Moneybox
A blog about business and economics.

Feb. 9 2016 7:02 PM

So, People Are Getting Nervous About Germany's Biggest Bank

It's never a good look when a major bank has to pipe up and reassure the world that it's still financially sound. But such is the lot this week of Deutsche Bank, which has been getting absolutely savaged by the markets as of late. Its shares, down more than 40 percent this year on the New York stock exchange, are trading at a record low, while the cost of insuring its debt has spiked, a sign investors are becoming more worried that it might default. The beating has been so bad that CEO John Cryan felt compelled to send his employees an upbeat memo on Tuesday promising them that the bank “remains absolutely rock solid.”

Its stock kept tumbling.

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The ups and downs of Teutonic high finance might not seem like a super pressing concern here in the United States, where Donald Trump might still be on the verge of turning the presidential election into a full-on Idiocracy prequel. But given the fragile state of global markets, it's possible that any trouble at Germany's largest bank could spread.         

What's wrong with Deutsche Bank? In part, it's dealing with the same problems facing banks all across Europe. The combination of sagging global growth and low interest rates have made it difficult to earn money from lending. Loans to energy companies are going bust. Stricter rules designed to make the financial system more stable have made investment banking less lucrative, leading some institutions to shrink that line of business. This has all culminated in a “chronic profitability crisis” among Europe's banks, as the Wall Street Journal puts it.

Things have been especially ugly for Deutsche Bank, though, because of its legal rap sheet. Last month, Frankfurt's finest announced a prodigious €6.7 billion annual loss, thanks in large part to the billions of dollars it has had to set aside to pay fines and settle litigation involving all manner of fraud and international sanctions violations. With more law-enforcement trouble potentially looming, investors are worried that Deutsche Bank is one big, unforeseen financial penalty away from serious trouble. Forget turning a profit—the bank might have to stiff some of its bondholders.

Understanding why requires a little bit of background. In order to prepare for new international requirements set under the Basel III agreement, banks have been trying to build up their capital bases—the financial safety cushions that are supposed to buffer them from losses on riskier assets. One can spend many deeply dull hours learning the ins and outs of what does and doesn't count as bank capital. But to simplify, “tier 1” capital, the type that's relevant to Deutsche Bank's predicament, is basically money that a financial institution doesn't have to pay back to a lender. That typically includes funds raised by issuing stock, or retained profits.

But in Europe, banks have also been fattening up their capital ratios by selling large quantities of so-called contingent convertible bonds, or CoCo Bonds, which Bloomberg has described as "high-yield hand grenades." These securities are a sort of cross between a stock and a bond. Like a regular bond, they pay interest. But banks can choose to skip payments if need be. And should their capital levels fall too low, the bank can convert them into stock or, in many cases, simply write off the debt.  

Investors have gone coo coo for CoCo bonds—sorry, I'm so sorry—in part because they offered fairly high interest rates, which have been hard to come by in recent years, but also because they were pretty sure banks would treat them as normal debt. Now that seems like less of a sure bet. This week, CreditSights analyst Simon Adamson warned that Deutsche Bank might have to miss coupon payments by next year. “While we are confident about 2016 coupons, we are less so about coupon payments in 2017,” he wrote. The bank has tried to reassure CoCo bondholders that in fact it has all the money it needs to keep paying them, but credit markets still went into a tizzy.The anxiety has been fueled, in part, by Deutsche Bank's precarious legal situation since, again, one big settlement could change its entire financial standing. In a worst case scenario, the bank could theoretically have to force losses on bondholders by swapping their CoCos for stock or wiping away the debt entirely.

Is that really something to lose sleep over? Maybe. “When the first one goes sour and halts coupon payments, it’s possible investors could suddenly wake up to the inherent risk and flee all CoCos, destabilizing the corporate bond market and possibly even the financial system,” Bloomberg opines. At the very least, it's one more potential source of instability at a moment when markets are already full of them. So much for German reliability.

Feb. 7 2016 8:15 PM

Quicken Loans Ad Promises Fast Mortgages on Your Phone. What Could Possibly Go Wrong?

Advertisements during the Super Bowl often make plays for attention by aiming for offense. This year, however, our early contender for winner of the controversy sweepstakes wasn’t particularly vulgar. Instead, it was a commercial for Rocket Mortgage, an app from Quicken Loans that promises to deliver mortgage judgments in as little as eight minutes. It proposes to “do for mortgages what the Internet did for buying music, and plane tickets, and shoes.” If we embrace this model, the ad suggests, we would be patriotically creating jobs and swelling the economy, as new homeowners rush to buy goods to fill their new homes.

Wondering how “people [are] going to afford all of this,” CNET’s Chris Matyszczyk worries that by making mortgages easier to acquire Quicken’s service might undermine “rational decision-making.” On Twitter, meanwhile, the judgments came fast and hard.

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Ultimately, Rocket Mortgage may not even be equipped to make good on its advertised promises. On the website Marketwatch, Andrea Riquier observes that while it’s “technically possible for a mortgage applicant to have all the data and documentation lined up” to make it through the process in less than 10 minutes, most are likely to “move more slowly.” 

Feb. 5 2016 4:44 PM

Why Legal Marijuana Could Be a $6 Billion Industry in 2016

This post originally appeared on Inc.com

…America's homegrown marijuana industry is expected to bring in $6.7 billion in 2016

Feb. 4 2016 11:33 PM

Hillary Is Finally Being Honest About Bernie’s Health Care Plan

Hillary Clinton's early attacks on Sen. Bernie Sanders' plan for single-payer health care were at best convoluted and at worst simply dishonest. In earlier stages of the campaign, she seemed to suggest that the Vermont senator's desire to "dismantle" America's current suite of public health care programs and replace them with a system of universal government insurance would somehow give Republicans permission to roll back Medicare, Medicaid, and Obamacare. She also attacked Sanders for wanting to raise taxes on the middle class without mentioning that those taxes would, theoretically, just be replacing their health premiums. For whatever reason, she seemed to think Democratic voters couldn't handle the obvious argument that moving to a single-payer system is politically and logistically unrealistic and instead settled for debating in bad faith. Ezra Klein summed it up at Vox with the line, "Hillary Clinton Doesn't Trust You.”

Tonight, at the Democratic debate, she did a better job explaining herself.

Senator Sanders and I share some very big progressive goals. I've been fighting for universal health care for many years and we're now on the path to achieving it. I don't want us to start over again. I think that would be a great mistake to once again plunge our country into a contentious debate about whether we should have and what kind of system we should have for health care. I want to build on the progress we've made. Go from 90-percent coverage to 100-percent coverage. And I don't want to rip away the security that people finally have. Eighteen million people now have health care. Pre-existing conditions are no longer a bar. So we have a difference.
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You may not especially like this argument, but it's honest. The wars over Obamacare aren't even over, and Clinton doesn't want to relitigate the fundamental question of how our health care system should be structured. She also doesn't think the government should take away coverage that people already have (likely because, as she learned in the early 1990s, people who have insurance tend to be incredibly protective of it). Instead, she wants to build on the framework that Obamacare put in place and try to expand insurance to those who still don't have it.

Again, you might not agree with all these points. You could argue her own goals aren't even especially achievable, so long as Republicans control the House. But, at least it's a straightforward, sincere argument.

Feb. 4 2016 10:31 PM

Hillary Just Successfully Attacked Bernie Sanders for Supporting a Bill Her Husband Signed

Going into Thursday night's Democratic presidential debate, pretty much everyone expected Vermont Sen. Bernie Sanders to criticize Hillary Clinton for accepting donations from Wall Street. And, indeed, he eventually brought up the millions of dollars her super PAC has collected, in part from donors in finance.

So, how’d she respond? In part, by criticizing Sanders for supporting a bill her own husband, former President Bill Clinton, signed into law. And weirdly, it was kind of effective.

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Clinton started off by taking umbrage at Sanders’ “insinuation” that “anybody who ever took donations or speaking fees from any interest group has to be bought.” Which, all right, fine. “You will not find that I ever changed a view or a vote because of any donation that I ever received,” she added. Which, again, all right, fine. But then she moved onto a more interesting point:

While we’re talking about votes, you’re the one who voted to deregulate swaps and derivatives in 2000, which contributed to the overleveraging of Lehman Brothers which was one of the culprits that brought down the economy. I’m not impugning your motive because you voted to deregulate swaps and derivatives. I’m not saying you did it for any financial advantage. What we’ve got to do as Democrats is to be united to actually solve these problems and what I believe is I have a better track record and a better opportunity to actually get that job done.

What Clinton is referring to here is Sanders’ 2000 vote in favor of the Commodity Futures Modernization Act, a bill that essentially banned the government from regulating derivatives, such as the credit default swaps that helped bring down the global economy during the financial crisis. The legislation gets talked about less often than the repeal of the banking regulation law Glass-Steagall, which Sanders opposed. (It’s also a law Sanders has said he would like to revive and Clinton would not). But it almost certainly played a far greater role in setting the stage for Wall Street’s meltdown.

In some ways, Clinton’s critique here is a bit unfair. The version of the bill that Sanders supported as a House member, while certainly deregulatory, wasn’t quite as extreme as the final version that was passed into law. It’s also a little discordant since, once again, her own husband signed the bill. (He’s since said it was a mistake.)  

But fundamentally, it’s a fair retort. In Sanders’ view, Wall Street wins in Washington thanks to the corrupting power of money on politics. To some extent, that’s probably true. But it ignores the fact that sometimes, bad, industry-friendly ideas just become popular because they sound good at the time. In the late 1990s, there were lots of intelligent people on the center-left who thought deregulation was a legitimately brilliant idea. Deregulation was in the air and even Bernie Sanders, democratic socialist, wasn’t immune. Today, Democrats have changed their tune. And in Clinton’s view, ideas matter more than money.

Sanders, for his part, responded by talking once again about Glass-Steagall, which wasn’t particularly relevant.

*Correction, Feb. 5, 2016: This post originally included a photo from the NBC debate on Jan. 17, 2016, in Charleston, South Carolina, but misidentified it as a photo from the MSNBC debate held at the University of New Hampshire in Durham, New Hampshire, on Feb. 4, 2016. The photo has been replaced.

Feb. 4 2016 5:50 PM

Obama’s Big New Idea This Year: A $10 Tax on Every Barrel of Oil

As if the election cycle hadn't already supplied us with enough ambitious and politically doomed policy ideas, President Obama on Thursday called for a new $10 fee on every barrel of oil sold in the United States, which would be used to fund billions of dollars in new green transportation projects. The plan, to be phased in over five years, will be included the White House's annual budget, which it is preparing to release next week.

Think of this as an increase in the gas tax, but with slightly broader reach, and perhaps slightly better political optics. Any fee imposed on oil companies would likely be passed on to consumers in the form of higher prices, so motorists, airline passengers, trucking companies, and the like would eventually end up paying much of the bill (transportation is responsible for about 70 percent of U.S. oil use). The cost of other petroleum products, like plastics, would also rise a bit. As the White House clarified on a call with reporters, the fee would apply to imported oil, but not to exports from the U.S., so American-drilled crude wouldn't be at a disadvantage on the global markets.

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A hike along these lines is probably long overdue. The federal gas tax has been stuck at 18.4 cents a gallon since 1993. Congress, fearful of angry suburban drivers, has refused to lift it, which has made adequately funding crucial infrastructure spending trickier over the years. One of the main benefits of taxing oil companies rather than commuters is that the fee is better hidden from the public—the cost might get passed downstream, but people have to think about it a little before getting mad. Plus, rhetorically, it's just easier for a politician to talk about making Exxon Mobil pay up than it is to ask car owners to pay more.

Ultimately, Politico notes that Obama's proposal could add about 25 cents onto the price of gasoline, which should be somewhere around $145 per driver, per year.

In theory, there are other policy advantages to an oil tax. Some advocates have suggested using it to replace all of the various fuel excise taxes the government currently collects. That would both simplify the IRS's job and perhaps help the public forget about the tax altogether. It would also act as a de facto carbon tax that would, again, reach beyond gasoline, and would encourage some amount of conservation. And though Obama doesn't seem to be going this route, the government could also tax a percentage of each barrel's cost rather than collecting a set fee, so that if the price of oil went up, Washington would get more revenue (of course, if the price went down, it would  collect less).

But given that most policy proposals are DOA at the moment, the White House's idea mostly seems like an experiment in messaging. We'll see if taxing oil is more politically palatable than taxing gasoline.

Feb. 4 2016 12:15 PM

Watch Martin Shkreli Troll Congress by Taking the Fifth Over and Over Again

Welp, Martin Shkreli trolled Congress pretty good Thursday.

The former Turing Pharmaceuticals CEO appeared before the House of Representatives’ Oversight and Government Reform Committee Thursday morning for a hearing about prescription drug prices—or, more precisely, about companies like Turing that wring profits out of hospitals, patients, and consumers by massively jacking up the price of old medications. Presumably, the committee members were looking forward to grilling the loquacious arch-villain of the pharma industry in front of C-SPAN's cameras. But instead, Shkreli stayed mum, smirking while using his pending indictment on charges of securities fraud as an excuse to plead the Fifth in response to all of the committee's questions, no matter how innocuous. Meanwhile, he largely chose to communicate his disdain for the whole event through facial expression—which, to be fair, was effective.

shkreli nodding2

C-SPAN

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Perhaps Shkreli really was acting on the advice of his counsel, who sat behind him throughout the event. Or perhaps he realized the best way to infuriate a few congressmen was to shut up. (I mean, Vice just ran a profile of the guy, reported post-arrest, titled “Why Is Martin Shkreli Still Talking?”) But overall, the hearing was sort of like watching a smartass high school student getting lectured by his assistant principal, but over gouging AIDs patients instead of, like, talking in class. By the time Shkreli was refusing to answer Rep. Trey Gowdy's questions about his purchase of a Wu-Tang Clan album, the whole thing had turned into high farce. Here's their full exchange:

Gowdy: Is it pronounced Shkreli?
Shkreli: Yes sir.
Gowdy: See there, you can answer some questions. That one didn’t incriminate you. I just want to make sure you understand you are welcome to answer questions and not all of your answers are going to subject you to incrimination. You understand that, don’t you?

Shkreli: I intend to follow the advice of my counsel. Not yours.
Gowdy: I just want to make sure you’re getting the right advice. You do know that not every disclosure can be subject to a Fifth Amendment assertion. Only those that you reasonably believe that could be used in a criminal prosecution, or could lead to other evidence.
Shkreli: I intend to use the advice of my counsel, not yours.
Gowdy: Do you also understand that you can waive you Fifth Amendment right? You gave an interview to a television station in New York where, if I understood you correctly, you couldn’t wait to come educate the members of Congress on drug pricing. And this would be a great opportunity to do it. So do you understand you can waive your Fifth Amendment right.
Shkreli: On the advice of counsel I invoke my Fifth Amendment privilege against self-incrimination and respectfully decline to answer your question.
Godwy: Well, Mr. Chairman, I’m vexed. He’s been willing to answer at least one question this morning. That one didn’t subject him to incrimination. I don’t think he’s under indictment for the subject matter of this hearing so the Fifth Amendment actually doesn’t apply to answers that are not reasonably calculated to subject you to incrimination. And even if it did apply, he’s welcome to waive it. I listened to his interview. And he didn’t have to be prodded to talk during that interview. And he doesn’t have to be prodded to tweet a whole lot or to show us his life on that little webcam he’s got. So this is a great opportunity if you want educate the members of Congress on drug pricing or what you call the fictitious case against you or we can even talk about the purchase of, is it Wu-Tang Clan? Is that the name of the album? The name of the group?
Shkreli: On the advice of counsel I invoke my Fifth Amendment right against self-incrimination and respectfully decline to answer your question.
Gowdy: Mr. Chairman, I am stunned that a conversation about an album he purchased could possibly subject him to incrimination.

As is his wont, Shkreli took to Twitter afterward to share his impressions.

Feb. 3 2016 6:50 PM

Compared With Other Rich Countries, the United States Is Pretty Bad at Fighting Poverty

The United States has been wrestling with how best to eliminate poverty ever since the days of Lyndon Johnson. The solution, however, isn't really all that complicated: If people don't have money, you give it to them. The U.S. cut elder poverty by about half in the late 1960s and early 1970s by expanding Social Security. And today, in the richer corners of Europe and the English-speaking world, governments use straightforward redistribution to keep their poverty levels well below ours.

Here's an illustration of that point, based on 2010 Luxembourg Income Study data included in the Stanford Center on Poverty and Inequality's most recent “State of the Union Report.” If you only measure by market incomes—earnings before taxes and government benefits, shown in blue—the U.S. has a slightly lower poverty rate than most other similarly wealthy nations. But once you take taxes and social spending by the government into account, as shown in red, our poverty rate is generally higher. We start out ahead and finish behind.

poverty_1

Jordan Weissmann

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It's not as if the U.S. is particularly good at helping specific vulnerable populations, either. Take child poverty. Using the U.S. poverty rate as a benchmark once again, we're less effective at bringing down our rate of youth impoverishment than most of our peers in Northern Europe or the Anglophone world. (Again, Greece, Italy, and Spain are another story. To make matters worse for them, these figures were gathered before the worst of the euro crisis.) We let kids dangle in need.

poverty_2_children

Jordan Weissmann

A conservative might counter that countries like Denmark or France are just papering over poverty by handing out benefits rather than combating its root causes through better schools or job training. But even countries like Finland, which has higher labor-force participation than the U.S. and an education system that's globally envied, still have fairly significant amounts of poverty (by our standards, at least).

They choose to combat it with cash. We don't.

Feb. 3 2016 6:29 PM

A Newswire Enforced a Noncompete Agreement Against a Young Journalist. That’s Outrageous.

In theory, noncompete clauses are intended to prevent employees with access to trade secrets from taking proprietary information with them to a firm’s competitor. But in recent years, these instruments have sprouted up in some of the most unlikely fields. In 2014, the Huffington Post discovered that sandwich chain Jimmy John’s was making low-level employees agree not to work for competitors for two years after leaving the company. Similar contracts have been found in Amazon warehouses, summer camps, salons, and doggy-daycare facilities. And now, the Wall Street Journal reports, legal newswire Law360 is attempting to enforce a noncompete agreement against at least one very unlucky journalist.

According to the Journal, reporter Stephanie Russell-Kraft left Law360 for a job at Reuters—only to find out weeks later that Law360 had notified Reuters of her noncompete clause. Reuters then fired Russell-Kraft for not disclosing the agreement—which prevented her for working in legal news for one year after leaving Law360—when she applied for the job. Russell-Kraft, who’d signed the agreement two years earlier, says she forgot about it—and now that she’s been unpleasantly reminded, she’s found that other publications are hesitant to hire her.

Feb. 3 2016 4:42 PM

No, Amazon Isn’t Crazy to Open Brick-and-Mortar Bookstores

The Wall Street Journal headline sounds like a joke: “Amazon Plans Hundreds of Brick-and-Mortar Bookstores, Mall CEO Says.” That mall CEO, the WSJ reports, claims that the online retailer will open hundreds of physical stores—“as I understand, 300 to 400”—to go along with its single physical location in Seattle. The irony is too delicious to ignore: Amazon, the company that helped destroy countless bookstores, independent and corporate alike, may be wandering into the realm of brick and mortar. But why would it want to? Is this for real?

As the New York Times explains, there may be some kernel of truth here, even if the company’s unlikely to roll out quite so many physical locations. Amazon itself has declined to comment on the matter, and that mall CEO—Sandeep Mathrani, the head of a company called General Growth Properties—hasn’t expanded on the remarks he made on an earnings call earlier this week. There’s reason to believe that there’s something to Mathrani’s remarks, though, because such a move from Amazon would make a surprising amount of sense.

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Bookstores aren't quite thriving these days, but they're not in a state of steady decline either. Data from the American Booksellers Association indicates that retail store sales were generally up last year, if only slightly. That steady state may have been enough to capture Amazon's interest, especially given the other possible advantages: Generally speaking, we assume that retailers save money by minimizing their physical presence. As the Wall Street Journal points out, however, opening up more physical stores can help to lower delivery costs. In this regard, these hypothetical Amazon stores wouldn’t just serve to open up new profit channels; they also might help to improve old ones. Matthew Yglesias likewise proposes that Amazon might be looking to streamline its infrastructure, using retail locations to improve on same-day delivery and other benefits of its Prime service.

In this regard, the e-commerce behemoth may actually be learning from smaller online retailers. Companies, such as Warby Parker, which were formerly online-only properties, have increasingly begun to open retail locations. In some cases, these moves may be effectively promotional, a kind of advertising for the brands that has the bonus of allowing them to move inventory. But in many cases, real-world stores help retailers meet customer needs that are difficult to satisfy online and allow them to engage with customers more personally.

Human fallibility is a factor here too. Retail stores encourage customers to try out items that they might otherwise refrain from purchasing, since physical locations make it easier to return an item that disappoints. This was apparently a key factor for Saks Fifth Avenue parent Hudson’s Bay Co. when it purchased online flash sale site Gilt Groupe earlier this year. Some analysts have suggested that’s a consideration in Amazon’s possible brick-and-mortar move as well. As the Wall Street Journal suggests, customers may be more willing to take a chance on an impulse purchase in a physical store—all the more so if they know they can easily renege on their purchase later. In this regard, it’s likely no accident that Mathrani first floated the Amazon rumor in the context of discussing increased mall foot traffic from customers returning unwanted online purchases.

Returns may be less pressing for booksellers than they are for other merchants, but that doesn’t mean physical stores don’t offer other advantages over a website: Whether or not it’s Amazon’s true intent, the company’s  stores—should it ever open them—may work best if they're pleasant places to be, contributing to collective pleasure instead of simply assuaging personal regret. For most of us, reading is a fundamentally solitary act: To take up a book is typically to embrace silence. Nevertheless, bookstores as such may be at their best when they move beyond algorithmic personalization, looking to the interests of entire communities, much as Waterstones has in the U.K. Amazon’s done a terrific job of targeting us in our individuality, selling us on products that appeal specifically to our tastes. With its still hypothetical brick-and-mortar stores, it may have the opportunity to let us expand our palates.

Regardless of what it’s up to, it’s clear that Amazon has money to burn, even if that means making things even more uncomfortable for Barnes and Noble in the meantime. In fact, that might be exactly its intention.

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