This Week in Bank Failures

The first large U.S. bank failure in five years occurred tonight when regulators in Puerto Rico closed Doral Bank. It had $4.1 billion in deposits and $5.9 billion in assets as of the end of the year. Banco Popular assumed responsibility for the deposits in an agreement with the FDIC, but the arrangement is not as simple as that. Banco Popular is keeping only 8 of Doral Bank’s branches in Puerto Rico, along with three in New York City. FirstBank Puerto Rico is purchasing the other 10 branches in Puerto Rico. Arkansas-based Centennial Bank is purchasing the five branches located in the western Florida panhandle. Banco Popular is purchasing around half of the assets. The FDIC says it has buyers for another $1.3 billion in assets and will seek buyers for the rest. The complexity of the arrangements makes this one of the most involved bank resolutions to date. Adding to the confusion, the FDIC erroneously announced the bank failure during the day while the stock market was still open. It was an uncharacteristic error from the usually very cautious FDIC, and may perhaps be explained by the one-hour time zone difference between Puerto Rico and the U.S. east coast. The FDIC retracted the report, then reissued it at the end of the day, but the damage had been done, and trading in the bank’s stock was halted after it fell by half in less than ten minutes. The bank failure will cost the FDIC about $750 million.

Doral Bank had been struggling for years and suffered a major setback on Wednesday when an appeals court ruled against it in a $229 million tax case. The FDIC will now file an appeal of that ruling on behalf of the bank. A former officer of the bank was one of several people indicted earlier in the week in a fraud case. The FBI was separately investigating the assassination of a bank executive in 2011.

An HSBC executive admitted to hiding $8 million in bonuses in a Swiss bank account in the name of a company registered in Panama, in part to avoid paying U.K. income taxes on the money. In other testimony, executives acknowledged the difficulties of managing such a large instituation and the extent of reputational damage the bank has suffered as a consequence of its unethical behavior.

HSBC may face a new inquiry in Austria next week after banking authorities there get copies of bank operating documents from authorities in other countries.

U.S. banking profits were stronger in the 4th quarter of 2014, with about two thirds of banks reporting improved profitability. A few of the largest banks suffered profit declines, but those were mostly attributed to legal costs.

Deposit flight in Greece reversed after the details of a bailout extension emerged. The episode demonstrates the way bailouts protect financial institutions at a cost to the broader economy.

In hearings this week, executives of CIT Bank tried to reassure the public that the bank would be made stronger, not weaker, by the proposed acquisition of California’s OneWest Bank.

The Shrinking Corporate Sector

Another earnings season is winding down on Wall Street, and revenue numbers seem to be declining broadly among corporations that mainly support the corporate sector. Some of this is just an improvement in efficiency in one way or another — for example, with computers lasting longer, it is harder to sell new computers to corporations — but some of it must be a sign of the corporate sector in retreat. It has always been the case that the established part of the large corporate sector tends to shrink over time, and this has been going faster since the 1980s. Now we are seeing a period in which the up-and-coming large corporations aren’t growing fast enough to cover the decline in the older, established large corporations.

In theory, the “flat” world economy that we talked about so much a decade ago should enable more effective competition from newer and smaller players, and perhaps that is what we are starting to see now.

A Trend Toward Detection

People are asking why there are so many data breaches now, but the question holds a hidden assumption. In truth, we don’t have good systematic knowledge of the data breaches that occur, so we can’t really say how many there were in the past or are now. With most of the events undetectable, it is impossible to say anything with any statistical confidence about what the trend is.

It is worth considering, though, that one reason data breaches are reported is that business are able to detect them. There is more technology and more skill when it comes to monitoring computer networks than there was in years past. Of course, that didn’t help Target a year ago when it detected intruding software in its retail network and ignored the finding. However, there is also more skill in detecting patterns in transactions and other events, and that capacity came to Target’s rescue two weeks later. We can even say with confidence that there are criminal groups trying to cover their tracks by keeping their exploits on a scale too small to be noticed. This tendency to keep things small is itself a pattern and any such pattern stands a small but significant chance of detection no matter how small and pseudorandom a criminal enterprise makes its activities.

In theory, the growing risk of detection would eventually deter criminals. In practice, there will always be criminals who are not rational enough to accurately measure the risks they are taking. On the other side of the data breach, the same quality can be found in businesses, which rarely consider the risk of data loss with the seriousness it deserves until after a loss has occurred. Put the two together, and it is easy to say that there will continue to be data breaches, and they will continue to be detected.

Procter & Gamble Seeks Boost in Coherence

Procter & Gamble is a sprawling empire of more than 100 consumers with nothing to tie them together beyond the company’s skill at getting consistent results with chemicals. We heard last year that the company had realized this was too much, and then there were deals to sell off the Duracell battery division and some others. The latest word is that the retreat goes deeper than that, and we can expect it to sell off half of its brands accounting for perhaps one fifth of its revenue within a few months. The result, the company hopes, is a more manageable operation.

P&G will still be a long way from the classic industrial model of one company selling one brand, but in theory, eliminating the brands that are least connected to the company’s sense of purpose should make it more coherent and therefore more manageable. There is reason to doubt that this restructuring is going quite that way, as the company is also trying to keep its big-money consumer brands, but it still must be a step in the right direction.

The story at Cincinatti.com:

P&G: Expect most deals to sell brands by summer

This Week in Bank Failures

HSBC issued a full-page Sunday newspaper apology for its shady practices, but the apology was hardly convincing. The tone of the executive letter fell somewhere on the spectrum between unrepentant and defiant, and the aggressive stance will come back to bite the bank the moment that more recent evidence comes to light. We might not have to wait long for that to happen, as Swiss law enforcement spent the day Wednesday inside HSBC’s Geneva office collecting records related to specific transactions.

Tax authorities in the United States, United Kingdom, and elsewhere are pursuing other threads in the case. Meanwhile, the scandal continues to spread with compelling links to high-profile big-money problems in Brazil, Russia, and Mexico. One London newspaper counts ten separate investigations launched since last week. Another, the Telegraph, has lost a prominent writer, who quit in response to its publishers’ ongoing role in the coverup. The paper’s statement in defense of its non-coverage is more aggressive than that of the bank itself, if that is possible, and has been ridiculed as a conspiracy theory and as having possibly been written by the bank’s PR department. Adding to the sense of scandal, two of the newspaper’s owners are said to have received an unusually large and seemingly irregular loan from the bank in the days before the non-coverage decision was sent down. Officials elsewhere, from the British prime minister to U.S. prosecutors, have been forced to join the chorus of denial, claiming they did not know basic facts of the case that were in documents they seemingly had possession of.

Greece formally applied for a six-month extension of its bailout. The plan met resistance from Germany, which wanted a deal for three years or longer. Some commentators thought the situation would set up a Greek exit from the euro, while others expected Wall Street to come to the rescue. There was some deposit flight from banks with worry about solvency if there were any delay in the government’s debt payments. The deal that is expected to be finalized this weekend is a four-month extension with Greece following the general outline of its austerity regime. This must be a disappointment to the new government in Greece, but it buys possibly enough time to get its house in order.

Royal Bank of Scotland might have to write down £4 billion in goodwill in connection with the spinoff of U.S.-based Citizens Bank. If so, it is a sign that RBS overpaid when it bought Citizens Bank.

Wall Street Journal says next month’s U.S. stress test results will show failing marks for Santander and Deutsche Bank, not for capital shortfalls, but for operational shortcomings. Santander failed last year’s stress test.