Coyote Blog

My company is taking over a new campground in Washington State.  In that small town, and anywhere near it, there is only one bank, a Keybank branch.  So I need to open a business checking account there so we have somewhere to put our weekly cash revenue deposits.

Unfortunately, many banks have crazy paranoid lawyers.  Years ago the US Government implemented "know your customer" rules making sure banks are dealing with a real person and not some fake entity meant to launder drug profits to Columbia, or something.  A lot of banks, including Keybank, have interpreted the rule as meaning that a business owner has to physically walk into a branch before they will open an account.  That is fine for the pet grooming business next door, but if one runs a multi-state business, it is a royal pain in the ass.

Note that I have completed all the paperwork for the account on the phone.  They have copies of my drivers license and all my corporate paperwork.  I am looking at my unsigned signature card.  But Keybank insists I go into a branch to complete the transaction.  Literally I have to just tag a branch for 5 minutes to make the lawyers happy.  Because making me travel across the country to walk into a bank branch makes the country safe from terrorism.

Keybank has no branches in AZ.  So I was going to have to take an entire day to fly to Utah or Colorado or Washington in order to create the account, which is obviously expensive and time-consuming.  I am actually on vacation soon in Florida, and I see Keybank has a bank in south Florida, so my current plan is to drive 3 hours on my vacation, tag the branch, and then drive back.  Good times.

By the way, if you want a business bank that a) is not insanely arrogant and b) actually wants your business, consider Enterprise Bank in the St Louis area.  I have shifted a lot of my corporate and treasury stuff there and have not regretted it.

The last few days I have written of my frustration at trying to get local business bank accounts, the sole purpose of which is to accept deposits of cash from my local campgrounds and then transfer that money to my main account.  This is a major hassle as opening a bank account as a corporation is not a simple task and, as I have found out, some banks won't even accept this sort of business.

Here is what I need:  I need a national network of offices, many in rural locations, that will take my cash and ACH (a cheap form of wire transfer) the money to my bank account.  So naturally, I think of Walmart.  Walmart already is used to handling a lot of cash and Walmart is already starting to offer a number of consumer banking services.  One reader told me about the Bluebird service, a joint effort between Amex and Walmart to create a sort of virtual consumer bank.  I love the idea, but it has rules limiting it to consumer accounts.

So here is my business for you Walmart

• I bring my cash to you at any store.  You zip it through a counter.  We agree on the amount.
• You wire my main account with the money.  I will give you three days so you can use the cheapest transfer and have time to get the cash into your own account.
• I will pay you 100 bp (1%) of the cash value for the service

Currently I pay merchant processors 270-300bp for those transactions and I have to wait 3-5 days for the money to hit my accounts.  So 100bp on cash would be fair for me, and I would guess fair for Walmart.

A while back I wrote on my concerns about privacy and being treated like a criminal in opening new business banking accounts in small town California.  My main bank closed so I had to go with the available local bank El Dorado.  Now El Dorado Bank refuses to take my business and open new accounts.  It could be because I criticized them online, but they say it is because they no longer take accounts that are just deposit accounts, ie accounts where we drop our local cash collections and then ACH it from time to time to our other accounts.

I guess I understand why this is not awesome business for them, but on the other hand all they have to do is make 4 deposits a month and they get to carry my $20,000 average balance and charge me a fee as well.  And they still don't want the business.

Here is what I need.  I need some easy way around the country, often in rural locations, I can turn cash into bits.  I can now scan checks anywhere in the country at my desk and have the check deposited to my account.  But not so with cash.   You still have to find someone local who will accept the cash into an account, effectively turning the cash into bits and bytes that I can then transfer to my main bank.  I don't think there is a solution to this but you are welcome to email me if you know of one.  My guess that anyone who tried to start such a service would be immediately hamstrung by the government who believes in its heart that every one of us is a drug dealer, money laundering, or tax evader, or all of the above.

For 15 years I have been a customer of El Dorado bank in a small town in California, just depositing our weekly revenues in the account and sweeping it out from time to time.  When Bank of America closed a few locations we use in other California small towns, it seemed easier to just add additional El Dorado accounts.  WRONG.  I was told today that because we might possibly maybe make three simultaneous deposits at the three banks that total to more than $10,000 in cash in one day, we suddenly are subject to all sorts of disclosure requirements.  I am used to having my privacy raped as a business owner to set up even a simple banking relationship, but now apparently any employee of mine who might make the weekly deposit is going to have to submit all sorts of personal information, including social security number, to the bank just for the ability to deposit money.  We have been doing the same business with El Dorado for nearly 20 years, and suddenly in the little town of Lone Pine, CA, population 2035, we are now treated as presumptive drug dealers and tax evaders.  It aggravates me that I have to put my employees in this position.

It used to be that it was easier to have fewer banking relationships to manage, but now I am thinking the costs may be running the other way, encouraging more smaller banking relationships that don't trigger whatever limits are set for treating customers as presumptive criminals.

I am a flaming hypocrite on this topic, because my company does not accept Amex, but for travel, particularly if it is a shared family card you are giving your kids, don't use Visa or Mastercard.  Most banks have systems now that are simply hair-trigger in freezing an account if they see a charge they don't expect, which generally means a charge in a new city, ie when you are travelling.  It is merely irritating on my own card, as I have to call and get it turned back on (which can be a pain in certain foreign lands) but it creates a real problem for my kids.  Twice my son has been travelling and twice they have immediately shut down his card.  When he called, they would not talk to him so he had to find me somewhere and I had to call them to verify a charge.  But since I did not make the charge I have to call my son back and then call the credit card company back.  All the while my kids are without any way to charge because this likely is their only card.

There are things you can try to do to avoid this, such as remember to contact the card issuer to warn them when you will be out of town, but this only has mixed success and trying to have my kids remember to do this is a tough proposition.  In my experience, perhaps due to their background as a travel company, Amex is far, far less likely to have travel to new lands trigger these sort of pre-emptive account shutdowns.

Postscript:  I don't get a commission, but I have the Starwood Hotels Amex.  One Starwood point per dollar spend on the card is a great deal.  Starwood points are very valuable, as loyalty points go.  Now that they are merged with Marriott, they can be traded 1 starwood point for 3 amex points.  Also, they can be exchanged for most airline points for 1 starwood point to 1.25 airline points.

So I called Bank of America to send a new credit card to me (the chip was screwed up, which has now happened to three of my cards).  The automated system asked me for the card number and zip code (the latter being a good idea since it is information not on the card itself).  The automated system then gave me some information, trying to head off standard phone requests I suppose.  It told me my current balance, my total credit limit, and my available credit.

I then jammed "0" and said "agent" over and over until I could get a real person.  Once I got a real person, they asked me my name, and then said they had to ask me a security question.  So they asked me ... what is the credit limit on my card.  LOL, their system just told me the number.  Had it not, I probably would not have even known the number.  I asked her how in the world this could possibly be a reasonable security question when their system just told me the answer.  I got a sort of "I just work here" answer and gave up and got my new card.

My small business has a Visa account with Bank of America so that our managers can have the ability to charge small expenses.  My personal corporate card is part of that account.  At least twice a year, I get the dreaded call from the bank telling me my card number was part of a data breach and I have to get a new card.  And then I have to spend hours and hours updating a zillion online accounts with new numbers, and I face weeks and months of past due notices from accounts I forgot to change.

I am willing to accept Bank of America's explanation that some merchant outside their system caused the breech.  So each time I ask the obvious question, "who was the merchant so I can stop doing business with them?"  And every single time Bank of America refuses to tell me.  For reasons beyond my reckoning, Bank of American and apparently the Visa system have a vow of Omerta in which they protect security-deficient retailers from scrutiny.  It is infuriating.  In a free society, we should not need the government to hold merchants accountable for data privacy, we should be able to do it ourselves as customers.  Apparently I am not the only one who is similarly frustrated by this.

Does anyone know of any Visa issuers that are more transparent about the sources of data breaches?  Is Amex better on this than the Visa/MC system?

Update:  From a Senior Fraud Analyst at Bank of America:

I am responding to an email you sent to us regarding the data compromise situation that keeps happening with your corporate card.

I do understand the frustration you experience.  We are not provided specific details about where the compromise occurred.  The compromise could have happened sometime in the past and it may not be limited to one specific merchant or processing center.  I do understand that  you not wanting to use the card at the site of the compromise, but keep in mind that when a merchant or processing center is compromised they likely took measures to improve their security, the continued compromises could be coming from different processing centers or merchants and not the same place each time.

My email back in response:

This is how banks invite regulation on themselves.  If Visa and the large credit card issuing banks were more transparent with customers about retailers that create data breaches, customers could take their own action to police irresponsible parties by taking their business elsewhere.  Ditto merchant processors -- we businesses could easily shift our merchant processing accounts.  But instead, by creating this sort of rule of Omerta where you protect the irresponsible party from public disclosure, people feel helpless.  It is in that environment that folks like Elizabeth Warren can create so much havoc with regulation.

By the way, please do not tell me to be comfortable that the offending merchants have already tightened up their security.  It has been nearly 18 months after the requirements that merchants accept chip cards to avoid extra liability and half the stores I visit still have the chip card slot on their credit card machines disabled.  No retailer is going to stop being irresponsible until you banks stop protecting the bad ones.  Look what happened at Target - they got a lot of bad publicity from their breach but you can be damn sure they were one of the first that were accepting chip cards.

From the WSJ:

The European Central Bank’s corporate-bond-buying program has stirred so much action in credit markets that some investment banks and companies are creating new debt especially for the central bank to buy.

In two instances, the ECB has bought bonds directly from European companies through so-called private placements, in which debt is sold to a tight circle of buyers without the formality of a wider auction.

It is a startling example of how banks and companies are quickly adapting to the extremes of monetary policy in what is an already unconventional age. In the past decade, wide-scale purchases of government bonds—a bid to lower the cost of borrowing in the economy and persuade investors to take more risk—have become commonplace. Central banks more recently have moved to negative interest rates, flipping on their head the ancient customs of money lending. Now, they are all but inviting private actors to concoct specific things for them to buy so they can continue pumping money into the financial system.

The ECB doesn’t directly instruct companies to create specific bonds. But it makes plain that it is an eager purchaser, and it lays out the specifics of its wish list. And the ECB isn’t alone: The Bank of Japan said late last year it would buy exchange-traded funds comprising shares of companies that spend a growing amount on “physical and human capital,” essentially steering fund managers to make such ETFs available to buy.

Note that none of the criteria for the debt purchases is anything like, "the company has sensible plans for investing the money."  It is merely buying debt for debt's sake.  In the US, private companies are using most of their debt issues to buy back stock, a nearly pointless exercise that channels money from central banks to propping up equity valuations.  I wouldn't be surprised if European companies do the same.

Folks, it may not feel like it, but we are at the top of the economic cycle.   We have negative interest rates and central banks buying up every available debt issues in relatively good times, when these were formerly considered tools for the deepest point in a recession.  I am not a big believer in government stimulus, but these folks are.  What are they counting on in the bad times, when nothing will be left in the tank?

But now, we see central banks going one step further, encouraging private companies to lever up at the top of the business cycle.   Historically, this has been a formula for disaster.  The oil industry has been a preview of this.  Take ExxonMobil (XOM).  XOM, given its size, has never been very good at developing certain sorts of plays (e.g. the shale boom).  What it has done historically is use its size and balance sheet to swoop in during inevitable periods of low oil prices and producer losses to buy up developed fields at good prices.  But this time around, XOM has only had limited ability to do this, because it spent the boom years levering up its balance sheet and buying back stock.  Other large oil companies are in even more dire straights, facing real cash flow crises because, again, they levered up to repurchase stock when they should have been cleaning up their balance sheet.

Twice in the last week I have had Bank of American credit or debit cards that have had to be replaced due to (accord to BofA) data breaches at merchants.  I (and I assume most others) find these episodes annoying, not the least because I can expect a month or so of warnings and notices from merchants, hosting companies, cable companies, etc that my automatic payment did not go through and I need to immediately tell them my new card number.

So in each case I asked Bank of America to tell me which merchant lost my credit card data.  I don't think this is an unreasonable request -- if a merchant through some sort of data carelessness causes me a bunch of hassle, and endangers my financial privacy, I would like to know who it was so I can consider shifting my business to someone else.  But Bank of America will not tell me.  I think Target initiated a lot of reforms when they suffered through the public backlash from their data breach a while back -- while many merchants have their chip card readers turned off, you can bet they are not turned off at Target.

If your business is like mine, a lot of folks to whom I owe money are insisting on the ability to automatically remove the money I owe them each month from our checking account (via an electronic process known as ACH, which is slower but much cheaper and easier to use than the old wire transfer method).  At first, any loan I took out insisted that the lender be able to automatically withdraw my payments.  Then my workers compensation company.  Then certain vendor accounts.  And of course my merchant processing companies are constantly shoving money in and out of my bank accounts.

In retrospect, I was far too sanguine about this situation.  What finally caused me to abandon my sense of security was a libel lawsuit filed by one of my vendors over a bad review I wrote of their product [I won't mention the name here but I am sure anyone can figure it out with a simple search].  Anyway, I realized that this company, who was suing me for untold bazillions of dollars, actually had the right to freely jack whatever they wanted out of my checking account.  What is worse, this same company is being sued by many companies for trying to take an arbitrarily high final payment out of their accounts at contract termination.  Eeek!  And this does not even include the possibility of outright fraud.  I have ACH tools where if I have your bank's name and your account number, I could pull out money from your account without your ever knowing about it until you see it missing.  I presume criminals could do the same thing.

Something had to be done, and it turned out that my bank, Bank of America, has something called ACH positive pay wherein nothing gets ACH'ed out of my accounts without my first approving the payments.   I check a screen each morning and in 60 seconds can do the approvals for the day.  They also have a very easy to use rules system where one can set up rules such that payments to certain vendors or for certain amounts don't need further daily approvals.

I presume most major banks have a similar product.  It cost me some money but I feel way safer and encourage you to look into it if you are in the same situation.

To me, the sub-prime auto loan market looks exactly like the home mortgage market in about 2006.

Back before 2009, Progressives were pushing like crazy to get banks to write mortgages to low-income borrowers with bad credit.  Banks that refused to do so would face the wrath of the banking regulators and lawsuits over redlining and ever other thing the Left could think of.   Seriously, if you had tried to stop sub-prime lending in 2006 the Progressives would have excoriated you as being racist, hating the poor, etc.  When the whole mess inevitably collapsed, the Progressives suddenly were there blaming this lending to low income people on the banks, accusing them of predatory lending practices.

OK, so now it is 2006 in the consumer credit market, and specifically in auto loans.  Banks are making crap loans to no-credit individuals on cars and getting them off the books by securitization.   So let's get Elizabeth Warren on the record right now.  Should banks stop lending to these no-credit low-income people?  My bet is that she would support this lending, doubly so because the Obama Administration feels on the hook still for their GM and Chrysler bailouts and would rather not see these companies tank (which they would if sub-prime credit suddenly dried up).  So, before she can piously accuse banks of predatory practices 3 years hence when it all collapses, I want to know what Elizabeth Warren thinks of all this right now.

Update:  Well, good news and bad news.  Good news is that Elizabeth Warren has criticized sub-prime auto.  Bad news is she appears to be totally on the wrong track with causes, talking not about the fact the loans should not be written at all but about the fact that she thinks dealers are reaping huge profits marking up the loans.  It would be interesting to see what the Obama Administration would think about a clamp-down on sub-prime auto.  Methinks they might freak out at that, knowing sub-prime loans are all that is keeping US automakers out of a new recession.

I just encountered my second major piece of software used by Bank of America for my business accounts that will only work with Internet Explorer and most definitely will not work with Chrome.  Their ACH/Treasury/Direct Payments system has to run on Internet Explorer (only) and now I find their secure email system that sends me all my merchant account notices does not work on Chrome and only works on IE.

I am just waiting for the moment that a Bank of America tech support person tells me I have to use Netscape.

Greece is looking like it's falling apart again.  Or perhaps more accurately: Greece continues to fall apart and the lipstick Europe put on the pig a few years ago is wearing off and people are noticing again.

I warned about this less than a year ago:

Kevin Drum quotes Hugo Dixon on the Greek recovery:

Greece is undergoing an astonishing financial rebound. Two years ago, the country looked like it was set for a messy default and exit from the euro. Now it is on the verge of returning to the bond market with the issue of 2 billion euros of five-year paper.

There are still political risks, and the real economy is only now starting to turn. But the financial recovery is impressive. The 10-year bond yield, which hit 30 percent after the debt restructuring of two years ago, is now 6.2 percent....The changed mood in the markets is mainly down to external factors: the European Central Bank’s promise to “do whatever it takes” to save the euro two years ago; and the more recent end of investors’ love affair with emerging markets, meaning the liquidity sloshing around the global economy has been hunting for bargains in other places such as Greece.

That said, the centre-right government of Antonis Samaras has surprised observers at home and abroad by its ability to continue with the fiscal and structural reforms started by his predecessors. The most important successes have been reform of the labour market, which has restored Greece’s competiveness, and the achievement last year of a “primary” budgetary surplus before interest payments.

Color me suspicious.  Both the media and investors fall for this kind of thing all the time -- the dead cat bounce masquerading as a structural improvement.  I hope like hell Greece has gotten its act together, but I would not bet my own money on it.

In that same article, I expressed myself skeptical that the Greeks had done anything long-term meaningful in their labor markets.  They "reformed" their labor markets in the same way the Obama administration "reformed" the VA -- a lot of impressive statements about the need for change, a few press releases and a few promised but forgotten reforms.  At the time, the Left wanted desperately to believe that countries could continue to take on near-infinite amounts of debt with no consequences, and so desperately wanted to believe Greece was OK.

I have said it for four years:  There are only two choices here:  1.  The rest of Europe essentially pays off Greek debt for it or 2.  Greece leaves the Euro.  And since it is likely Greece will get itself into the same hole again some time in the future if #1 is pursued, there is really only leaving the Euro.  The latter will be a mess, with rampant inflation in Greece and destruction savings, but essentially the savings have already been destroyed by irresponsible government borrowing and bank bail-ins.  At least the falling value of Greek currency would make it an attractive place at for tourism if not investment and Greece could start rebuilding its economy on some sort of foundation.  Instead of bailing out banks and Greek officials, Germany should let it all fall apart and spend its money on helping Greece to pick up the pieces.

By letting Greece join the Euro, the Germans essentially let their irresponsible country cousins use their American Express Platinum card, and the Greeks went on a bender with the card.   The Germans can't keep paying the bill -- at some point you have to take the card away.

Arnold Kling on the recent financial crisis:

1. The facts are that one can just as easily blame the financial crash on an attempted tightening of regulation. That is, in the process of trying to rein in bank risk-taking by adopting risk-based capital regulations, regulators gave preference to highly-rated mortgage-backed securities, which in turn led to the manufacturing of such securities out of sub-prime loans.

2. The global imbalances that many of us thought were a bigger risk factor than the housing bubble did not in fact blow up the way that we thought that they would. The housing bubble blew up instead.

What he is referring to is a redefinition by governments in the Basel accords of how capital levels at banks should be calculated when determining capital sufficiency.  I will oversimplify here, but basically it categorized some assets as "safe" and some as "risky".  Those that were risky had their value cut in half for purposes of capital calculations, while those that were "safe" had their value counted at 100%.  So if a bank invested a million dollars in safe assets, that would count as a million dollar towards its capital requirements, but would count only $500,000 towards those requirements if it were invested in risky assets.  As a result, a bank that needed a billion dollars in capital would need a billion of safe assets or two billion of risky assets.

Well, this obviously created a strong incentive for banks to invest in assets deemed by the government as "safe".  Which of course was the whole point -- if we are going to have taxpayer-backed deposit insurance and bank bailouts, the prices of that is getting into banks' shorts about the risks they are taking with their investments.  This is the attempted tightening of regulation to which Kling refers.  Regulators were trying for tougher, not weaker standards.

But any libertarian could tell you the problem that is coming here -- the regulatory effort was substituting the risk judgement of thousands or millions of people (individual bank and financial investors) for the risk judgement of a few regulators.  There is no guarantee, in fact no reason to believe, the judgement of these regulators is any better than the judgement of the banks.  Their incentives might be different, but there is also not any guarantee the regulators' incentives are better (the notion they are driven by the "public good" is a cozy myth that never actually occurs in reality).

Anyway, what assets did the regulators choose as "safe"?  Again, we will simplify, but basically sovereign debt and mortgages (including the least risky tranches of mortgage-backed debt).  So you are a bank president in this new regime.  You only have enough capital to meet government requirements if you get 100% credit for your investments, so it must be invested in "safe" assets.  What do you tell your investment staff?  You tell them to go invest the money in the "safe" asset that has the highest return.

And for most banks, this was mortgage-backed securities.  So, using the word Brad DeLong applied to deregulation, there was an "orgy" of buying of mortgage-backed securities.  There was simply enormous demand.  You hear stories about fraud and people cooking up all kinds of crazy mortgage products and trying to shove as many people as possible into mortgages, and here is one reason -- banks needed these things.  For the average investor, most of us stayed out.   In the 1980's, mortgage-backed securities were a pretty good investment for individuals looking for a bit more yield, but these changing regulations meant that banks needed these things, so the prices got bid up (and thus yields bid down) until they only made sense for the financial institutions that had to have them.

It was like suddenly passing a law saying that the only food people on government assistance could buy with their food stamps was oranges and orange derivatives (e.g. orange juice).  Grocery stores would instantly be out of oranges and orange juice.  People around the world would be scrambling to find ways to get more oranges to market.  Fortunes would be made by clever people who could find more oranges.  Fraud would likely occur as people watered down their orange derivatives or slipped in some Tang.  Those of us not on government assistance would stay away from oranges and eat other things, since oranges were now incredibly expensive and would only be bought at their current prices by folks forced to do so.  Eventually, things would settle down as everyone who could do so started to grow oranges. And all would be fine again, that is until there was a bad freeze and the orange crop failed.

Government regulation -- completely well-intentioned -- had created a mono-culture.  The diversity of investment choices that might be present when every bank was making its own asset risk decisions was replaced by a regime where just a few regulators picked and chose the assets.  And like any biological mono-culture, the ecosystem might be stronger for a while if those choices were good ones, but it made the whole system vulnerable to anything that might undermine mortgages.  When the housing market got sick (and as Kling says government regulation had some blame there as well), the system was suddenly incredibly vulnerable because it was over-invested in this one type of asset.  The US banking industry was a mono-culture through which a new disease ravaged the population.

Postscript:  So with this experience in hand, banks moved out of mortage-backed securities and into the last "safe" asset, sovereign debt.  And again, bank presidents told their folks to get the best possible yield in "safe" assets.  So banks loaded up on sovereign debt, in particular increasing the demand for higher-yield debt from places like, say, Greece.  Which helps to explain why the market still keeps buying up PIIGS debt when any rational person would consider these countries close to default.  So these countries continue their deficit spending without any market check, because financial institutions keep buying this stuff because it is all they can buy.  Which is where we are today, with a new monoculture of government debt, which government officials swear is the last "safe" asset.  Stay tuned....

Postscript #2:  Every failure and crisis does not have to be due to fraud and/or gross negligence.  Certainly we had fraud and gross negligence, both by private and public parties.  But I am reminded of a quote which I use all the time but to this day I still do not know if it is real.  In the great mini-series "From the Earth to the Moon", the actor playing astronaut Frank Borman says to a Congressional investigation, vis a vis the fatal Apollo 1 fire, that it was "a failure of imagination."  Engineers hadn't even considered the possibility of this kind of failure on the ground.

In the same way, for all the regulatory and private foibles associated with the 2008/9 financial crisis, there was also a failure of imagination.  There were people who thought housing was a bubble.  There were people who thought financial institutions were taking too much risk.  There were people who thought mortgage lending standards were too lax.  But with few exceptions, nobody from progressive Marxists to libertarian anarcho-capitalists, from regulators to bank risk managers, really believed there was substantial risk in the AAA tranches of mortgage securities.  Hopefully we know better now but I doubt it.

Update#1:  The LA Times attributes "failure of imagination" as a real quote from Borman.  Good, I love that quote.  When I was an engineer investigating actual failures of various sorts (in an oil refinery), the vast majority were human errors in procedure or the result of doing things unsafely that we really knew in advance to be unsafe.  But the biggest fire we had when I was there was truly a failure of imagination.  I won't go into it, but it resulted from a metallurgical failure that in turn resulted form a set of conditions that we never dreamed could have existed.

By the way, this is really off topic, but the current state of tort law has really killed quality safety discussion in companies of just this sort of thing.  Every company should be asking itself all the time, "is this unsafe?"  or "under what conditions might this be unsafe" or "what might happen if..."   Unfortunately, honest discussions of possible safety issues often end up as plaintiff's evidence in trials.  The attorney will say "the company KNEW it was unsafe and didn't do anything about it", often distorting what are honest and healthy internal discussions on safety that we should want occurring into evidence of evil malfeasance.  So companies now show employees videos like one I remember called, I kid you not, "don't write it down."

Conservative sites are running with this story:

OBAMANOMICS IN ACTION: Typical US Household Worth One-Third Less Than Under Bush

Seriously?  The bursting of the housing bubble, which actually began under Bush, is Obama's fault?  Because that is what likely drove middle class household worth down (while the Fed-sponsored asset boom in financial instruments drove up wealth of the top 1%).  I suppose one could say that the Republicans sponsored a bubble that helped the middle class while Obama is sponsoring a bubble that helps the wealthy.

I won't say this stuff is meaningless to the economy, because clearly they affect people's perception of wealth and thus spending and optimism.  But sound long-term economic growth has got to come from stable and rational monetary policy that allows interest rates and financial assets to find their correct level.  Getting political mileage out of bubble pricing of assets only creates incentives for politicians such that they will never stop fiddling with interest rates and credit.

One of the factors in the financial crisis of 2007-2009 that is mentioned too infrequently is the role of banking capital sufficiency standards and exactly how they were written.   Folks have said that capital requirements were somehow deregulated or reduced.  But in fact the intention had been to tighten them with the Basil II standards and US equivalents.  The problem was not some notional deregulation, but in exactly how the regulation was written.

In effect, capital sufficiency standards declared that mortgage-backed securities and government bonds were "risk-free" in the sense that they were counted 100% of their book value in assessing capital sufficiency.  Most other sorts of financial instruments and assets had to be discounted in making these calculations.  This created a land rush by banks for mortgage-backed securities, since they tended to have better returns than government bonds and still counted as 100% safe.

Without the regulation, one might imagine  banks to have a risk-reward tradeoff in a portfolio of more and less risky assets.  But the capital standards created a new decision rule:  find the highest returning assets that could still count for 100%.  They also helped create what in biology we might call a mono-culture.  One might expect banks to have varied investment choices and favorites, such that a problem in one class of asset would affect some but not all banks.  Regulations helped create a mono-culture where all banks had essentially the same portfolio stuffed with the same one or two types of assets.  When just one class of asset sank, the whole industry went into the tank,

Well, we found out that mortgage-backed securities were not in fact risk-free, and many banks and other financial institutions found they had a huge hole blown in their capital.  So, not surprisingly, banks then rushed into government bonds as the last "risk-free" investment that counted 100% towards their capital sufficiency.  But again the standard was flawed, since every government bond, whether from Crete or the US, were considered risk-free.  So banks rushed into bonds of some of the more marginal countries, again since these paid a higher return than the bigger country bonds.  And yet again we got a disaster, as Greek bonds imploded and the value of many other countries' bonds (Spain, Portugal, Italy) were questioned.

So now banking regulators may finally be coming to the conclusion that a) there is no such thing as a risk free asset and b) it is impossible to give a blanket risk grade to an entire class of assets.  Regulators are pushing to discount at least some government securities in capital calculations.

This will be a most interesting discussion, and I doubt that these rules will ever pass.  Why?  Because the governments involved have a conflict of interest here.  No government is going to quietly accept a designation that its bonds are risky while its neighbor's are healthy.  In addition, many governments (Spain is a good example) absolutely rely on their country's banks as the main buyer of their bonds.  Without Spanish bank buying, the Spanish government would be in a world of hurt placing its debt.  There is no way it can countenance rules that might in any way shift bank asset purchases away from its government bonds.

I often criticize others for attributing 100% of any bad trend to their personal pet peeve.  To some extent I am guilty of that in my last post, where I blamed declining business formation on increasingly complex regulation and licensing.  I think there are good reasons for doing so -- I have spent the last 6 months passing up on business growth opportunities because I was too consumed with catching up on regulatory compliance minutia, particularly in California.  And I have watched as many of my smaller competitors who have fewer resources to dedicate to such compliance issues have left the business, telling me they could no longer keep up with all the requirements.

But there is seldom just one single cause for any trend in a complex, chaotic system (e.g. climate, but economics as well).  One other reason business formation may have dropped is the crash of the housing market and specifically in the equity many have in their homes.

Home equity has historically been an important source of capital for small business formation.  My first large investment in my company was funded with a loan that was secured by the equity in my home.  What outsiders may not realize about small business banking nowadays is that it is nothing like how banking is taught in high school civics.  In that model, the small business person goes to her local banker and presents a business plan, which the banker may fund if they think it is a good risk.

In the real world, trying to get such an unsecured loan from a bank as a small business will at best result in laughter.  My company is no longer what many would call "small" -- we will do millions in revenue this year.  But there is no way in the world that my banker of over 10 years will lend to my business unsecured -- they will demand some asset they can put a lien on.  So we can get financing of equipment purchases (as a capital lease on the equipment) and on factored receivables and inventory.  But without any of that stuff, a new business that just needs cash for startup cash flow is out of luck -- unless the owner has a personal asset, typically a house, on which the banker can place a lien.

So, without home equity, one of the two top sources of capital for small business formation disappears (the other top source is loans from friends and family, which one might also expect to dry up in a tough economy).

Postscript:  Banks will make cash flow loans if guaranteed by the SBA.  This is another whole can of worms, which I will not discuss today.  SBA loans are expensive and difficult to get, and the SBA has a tendency to turn the money spigot on and off at random times.  I have often wondered if the SBA helped to kill cash flow lending by banks.  First, why make risky small unsecured loans when you can get a government guarantee?  And second, with more formulaic lending criteria, SBA lending eliminated the need for loan officers who were good at evaluating business risks.  I can say from personal experience that the folks who can intelligently discuss a business plan and its risks are all gone from banks now (at least in the small business market).

It is always hard to tell if the media is really offering a balanced sample of customer experiences when they pile on some company, but the Huffpo makes a pretty good case that large Wall Street home rental companies are doing a terrible job at customer service.

If so, I am unsurprised for three reasons:

• I run what is essentially a property management company.  One thing I have learned is that everyone outside of the business systematically underestimates basic maintenance and operating costs, and few if any ever factor in the costs of longer-term capital maintenance.  Further, and perhaps more critically, outsiders frequently underestimate the detailed, even minute focus on process and organization that is necessary to make sure everything is getting maintained satisfactorily  particularly when the portfolio gets larger than the executive group can personally oversee.
• I have rented out a second home for a few years.  It is difficult and expensive to stay on top of basic maintenance, and this is with one property that one is intimately familiar with.  I challenge you to find many people who will say they made money renting their second homes, particularly given the high cost of property management.  They may have made money on the appreciation of the real estate value, or reduced the net costs of owning a vacation home, but I seldom run into anyone making money on a annual basis (as long as the real cost of capital is being considered in the equation).
• Wall Street has a long history of treating operational assets as financial assets.  There is a huge mindset difference between the two.  The book Barbarians at the Gate included some early history of LBO firms like KKR, and it is interesting the culture clashes they faced as they tried to explain the need to be operationally involved in their investments to the financial guys who wanted to treat them as Deals.

This article from the LA Times confused me greatly:

Advocates for borrowers took such comments to mean that the banks would prioritize debt write-downs on first mortgages, which banks resisted before the [$25 billion] settlement. Now, with nearly all the promised relief handed out, it is clear that the banks had other ideas.

The vast majority of the aid to borrowers, it turns out, came in the form of short sales and forgiveness of second mortgages. Just 20% of the aid doled out under the national settlement went to forgiveness of first-mortgage principal, the kind of help most likely to keep troubled borrowers in their homes. In terms of borrowers helped, just 15% of the total received first-mortgage forgiveness.

The five banks collectively delivered twice as much aid using short sales, in which owners sell their homes for less than the amount owed and move out, with the shortfall forgiven.

In all, the lenders sought credit for nearly $21 billion related to short sales and $15 billion related to second mortgages. That compares with $10.4 billion in write-downs on first mortgages.

Critics on the Left (example) are calling this a failure of the program, that most of the relief went to short-sales and 2nd mortgage forgiveness rather than first mortgage forgiveness.  The original article has this quote:

"It just shows you that the banks are running the government," Marks said. "There's virtually no benefit to borrowers, and yet you give the banks credit for short sales and getting second liens wiped out — something they were going to have to do anyway."

Hmm, well I am not the biggest fan of bankers in the world, but short sales and second lien forgiveness are principle forgiveness as well, just of a different form.  If they wanted a settlement that was first-lien forgiveness only, they should have specified that.

In fact, both short sales and second lien forgiveness have tremendous value to individuals if one considers individual well-being one's goal rather than just this obsessive fixation on home ownership.  

For many people, the worst part of their negative equity is that it created a barrier to their moving.  Perhaps they could find a job in another part of the state or country, or they wanted to move into a home or apartment with less expensive payments but were stuck in their current home because they could not afford to bring tens of thousands of dollars to closing.  In such cases, a short sale is exactly what the homeowner needs and facilitating and expediting this likely helped a ton of people  (It is also an example of just how unique our mortgage rules are in the US -- in almost any other country in the world, the amount of the negative equity in a short sale would get hung on the seller as a lien that must be paid off over time.  Only in the US do buyers routinely walk away clean from such situations).  Given that first mortgage loan forgiveness more often than not does not save the loan (ie it eventually ends in foreclosure anyway), short sales are the one approach that lets lenders get away clean for a fresh start.

As for second mortgages, I can tell you from personal experience that it is virtually impossible in the current environment to restructure or refinance a first mortgage with a second lien on the house -- even in my case where everything is performing and the underlying home value is well above the total of the two liens.  Seriously, what is the point in reducing principle in the first mortgage if there is a second mortgage there, particularly when the second mortgage is likely far more expensive?  For people with a second mortgage, forgiveness of that is probably the first and best gift they could get.  They may end up still losing their home, but they can't even begin to discuss a restructure or refinance without that other mortgage going away.

I have a column up at Forbes on Monday discussing the irony of how progressives, in opposing Larry Summers as Fed Chairman, have essentially made common cause with the 1%, who opposed Summers because they feared that he might end the quantitative easing gravy train for the financial markets.

No particular point to this post - just thinking out loud.  As a warning, the best way to make a million dollars with my investment advice is to start with 2 million.  I know others are in the same boat so perhaps this is just commiseration

This is an odd stock market.  To me, and to many others, stock price increases have outpaced the economic recovery, and are being driven now in large part by huge injections of printed money by the Fed via ongoing quantitative easing.

First and foremost, quantitative easing has been a savior for bank income statements.  Much of the new money ends up in banks, which shows up as increasing excess deposits.  Even at fractional interest rates, a trillion dollars of new deposits does wonders for bank profitability.  It's an odd sort of bank bailout, cheap if someday the Fed can unwind its balance sheet gracefully, very expensive if not.

Second, though, this money has also found its way into the securities markets, inflating what many people fear may be a bubble in equity and bond prices  (and perhaps even into a newly-reignited bubble in real estate, as house flippers again make their presence felt in California and Arizona home markets).  I have a friend at a party the other night who shook his head in remorse that he had missed the recent run-up in equity prices.  But, unlike many personal investors, he is too smart to jump in now.

I have stayed in the market, though at a reduced mix of my assets, having been convinced by others that you don't fight the Fed and as long as the Fed was injecting money into the financial markets, that security prices would rise almost irregardless of the fundamentals.

Which raises this problem:  I am as certain as one can be in such things that in the next 6-12 months the stock market will be lower, at least 10-20% lower, than it is today.   I am also fairly certain there is some positive run left before the bubble deflates  (you can see that today -- the market is up about a percent as I write this).  So I stay in, ready to skedaddle at a moments notice.

My fear is that almost everyone in the market has the same plan, so that the skedaddling will happen so quickly and so in mass that it will be hard for me as a casual investor to stay ahead of it.  As a result I am slowly liquidating, willing at some point to just miss out on the last stages of the bubble.

The real question is liquidate into what?  Bonds are perhaps more overvalued than stocks, so I certainly tend to stay away from long-duration bonds and bonds that have enjoyed a big run up, such as high-yields, which are trading at some ridiculously small premium to government bonds.  I would not invest in Europe right now at the point of a gun, and I have been anticipating a bursting of the China bubble for a couple of years now.  Commodities are always a crap shoot -- gold is falling and if OPEC does not act soon oil will be falling soon too.  Right now I have decided to sit for a while in short duration bonds, checking my greed at the door and accepting a low return.

JP Morgan finds itself under the government microscope for having heartlessly... cooperated with the government four years ago

The U.S. Department of Justice and New York Attorney General Eric Schneiderman teamed up last week to sue J.P. Morgan in a headline-grabbing case alleging the fraudulent sale of mortgage-backed securities.

One notable detail: J.P. Morgan didn't sell the securities. The seller was Bear Stearns—yes, the same Bear Stearns that the government persuaded Morgan to buy in 2008. And, yes, the same government that is now participating in the lawsuit against Morgan to answer for stuff Bear did before the government got Morgan to buy it....

As for the federal government's role, it's helpful to recall some recent history: In the mid-2000s, Bear Stearns became—outside of Fannie Mae and Freddie Mac—perhaps the most reckless financial firm in the housing market. Bear was the smallest of the major Wall Street investment banks. But instead of allowing market punishment for Bear and its creditors when it was headed to bankruptcy, the feds decided the country could not survive a Bear failure. So they orchestrated a sale to J.P. Morgan and provided $29 billion in taxpayer financing to make it happen.

The principal author of the Bear deal was Timothy Geithner, who was then the president of the Federal Reserve Bank of New York and is now the Secretary of the Treasury. Until this week, we didn't think the Bear intervention could look any worse.

Somewhere there was a legal department fail here - I can't ever, ever imagine buying a company with Bear's reputation that was sinking into bankruptcy without doing either via an asset sale or letting the mess wash through Chapter 7 so there could be an old bank / new bank split.  But Bank of America made exactly the same mistake at roughly the same time with Countrywide, so it must have appeared at the time that the government largess here (or the government pressure) was too much to ignore.

Whether crimes were involved in the failures of Enron, Lehman, & Bear Stearns is still being debated.  All three essentially died in the same way (borrowing short and investing long, with a liquidity crisis emerging when questions about the quality of their long-term investments caused them not to be able to roll over their short term debt).  Just making bad business decisions isn't illegal (or shouldn't be), but there are questions at all three whether management lied to (essentially defrauded) investors by hiding emerging problems and risks.

All that being said, MF Global strikes me as an order of magnitude worse.  They had roughly the same problem - they were unable to make what can be thought of as margin calls on leveraged investments that were going bad.  However, before they went bankrupt, it is pretty clear that they stole over a billion dollars of their customers' money.  Now, in criticizing Wall Street, people are pretty sloppy in over-using the word "stole."  But in this case it applies.  Everyone agrees that customer brokerage accounts are sacrosanct.  No matter what other fraud was or was not committed in these other cases, nothing remotely similar occurred in these other bankruptcies.

A few folks are talking civil actions against MF Global, but why isn't anyone up for criminal charges?  Someone, probably Corzine, committed a crime far worse than anything Jeff Skilling or Ken Lay were even accused of, much less convicted.   This happens time and again in the financial system.  People whine that we don't have enough regulations, but the most fundamental laws we have in place already are not enforced.