from its previous record levels.

This Week in Bank Failures

Bank Transfer Day is a boycott movement protesting some of the fees at the giant banks, designating November 5 as a day for customers to move deposits to local credit unions. What started out as a Facebook post has grown into a nationwide movement with an estimated 500,000 people participating.

The loss of 500,000 customers would be a major blow to almost any business, but the giant banks will barely notice the decline in deposits, and that not until they check their balance sheets in January. For the benefit of those who might worry, the movement of deposits is not like a run on the banks and won’t create unusual cash management challenges. Banks face larger cash management exercises every Thursday and Friday as payroll direct deposits go out.

Bank Transfer Day is not the only consumer movement affecting the banks. It is supported somewhat by Occupy Wall Street, and all year, Move Your Money has been agitating for local banking. At the same time, consumers are moving on their own after being startled by new banking fees. When Move Your Money first launched, banking industry observers said they would be surprised if the giant banks lost more than 2 or 3 million customers. But that was before the latest round of new fees, and looking at it now, the eventual movement of customers will be an order of magnitude larger than that.

The winners in this movement are, first of all, the banking customers who will save a fortune in fees, but also the credit unions and local community banks. Some credit unions reported almost a year’s worth of new deposit customers in the month of September, and October and November could be larger. With the additional deposits, the rate of small bank failures, already low, will become that much lower. The FDIC also benefits, and not just by avoiding a few small bank failures. When the next major bank failure hits, the Deposit Insurance Fund will be on the hook for a smaller amount of insured deposits.

There is a bigger issue at stake than banking fees themselves. Banks ultimately need to charge for the services they provide, but the cost structure of the giant banks is 2 to 5 times that of almost all other banks. Cost, rather than greed, is the reason the giant banks feel justified in charging $8 for a service that might cost $2 at a normal bank. But the costs put the giant banks at a competitive disadvantage in a time when the trend is for banks to charge transaction fees to cover the costs of services. The giant banks cannot survive in their current form; they must find ways to cut their operating costs.

Bank of America, which inspired much of this fuss with its announcement of a $5 per month activity fee for debit cards, now says it will provide customers with more ways to avoid the monthly fee. For example, active credit card users might not be charged for using their debit cards. But the bank has not settled on anything specific yet. In the meantime, the new fees are already taking a bite out of the card business. Visa reported soft transaction volumes, indicating that consumers, uncertain about what fees they will be charged, are holding back on debit card transaction even in situations where no usage fees are actually in effect.

One very small bank failed tonight, though its name might make it sound more important than it is. The bank was All American Bank, in Des Plaines, Illinois, with $33 million in deposits. International Bank of Chicago is purchasing the assets and taking over the deposits.

The NCUA took over a credit union yesterday. Birmingham (Alabama) Financial Federal Credit Union, with 400 members, was put into conservatorship and its office closed. Members can access their accounts at the nearby office of America’s First FCU. In conservatorship, the NCUA will hope to improve the fortunes of the credit union. In this case, not having to pay the expenses of operating its own location might help the credit union’s financial picture.

Problem-Solving vs. Decisive Action in Europe

It is a relief to see that the next step in the European sovereign debt saga, announced today, is not the “decisive action” that pundits had called for, but a measured response to the most immediate problems.

This distinction between control and problem-solving is one of the fundamental concepts of leadership. When things are going badly, it is a natural impulse to want to seize control — to do and decide everything yourself instead of trusting the experts to find solutions to the myriad details. But the biggest problems require the most ideas and the most action. When one hundredth of the Russian countryside was on fire, the central government did not say, “Don’t do anything till we get there.” Instead, it offered general guidance about what local authorities and individual citizens should do to respond. It deployed its own resources, including the military, in a supporting role where it seemed they might do the most good.

The problems in Greece and Italy were brought to the current point as a direct result of too much strong-willed central control. With the debt crisis in Greece, it was the European Union forcing a plan on Greece, then another plan when that one failed, and so on. The latest plan tacitly admits that was all a mistake, and turns most of the budget issues back over to Athens. The more recent and more startling budget crisis in Italy comes from political leaders strong-arming the political process to try to keep a corrupt system going. Italy’s situation will not improve until it replaces its current leaders with ones who can take a more flexible approach. The way things stand now, Italy is at risk of collapsing in a matter of weeks, long before Greece might, but when the commitment to corruption is set aside, Italy can easily find ways to keep the government and country going.

With control-minded leaders, things eventually deteriorate to the point where a more open approach is forced upon them, so that more ideas can be involved, and more complete solutions forged. This is what has finally happened in the European Union. If leaders cling to control beyond this point, then either the leaders are replaced or the whole enterprise collapses. This is the nature of the turning point we just observed in Libya and the one we are rapidly approaching on Wall Street. There was, of course, never any reason for Europe to go down that road.