I had a fascinating meeting this morning with Anil Arora, the CEO of Yodlee (a firm you’ve probably never heard of), and Josh Reich, of i2π (a one-man consulting shop you’re very unlikely to have heard of). But at the end of it both Josh and I came out with a sense that maybe — just maybe — we might be near the cusp of the long-overdue revolution in consumer banking that millions of Americans have been waiting years for.
There’s no doubt that the present way that banks do business in America is broken. They make most if not all of their income from fees which overwhelmingly hit those who can least afford them; the payments system is insanely and anachronistically reliant on paper checks and the postal service; and they’re generally hated by the consumers they nominally serve. There’s got to be a better way — and indeed multi-billion-dollar companies like PayPal have sprung up precisely because America’s banks are so incompetent. “PayPal should not exist,” says Arora — after all, it’s not needed in other developed countries, where people can happily transfer money into anybody else’s bank account without either party paying a massive fee. But in America, the short-sighted desire to keep those transfer fees allowed the banks to concede the field to the dot-com upstart.
“The banks should have done it,” says Arora. “Why didn’t they? Because they weren’t asking consumer-oriented questions.” Today, the banks can’t dream of setting up a rival company to compete with PayPal, because PayPal has a huge directory of signed-up members and they don’t. The only thing they can do is give up their beloved transfer fees, and simply let their customers transfer money for the same cost ($0) as writing a check. After all, processing checks costs the banks much more than processing a wire does. But 80% of the bills paid in the US are still paid by check; next door, in Canada, 80% or so of bills are paid online.
What has all of this got to do with Yodlee? Well, Yodlee is the engine behind the online banking operations of most banks in America — and, for that matter, of mint.com. (I wrote about Yodlee and Mint back in September.) It’s built up an enormous dataset over the years — $3 trillion of transactions from 23 million users have been cleaned up and put into a huge database by 500 employees — and it’s now going to open up that database to software developers around the world. People like Josh will be able to write applications, or “widgets”, which will allow people do do things with their personal finances which until now simply haven’t been possible.
For instance, a company like BillShrink might build a widget to look at all of your bank accounts and give impartial advice on where you might be losing money, or missing out on the opportunity to make money. Or there could be some kind of payments widget, using the cheap ACH network rather than the expensive wire-transfer network, allowing people to pay each other easily without going via PayPal. Or a bank could set up a simple dynamic comparison tool, a bit like Progressive Insurance, showing how their rates and fees compare to anybody else’s. Or someone could build a new kind of scoring system based on assets as well as just credit history — as Arora notes, you can have a $10 million of cash in the bank, but any number of very normal snafus can still result in your having a bad credit score. Josh talked about building an app which lets you take a photo of a bill with your iPhone, and the widget automatically pays it on the due date. And then there are all manner of savings and investment and tax possibilities on top. There might not be 100,000 apps like there are on the iPhone, but a few hundred is a distinct possibility. Any of them could be offered by banks for a fee or for free to all the users of their online banking systems; all of them will be available on yodlee.com.
It’s the outsourcing of innovation, and right now might just be the perfect time to implement it. “We saw a huge traffic spike when the crisis happened”, says Arora, who’s convinced that consumers are more receptive than ever to the kind of message being sold by Ally bank: no hidden fees, lots of transparency, much more control over your money than you’ve been used to in the past, not just from computers but from mobile devices as well. At the same time, banks are looking to recoup some of the money they’re currently spending on their websites, which generally cost about $10 per user per month, thanks largely to crazy billpay systems which often involve sending paper checks in the mail.
Rather than trying to maximize the amount of fees they extract from each customer, smart banks might start trying to maximize the proportion of each customer’s financial business that they look after: most people keep only about 35% of their total balances with their primary bank. And with the transparency of the internet, it’ll be more obvious than ever which banks are worth using and which are the rip-off merchants.
Arora talked about the rate of uptake of personal computers from the mid-1980s to the mid-1990s: although the technology improved enormously over that time, the rate of growth of the user base never really took off. And then the internet arrived, and suddenly PC penetration skyrocketed. Maybe the advent of easy and transparent collaborative tools will be the precipitating factor which finally brings US banking out of the era of checks-in-the-mail and into the 21st Century — especially if the stick of improved customer satisfaction is combined with the carrot of a Consumer Financial Protection Agency cracking down on fee income. In fact, the CFPA might even build its own widgets designed to set off a red flag whenever a bank tried to offer a non-compliant product. Yodlee has all that information right now; it’s just that no one’s really using it. With the release of a set of APIs in January, all that will change. Almost certainly for the better.
Eric Arnold reports back from a blind-tasting wine stunt:
This fall, at New York restaurant Eleven Madison, six top pinot noirs from California, Oregon and Burgundy (the most expensive of which was $425 per bottle) were served blind alongside six of Craggy Range’s pinots. The two dozen or so tasters were asked to guess where each wine was from, then rank them on taste from one to 12.
None were particularly good at guessing each wine’s origin (I got four of the 12 correct), indicating that all the wines were made very well (for example, there was no stereotyping of all California pinots as tasting like this or New Zealand ones smelling like that). But in the final scoring, an average among all the tasters’ scores, Craggy Range dominated, claiming tasting spots one through five. Its sixth entry came in eighth place.
A similar thing occurred at a tasting, a few weeks prior, for several critics and writers in San Francisco. There, Craggy Range’s Bordeaux-style merlot, called Sophia ($50), bested a range of top Bordeaux wines as well as some other entries from New Zealand. The Château Mouton-Rothschild Pauillac 2006 ($695) landed in 11th place out of 12.
It seems that the Craggy Range owners have cracked the blind-tasting code, and are using it to their great advantage. Arnold says, correctly, that the results of blind tastings are “notoriously inconsistent” — but you can be sure that the results of this tasting weren’t down to blind luck, or Craggy Range would never have gone to the expense of mounting it.
The first trick that Craggy Range uses is to put its wines, which are made for drinking immediately, up against very young French wines which are made to be cellared for many years. That’s an invidious comparison, and it basically means that the tasters at these events are being asked to compare, on an apples-to-apples basis, wines which are drinking well now with wines which will taste much better in a decade’s time. That’s a bit silly.
The second trick, I suspect (and I haven’t tasted Craggy Range wines, so I don’t know for sure) is that the Kiwi contingent is simply sweeter and fruitier than the wines it was put up against. Here’s what I wrote back in September:
When I did a blind tasting of Pinot Noirs a couple of years ago, I got really excited about the eventual winner, the 2005 Heron. I ended up buying quite a lot of it, and sometimes ordering it in restaurants or bars as well, and, weirdly for a wine which everybody thought was spectacularly good, it didn’t grow on me at all — quite the opposite.
Part of that is maybe just that most wine deteriorates with age, and that the ‘05 was better when we first tasted it than when I drank it a year or more later. But another part of it, I think, is that the kind of wines one loves in blind tastings are not necessarily the kind of wines one actually likes to drink in real life. As Bob says, they tend to the soft, and fruity, and sweet. If you normally like that sort of thing, then great, but if you tend to prefer something a bit more austere or elegant, then you might well end up doing yourself no favors at all if you taste a lot of wines blind.
Craggy Range, here, is taking its New World winemaking skills and then comparing them in a blind taste test with the very epitome of austere and elegant wines: expensive Burgundies. It’s then giving that test to wine snobs — people who like to think that they have outgrown a childish love of sweetness, and have moved on to appreciate the finer things in life. But the fact is that blind tastings are a really bad way of appreciating a fine wine. (The best way, of course, is to drink it with great food and great company.)
The Wine Spectator’s Thomas Matthews left a comment on that blog entry, saying that “good judges know that the ‘immediate gratifications’ of, say, residual sugar and high alcohol are not necessarily indicators of underlying quality” — to which I can only say that although they might know that in theory, they’re pretty predictable when it comes to forgetting it in practice. And I suspect that Craggy Range is cunningly taking advantage of exactly that disconnect.
Buying homes at foreclosure auctions is not for the faint of heart, and James Hagerty’s WSJ article today does a good job of explaining many of the potential pitfalls — up to and including finding concrete poured down the toilet. But what really puzzles me is the degree to which banks seem to be just giving money away here:
Lenders, or the loan-servicing firms that represent banks and investors, are increasingly likely to set the minimum much lower [than the mortgage balance]. Their goal is to tempt others to buy the house and spare banks the headaches and costs that come with taking possession.
Sean O’Toole, chief executive officer of ForeclosureRadar.com, a research firm, estimates that in November about 21% of homes sold in trustee sales in California went to investors rather than to a foreclosing lender, up from 6% a year earlier. The trend is similar in some other areas with high foreclosure rates, including Phoenix and Miami…
“The banks are so screwed up,” says Mr. Mirmelli, the Phoenix investor, that they don’t always have a clear idea of the value of the property they are foreclosing on.
It seems to me that lenders are simply allowing their plum properties to be picked off by these vulture-like speculators. (And I mean that in the best possible way.) What the flippers are doing makes perfect sense; what the banks are doing makes no sense at all.
The key thing here is that the banks know full well that they’re working in a world of imperfect, asymmetrical information: the buyers at auction know significantly more about the local property market than they do. The banks have a good idea of how much it will cost them, on average, if they take ownership of the property and sell it. And they then use that number to determine the minimum price that they’ll accept at auction in order that they don’t need to go through that hassle and cost.
But here’s the thing: the average loss associated with selling a foreclosed home is just that — it’s an average of homes where you lose a little, and homes where you lose a lot. What happens when you start allowing speculators to pick off the best homes at auction? They’re going to buy the 21% of houses where the bank would have lost only a little money (relatively speaking), and leave the bank with the 79% of houses where it’s going to end up losing a lot of money.
The bank then sees its average loss go up, since it no longer takes possession of the good properties to offset the bad. It then determines that this particular property market is even worse than it had thought, and lowers its minimums even further. It’s an outright gift to the speculators, directly from the bank and the owners of the underlying debt.
But it gets worse. Here’s Hagerty focusing on one property in particular:
Citigroup initially set the minimum bid at auction at $1.3 million, far more than the market value, given comparable sales in the neighborhood. Then, on the morning of the sale, Citigroup lowered that minimum to $379,900. PostedProperties, which monitors Web sites for such price changes, sent out an email on the opportunity to Mr. Mirmelli.
Mr. Mirmelli has his iPhone set up so he can call up the address of a home due to be auctioned, see a map of the neighborhood with a tap of his finger and then see panoramic photos of the street with another tap. While he researched the home, one of his partners drove out to see the exterior and make sure there were no occupants. A PostedProperties employee bid on their behalf and won the house for $486,300, a sum that then went through the trustee to Citigroup.
After expenses of about $54,000, including real-estate commissions and minor repairs, Mr. Mirmelli and his partners expect a profit of about $150,000 on the flip. “It turned out to be a very good return,” he says.
What on earth did Citigroup think it was playing at here? It’s much worse than just setting a minimum bid of $379,000 on a property which turned out to be worth $690,000. In fact what Citi did was set the minimum bid at $1.3 million in advance, well above the conceivable value of the property, basically telling anybody who might be interested in bidding that this one wasn’t for sale. And then, at the very last minute, it slashes the minimum bid by $921,000, setting off a mad scramble of mobile-enabled speculators who get in their cars to try and determine the most basic information about the house before the auction is concluded.
If you’re going to set a lowball bid at auction, it’s a no-brainer to do so well in advance, so as to maximize the number of informed bidders on the property. There’s no conceivable reason to lower the minimum at the last minute like this — if anything it just sends the message that you’ve discovered something horrible about the house (like a previously unknown first lien) which a last-minute drive-by inspection wouldn’t necessarily pick up.
It’s almost as if Citigroup was trying to lose as much money as it possibly could on this property: maybe it was just the servicer, and had no connection to the ultimate owners of the debt. But anybody holding mortgage-backed loans should be very worried about this story. If you think you’re going to get remotely market value on foreclosed property, think again.
Jake takes me to task on houses-as-investments. I leave a brief reply in the comments — EconomPic
Krugman defends cap-and-trade — NYT
Let’s levy a windfall tax on Goldman Sachs! — NYT
Why is Deutsche Bank raising its ETF fees? — FT
Grant Achatz’s 37-course menu for Paul Liebrandt. I think I’d prefer three courses at Corton. — Alinea
This week’s New Yorker has a David Foster Wallace short story — TNY
Kathryn Tully on monetizing penguins — Metro
“One of the ladies was so large that she physically wouldn’t be able to exit the aircraft through the emergency exit” — NYP
Charting crisis books per month — Kedrosky
Google search results are now personalized by default. Danny Sullivan explains why this is a big deal — Search Engine Land
One of the single best explanations of the credit crisis — Headwaters
Kirsten Grind follows up on WaMu — Portfolio
Gold Can’t Beat Checking Accounts 30 Years After Peak — Bloomberg
A defender of Neel Kashkari writes in:
He worked his butt off at Treasury at great personal cost (both financial, with an 80% pay cut, and otherwise) to help keep catastrophe from happening, and now he’s out and reconnecting with the rest of his life. I seriously doubt that he invited the Post reporter to “hang out with him in the mountains”, as I know he chose not to “do” any press beyond hearings and remarks while heading TARP.
As for PIMCO, he has a Wharton MBA and experience in investment banking; In his mid 30s I doubt he’s ready to retire and needs to work somewhere. He was a political appointee under Paulson and only stayed on into the Obama Administration to provide continuity during a period that really needed it. Not to sound flippant, but where should someone like him work after serving in government?
It’s true that Kashkari worked hard at Treasury: everybody did. And it’s true that he made much less money there than he was making at Goldman. But that’s looking at his tenure at Treasury on a very narrow view. If you look at what going to Treasury did for Kashkari’s lifetime earnings and ability to easily find a high-paying job, it turns out to have been a very smart career move.
Now it’s entirely possible that Kashkari went to Treasury out of pure selflessness — but he’s blazed a trail now (or at least he would have done had he not been following in the footsteps of many who went before him) and in future anybody moving to Treasury can expect that doing so is liable to do wonders for their employability and their chances of ever making a seven-figure income.
Remember too what Kashkari’s job was at Treasury, before Hank Paulson came out with the Plan B of simply buying equity stakes in the banks: he was meant to be putting in place a mechanism to value precisely the kind of complex debt instruments that Pimco considers itself an expert in. In doing so, he doubtless spent a great deal of time with very senior Pimco officials who were probably flattering him daily in an attempt to bring him round to their way of thinking on the matter. It hardly matters whether or not they explicitly said at the time that they’d be interested in hiring him when he left government — Kashkari’s a smart guy, and he knows how the revolving door works.
So, where should someone like Kashkari work after serving in government? Well, for one thing, the system of having layers upon layers of political appointees at Treasury is ridiculous — and served to seriously hobble Tim Geithner in his first months on the job. Treasury should be run largely by career civil servants, not by political appointees.
And if Kashkari wants to serve the public, there are lots of ways he can do so which don’t involve working directly in financial services. Alternatively, if he wants to get out of that kind of thing althogether, he can go off and become a mountain ranger or a carpenter or a poet. More realistically, he had a career as an aerospace engineer; he could go back to that, or to manufacturing and engineering more generally. There’s no shortage of jobs for the likes of Neel Kashkari, and yet he picked the one which conflicted most egregiously with his attempt to serve his country. His decision to join Pimco right now means that no one will ever look at his decision to join Treasury quite the same way again.
As for the WaPo profile, you can be sure that it was written and photographed with the clear and express consent and permission of Neel Kashkari. He might not have been “doing press” for a while, but he certainly opened up to Laura Blumenfeld and Linda Davidson.
If you have any interest in art-world machinations, Richard Dorment’s account of the nefarious doings of the Andy Warhol Foundation is a must-read. But there’s one bit which rings false to me:
Decisions like the one about the “Bruno B Self Portrait” at best raise doubts about this board’s competence and at worst about its integrity. For with assets in the region of $500 million worth of art, the Andy Warhol Foundation funds its charitable activities by selling the works it owns. This has left it open to the accusation that it is in the foundation’s financial interest to control the market in Warhols. Simon-Whelan’s lawsuit alleges that the board routinely denies the authenticity of works by Warhol in order to restrict the number of Warhols on the market and thereby to increase the value of its holdings.
As we’ve seen, the enormous number of Warhols in the market seems to have done nothing to reduce their market value — quite the opposite. If the red self-portraits were to be authenticated by the Foundation, no one else’s Warhols would fall in value.
Instead, I incline to a combination of incompetence (the Foundation refusing to accept that Warhol was happy making “remote-control art” as early as 1965) and personal animus towards Richard Ekstract, who was responsible for physically making the paintings. Maybe the problem is that he’s simply too high-profile: while the likes of Gerard Malanga and Billy Name will always go down in history as Warhol assistants, Ekstract is very much his own person, and was successful before Warhol was. You can get assistants to make paintings, seems to be the implicit statement here: you just can’t get anybody important to do it. How idiotically snobbish can you get.
(Many thanks to the great Heather Horn both for finding the Dorment piece and for including my blog entry on him in her Warhol round-up.)
Simon Johnson joins in the chorus advocating a hard cap on bank size:
There is a strong precedent for capping the size of an individual bank: The United States already has a long-standing rule that no bank can have more than 10 percent of total national retail deposits. This limitation is not for antitrust reasons, as 10 percent is too low to have pricing power. Rather, its origins lie in early worries about what is now called “macroprudential regulation” or, more bluntly, “don’t put too many eggs in one basket.”
This cap was set at an arbitrary level — as part of the deal that relaxed most of the rules on interstate banking — and it worked well (until Bank of America received a waiver).
Probably the best way forward is to set a hard cap on bank liabilities as a percent of gross domestic product; this is the appropriate scale for thinking about potential bank failures and the cost they can impose on the economy. Of course, there are technical details to work out — including how the new risk-adjustment rules will be enacted and the precise way that derivatives positions will be regarded in terms of affecting size. But such a hard cap would the benchmark around which all the specifics can be worked out.
What is the right number: 1 percent, 2 percent, or 5 percent of G.D.P.? No one can say for sure, but it needs to be a number so small that we all agree any politician who cares about our future would have no qualm letting it fail, and when doing so have confidence that our entire financial system is not at risk as it fails.
A hard cap at 4 percent of G.D.P. seems about right for a bank with the most conservative possible portfolio. This would mean no bank in our country would have no more than about $500 billion of liabilities, even with a relatively low risk portfolio. On a risk-adjusted basis, most investment banks would face a cap around 2 percent of GDP.
This is very much in line with the number of $300 billion which I pulled out of thin air in March: the key is to get a number, any number, and to make sure that any banks of that size are small enough to fail. Arbitrary rules are fine, just so long as they’re stuck with: we’re not trying to optimize the regulatory structure, we’re just trying to make it so that too-big-to-fail isn’t a systemically-devastating problem.
TED, however, still isn’t happy:
Mr. Johnson fails to mention what I consider to be an equally if not more important point: what financial leverage we will allow these institutions to maintain. It will do us no good whatsoever to have a bunch of globally interconnected $500 billion financial intermediaries if they are all levered 15-, 20-, or 30-to-1. At least in the subsector known as investment banking, one can make a strong argument that it was leverage which killed Bear Stearns and Lehman Brothers, not simply their sheer size.
This is true, but it’s a slightly different issue. The good thing about Simon’s use of liabilities is that it automatically includes a lot of the simplest leverage: the more you borrow, by definition, the more that your liabilities increase. The cap should I think be on contingent liabilities, and should try to recognize the use of embedded leverage as much as possible, with a principles-based approach which doesn’t allow banks to try to do an end-run around regulations by using off-balance-sheet vehicles and the like.
TED’s right, however, that we still need a leverage cap over and above the hard cap on liabilities: just because banks are small enough to fail, that doesn’t mean that we want many such banks all failing at the same time because they’re all small and over-leveraged. And capital ratios should be higher for big banks, with liabilities over $100 billion, than they are for smaller banks with lower leverage.
The problem, of course, is that all the distressed M&A over the course of the crisis means that US banks are bigger than ever — and that there are no plans at all for shrinking them. How would you even start taking behemoths like JP Morgan Chase or Bank of America Merrill Lynch and turning them into small-enough-to-fail institutions with a mere half-trillion in liabilities? It’s getting there from here which is the hard bit, and I haven’t seen anything which looks like a workable roadmap yet.
Now that it’s obvious that Tiger Woods has had affairs, why would he pay millions of dollars to buy silence from the “Tiger lilies”?
What’s the marginal cost to Tiger of the publication of explicit details about an affair, over and above the cost of the revelation of that affair in the first place?
How did Tiger (and, presumably, his lawyers) arrive at the amount of money by which he would increase his wife’s prenup in the wake of the revelations?
What mechanism is responsible for the fact that as soon as one lily emerges, the rest all tumble out into the open? What credible signal can a bar girl send to a celebrity of Tiger’s magnitude that she won’t sell her salacious story for millions or effectively blackmail him? And is there some kind of unspoken pact between Las Vegas bar girls and their clientele that no one should ever be the first to be outed, but that there’s no shame in being the third or fifth? Or is it just that it becomes easier to sell your story in the midst of a feeding frenzy like the one we’re seeing right now?
Then there’s the tabloids: wouldn’t they pay more for the first kiss-and-tell story than for the fourth? Do they, too, get caught up in the frenzy? Or does the frenzy itself increase the value of these stories?
Enquiring minds want to know!
(Picture: REUTERS/Danny Moloshok)