Felix Salmon

Give teens bank accounts, not prepaid cards

Felix Salmon
Nov 12, 2010 19:52 UTC

Dan Kadlec is right to give short shrift to the horribly misconceived Kardashian Kard, a prepaid debit card aimed at teenagers. But I think he’s too kind about prepaid debit cards in general:

There is nothing wrong with a pre-paid debit card for young people. Pre-paid cards have a lot of advantages:

* Kids can use a pre-paid card to shop online.

* Parents get a detailed spending report.

* Over drafting is not a risk.

* Pre-paid cards are easy to re-load and thus are good vehicles for paying allowance, assuming no or low re-load fees.

* Kids become familiar with plastic in a controlled environment.

* In some cases, your child begins to build a credit score.

Dan links to a piece by Beverly Herzog explaining why debit cards can be a better idea than credit cards. Which is all well and good — but the thing I don’t understand is why no one seems to be screaming from the rooftops that no standalone card offers the flexibility and convenience of a good old-fashioned bank account.

Every kid should have a bank account, with a debit card, but without overdraft protection; something like the USAA Teen Checking account is perfect. Given that it’s just as easy to take out cash at an ATM with a prepaid debit card as it is with a normal debit card linked to a bank account, I can’t think of any good reason why a parent would opt for the prepaid debit card. Prepaid debit cards are expensive (although there are some which aren’t as expensive as the Kardashian Kard, it’s true); they don’t have branches; it’s hard to deposit checks from relatives into them; they don’t pay any interest on savings balances; and, most importantly, they don’t give teens a safe way to get used to how bank accounts work.

The main danger with a teen checking account is that the kid will bounce checks and run up NSF fees — but frankly there’s no reason why the kid should ever have a checkbook in the first place. Checks have about as much relevance to kids as do floppy disks, and the only people who might want to see them are nostalgic parents who associate financial literacy with the bizarre ritual known as “balancing your checkbook.”

We’ve already been greatly harmed, as a nation, by the move from personal loans to credit cards. Let’s be on the lookout for a similar move from checking accounts to prepaid debit cards. No good can come from that, beyond excessive fees and an uptick in egregious celebrity endorsements.


I agree with the article completely — I looked into a bunch of different teen bank accounts, including pre-paid cards, and decided to open a MONEY account with ING Direct instead. No fees or minimums. Also think it’s great that they’re making financial aspects cool for teens with a Facebook page and sweepstakes.


Definitely worth checking out, great option for teen banking!

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If websites don’t cannibalize, how about apps?

Felix Salmon
Nov 12, 2010 16:42 UTC

James Murdoch seems to have decided that free websites might not really cannibalize newspapers after all:

Sales of newspaper apps for devices like the Apple iPad are cannibalizing sales of physical newspapers, James Murdoch, head of News Corp’s operations in Europe and Asia, said Friday…

He said apps for mobile devices, with which readers typically engage far more than they do with computer websites, were more dangerous to print sales.

“The problem with the apps is that they are much more directly cannibalistic of the print products than the website,” he said. “People interact with it much more like they do with the traditional product.

This is intuitively true, but I’m not persuaded yet. For one thing, everybody thought that free websites were cannibalizing print newspapers, before we changed our minds. Rupert Murdoch, of course, was the loudest such person, saying that “an industry that gives away its content is simply cannibalizing its ability to produce good reporting.” And so long as such statements are based on gut feeling rather than any kind of quantitative analysis, they’re pretty worthless.

What’s more, News Corp is still putting enormous paywalls up around its UK newspaper websites, to no good effect. If James Murdoch is coming around to the idea that websites don’t cannibalize newspapers after all, what’s the point?

My feeling is that James Murdoch is probably half right here: there are some people who will directly replace a print subscription with a tablet subscription. Equally, however, there are surely also people who will find that a tablet subscription enhances the value they get from the physical newspaper, and increases their loyalty to it. Is the first group larger than the second? One thing we know for sure is that it’s far too early to tell.


Whether any technological innovation destroys the ability of another form of media to make a living doesn’t seem nearly as important as the fact that the shear number of news sites and blogs may have destroyed the credibility of what used to be called “papers of record”.

Perhaps it was only a comforting illusion that Newspapers like the New York Times or the Times of London, could claim that they reported the facts, and actually tried to verify their sources and could be held liable for inaccuracies? At least they attempted to maintain some kind of journalistic integrity. Historians could use newspapers as, at least, one of the sources for their information.

So may websites, news blogs, news feeds etc. don’t seem to be much more than private and spurious bully pulpits for anyone with a bone to pick. Articles written and paid for by the government and that are fed to various papers also undermine their objectivity and independence. I have read articles in this paper or the NYT that state that China wants a Wall Street Journal type of business paper that the Government would insist on editing. That hardly seems like the royal road to objectivity or truth either.

The Iraq war brought us “embedded journalists” (that at least was admitted), but it also brought embedded articles. That was not so readily admitted.

The global village can be drowning in a sea of misinformation. One can even tailor make reality and listen to only those articles and sources that cater to ones preferences and prejudices. It is a form of insanity to cling to one’s point of view and to exclude any point of view that contradicts it.

The media moguls may worry about lost revenue but they should be even more concerned about massive loss of credibility. Restoring credibility may be more difficult than the problem of being able to keep sufficient numbers of reporters to do an adequate job of reporting newsworthy events accurately.

A fly has thousands of eyes but one central “processor” to synthesize that information. The Web is like a fly with billions of eyes and billions of central processors that not only don’t see the same things, but also may not ever be able to agree on the significance of what they are all seeing.

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Looking at the deficit commission’s tax plans

Felix Salmon
Nov 12, 2010 15:14 UTC

The WSJ does none of its readers any favors with its silly headline attempting to sum up the effects of the deficit commissions tax proposals. “Top Earners May Face Big Hit”, it says—which would surely be more accurate if the “May” was replaced with “Won’t”.

The piece begins:

A presidential panel’s draft overhaul of the tax system could hit higher earners hard, largely by wiping out deductions and investment breaks that tend to especially benefit those who make enough money to itemize their taxes.

For one thing, the draft is coming from the panel chairmen, not from the panel itself. And more generally, while it’s true that most people who itemize their taxes are high earners, it doesn’t follow that most high earners itemize their taxes, or get a huge benefit from doing so. Some are better off with the standard deduction, especially if they don’t have a mortgage; others are subject to the phaseout rule, and others still get hit by the alternative minimum tax.

On top of that, the chairmen aren’t really suggesting that all these “tax expenditures,” as they’re known, actually be wiped out. They’re actually suggesting something quite reasonable: that you start with a very simple tax rate, and then, if you find a tax expenditure you really believe in—the earned income tax credit, say—you pay for it by raising some or all of those basic tax rates.

That’s a great way of making the cost of these deductions explicit: you want generous mortgage-interest tax relief? OK, but your income tax is going up a penny.

But putting that to one side, the big question is whether the higher tax burden from the loss of deductions would wipe out the tax savings from lower income tax. The WSJ seems sure that it would:

Deductions and investment breaks… increase after-tax income for the top 20% of earners… by more than 10%…

Higher earners could stand to recoup some of that loss through several other proposed changes, notably lower marginal income-tax rates. The plan… would cap the top tax rate as low as 23%, down from the current top rates of 33% and 35%.

Really? High earners would only recoup some of that loss? If you’re currently paying income tax of 35%, that means your after-tax income before deductions is 65 cents on the dollar. If that’s raised by 10%, it becomes 71.5 cents on the dollar. On the other hand, if you simply pay income tax of 23%, your after-tax income is significantly higher, at 77 cents on the dollar.

Paul Krugman, for one, is convinced that the rich are going to be winners, not losers, here:

What the co-chairmen are proposing is a mixture of tax cuts and tax increases — tax cuts for the wealthy, tax increases for the middle class. They suggest eliminating tax breaks that, whatever you think of them, matter a lot to middle-class Americans — the deductibility of health benefits and mortgage interest — and using much of the revenue gained thereby, not to reduce the deficit, but to allow sharp reductions in both the top marginal tax rate and in the corporate tax rate.

It will take time to crunch the numbers here, but this proposal clearly represents a major transfer of income upward, from the middle class to a small minority of wealthy Americans.

In fact the two aren’t completely contradictory; it’s just that what the WSJ considers “Top Earners” have a large overlap with what Krugman considers “the middle class.” (Think people earning between about $120,000 and $350,000 per year.)

And Krugman isn’t giving the whole picture either. One of the best parts of the chairmen’s plan is the way in which it raises the tax rate on capital gains and dividends so that they’re simply treated as ordinary income. The very wealthy, who often live off capital rather than labor, would definitely be hit hard by that move.

The WSJ does have one fact on its side when it sees taxes going up rather than down on the rich: “the draft proposal recommends overall that taxes go up by $751 billion by 2020,” it says. But that’s a cumulative figure, not an annual figure. Overall, taxes would be unchanged in 2012, go up on a net basis by a mere $20 billion in 2013, and rise as far as $160 billion in 2020. That’s substantially less than the $241 billion the chairmen want to cut in discretionary spending this year: their plan concentrates much more on spending cuts than it does on higher taxes to achieve deficit reduction.

The fact is that a net increase of $160 billion in 2020 is so small, compared to the overall tax base, and so far away in time, that it’s impossible to tell with any certainty at all who would be the winners and who would be the losers. Some taxes will go down, some deductions will go away, and other taxes will go up: it’s a complicated plan and the effect on various income strata is likely to depend enormously on how much any given taxpayer currently itemizes, and how much tax they currently pay on capital gains and dividends.

And the big picture is that the chairmen do not propose to reduce the deficit by raising taxes: indeed, they propose a hard cap on how much the government can get in tax revenue. This is a cost-cutting proposal, rather than a tax-hiking one. It also has zero chance of ever making it into law. But as an idea of where some kind of hypothetical bipartisan consensus might exist, the message is clear: no one’s interested in innovative new taxes, least of all a carbon tax. If the deficit’s going to come down, the technocratic elite wants to see that happen from spending cuts instead.


Yes, Dan, like mattski, I can’t agree with your view – I consider it part of the “free markets as religion” myth – that if we could only have a truly free market in health care in the US, costs would go down and the benefits would flow to all. In this view, it’s the gov’t regulation that’s the problem, rather than, for example, the immoral behavior of insurance companies which mutually agree to enact laws prohibiting int’l purchase of drugs, not to insure people who are sick and find ways not to pay insured people with valid claims. Anyone who looks at capitalism with clear eyes historically sees that corporations have always represented a pure profit motive only, and aren’t a good way to structurally embody humane values – they never have been. Structurally, by definition, they are capital looking for returns with very limited liability (responsibility) – organizations looting for booty based on projections of return on capital, restrained only by the particular morality of the people who happen to be in charge (until they’re fired for not generating enough profit) and by strong laws defending the common good – eg don’t poison the rivers, etc. For as long as capitalism survives in its current money-as-religion form, which I think may be shorter than most imagine, it will always be finding a balance between the free market ethic and “the nanny state” as you say. Without something like the nanny state, including, for example, unemployment insurance and social security in the US, capitalism might well already have been destroyed here – the people wouldn’t tolerate the uncaring brutality of its “dark side”. It might have been destroyed in the depression if FDR didn’t enact the very “nanny state” provisions that are now steadily being disassembled. Without doubt, I agree an overly intrusive state has a dark side too. But truly free and unregulated, intense concentrations of money and power build and corrupt the operation of the both gov’t and the “free” market itself and become monopolies under any form of gov’t. As Adam Smith himself said, paradoxically, monopolies distort and destroy the beneficial operation of free market capitalism. High prices don’t come from laws made by a gov’t that is “of, by and for the people” – they favor the businesses that charge the prices and pay politicians to have the laws enacted.

Anyway, the real problem is global overpopulation and diminishing resources. Seems like the generational issues will end up being an important side story, but the population/resource issues will likely begin to become more and more disruptive lead story before too long I agree with you, Dan, that the developed countries are in decline, but I don’t see why you don’t include the US in that pack of decliners – although our demographics are a little better. Yee gods! As of this week, the US is now printing 100% of the money it borrows out of thin air. Last week, Richard Fisher, head of the Dallas Fed, told us this kind of financial auto-erotic fraud has historically destroyed countries economies. The problem is not just funding gov’t deficits due to massive overspending on “nanny state” programs. It’s that capitalism actually needs nanny state programs to be acceptable to people – contrary to the popular myth, the free market alone doesn’t come close to supporting a good life for the vast majority of humans, particularly in a world of limited resources and growth. It’s brutal, as we’re all in the process of finding out, as gov’ts make a massive effort to blunt the impact with monetary interventions and nanny programs. The only solution is really going to be for the great citizens (geniuses, entrepreneurs and pirates) who have amassed great wealth to be forced to share their monopoly on the Earth’s wealth and resources more broadly while everyone collaborates to plan a sustainable future, or for everyone to hunker in their bunkers and prepare for anarchy. Based on current politics and the in vogue propaganda that somehow brutally capitalist free markets are uncorrupt and will take us to a humane and sustainable future, it’s difficult to be hopeful.

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Felix Salmon
Nov 12, 2010 05:24 UTC

The courtship is over. Daily Beast, Newsweek to Wed — TDB

“This is the ‘Human 8-bit Video’. We wanted to make something cheap and awesome” — YouTube

Porpoises rescue Dick Van Dyke — Guardian

Banks Don’t Understand How Social Media Works — Lending Club

Arsenio Hall gets into bed with an online payday lender — My Money Partner

“We need to ensure that, given the impact of climate change, SABMiller has the capability to deploy future breweries” — Guardian

Netflix Helps Win Video-on-Demand Bet from 2002 — Hacking Netflix

How the rich live: they dangle rocks from pulleys when trying to sell their $14 million apartments — Curbed

Italian film producer De Laurentiis dies at 91 — Reuters


Big notice on TDB, go to Newsweek.com, not a peep.

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When Google gets into a bidding war for its own talent

Felix Salmon
Nov 12, 2010 05:11 UTC

No sooner do I have lots of good things to say about Google’s pay policies than Mike Arrington breaks the news that Google is keeping one engineer, who was threatening to decamp to Facebook, by paying him $3.5 million in restricted stock.

I suspect and hope, though, that the big across-the-board pay rise came after — and possibly as a result of — the $3.5 million deal. Because giving in to that kind of threat — “pay me or I leave” — is a horrible way to run a company.

Ben Horowitz explains why:

The other ambitious members of your staff will immediately agitate for raises as well… You will now spend time dealing with the political issues rather than actual performance issues. Importantly, if you have a competent board, you will not be able to give them all out-of-cycle raises, so your company executive raises will occur on a first-come, first-serve basis.

The less aggressive (but perhaps more competent) members of your team will be denied off-cycle raises simply by being apolitical.

The object lesson for your staff and the company will be the squeaky wheel gets the grease and the political employee gets the raise. Get ready for a whole lot of squeaky wheels.

Certain companies have reputations as places where loyalty isn’t rewarded, and where people only ever get small annual raises unless and until they go off and find themselves a more lucrative job offer elsewhere. At that point, the company suddenly realizes how valuable they are, and ups their pay substantially. Needless to say, employees at those companies have perverse incentives to spend their time looking for job offers, since that’s the best way to get a big raise.

Maybe, after waking up the morning after signing off on a $3.5 million retention bonus, Eric Schmidt saw the kind of company that Google was becoming and acted pre-emptively to put an end to such things. But his action would have been much more credible if he had explicitly said that Google was not going to get involved in bidding wars henceforth: if you want to defect to Facebook, then defect, but don’t expect Google to bend over backwards to retain someone exhibiting that kind of disloyalty.

The risk, then, is that the 10% pay rise notwithstanding, Google is still going to cave, on a case-by-case basis, to star engineers waving job offers elsewhere. In any given case, the decision might make sense. But as a general principle, it’s poisonous.


Man, if I ever needed confirmation that my idea to offer up “startup worthy” developers from Latam had legs, this was it. http://ow.ly/399qw

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The NYT’s subscription strategy

Felix Salmon
Nov 11, 2010 20:55 UTC

If a gaffe is when somebody accidentally tells the truth, then Gerry Marzorati’s latest comments probably count:

During a panel discussion at the Digital Hollywood New York conference, Gerald Marzorati, the Times’s assistant managing editor for new media and strategic initiatives, explained why the paper’s print business is still robust. “We have north of 800,000 subscribers paying north of $700 a year for home delivery,” Marzorati said. “Of course, they don’t seem to know that.”

Marzorati went on to become positively disingenuous:

“I think a lot of it has to do with the fact that they’re literally not understanding what they’re paying,” he said. “That’s the beauty of the credit card.”

Well, no. When I pay for most things by credit card, I know exactly what I’m paying. But the NYT deliberately makes it impossible to work out what the cost of a subscription is — and even if you look at your monthly credit card bill for a clue you’re likely to underestimate the true cost, since the charges come not every month but rather every four weeks.

Nothing has changed since I first wrote about this four years ago: even when you’re a subscriber, there’s nowhere on the website telling you what your subscription rate is*. There’s a FAQ, but the most obvious question of all — “how much does home delivery cost?” — isn’t on it.

Once upon a time, the NYT would actually publish its home delivery rates: in 1989 they rose from $4.25 a week to $4.50 a week, for instance, and in 2001 they rose from $7.20 to $8 for subscribers in New York, with rates as high as $10.25 elsewhere.

Today, I can tell you — but the NYT nowhere reports — that home delivery costs $11.70 per week in New York, and $14.80 per week nationally.

In other words, the price of home delivery has been rising faster than inflation for at least 20 years, and for most of that time the NYT has done its darnedest to make sure that as many subscribers are possible are ignorant of how much they’re paying. After all, it stands to reason that many subscribers would be shocked and upset to learn that they are paying $769.60 per year for their subscription. And the NYT doesn’t want to shock or upset its subscribers.

Still, the fact is that they’re not shocked or upset. Jeff Bercovici writes:

Stealthily hiking rates on the assumption that customers are too dim to catch on and/or too lazy to do anything about it is the kind of thing that gives banks, credit card companies and cell phone providers such a bad reputation.

That’s true — but the NYT has been stealthily hiking rates for decades now, and has signally failed to get a bad reputation for doing so. Clearly, it’s going to continue doing this: it’s one of the few successful business strategies in the newspaper publishing industry, so it’s obvious that the NYT should adopt it.

The downside to the strategy, insofar as there is one, is that the higher the delivery price, the harder it becomes to attract new subscribers under the age of, say, 30. But it’s always going to be hard to persuade those people to read the newspaper in print, no matter how low the price. It makes sense, in that situation, to take advantage instead of the price inelasticity of the present subscriber base.

I suspect that the NYT might attempt a similar strategy with its online paywall. If I was charged with maximizing paywall revenue, I’d start with a very low fee indeed — maybe just a buck or two a month, to attract as many subscribers as possible and to get them used to the idea of paying for content online. Once the subscriber base hit a critical mass, then I’d start raising the rate, as quietly as possible. (Much as they’ve started doing with the Kindle subscription.) It would take a few years, but the end result would be many more people paying for their online subcription than if you started off with a rate remotely comparable to the price of the print subscription.

*Update: Thanks to john_456 in the comments, there is actually somewhere on the site showing your own personal weekly delivery rate: it’s on the “My Account” page which you may or may not be able to find here.


Since the essence of your assertion — that the Times is somehow failing to disclose its price — is completely wrong, why are we having this conversation? You want the paper to give itself away free on the Web and now you complain that it charges for the print edition. What, exactly, is your business model? Don’t tell me you still believe in the fantasy about online advertising.

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Pandit’s parallel universe of gabfests

Felix Salmon
Nov 11, 2010 18:09 UTC

Is Vikram Pandit going to go back to Davos in January? He certainly seems to enjoy himself at well-meaning technocratic gabfests:

“I kind of feel like I’m living in parallel universes,” Mr. Pandit said in a forum that included Peter Sands of Standard Chartered Bank and Stephen A. Schwarzman of the Blackstone Group. “I’m here in Korea and I feel this warmth and need and the sense of trying to have a dialogue with each other, but then when I get back to my real universe, it’s cold in that universe.”

Well yes, Vikram, places like the G-20 Business Summit can credibly be described as a parallel universe. But not in a good way. They’re little bubbles of hubris and self-regard, where everybody is admirable, no one ever asks tough personal questions, and the enemy is a faceless mass of populists who just don’t know what’s good for them. I’m sure you feel all manner of warmth when you enter that particular universe, but don’t let it distract you from cold reality.

It’s good that Pandit is cognizant of the disconnect, and is willing to call such conferences out for being divorced from reality. But still, it’s so tempting to give in to their charms. Who doesn’t love to be loved?


“Who doesn’t love to be loved?”

There’s a lot of love in DC.

http://tpmdc.talkingpointsmemo.com/2010/ 10/jon-stewarts-video-take-down-of-mccai n-hes-been-saying-dcs-broken-since-1989- video.php?ref=fpb

(watch the whole thing)

Posted by mattski | Report as abusive

Medicare and the deficit

Felix Salmon
Nov 11, 2010 16:01 UTC

The most clear-eyed view of the silliness of the deficit commission report comes from Kevin Drum, who points out that at heart it says much less about reducing the size of the deficit than it does about reducing the size of the government. The distinction is a crucial one, since the mathematics of the deficit are simple, and overwhelmingly a function of Medicare expenditures. “Medicare, and healthcare in general, is a huge problem,” says Drum: “It is, in fact, our only real long-term spending problem.”

Medicare is a true fiscal nightmare. The population of the US is aging: the current Medicare enrollment of 47 million will soar to 71 million by 2025. Those people will be living longer, too, and their healthcare costs are certain to continue to rise not only faster than inflation, but also faster than the growth of the economy as a whole. So long as the U.S. commits to pay the healthcare costs of substantially everybody over the age of 65, nothing else really matters, in terms of the long-term fiscal deficit.

Here’s Drum:

Any serious long-term deficit plan will spend about 1% of its time on the discretionary budget, 1% on Social Security, and 98% on healthcare. Any proposal that doesn’t maintain approximately that ratio shouldn’t be considered serious. The Simpson-Bowles plan, conversely, goes into loving detail about cuts to the discretionary budget and Social Security but turns suddenly vague and cramped when it gets to Medicare. That’s not serious.

And here’s Matt Steinglass, commenting on Drum:

Mr Drum writes for a liberal magazine. And here he is saying that the main thing we need to do in order to restrain growth in the deficit and in government spending, which will otherwise bankrupt us, is to cut the biggest government entitlement programme, Medicare. Indeed, this is a bog-standard consensus position among American liberals… Shouldn’t this be shocking? Shouldn’t this be big news for our contrarian press? “Liberals Call for Cuts to Entitlements!” Aren’t we amazed that supposedly big-government liberals want to slash the projected Medicare budget?

The point here is that the deficit commission chairmen are doing everything in their power to perpetuate the intellectually dishonest meme that if we just pare enough excess from the government’s discretionary budget, that can somehow solve the problem of the soaring deficit. It can’t. Liberals like Drum recognize the problem, and can work out the mathematics of Medicare in public. The deficit commission, it seems, can’t.


hsvkitty, only y2kurtus can speak to what he meant by “quality and purpose of those additional years”, however consider the following study from 2002:

http://www.ncbi.nlm.nih.gov/pmc/articles  /PMC1464043/

“From 1992 to 1996, mean annual medical expenditures (1996 dollars) for persons aged 65 and older were $37,581 during the last year of life versus $7,365 for nonterminal years. Mean total last-year-of-life expenditures did not differ greatly by age at death.”

While the costs have increased over the last 15 years, the balance appears to be similar. A more recent article estimates that 27% of Medicare goes towards last-year-of-life care.

Most intriguing, there appear to be metropolitan areas that aggressively treat the dying in the ICU while other cities are more likely to go with hospice care (at half the cost). Frankly, I hate hospitals — hospice treatment sounds more attractive in my final months (even if I don’t “live” quite as long). That might have been what y2kurtus was talking about?

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When bankers make windfall profits from the FDIC

Felix Salmon
Nov 11, 2010 14:28 UTC

Elizabeth Warren has been doing the rounds in recent days, extolling the virtues of small community banks and talking about how tough it is for them to compete with the big guys. It certainly seems that way over at the FDIC, where the list of bank failures in 2010 is up to 143 and counting—already more than the 140 banks that failed in 2009.

And then there’s BankUnited, which was bought from the FDIC by a bunch of private-equity honchos in May 2009 and which has already filed to go public with a valuation of $2.7 billion or thereabouts.

Rob Cox has a great column on the deal, concentrating on the instant riches accruing to BankUnited’s CEO, John Kanas. Cox has found a smoking-gun quote from Kanas when he sold North Fork, making $185 million for himself: “It’s not like I flew in here on a private jet three years ago and prettied up the company and then booted it out of here.”

In the case of BankUnited, by contrast, Kanas seems to have found himself with a $68 million stake in the bank, plus millions more in salary, bonus, pension, and the like, in the course of just 18 months.

How is this possible, when banks elsewhere are dropping like flies? The simple answer is that Kanas and the other BankUnited investors are taking money straight from US taxpayers*: the FDIC lost $4.9 billion when it sold BankUnited, it’s guaranteeing more than 80% of the bank’s assets, and the future income stream from the FDIC to the bank is worth a whopping $800 million.

As Cox says, “for the FDIC and its chairman, Sheila Bair, it won’t look good.”

It’s possible to attempt a positive spin on all this—in fact, Cox himself made the case, a couple of weeks ago, that the BankUnited deal was so gloriously profitable for its investors that it sparked a broader resurgence of interest in buying banks, saving billions for the FDIC over the long term. And what’s more, the FDIC cracked down on the ability of private equity players to buy banks shortly after the BankUnited deal closed: this story isn’t going to have many sequels.

But if BankUnited’s clever financiers have made billions of dollars with their clever financing, you can be sure that the equally clever financiers at JPMorgan and other FDIC counterparties are also sitting very pretty. They’re just not making their FDIC profits so obvious.

The big point here is that smaller banks in the real world, forced to try to make money from banking their real customers, are continuing to fail at a depressingly high rate. Meanwhile, huge financial profits can be made by swooping in and buying distressed assets from the FDIC, which has become an engine for consolidating assets and profits in a handful of highly profitable financial institutions.

It certainly looks as though the FDIC is selling dimes for a nickel to its highly exclusive group of qualified buyers, and that purchases from the FDIC have invariably turned out to be fabulous deals. That’s not the boring banking that the US wants to see: instead, it’s the kind of high-stakes dealmaking which makes Wall Street so resented in the heartland, and which, clearly, is never going to die.

*Update: The FDIC’s Andrew Gray emails to say that FDIC losses are borne by the banking industry’s deposit fund rather than taxpayers, which is a fair point, although ultimately those FDIC funds come from people with bank accounts, and that’s more or less the same thing as taxpayers. And the FDIC is of course a part of the US government. He adds that the FDIC took the least costly bid for BankUnited, as required by law. But did the FDIC have to sell that quickly?


The FDIC provides coverage or a guaranty to an acquiring bank for possible additional losses on the acquired, failed bank assets.

An FDIC “Indemnification Asset” represents the present value of the estimated losses on covered loans to be reimbursed by the FDIC based on the applicable terms of the Loss Sharing Agreement.

Despite the intent of “Loss Sharing” to bring order and calm to the commercial debt markets via long term asset management, some FDIC-assisted banks have raced to recognize and convert to cash loan impairments, liquidating assets as quickly as possible in order to be reimbursed by the FDIC for Loss Sharing losses.

In one of the rare instances of transparency into the Loss Sharing process as value proposition, we see that BankUnited “has received $863.3 million from the FDIC in reimbursements under the Loss Sharing Agreements for claims filed for losses incurred as of June 30, 2010″ and has at least $2.9 billion (in present value) to go.

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