In an era where every day seems to bring a new article about banks doing silly things (liar loans are my current favourite), it’s refreshing to learn about a bank that’s actually doing something great. Unfortunately for those of us in North America, this bank is in India.
Technology Review has an article in this month’s issue - Upwardly Mobile - describing how banking is being brought to rural India. A lot of it was stuff I’d heard before; basically payments via cellphones (it’s been done in the Phillipines for a while). What was fascinating was this:
These women live in a village that is seven kilometers from the nearest bank. However, there’s a bank in that town that trusts a local woman (she’s the government’s representative for aid work) and has given her a special machine to extend banking to the village. The way it works is like this:
- She has a strong box where she stores money from people in the village
- When people want to deposit or withdraw money they sign into a special machine via their fingerprint
- The machine uses the cellphone network to send a message to the bank’s central computer
- The cash is issued from the strongbox and the user gets a receipt
The system isn’t perfect (what happens if everyone wants to withdraw at once?), but it solves the greatest need of the villagers: the ability to store sums of money for short periods of time. I thought it a very elegant solution; read the article to get an understanding of the impact this could have if it is scaled up across the entire country.
With all the news recently about the global financial crisis, some of you may be wondering, what happens when a bank fails? I mean, not all of us are lucky enough to be in towns with failing banks so that we can witness it with our own eyes. Fortunately, I live in New York and the banks here are dropping like flies, so I can give you an update.
If you’re JP Morgan Chase and you’ve bought Washington Mutual, you haven’t done too much. There’s a branch in my building at work and there’s nary a sign that it’s now part of JPM. Similarly, their website doesn’t really mention it either.
On the other hand, if you bought an investment bank that collapsed in ignominy, it’s a different story. Barclays is making sure that there are no doubts that there’s no more Lehman Brothers and it’s now Barclays:
For those of you who don’t live in the City of Disappearing Financial Institutions a.k.a. New York, you may be wondering what happens when, say, Washington Mutual or Lehman Brothers go bankrupt and get bought
Unless you live under a rock you’ve probably heard that Congress voted down Hank Paulson’s bailout plan and then the Dow lost 777 points. The fundamental question is: why was it voted down? There’s a lot of speculation that it’s due to the deal being unfair, it being too kind to Wall Street, etc., but I think there’s a more subtle issue.
I think the bailout failed in part due to a failure of metaphor. No one in the Administration came up with a nice metaphor to succinctly explain to the average American why they needed to buy assets they don’t understand to keep a tightly coupled complex system afloat.
The one I keep thinking of is the gas station analogy. The banks are the gas stations and credit is gas. If you run out of gas or it gets really expensive you’ve still got your car and it works but you can’t get anywhere or you end up taking the bus. Maybe this is too politically sensitive a metaphor in these days of $100 gasoline, but I think Main Street could be pursuaded to with a good metaphor (or simile).
In other news, here’s a great solution to the credit crisis.
I always get a kick out of stock analysts. It’s a weird job: you’re paid a lot of money to talk about an industry you’ve never worked in and model the future profits of companies you have no inside knowledge of. And on top of it all you have a profound impact on the companies’ share prices (having worked at two publicly traded corporations I can tell you that our CEO’s cared what the analysts said).
Most of the time it’s nothing new with these guys; they tend to exhibit herd behaviour. However, sometimes I’m surprised by what they say. Check out this recent article in the New York Times on Verizon. It’s all about the FiOS program (running fiber optic cable to houses to replace copper and provide practically limitless data transmission speeds) and whether it’s a good or bad idea.
The numbers thrown around are pretty substantial: Verizon’s spending $23 billion to roll this thing out, so lots of analysts are trying to figure out if it will make money. One of them states:
“If I were an auto dealer and I wanted to give people a Maserati for the price of a Volkswagen, I’d have some seriously happy customers,” said Craig Moffett, an analyst with Sanford C. Bernstein. “My problem would be whether I could earn a decent return doing it.”
Moreover, he figures they’ll be $6 billion in the hole at the end of the day. But who cares if Verizon loses money on this? They’ve already sunk four and half years of costs into this thing (the roll out started in 2003), so if you’re investing now, you stand to make a good return. This isn’t lost on Craig’s peers at Bank of America:
“If you are an investor today thinking about what the prospects of FiOS are tomorrow, you don’t look at what has been spent. You look at what needs to be spent,” Mr. Barden said. “The 2008 investors owe the 2003 investors a debt of gratitude because the 2008 Verizon is in a vastly better competitive position than it otherwise would be.”
So there you have it. Two analysts looking at the same stock. One saying it’s a waste of cash as it’ll never break even and the other saying that all the costs are sunk so it’s worth a lot more than people think.
Like I said, I always get a kick out of stock analysts.
I just finished listening to This American Life’s story on The Giant Pool of Money a.k.a. how the subprime mortgage fiasco became the credit crunch. It’s a fascinating story, made all the more real by their “man on the street” interviews. I highly recommend listening to it so you can get a taste of the ridiculous excess that led to where we are today.
