Felix Salmon

With Peter Eavis having left the WSJ, who will take on the job of poring over banks’ balance sheets to expose their crazy accounting? Aaron Elstein, that’s who! He pulls no punches today:

BNY Mellon spins the numbers to make its results look better.

Consider the way the company reports earnings. In quarterly releases, BNY Mellon prefers to highlight income from continuing operations, because it feels that’s the best way to show underlying performance. But its definition of “continuing operations” is always changing, according to a review by Crain’s New York Business of all the bank’s releases for the past three years.

BNY Mellon sometimes excluded investment write-downs from operating results or assessment fees imposed by the Federal Deposit Insurance Corp. At other times, it didn’t include certain taxes or the costs of settling a dispute with the IRS over leases. In one quarter, BNY Mellon excluded litigation reserves; in two others, it called them “special” litigation reserves.

Additionally, the 48,000-employee company routinely excludes costs associated with relocating staffers and merger-related items, even though it often moves people and does M&A deals—26 over the past three years…

“They’re definitely playing games, cherry-picking to inflate their numbers,” says Douglas Carmichael, an accounting professor at Baruch College and a former chief auditor of the Public Company Accounting Oversight Board…

Longtime banking analyst Nancy Bush of NAB Research says BNY Mellon’s frequent changes in defining earnings make it difficult for investors to figure out how well the bank is doing. “You never get the same figures twice,” she says. “It’s very frustrating.”

Yes, BNY reports GAAP figures—but at banks, GAAP figures tell you very little, and it’s crucial that the reported numbers allow analysts to make apples-to-apples comparisons. Bank earnings are extremely opaque at the best of times, which is one of the reasons that banks tend to trade at lower multiples than other industries: no one really knows what might be buried within them. And as a rule, the more that senior management is spinning its earnings rather than reporting them as transparently as it can, the less trust that markets will have in the bank.

I do wonder, though. Is this a tactical decision by BNY’s Bob Kelly? Has he calculated that the boost in share price he gets from reporting artificially-rosy earnings is greater than the decline in share price he gets from leading analysts on a wild goose chase every quarter to try to work out what he’s doing? Does he reckon that analysts’ opinions don’t actually matter that much, and that his shareholders—including Warren Buffett—would rather just see something pretty and massaged?

Or is it simply that once he started down this road he couldn’t stop? It might make sense to switch to a more transparent and consistent set of reporting standards, but that would mean reporting lower earnings, and it’s hard for any CEO to admit that prior earnings figures were massaged in any way. So we might have to wait for a new BNY CEO before we see any changes on this front. After all, the chairman of the board—one Robert Kelly—is not about to rock the boat at all.

I’m not a huge fan of Roger Lowenstein’s NYT Magazine piece on Jamie Dimon, which comes complete with a positively glowing cover photo. It seems altogether too sympathetic to the man — who is, it must be said, a good banker — while failing to make the point that we can’t regulate a banking system on the assumption that the biggest banks will always be run by good bankers.

Dimon gave Lowenstein a very impressive degree of access for this article and from a PR perspective that decision makes perfect sense. Dimon is a good bank CEO and can make a very credible case that he’s part of the solution rather than part of the problem. One can’t necessarily blame Dimon for taking the banker-bashing personally — but I think it’s fair to blame Lowenstein for failing to point out that Dimon’s “l’état, c’est moi” attitude is itself problematic. The problems with megabanks like JP Morgan are not problems that Dimon or anybody else can solve: they’re endemic to any bank with assets of $2 trillion and growing. Here’s Lowenstein, on Dimon:

He was adamant that government officials — he seemed to include President Obama — have been unfairly tarring all bankers indiscriminately. “It’s harmful, it’s unfair and it leads to bad policy,” he told me again and again. It’s a subject that makes him boil, because Dimon’s career has been all about being discriminating — about weighing this or that particular risk, sifting through the merits of this or that loan.

The point here, surely, is that government has to be indiscriminate when it comes to bank regulation. Yes, on a case-by-case basis, the government can play favorites — and indeed it did so, during the crisis, when it engineered the transfer of both Bear Stearns and Washington Mutual into Dimon’s safe pair of hands. But equally the government can’t soft-pedal its regulation of banks and bankers on the grounds that one particular banker happens to have come out of the crisis with his reputation for risk management largely intact.

Lowenstein continues:

There are, believe it or not, reasons for wanting banks to be big, including safety. A large bank with many loans is less prone to failure than, say, a bank in Texas that lends to only oil drillers. For related reasons, as a bank gets bigger, its credit will generally be stronger, its borrowing costs lower. But as Dimon points out, banking also suffers from diseconomies of scale, like the lack of attention to detail and the “hubris” that can undermine a large organization. Such sins are precisely what crippled Citigroup and A.I.G. Nonetheless, Dimon insists that for a bank that gets it right, the positives of consolidation are overwhelming. Since J. P. Morgan’s acquisition, in 2008, of Washington Mutual, each Chase branch spends $1 million less on overhead and technology than it did before.

This is too credulous. Yes, big banks are less prone to failure than small banks — but that just makes them more dangerous, from a systemic perspective. If a lender to Texan oil drillers goes bust, the systemic repercussions are de minimis. If Citigroup or AIG goes bust, the whole world feels the impact. If a lot of small banks all make very similar loans to very similar people, then they can collectively approach the systemic impact of one large bank — but even then they won’t be so interconnected and so international that taxpayers are essentially forced to bail them out.

And I really don’t know what to make of that $1 million a year figure. If it’s true, it implies that Chase was a very inefficient retail bank and that Dimon was not half as good at running it as he’d like us to think. It also means that if small banks and credit unions found it hard to compete with Chase before, they’ll find it impossible to compete with Chase now. But I do wish I knew where the number came from, because I have to admit I’m suspicious.

Lowenstein then lauds Dimon’s exceptional risk-management skills:

That he manages to be the exception to the rule is a credit to his radar for trouble. Judy, his wife, whom he met at Harvard, claims he has an instinct for danger. Jay Fishman, who worked with Dimon in the ’90s (today he is chief executive of Travelers), says: “Jamie has a healthy regard for the idea that we will go through crises and that we will be lousy at predicting them. The flip side is he will run his businesses more carefully.” In the early ’90s, when banks were racking up huge losses in commercial real estate, Dimon ordered Fishman to study what would happen to Primerica if Citibank should fail. It was the sort of far-fetched risk that no other banker would worry about. A few years later, Primerica acquired Travelers, which had been weakened by Hurricane Andrew. Dimon demanded to see the catastrophe risk in every region the firm covered. Dimon did not have day-to-day control over insurance, but he routinely trespassed over organizational charts. He told Fishman to limit his exposure so that even a once-in-a-­century storm would not cost the company more than a single quarter’s earnings. That was a highly unusual, and unusually conservative, approach.

THIS FALL, DIMON SPOKE at a conference sponsored by Barclays Capital: a thousand people crammed into the ballroom at a Manhattan Sheraton to hear him. The master of ceremonies began by noting that Dimon was also the lunchtime speaker at the conference in 2006, just before the mortgage bubble burst. It was interesting to recall, he said, who else spoke then: Kerry Killinger, the chief executive of Washington Mutual; Michael Perry, chairman of IndyMac; as well as executives from the subprime lender Countrywide Financial and Lehman Brothers. “Jamie told us that day about subprime exposure — his was the first major bank to talk about that,” the master of ceremonies said. “All of those other firms disappeared.”

What Lowenstein doesn’t do, at this point, is talk about how all this only serves to underscore how weak the U.S. banking system’s risk-management systems are: JP Morgan Chase survived in large part thanks only because it was lucky enough to have Dimon at its helm. If Stan O’Neal had been in charge, things would have turned out very differently indeed. As a result, it becomes not only sensible but necessary to hobble JP Morgan more than Dimon feels is warranted. You don’t set speed limits on the basis of how fast the very best drivers can safely travel.

Lowenstein shows just how uncritical he’s being in his section on credit cards:

Dimon laments that people — he means the Congress — don’t really understand the credit-card business. Last year, Congress enacted a law that restricted pricing flexibility — for instance, banks must give a 45-day notice before raising their rates, even when a borrower misses a payment. The legislation was meant to prevent sudden interest-rate increases that had caught cardholders unawares.

Dimon argues that all businesses charge for some things and not for others. For instance, restaurants give you the tablecloth and the silverware free and “mark up” the food. (Dimon loves to illustrate banking verities with examples from more familiar, and less threatening, industries.) Credit-card companies provide a service — convenience — “free,” but the business entails significant risks. In a typical month, Chase lends $140 billion to people, with no form of security. The bank earns interest on those loans, of course, but it has to pay expenses and eat the bills of cardholders who fail to pay them back. Before the bust, unpaid bills totaled roughly $6 billion; in 2009, when unemployment rose to double digits, credit-card losses soared to $18 billion, and the business plunged into the red. How to set rates that keep such a business both profitable and an attractive proposition for customers is what bankers do — or at least, what they try to do.

To compensate for its inability to quickly raise rates, Chase has decided to lessen its exposure by no longer offering cards to a portion of its customers that it deems the riskiest. This isn’t necessarily bad; if the mortgage mess taught us anything, it is that banks should exercise discipline.

It has been amply documented that exploding interest rates on credit cards are not a way of pricing the “significant risks” of default; instead, they’re a way of sweating the maximum amount of money out of borrowers so that when they do default, the card company has already made a tidy profit. If banks can no longer wring monster interest payments and penalties out of people who clearly can’t afford them, then sure, they’ll drop those people as customers — that’s the whole point and the intended effect of Congress’s intervention here. The discipline being exercised is in the law, not within the banks.

And then there’s this:

Dimon acknowledged to me that in Chase affidavits, individuals incorrectly said they had reviewed loan files when in fact they relied on the work of others. So far, he says, Chase has not found cases of homes foreclosed on in error; payments on its suspended foreclosures are, on average, 15 months overdue.

The implication here — that if a homeowner is in default, then they can’t be foreclosed on in error — is simply false. It doesn’t matter how overdue the mortgage payments are: if you don’t legitimately own the mortgage, then you can’t foreclose. But, of course, many banks do just that — including Chase.

Or there’s the literally parenthetical treatment of hedge funds:

Perhaps naïvely, he was disappointed that political concerns played a large role in shaping the legislation. (An example is that Dodd-Frank limited bank investment in hedge funds, even though the latter were peripheral to the crisis.)

For one thing, the crisis began with Bear Stearns’s investment in its own subprime funds going horribly wrong. But in any case, Dodd-Frank was always intended to prevent future crises, not the last one. And having banks invest in hedge funds can’t conceivably improve systemic stability. Banning investments in hedge funds is hardly a “political concern” — it’s an important way of keeping banks sticking to their knitting, rather than branching out into dangerous areas which can hole them below the water line.

Dimon’s clearly a charmer — it’s the only way to explain passages like these:

Bear Stearns modestly added to J. P. Morgan’s franchise (Dimon says he was largely motivated by a desire to ease the crisis)…

Dimon could remain at J. P. Morgan for another decade — he says he has forsaken any thought of public service.

I haven’t spent months following Jamie Dimon around private meetings and dinners, but how is it possible not to burst out laughing when Dimon says with a straight face that has forsaken any thought of public service? All powerful CEOs live in a reality-distorting bubble, of course, and I suppose it’s not Lowenstein’s job to puncture that bubble in the presence of such greatness. But really.

What I’d really like to see is some bonus online material, surrounding this episode:

The new “systemic regulator” that the Dodd-Frank act established is meant to unwind a failing institution without rewarding its creditors or investors. Dimon is a huge supporter of the concept. “No one should be too big to fail,” he tells me. And J. P. Morgan? “Right,” he says. “Morgan should have to file for bankruptcy.” Suddenly, he begins to scratch out how a putative bankruptcy of his company would look, dissecting the capital structure line by line.

Lowenstein leaves it there — with no indication whatsoever of how Dimon thinks a bank could ever successfully declare bankruptcy. It’s never happened before, and there’s a strong case to be made that, at least in the case of a big international bank like JP Morgan Chase, it can’t possibly happen in the future, either.

My biggest problem with Lowenstein’s piece is that he never really grapples with JP Morgan’s sheer enormity — the root cause of substantially all the enmity between Dimon and those who would seek to hobble his plans for global domination. Is JP Morgan too big to fail? If so — and surely the answer is yes — then how can Dimon justify its existence, or his own plans to make it even bigger? To read this profile, you’d be forgiven for thinking that if Dimon is qualified to run a big bank, he should be allowed to do so. But he shouldn’t — no one should — if the cost of failure, no matter how unlikely, is a massive taxpayer bailout and another devastating global recession.

ProPublica is my favorite one-stop shop for presenting the Fed data dump in an at-a-glance format. The main thing that jumps out is that three banks, more than any others, were the primary recipients of the Fed’s lending facilities:

I’ve included the banks in positions 4 and 5 just to make clear how big the gap is here: Citi, Merrill, and Morgan Stanley each borrowed more than $2 trillion from the Fed in total. No one else borrowed even $1 trillion.

Of course, a lot of these were overnight loans being rolled over day after day: it’s not like the Fed ever lent this much money at any one time. But the sums involved are still astonishing, especially for Merrill Lynch and Morgan Stanley. We all know what happened to Citi and to Merrill, but this underlines just how rocky Morgan Stanley was at the height of the crisis.

The only time I’ve ever got a genuine death threat from my blogging was when I wrote this, on October 9, 2008:

It looks like we’re getting close to one of the market’s vicious syllogisms here: without the market’s trust, Morgan Stanley is nothing. The market doesn’t trust Morgan Stanley. Therefore, Morgan Stanley is, well, toast.

My guess is that at some point over the weekend, Hank Paulson will announce that he’s using his new authorities under the TARP to effectively nationalize Morgan Stanley, following Gordon Brown’s lead in the UK. And Morgan Stanley will only be the first of many banks to suffer such a fate.

I was right about the government stepping in to save Morgan Stanley from a vicious market where it couldn’t stand alone; I was just wrong about which arm of the government would be intervening. It wasn’t Treasury, it was the Fed.

It’s far too difficult to send money to your friends, family, or acquaintances.

At the moment, in the U.S., you basically have three options. You can try to do it physically, in person, with cash; that’s cumbersome, and often the reason you want to send them money is precisely because they’re paying cash for something and you want to pay them back. You can write them a physical check, which is even more cumbersome, and requires you to either carry your checkbook around or else start sending the payment in the mail. Or you can send them money through PayPal, which requires that they set up a PayPal account, and which often leaves them with less money than you sent, if you attached your PayPal account to your credit card.

If you live in Europe, or Canada, or just about anywhere else in the world, however, it’s easy—all they need to do is give you their account details, and you can transfer money directly from your account to theirs, for free. The lack of this basic banking functionality essentially explains why PayPal was created in the first place—by rights, if the U.S. banking system were remotely efficient or sensible, PayPal would never have existed.

Finally, however, that’s changing—and not just at forward-thinking credit unions and community banks. Citibank is now offering Popmoney, a service from CashEdge which allows Citi customers—and customers of 164 other banks—to send money easily to anyone in the U.S. with a bank account. If you send it straight to their account, the money simply appears there, just as it does in Europe. Alternatively, you can send it to their email address or mobile phone number, as you would with PayPal; in that case, they need to provide their bank account details to Popmoney before they can get the cash.

Citi has another service, too, called Inter Institution Transfers, which allows you to transfer money from your bank accounts at other banks straight into your Citi account.

These are basic wire transfers, but they don’t come with fees of $25 or more for the privilege: instead, they’re free. (Although, slightly ominously, Citi says that Popmoney pricing “is subject to change.”)

Tom Noyes had a good blog post about this back in October—I’m late to this story—saying that with this move, “Citi is now the leader in mobile payments.” But in fact he understated the extent of Popmoney: you can send money to anybody with a bank account, not just to anybody with a bank account at a Popmoney-enrolled bank.

For reasons I don’t understand, the big three retail banks are not following Citi down this path; instead, they’re laboriously trying to build their own systems to replicate Popmoney.

It’s all a bit depressing that these kind of systems have to be built at all, and aren’t just baked in to the national payments operating system, as it were. I’m sure that while Citi is offering Popmoney free to its customers, it’s still paying CashEdge some serious money for use of their technology.

The only thing I wonder about is whether Americans will ever get into the habit of happily giving out their bank account details to their friends and acquaintances. Most Americans, in my experience, think there’s a huge security risk to doing that. I think they’re probably wrong, but I’m not sure: is there a good overview, anywhere, of how safe or risky it is to give out such information?

The Epicurean Dealmaker has a very smart gloss on the CELF transaction I wrote about on Friday:

Investment banks traditionally thought of market making as a client service. An agency business. We put our capital at risk to facilitate the trading of our investing clients. In exchange, we earned a small commission, the occasional chance to put our capital to work in longer-term trades where we thought we had an edge, and—most importantly—priceless insight into the daily operations of particular securities markets, including the appetites, biases, and weaknesses of countless third party market participants. This insight is incredibly valuable, not only in market making itself, but also in making the investment bank possessing it a better informed underwriter for new securities. Securities markets are hotbeds of asymmetric information. The party with the best information has the greatest power. Market making can provide that power.

All of this is well and good, says TED until the market makers’ balance sheets balloon into the trillions of dollars. At that point, market marking becomes indistinguishable from large-scale prop trading.

And in the CELF trade, for all Goldman’s protestations that it was making a market in otherwise-illiquid structured securities, in fact it was simply bidding on those securities, against other bidders:

Goldman’s actions in 2010 bear absolutely no resemblance to behaving like an agent when it purchased the outstanding CELF securities and liquidated them. It did not behave like a normal market maker, buying securities from one investor and selling them to another. It paid an arm’s length price, determined after an auction run by a third party, to the investor it originally sold the AAA rated tranche to. It then triggered the liquidation of the securitization by purchasing a majority stake in its equity. With respect to the seller of the AAA tranche, it acted as a pure trading counterparty. A principal.

I’ve since learned a few more interesting facts about this transaction, none of which make Goldman look particularly client-centric.

For one thing, the investor selling the AAA tranche was exactly the same as the investor from whom Goldman bought enough equity that it could gain control of the CLO and liquidate it. That’s really weird. It makes sense that a Dutch pension fund might want risk-free assets — pension funds are like that. But why on earth would they want a piece of the incredibly risky and volatile equity tranche as well?

Goldman’s trade, here, was to buy the AAA tranche at a discount, and then to also buy up the equity tranche — which, when added to the residual equity which Goldman already held, pushed its total shareholding over 50% and gave it control of the deal. It then found a couple of outside investors (hedge funds, I assume), to come along for the ride and to promise that they would vote as a bloc, and sold them a package of bonds and shares on the understanding that if the shareholders voted to liquidate, the bonds were sure to be paid off in full.

This is a really complicated way of adding value which could have gone much more easily, with much less use of Goldman’s balance sheet. Goldman’s financial advisers, with the best interests of their client at heart, could have looked at the pension fund’s assets and noticed that it had almost enough equity to liquidate the CLO and be paid off in full on its bonds. And looking into their own bottom drawer, they could have noticed that Goldman’s own shareholding would be enough to push the pension fund over the 50% mark.

The most obvious thing to do would be to simply tell their client that Goldman would vote with them to liquidate the deal, and thereby help them get 100 cents on the dollar for their AAA tranche. But since that might involve Goldman taking a loss on its equity tranche, the next most obvious thing to do would be for Goldman to sell its shares to the pension fund at a small premium, and simultaneously help the fund liquidate the CLO, making a substantial mark-to-market profit on the deal.

Both those actions would have been client-centric things to do, and neither would have constituted proprietary trading. But Goldman instead decided to wheel out more than a billion dollars of its own money to buy up the pension fund’s holdings at a discount and take the profit for itself. It was so much money, indeed, that Goldman felt the need to bring in outside partners to share the risk — risk it never even needed to take in the first place.

A clearer example of what TED is talking about could hardly be found. Goldman had asymmetric information: it knew that there was a good enough bid for the loans which made up the CLO that if the structure were unwound, all the debtholders would be paid off in full, and even the equity holders would make decent money. (I’m hearing that the equity holders walked away with 80 cents on the dollar.) Goldman then used its monster balance sheet to profit from that information itself, rather than simply sharing the information with its client and letting the client do the trade instead.

Goldman is adamant that what it did on this trade was client-focused market-making. “This is a good example of helping a client achieve its objective,” the bank told Jesse Eisinger, “and underscores the critical importance banks play in using their capital to facilitate transactions on behalf of clients.”

TED, on the other hand, sees things slightly differently, calling that statement “a patently disingenuous dodge” and “pure, unadulterated horse****”.

I’m tempted to side with TED on this one. Yes, the client’s objective was to get out of its position. But Goldman could have helped it do so more profitably than it did, and what’s more could have done so without using its capital at all. The only reason it didn’t was that it made more money this way round.

Jesse Eisinger has the story of CELF, which has some interesting implications. Essentially, Goldman Sachs took a bunch of leveraged loans it had lying around on its balance sheet, and bundled them into a CLO called CELF which it sold in July 2008.

The transaction was clearly profitable for Goldman — if it wasn’t, the bank wouldn’t have done it. And like all CLOs, the reason was that there was insatiable investor demand for triple-A-rated securities. As a result, by bundling up a bunch of loans and tranching them so that a triple-A-rated security fell out the other side, Goldman could make money: demand for AAA debt was much greater than demand for leveraged loans, so turning the latter into the former was profitable.

Then, this year, Goldman unwound the deal. It bought back those AAA-rated loans — I’m hearing at about 96 cents on the dollar — and bought a bunch of the equity in the deal as well, enough to bring its equity stake to something over 50%. With control of the CLO, Goldman then decided to liquidate it entirely, breaking it up into its constituent parts and selling off those loans in the secondary market.

This deal, too, was profitable for Goldman — for exactly the opposite reason that the CLO was. Today, there’s a lot of demand for high-yielding loans, or high-yielding anything, really. Meanwhile, there’s no appetite at all for structured products carrying AAA credit ratings which no one believes. So Goldman can make money by turning out-of-favor structured product into highly-desirable loans.

Eisinger’s point here is that Goldman reckons it can do this kind of thing — making money by structuring and unstructuring complex financial products — without falling foul of the Volcker Rule: at each step along the way, it can claim to be acting in its clients’ best interest. He’s right about that, and he’s also right that if the Volcker rule can’t stop this kind of activity, it’s likely to prove pretty toothless.

But we can also draw another lesson from this story: that securitization is still pretty dead. So long as investors prefer plain-vanilla loans to collateralized loan obligations, the securitization market — which bankers and politicians both have said is crucial to the efficient functioning of the economy — will remain moribund. Let’s hope they’re wrong, and that securitization isn’t all that necessary for a vibrant economy after all. Maybe it’s mainly just good in terms of making money for investment banks.

Even before the Consumer Financial Protection Bureau gets up and running, other branches of the government are fighting the good fight against excessive overdraft fees. First came the Fed, of course, which forced banks to get their customers to opt in to the fees, at least when it comes to ATM and POS transactions: no longer can they charge them automatically.

But then something very odd happened. The Fed rule came into effect on July 1, and by mid-September Moebs had some data on the number of bank customers who had decided to opt in:

About 90 percent of overdraft revenue comes from frequent users. The Moebs study noted frequent users, those with 10 or more overdrafts in a year, almost all opted in. For all consumers, consent varied between 60 percent and 80 percent with a median of about 75 percent.

This astonishes and depresses me no end. Most banking customers are relatively unharmed by overdraft fees; by far the greatest damage to consumers, and the greatest profits for banks, came from the poorer customers who could least afford it. Essentially, overdraft fees were a way for the banks to monetize the naiveté and imprudence of their least-sophisticated customers, and the Fed rule was meant to put an end to such predatory price-gouging. Evidently, it failed: Moebs reckons that banks’ total overdraft revenue will hit $38 billion in 2011, a new record high.

David Benoit, today, provides some bank-level data which is only marginally more encouraging:

Earlier this month, Regions Financial Corp. Chief Executive Grayson Hall said at a conference that roughly half of the bank’s customers who have overdrawn their accounts have opted in for protection. He said the impact of the regulation on Regions is less than originally thought.

J.P. Morgan Chase & Co. said earlier this month that, of those who frequently overdraw their accounts, 53% have chosen to sign up for the service. At J.P. Morgan, the service includes a flat $34 fee for insufficient funds, the phrase the banking industry uses to identify the fees.

Of those who overdraw four to nine times a year, 41% have elected the service, and of those who overdraft fewer than four times, 21% have chosen the protection, J.P. Morgan said.

Note here that JP Morgan’s definition of “those who frequently overdraw their accounts” means people who do so ten times a year or more — at $34 a pop. How many times do those people overdraw their accounts, on average? I don’t know, but if it’s over 14.7, then these people are spending more than $500 a year in overdraft fees. Which I can guarantee you is money they can’t afford.

Still, 53% is better than “almost all,” and across the board JP Morgan’s take-up is clearly lower than what Moebs found, maybe because the overdraft fee is so high. The bank might have been better advised to reduce it, says Moebs:

6.5 percent decreased their overdraft price. “We have never seen this many institutions decrease the price of a fee service in almost 30 years of tracking bank and credit union pricing,” pointed out Moebs. “Our data shows institutions which decreased their overdraft fees, actually maintained or increased their overall revenue in the past year.”

In any case, there’s clearly still regulatory work to be done on this front, and so I’m glad that the FDIC is stepping in.

Under the FDIC’s new rules, which come into force in July 2011, banks are going to have to start trying to help those frequent overdrafters. Banks need to

Monitor programs for excessive or chronic customer use, and if a customer overdraws his or her account on more than six occasions where a fee is charged in a rolling twelve- month period, undertake meaningful and effective follow-up action, including, for example:

• Contacting the customer (e.g., in person or via telephone) to discuss less costly alternatives to the automated overdraft payment program such as a linked savings account, a more reasonably priced line of credit consistent with safe and sound banking practices, or a safe and affordable small-dollar loan;4 and
• Giving the customer a reasonable opportunity to decide whether to continue fee-based overdraft coverage or choose another available alternative.

Other parts of the rule are weaker, though: banks just need to “consider,” for instance, “eliminating overdraft fees for transactions that overdraw an account by a de minimis amount,” or alerting customers when their account balance is at risk of generating an overdraft fee.

This, however, I like a lot:

Under new Regulation E requirements that took effect on July 1, 2010, institutions must provide notice and a reasonable opportunity for customers to opt-in to the payment of ATM and POS overdrafts for a fee. In complying with these requirements, institutions should not attempt to steer frequent users of fee-based overdraft products to opt-in to these programs while obscuring the availability of alternatives. Targeting customers who may be least able to afford such products such as through aggressive advertising or other promotional activities can raise safety and soundness concerns about potentially unsustainable consumer debt. Any steering activity with respect to credit products raises potential legal issues, including fair lending, and concerns about unfair or deceptive acts or practices (UDAPs), among others, and will be closely scrutinized.

There have been a lot of complaints about how aggressive and mendacious banks have been in their attempts to get their customers to opt in to overdraft protection. Maybe they’ll back off a bit now that the FDIC has said that it considers such activity to threaten their safety and soundness. It’s just a pity that the FDIC didn’t say as much when the Fed’s new rule was first introduced.

Does the Ireland crisis bespeak a major weakness in the Basel capital-adequacy regime? Simon Nixon thinks so: the fact that investors won’t lend to Bank of Ireland, he says, “highlights a major weakness of the Basel capital rules that European banks operate under.”

This is an interesting idea: Ireland’s problem is a banking problem, banking problems are Basel problems, and therefore it stands to reason that Ireland’s problem might be a Basel problem. But if you look more closely at Nixon’s reasoning, his thesis ends up falling apart.

Nixon lays the blame at the feet of Basel’s well-known weakness: the fact that it concentrates on risk-weighted assets rather than total assets. And he implies that there might be large national differences when it comes to the ratio of risk-weighted assets to total assets, while conceding that thesis ” is impossible to prove from regulatory disclosures.”

But there are three huge things missing from Nixon’s piece. First, he takes just one bank from each of four different countries (Santander in Spain, BNP Paribas in France, Barclays in the UK, and Deutsche Bank in Germany) to illustrate national differences. He would be much more interesting, and much more compelling, if he presented a couple more datapoints in each country, to help give readers a better idea of whether French banks in general tend to have a higher ratio of risk-weighted assets to total assets than German banks in general, or whether we’re just looking at idiosyncratic differences between BNP Paribas and Deutsche Bank.

Second, Nixon thinks that the credibility problem in Ireland is a function of the way that the banks’ risk-weighted assets are calculated. He’s right that the market is skeptical that Bank of Ireland really has a core Tier 1 ratio of 8%. And he’s right that risk-weighted assets are a key part of that calculation, and can throw it off. Essentially, the ratio is (A-L)/R, where A is total assets, L is total liabilities, and R is risk-weighted assets. If R is artificially low, then that makes the ratio artificially high.

But the fact is that it’s not the denominator here that the markets are worried about. Instead, it’s the numerator. The key problematic number is A, Bank of Ireland’s total assets. Many of those assets are Irish commercial real-estate loans for which there’s essentially no buyer right now except for the Irish government. And a huge proportion of the rest are Irish residential mortgages, which might be performing for the time being but which would surely sell for much less than par if the bank tried to sell them on the open market.

Any mark-to-market valuation of BoI’s assets, then, would almost certainly show the bank to be insolvent. (This is not news: it’s true of all banks in all crises.) And the reason that the market won’t lend to BoI is that it fears the bank is insolvent. And that has nothing to do with its risk weightings at all: it doesn’t matter what the denominator is, if the numerator is negative.

Finally, Nixon nowhere mentions any Irish ratios of risk-weighted assets to total assets! The very heart of his thesis would seem to be that Basel understated the riskiness of Irish banks by coming up with an unreasonably low number for their risk-weighted assets. Yet Nixon doesn’t tell us what Bank of Ireland’s ratios were, in comparison to those other European banks, and he doesn’t give ratios for any other Irish banks, either.

I suspect this is more than just an oversight. In general, banks reduce their ratio of risk-weighted assets to total assets in one of three ways. They can be heavily involved in investment banking, where loans tend to be taken out in the repo market and are fully collateralized; they can be heavily invested in structured products with triple-A credit ratings; or they can be heavily exposed to OECD sovereign credits. Ireland’s banks, by contrast, were more old-fashioned than that: they just loaded up on property loans, which tend to carry a full risk weighting. There are clearly lots of things wrong with Ireland’s banks, but I doubt that artificially reduced risk weighting was one of them. Certainly Nixon adduces no evidence that it was.

Is Ireland’s problem a Basel problem, then? I don’t think so—or if it is, then we’d need to see a lot more numbers first before Nixon came close to making his case. I understand that the Heard column has space constraints and specializes in short, punchy analysis, but this piece is so short as to be pretty much useless. At the very least, Heard should allow its writers to put extra material online, showing their work, as it were, to back up the conclusions in the printed paper.

It seems I got results! In the wake of my post about Banco Popular’s ATM fees on Sunday, Banco Popular has been in touch to say that they’re fixing things.

But first, a correction: the charge saying “debit of ATM with flat fee” was not a flat fee after all, despite what the customer-service person told Engels, the account holder. Instead, the $10 was the aggregation of five $2 charges for using five different out-of-network ATMs over the previous month.

As of today, that changes: every time you use an out-of-network ATM, you’ll see a separate $2 fee on your statement, saying “Non-Popular ATM fee”.

That’s definitely a positive change, since up until today, Popular would save up all those bank fees in its back pocket and hit you with them all at once, at the same time as charging its $5 monthly account fee, thereby maximizing the chances of driving you into overdraft territory. That’s less likely now.

What’s more, Larry O’Brien, Banco Popular’s head of marketing, promised me that the bank would put a full schedule of all its fees up on its website. Again, that’s a huge improvement on the status quo, where you’re told the fees once — when you open your account — and then subsequently only on a piecemeal basis as and when they change.

In the case of the $2 out-of-network ATM fee, for instance, Banco Popular customers got a letter on July 15 that as of August 15 they could use the Allpoint network of 33,000 ATMs free of charge. In that same letter — which O’Brien has promised to send me, and I’ll post here when he does — they were also told that the surcharge for using an out-of-network ATM would rise from $1.50 to $2.

Incidentally, this stuff isn’t transparent even to relatively senior bank officers. Enrique Martel, the Banco Popular media relations person, initially told me that existing customers weren’t told about the rise in the ATM surcharge to $2. And even O’Brien said at one point that the $2 charge went into effect for existing customers only on November 8, rather than on August 15. (November 8 is the date that the bank changed the way it reported the charge on its statements.) So it’s hardly surprising that Engel’s customer-service rep got things wrong too. This is why having a public website for such information is such a good idea: it makes it much easier not only for customers but also for employees to get everything right.

In any case, well done to Banco Popular for changing the way it charges so quickly. And let’s hope it doesn’t take too long for them to put their full schedule of fees up on their website.

Update: Here’s two slightly different versions of O’Brien’s letter, and the statement insert. (All PDFs).

This week’s New Yorker features 8,000 words from John Cassidy on how financiers extract rents from the real economy rather than adding real value. His article features not only The Epicurean Dealmaker, star of blog and Twitter, but also Paul Woolley, a former fund manager who now runs the Woolley Centre for the Study of Market Dysfunctionality, a man who knows how to give great quote:

“I realized we were acting rationally and optimally,” he said. “The clients were acting rationally and optimally. And the outcome was a complete Horlicks.” …

“Mispricing gives incorrect signals for resource allocation, and, at worst, causes stock market booms and busts,” Woolley wrote in a recent paper. “Rent capture causes the misallocation of labor and capital, transfers substantial wealth to bankers and financiers, and, at worst, induces systemic failure. Both impose social costs on their own, but in combination they create a perfect storm of wealth destruction.”

Cassidy is good at focusing on excessive pay in the industry:

Perhaps the most shocking thing about recent events was not how rapidly the big Wall Street firms got into trouble but how quickly they returned to profitability and lavished big rewards on themselves. Last year, Goldman Sachs paid more than sixteen billion dollars in compensation, and Morgan Stanley paid out more than fourteen billion dollars. Neither came up with any spectacular new investments or produced anything of tangible value, which leads to the question: When it comes to pay, is there something unique about the financial industry?

Thomas Philippon, an economist at N.Y.U.’s Stern School of Business, thinks there is. After studying the large pay differential between financial-sector employees and people in other industries with similar levels of education and experience, he and a colleague, Ariell Reshef of the University of Virginia, concluded that some of it could be explained by growing demand for financial services from technology companies and baby boomers. But Philippon and Reshef determined that up to half of the pay premium was due to something much simpler: people in the financial sector are overpaid. “In most industries, when people are paid too much their firms go bankrupt, and they are no longer paid too much,” he told me. “The exception is when people are paid too much and their firms don’t go broke. That is the finance industry.”

Cassidy concludes with an ode to an earlier era:

In 1940, a former Wall Street trader named Fred Schwed, Jr., wrote a charming little book titled “Where Are the Customers’ Yachts?,” in which he noted that many members of the public believed that Wall Street was inhabited primarily by “crooks and scoundrels, and very clever ones at that; that they sell for millions what they know is worthless; in short, that they are villains.” It was an extreme view, but public antagonism toward bankers and other financiers kept them in check for forty years. Economic historians refer to a period of “financial repression,” during which regulators and policymakers, reflecting public suspicion of Wall Street, restrained the growth of the banking sector. They placed limits on interest rates, prohibited deposit-taking institutions from issuing securities, and, by preventing financial institutions from merging with one another, kept most of them relatively small. During this period, major financial crises were conspicuously absent, while capital investment, productivity, and wages grew at rates that lifted tens of millions of working Americans into the middle class.

Since the early nineteen-eighties, by contrast, financial blowups have proliferated and living standards have stagnated. Is this coincidence? For a long time, economists and policymakers have accepted the financial industry’s appraisal of its own worth, ignoring the market failures and other pathologies that plague it.

Cassidy’s view is a clear-eyed and straightforwardly reported version of, say, this, from Noam Chomsky:

The capitalist class in the ’50s was sort of part of a social contract. It was part of the tenor of the times… Changes have taken place since then… In the financial institutions, which by now dominate the economic system, the management level repeatedly acts in ways which will destroy their own institutions if it’ll increase their benefits, and benefits are not small. You know, you take a look at the revenue of, say, Goldman Sachs – a very high percentage of it just goes to payment of management and bonuses. There was a time traditionally – say, GM in the 1950s – it was trying to develop a consumer base that would be loyal and lasting and they were thinking in terms of an institution that would remain and grow and thrive in the society. By now, a lot of the investment firms – bankers, hedge funds – are perfectly happy to destroy what they’re in and come out with huge, tremendous benefits. That’s a new stage of capitalism.

Chomsky praises Yves Smith’s book as being “really good”, and says nice things about Simon Johnson, too; I’m sure if asked he’d be equally complimentary of, say, Joe Stiglitz or Jamie Galbraith. Elsewhere, he praises Dean Baker, and dates the beginning of the end to the dissolution of the Bretton Woods system:

In the mid 1970s that changed. Bretton Woods restrictions on finance were dismantled, finance was freed, speculation boomed, huge amounts of capital started going into speculation against currencies and other paper manipulations, and the entire economy became financialized. The power of the economy shifted to the financial institutions, away from manufacturing. And since then, the majority of the population has had a very tough time; in fact it may be a unique period in American history. There’s no other period where real wages — wages adjusted for inflation — have more or less stagnated for so long for a majority of the population and where living standards have stagnated or declined.

There’s clearly a large and appreciative audience in the blogosphere and in middlebrow magazines for this kind of analysis, which has even now become a feature-length documentary. But equally clearly it doesn’t even begin to play with the electorate as a whole. Look at what happened in the mid-term elections: insofar as Dodd-Frank was an issue at all, it was criticized for going too far — for being too much of an incursion by government in private industry — rather than for being too weak.

What has changed since the 1940s and 1950s, when popular mistrust of Wall Street was more than sufficient to constrain its ambitions and dangers? When even well-heeled investment bankers are on pretty much the same page as Noam Chomsky (or, for that matter, Eric Cantona), why is it that such sentiments still seem confined to the chattering classes? Maybe it’s just that this stuff is complicated, and that there’s little incentive for most people to put in the work needed to begin to understand it.

It’s certainly a lot more complicated now than it was in the 30s and 40s. As I noted in my review of Michael Perino’s book on Ferdinand Pecora, the Wall Street excesses of the 1920s were far simpler and more obviously egregious than the Wall Street excesses of the 2000s. Unless and until we see a parade of bankers in handcuffs being convicted of serious crimes, I suspect it’s going to be impossible to persuade the public at large that Wall Street is out of control and needs to be brought down to size. Even when former Wall Streeters like Woolley are clear of what needs to happen:

“The amount of rent capture has been huge,” Woolley said. “Investment banking, prime broking, mergers and acquisitions, hedge funds, private equity, commodity investment—the whole scale of activity is far too large.” I asked Woolley how big he thought the financial sector should be. “About a half or a third of its current size,” he replied.

That would be nice. But it’s not going to happen.

Alexandra Berzon has an enjoyable piece in today’s WSJ about the Cosmpolitan, the new $4 billion casino, fully paid for by Deutsche Bank, which is opening up in Las Vegas next month.

Berzon gets the obligatory isn’t-Wall-Street-a-casino-anyway shot in at the beginning of the piece, and then walks through the chain of events which resulted in a $60 million loan to a Las Vegas developer somehow morphing into ownership of a $4 billion project. But I would have loved to see a bit more detail on the finances:

Deutsche was originally just funding the project, pumping in a loan of $1 billion to build the soaring two-tower development. But its original developer, Ian Bruce Eichner, defaulted on Deutsche loans in 2008…

By the time the Cosmopolitan holds its grand opening next month with a New Year’s Eve party featuring Jay Z and Coldplay, Deutsche will have spent an additional $3 billion from its own coffers. That makes it one of the most expensive resorts in Las Vegas history.

Already, Deutsche has written off nearly $1 billion of its Cosmopolitan investment, according to securities filings…

After Mr. Eichner left the development, the bank was still uncomfortable about getting directly into the casino business. It tried to cut deals with more established players, including Hilton Worldwide and MGM Resorts International, but the deals didn’t come through.

Several other potential investors declined because they weren’t confident the Cosmopolitan could cover its loans, according to people involved in the talks.

What’s missing here is any explanation of its decision from Deutsche itself, beyond a bland statement that Thomas Fiato, the bank’s head of corporate investments, made to Nevada regulators. Berzon has talked to “people involved in the talks”, and there’s nothing about Deutsche refusing to comment, so I assume she talked to Deutsche executives off the record. But after reading her article I’m left with a lot of questions.

For one thing, how did Deutsche come to the decision that the best thing to do with a construction site in the middle of Las Vegas was spend $3 billion of its own money turning it into a new casino? I can see how it might have been a bit overoptimistic when it lent $1 billion to Eichner in the first place. But when Eichner defaulted on that loan and Deutsche defaulted, clearly there were problems in the Las Vegas real estate market. And when big casino operators took a look at the construction site and walked away, that was obviously a sign that Deutsche’s sunk costs were never going to be recovered.

And yet, somehow, Deutsche decided that the smart thing to do was to throw $3 billion of good money after its $1 billion of bad money. Why? What made them think that they could see a healthy return on that $3 billion even as no one else showed any interest in the deal? And given that casino investments are always risky, what justification did they have for adding such a big one to Deutsche’s balance sheet?

Furthermore, when did Deutsche take its “nearly $1 billion” write-off? If Deutsche knew that it was going to write off substantially all of its initial loan in any case, then wouldn’t it have been just as expensive and much less risky to just give the entire construction site away? And if Deutsche has now put $4 billion into the development, does that mean that the Cosmopolitan, which has yet to host a single paying guest, is valued at something north of $3 billion on Deutsche’s books? What would a reasonable valuation be, in this market?

Finally, what does Berzon mean when she says that other potential investors walked away “because they weren’t confident the Cosmopolitan could cover its loans”? What loans? Wasn’t Deutsche the owner of the project at that point, perfectly capable of selling an equity stake unencumbered by any debt?

The tale that Berzon tells is entirely consistent with Fiato and his team getting so caught up in the Cosmopolitan concept when they agreed to finance it that they simply couldn’t let go, wanting to retain at least a substantial debt-finance involvement and ultimately deciding to finish themselves what Eichner was unable to do, placing valuations on the Cosmopolitan that no one else was willing to ratify. But we don’t quite get there: we get hints of that story, but not enough detail to see it clearly. Let’s hope there’s a follow-up.

(Cross-posted at CJR)

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.

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?

I love the way that the WSJ today covers the collapse of Ireland’s banking system, and with it the country’s fiscal leadership. There’s little if any actual news here, but that’s a feature, not a bug: it frees up the WSJ‘s writers and editors to present the big-picture narrative in as clear and compelling a manner as possible, without having to overemphasize some small factoid which they happen to be breaking.

The story reads like one of those epic lyric tragedies of old, where no one ever learns from their mistakes, and errors simply compound endlessly. First, the Irish government, convinced that the country’s banks were suffering from a liquidity crisis rather than a banking crisis, decided to solve that problem in the way that only a government can — with a blanket guarantee of substantially all of the banks’ liabilities.

But of course the banks were fundamentally insolvent, and so began a series of cash drains on the government, each one meant to be the last and final. First there was €1.5 billion for Anglo, and €2 billion each for Bank of Ireland and Allied Irish. Then there was another €7 billion for Allied Irish and Bank of Ireland. Then Anglo’s losses reached €20 billion, with another €48 billion “at risk” of default. And where are we now?

The total capital injected into banks by the government so far: €34 billion, with at least another €12 billion on the way. The bailouts mean Ireland will run a government deficit equal to 32% of its gross domestic product, the highest figure ever in any euro-zone country. Skeptics say a still-sinking property market will next sour residential mortgages, inflating the government tab even more.

Yes, this inconceivably enormous bailout tab—32% of GDP would correspond to an annual deficit of $4.7 trillion here in the U.S., or something over $40,000 per household—has been run up on commercial real-estate losses alone. If and when Ireland’s residential mortgages start defaulting, the country is surely toast.

Bankers, auditors, regulators, politicians—all of them made the same mistake, in Ireland, which was to believe the numbers they were being shown. Numbers are like that: once they’re printed and ratified, they become perceived as hard facts, in the way that merely verbal statements never are. If a politician says “our banks are solvent,” that’s a contentious statement; if PricewaterhouseCoopers comes out with a massively overoptimistic take on the strength of Anglo’s loan book, backing up an official-looking report with lots of numbers and institutional authority, people simply believe them implicitly.

One of the authors of the article, Charles Forelle, has a great accompanying blog entry in which he explains that Ireland’s crisis came out of the blue: it wasn’t a slow-moving train wreck like Portugal. And even with hindsight, it would have been incredibly hard for either the Irish government or the European Union to prevent the build-up of bad loans.

That blanket guarantee of banks’ liabilities, of course, was entirely preventable, and in hindsight a very bad idea. While the banks’ smaller depositors deserve to remain whole, their other lenders should have taken much larger haircuts by now. Instead, they’ve been bailed out by Irish taxpayers, which doesn’t seem fair at all. The Irish government is sovereign, of course: it could always unwind that guarantee if it wanted to. But at this point, it’s too late to do that, since unwinding the guarantee would immediately precipitate a massive run for the exits and a monster sovereign collapse.

One of the key lessons we’ve learned in this crisis is that any time a small country takes pride in its large and profitable international banks, everything is liable to end in tears. Big banks are too big to fail, which means their national governments have to bail them out—but when the banks are as big or bigger than the government in question, such a bailout becomes politically and economically disastrous. My feeling is that no government should ever allow its banks to become too big to bail out, because no government can credibly promise not to bail out such banks should they run into difficulties.

If you look down the Financial Stability Board’s list of the top 30 systemically-important financial institutions, there are definitely a few on there which look like they’re too big for a national bailout. The two big Swiss banks certainly are, and possibly the two big Spanish banks, too; then there’s six insurers as well. I have no idea what can be done about this: no one’s going to blunder in and force UBS and Credit Suisse to break themselves up just because they happen to be based in a small Alpine nation. But the lessons of Iceland and Ireland should wear heavily on any government with an oversized financial sector.

It’s hard to sell a circular house: over the past year, the palindrome-friendly realtors at Weichert have tried and failed to move 300 Farmington Road at $524,425; $499,994; and most recently $449,944. But it’s still on the market, and the banks are to blame. Mae Ngai and John New wanted the house, had the 20% down-payment ready, and were pre-qualified for a loan. But it wasn’t enough for the lenders:

Two mortgage companies turned us down. The first did so after its investors – big banks with household names – rejected our application. The second mortgage company’s internal underwriters also rejected us. Their reasons were the same: The home, a customized modular house of internationally acclaimed design, built in 1989, is . . . round.

Being “unusual” or “unique,” it was deemed “not marketable.” Despite its evident worth and multiple independent appraisals, the lenders said they could not assign a value to the house because there were no comparable properties. And, with no “value,” there was insufficient collateral for a loan.

Ngai and New say, reasonably enough, that “there is a certain perversity about making a house unbuyable, even to two eager would-be purchasers, for fear of it being unsellable in the future”.

More generally, this shows a mortgage system broken in all manner of different ways.

For one thing, everybody is far too rule-bound, still. If a lender is worried about the difficulties involved in selling a round house, then it should be able to ask for a higher downpayment, or require a slightly higher mortgage rate, to make up for the extra risk. But no one seems set up to be able to do that.

What’s more, unique houses have an upside as well as a downside, from the point of view of a big lender: they’re less correlated to the market as a whole. If you’re trying to sell a standard suburban tract home which is to all intents and purposes identical to the 152 other suburban tract homes on the market, you’re in trouble. The nightmare for a mortgage lender is a property-market crash with prices plunging and far more properties coming onto the market than there are qualified buyers for them.

The other nightmare for mortgage lenders, of course, is the idea that homeowners might simply walk away from their underwater property, often because it makes perfect rational sense to do so when you can rent something identical or better for less money than you’re paying on your mortgage.

Unique homes, by contrast, are the kind of things which can prompt bidding wars in the midst of a property crunch — they’re not nearly as susceptible to the whims of the broader market. And when they’re sold, they’re nearly always sold to people who love them and have a strong emotional connection to them, which makes their owners less likely to walk away from their mortgage.

If I were a big bank with a large mortgage portfolio, then, I’d love to add a few unique houses to the mix: they would help a lot on the diversification front. But that would involve giving individual bankers more discretion, and trusting them to be good at their jobs. So instead the banks just say no. And the owners of 300 Farmington Road, I guess, are just going to have to wait for a cash buyer to come along. Or be willing to finance any purchase themselves.