An Heritage in Banking

Since August 2008, the Wikipedia article on Bank One has included a graphic illustrating the key mergers that led to Bank One's formation. The diagram, which effectively is a three generation pedigree chart, inspired me to look deeper into Bank One's merger linage. In some lines, seven generations of financial institutions are found: Plainfield Savings and Loan merged into Joliet Federal S&L, which merged into Amerifed Federal Savings Bank. NBD bought out Amerifed Bank before merging with First National Bank of Chicago and then Banc One to become Bank One. Finally, Bank One was acquired by JP Morgan Chase.

Another branch of JP Morgan Chase's genealogy is more troubled. Westside Federal S&L was merged with government financial assistance into Mariner Federal S&L, which itself was merged with assistance into Prudential Federal Savings Bank. Pacific First FSB acquired Prudential FSB before being taken over by a thrift called Washington Mutual. JP Morgan Chase assumed WaMu's assets after the latter's September 2008 failure. It's probably not the pedigree JP Morgan executives will cross-stitch on to pillows.

Elsewhere merger lineages can be just as lengthy. Norton Savings and Loan of Norton, Kansas was acquired by Heritage Savings Association, which was acquired by People Heritage Federal S&L, which failed and was carried away into receivership. After it was reorganized, it was acquired by Bank IV, which was acquired by Boatmen's National Bank, which was acquired by NationsBank, which merged with BankAmerica to become Bank of America. So all the generations from Norton to the S&L crises are three, and from the S&L crises until Boatmen's are two, and from Boatmen's unto Bank of America are two.

The Mighty Max

In January my brother mentioned that I was to be a new contributor to the blog. ten months later I am over my writer's block and can share a childhood story about my good old Mighty Max. That name sounds kind of like a Tonka toy truck. The subject of this piece is indeed quite similar in stature and power to the Tonka trucks, but what I am referring to is the aptly named 1987 Mitsubishi Mighty Max pick-up truck that I had the privilege to drive as a high school student. The truck was a hand-me down: my father drove it when it was new, and my brother and sister each did their time in it before my turn came. This car didn’t have all the frivolous accessories modern cars have. Power locks, bah; how hard is it to push a lock up and down with your finger? Same thing goes for windows. Power steering just robs the driver of their workout when parallel parking. A car alarm was unnecessary for reason which should be obvious.

When my sister complained about driving the truck I would tease her that though she had to drive it, it would surely brake down and be replaced by a newer vehicle by the time I turned 16. I started to get more and more nervous that my taunt would prove to be incorrect as the years went by and my brother became the next driver of the truck. But I kept up the teasing. However, the Mitsubishi, like all good Japanese-made cars, deteriorated over the many years, but flatly refused to die. And in the end it was passed on to me, who was a few months its junior.

Over the years this vehicle gained character, one defect at a time. The first came when my father expected the vehicle to live up to its name and tow a stalled K-car. Unfortunately the Mighty Max did not have a trailer hitch or anything of the sort, so the next best thing to tie a rope between the car and the truck’s tailgate. This incident resulted in the Mighty Max having a severely convex tailgate. I am not sure how the antenna died, but super glue was only able to delay the inevitable for so long. Antennaless cars receive poor radio reception. The truck’s 1987 birthyear precluded any chance of CD player. Indeed, by the time I drove it the cassette player was dead as well. Since the truck couldn’t play any music through the normal channels, it developed its own unique rhythm for the enjoyment of the driver. The whole frame developed a vibration. Perhaps the shaking was the death throes of the engine, but I only knew that it had resonance frequencies at 15 and 55 mph at which its vibrations would become deafeningly loud.

One fateful day, the Mighty Max finally died and it was not of natural causes. I was guiltless, having a clean driving record to this day. With a fate fit for a decrepit little car, my Mighty Max was rundown by a monster truck in the high school parking lot. Ok, so it didn’t actually run over it, but it did run in to it at a high enough speed to spin it 45 degrees from it’s initially parking spot and it was a monster truck, you know, the kinds of trucks with raised frames and 4ft tall tires that are abundantly distributed in that portion of the Hoosier state. When I came out of school, in the lightly falling snow, I saw the crippled remains of my truck. It was a better-sweet feeling to outlast the vehicle that equaled me in age. Previously I had begun to wonder if it might outlive me. Instead, it was the victim of a senseless hit-and-run accident. Ok, this isn’t a sob story, there was a witness, the culprit was tracked down, and fortunately, in the end I was able to start driving a vehicle that didn’t have quite so much character. But maybe if I go through with car shopping at the end of Christmas break I will be lucky enough to stumble upon another Mighty Max just like it.

The Unsound and the Fury

Arkansas National Bank expanded from 2 branches to 10 branches between 1995 and 2000. Then, this small bank from northwest Arkansas changed its name to ANB Financial and went big into commercial real estates loans in Idaho, Utah, and Wyoming. The Office of the Comptroller of the Currency closed ANB Financial in May 2008, when these loans began defaulting in mass. When I related its story, a friend exclaimed, “What were they thinking?” He marveled that community bank executives imagined they had any advantage monitoring mortgages a thousand kilometers away.

Some insight into the strategy of failed banks comes in the Letters to the Shareholder in old annual reports. Irwin Financial, for example, was a holding company owning a small bank and mortgage company. Will Miller, Irwin Financial’s Chair and CEO explained the strategy for the mortgage unit in the 2006 annual report:

We started our home equity segment in 1995 as a high loan-to-value second mortgage lender. Twelve years ago, "high loan-to-value" was considered any mortgage loan with a loan-to-value (LTV) ratio in excess of 80 percent. By hiring the bulk of our initial senior management and staff with experience in both mortgage lending and credit cards, we combined the best of both of those industries and found a profitable niche. Since then, others in the mortgage market recognized the opportunity. Today, first and second mortgage loans at LTV ratios of 100 percent are commonplace. Given our initial experiences, we began testing mortgage products in 1997 with loan-to-value ratios of up to 125 percent. Our theory was that if customers were underwritten as if they were unsecured (analogous to the credit card business), but had an incentive to repay our debt before their credit cards due to our application of a mortgage lien, our credit quality would be better than that of unsecured debt. This has been true, and including a recent increase in delinquencies and losses, still is. We face a number of challenges with this strategy: the discipline of intensive credit evaluation is expensive; our credit systems and resources are a relatively fixed cost; and, as a result, we need a good amount of volume to maintain attractive margins.

In an increasingly competitive mortgage market, Irwin Financial decided that its conventional mortgage operation was doing too little volume to repay fixed costs, so it sold its conventional mortgage business in 2006 and announced “expansion of our high loan-to-value first mortgages, in an effort to increase our share of the market….By doing so, we believe we will meaningfully increase our volumes, improve our costs per funded loans, and improve profitability.”

So stated, the strategy almost seems reasonable. Credit card companies had a long record of profits from unsecured loans to borrowers of questionable repute. Irwin Financial’s loans would be secured and available only to prime or near prime borrowers. The presence of fixed costs explains the all or nothing approach. Of course, one could argue that high loan-to-value mortgages were insanity itself, that any borrower willing to sign one was sufficiently maladroit at personal finance to constitute a default risk, and that Irwin Financial should have learned from the default losses it took on these loans after the recession in 2001. One so arguing could make a good case.

The 2006 letter also contained two sentences that now stand out: “More recently, volume trends have been in the right direction as broker and correspondent production is increasing... Credit quality has slipped a bit, but it is not yet worrisome.” These would make fitting last words, but Irwin Financial survived long enough to release two more annual reports, each with apologetic letters. The 2007 Letter to the Shareholders began:

In 2007, Irwin Financial had a loss of $24.1 million, or $0.90 per diluted share from Continuing Operations with an additional $30.5 million loss from Discontinued Operations for a consolidated loss of $54.7 million for the year.

My colleagues and I are extremely disappointed with these consolidated results. While we have made significant strategic moves over the past several years to lower our risk exposure to mortgage markets - exiting the conforming conventional first mortgage banking business and continuously tightening credit standards on home equity loans -these moves did not come soon enough for us to avoid being hurt by the deterioration of the residential real estate market far beyond what we and most other observers had expected. I am confident we can substantially improve our results in 2008, although not all the way back to satisfactory levels of long-term performance; that will take longer than one year.

The 2008 annual report announced even greater losses and the letter discussed corporate restructuring, plans to recapitalize the banks, and mass layoffs. Regulators seized both bank and holding company in September 2009. ANB Financial and Irwin Financial were being risky, and perhaps even silly, but at the time their leaders, like the protagonists in most tragedies, thought they were being sensible.

Three Short Observations

1. I'm impressed with credit card fraud detection. False positives rarely occur, but the systems recently found fraudulent but small and routine-looking charges on a friend's account within hours.

2. I installed Linux on my aging desktop. This was a free way to get the benefits of a current operating system, and the contrast between Fedora 11 and Windows 2000 amuses me. Soon I plan to dual boot OpenBSD and Windows 3.1.

3. My new desk is in a place with a tradition of faculty and their RAs eating lunch together. It is a wonderful gesture, but the economists sometimes lapse into conversations about boats or upscale restaurants. The other day while eating my lunch (bought not at the cafeteria, but at the discount grocer Aldi) and listening to a senior economist describe a spouse's five thousand dollar bicycle, I was struck by the realization that my bagel cost seventeen cents.

Regions and Recession

Though the current recession is global in scope, regional variation in its intensity is pronounced. Excellent articles and maps in the Economist (America’s Regional Recession, 7 Feb 2008) and the New York Times (Geography of a Recession and Job Losses Show Breadth of Recession, 3 Mar 2009) have brought some public attention to this. Both pieces are accompanied by maps of the United States that plot BLS Local Area Unemployment data. The two maps are a year apart, so the Times map displays more severe and widespread joblessness.

The intensity of the housing crisis also varied regionally, and for awhile home price movements and unemployment rates were related in an understandable way. California is a tragic case study where the recession began soon after its housing bubble ended. Yet, the spatial correlation of unemployment and home price declines is disappearing. (Charlotte recorded little home price movement, but unemployment in that metro area is measured at 11.7%. Phoenix has seen a collapse in home prices but not in employment.) Now the geography of the recession is becoming a more complicated story.

Since mapping out the BLS data seems to be in vogue, Temiandu Kuera will contribute 19 months of data combined into one video.

Stephen Leacock

Stephen Leacock was an economist, political scientist, and one of Canada’s most praised writers of humor and local colour. About the demands of economics and writing, he wrote:

“Many of my friends are under the impression that I write these humorous nothings in idle moments, when the wearied brain is unable to perform the serious labors of the economist. My own experience is exactly the other way. The writing of solid, instructive stuff, fortified by facts and figures, is easy enough. There is no trouble in writing … a statistical inquiry into the declining population of Prince Edward Island. But to write something out of one's own mind … is an arduous contrivance only to be achieved in fortunate moments…” (1)

I personally find neither economics nor writing to be easy enough, as evidenced by the scarcity of posts here this semester. I did find time, however, to read two of Dr. Leacock’s classics.

In Arcadian Adventures with the Idle Rich the eponymous targets are easy ones to satirize. Yet among the caricatures of an avaricious, inept, and hypocritical leisure class is a brief insider’s look at academia. In one story after a geology professor makes what seems a huge gold discovery, he shakes “with excitement; not of course, for the gold’s sake as money (he had no time to think of that), but because if this things was true it meant that an auriferous vein had been found in what was Devonian rock of the post-tertiary stratification, and if that was so it upset enough geology to spoil a textbook. It would mean that the professor could read a paper at the next Pan-Geological Conference that would turn the whole assembly into a bedlam.” (2) Citation count implications, of course, trump any financial or practical implications.

Sunshine Sketches of a Little Town has more nuance but on the surface even less economics. Still, Dr. Leacock displays an economist’s grasp of nonjudgmental euphemism. (Ever since reading Hortaçsu and Syverson’s QJE article, I’ve been repeating the phrase “investor with high search costs.”) One of the sketches is about an activity of the Knights of Pythias which “are by their constitution, dedicated to temperance. [Attending is] Henry Mullins, the manager of the Exchange Bank, also a Knight of Pythias, with a small flask…in his hip pocket as a sort of amendment to the constitution.” (3)

Stephen Leacock is compared frequently to Mark Twain, but Sunshine Sketches of a Little Town reminded me more of the present-day radio storytellers Garrison Keillor and Stuart McLean. Yet, perhaps his work is better regarded as a natural extension of “the Great Humorists from Chaucer to Adam Smith.” (4)


(1) Leacock, Stephen. Sunshine Sketches of a Little Town. Page 6 in the Norton 2005 edition.
(2) Leacock, Stephen. Arcadian Adventures with the Idle Rich. Page 36 in the 2001 Canadian Critical Edition.
(3) Leacock, Stephen. Sunshine Sketches of a Little Town. Page 40 in the Norton 2005 edition.
(4) Leacock, Stephen. Sunshine Sketches of a Little Town. Page 68 in the Norton 2005 edition.

The AP and the IRS

For the first time I am worried about taxes. My concern is not that the Internal Revenue Service will audit me or place a lien on my ramen stash. My concern is that years from now the press will find that I entered the sales tax on Amazon purchases on the wrong line and therefore conclude that I’m unqualified to advise the government on economic matters. My 1098-T form is no morass of complexity, but the numbers on it are counterintuitive. If my university has erred, the IRS probably would understand, but recent nomination controversy shows no tax issue is too obscure for public judgment. One of Timothy Geitner’s main indiscretion was failure to pay the employer’s portion of his Social Security Tax when the IMF classified him as a contractor. As an inveterate skimmer of Human Resources memoranda, I can cast no blame. The Associated Press, however, quoted critics questioning his competence because of this.

I remember one of my friends admitting that in elementary school she assumed mathematicians add and subtract really big numbers all day. A similar misconception seems at the root of why many link mastery of tax trivia with the ability to manage the Treasury Department. Fearing that those around me are unwilling to differentiate accounting and IO theory, I likely always will self-prepare my taxes lest I lose credibility with my neighbors. Are other fields subject to similar expectations? Are astronomers expected to recite mythological stories about the constellations? Are landscape architects shamed into mowing their own lawns? Are historians expected to know their genealogy?

More New Staff

Our younger brother will soon join us here at Temiandu Kuera, so a full generation of us will be writing. It will be like the Romney Five Brothers Blog, except we’ve dispatched ourselves to tier 1 research universities instead of early primary states and our father is not squandering millions on attack ads. Still, we'll share childhood stories and try to convince the world of our family’s honor.

By way of introduction, SA is now an astronomy undergrad. In high school, he was a Salutatorian, an All-Conference tennis player, and a national medalist in science competitions. Also, his Cantonese is mightily impressive for someone of his ethnicity.

Cabinet Diversity

Save one New Mexico governor (edited to add: and one former South Dakota Senator), it appears all of President Barack Obama’s Cabinet selections will be confirmed. The Cabinet is more racially diverse than the United States as a whole and far more diverse than the Senate that confirms it, but by some measures not as racially diverse as past Cabinets.

At least two advantages have led recent Presidents to consider demographics in the appointments. First, having a representative in the Cabinet helps a constituency to feel included in the government and in the nation. Second, a diversity of individuals might give rise to a diversity of ideas, something valuable to large organizations solving new problems.

For the latter purpose, I think educational backgrounds and work experiences are the most relevant forms of diversity. In a government full of JDs, among the Cabinet nominees are recipients of masters’ degrees in East Asian studies and international economics, English, architecture, and public administration. Two nominees have (non-jurisprudence) doctoral degrees: Robert Gates in Russian history and Stephen Chu in physics. Three nominees finished with BAs. The nominees’ work experiences are varied, and sometimes quixotic. Timothy Geithner has worked at the Treasury Department, the IMF, and the Federal Reserve Bank of New York. Arne Duncan played professional basketball in Australia before becoming the head of the Chicago Public Schools. Eric Shinseki was a general in the Army and Steven Chu a researcher at Bell Labs and Stanford. (Gen. Shinseki has a Purple Heart, Dr. Chu a Nobel Prize.) Ken Salazar has a law degree from Michigan, but also owned a Dairy Queen and a ranch. Senators and governors are overrepresented, but other nominees are new to government.

The Cabinet lacks a Southerner, a MBA recipient, a naturalized citizen, a Native American, a male librarian, a Libertarian, and proponents of countless perspectives. Still, if this pattern of real diversity extends into sub-Cabinet positions, the federal government could become an innovative and interesting workplace.

Sociologists win this time...

The Wall Street Journal reported Tuesday on the latest occupational ratings. The methodology included many subjective indices weighted by arbitrary coefficients. Average salary was an important factor and frequency of bending over also seemed important to CareerCast rankers. We here at Temiandu Kuera were nevertheless amused by the results: Sociologist rated 8th out of the 200 jobs ranked. Economist placed 11th, weighed down by a high Stress score. (Peculiarities in the work environment were not considered.) Astronomer was back at number 20, still in the top decile but below both Parole Officer (#14) and Paralegal Assistant (#17).

Scholarly occupations rated highly with Mathematician at #1, Biologist at #4, Historian at #7, and Sociologist, Economist, Philosopher, and Physicist all in the top 15. Academics rarely lift heavy objects and usually enjoy a safe work environment despite how toxic dry erase markers are. To those at CareerCast that seems like paradise.

Year in Review: 2008

Wrote thesis.
Cried.
Finished thesis.
Cried.
Defended thesis.
(Note-- no crying here)
Moved.
Cried.
Started another grad program.
(Results pending)

Trivial Pursuit

Question (difficulty level: hard): Which South American country speaks and spends Guarani?

Oh, the irony.

Four Ambitious New Year’s Resolutions

1. Go running before leaving for campus in the morning.
2. Earn the chili pepper on RateMyProfessors.com.
3. Compliment my classmates daily.
4. Resist whispering “Heresy!” when I hear false doctrine in church.