Red Lobster, Gone To Pot

Drive into any sprawling retail shopping area in the United States and there’s a good chance you’ll see a Red Lobster (or maybe an Olive Garden) in one of the outbuildings as you enter the parking lot. That may not be the case for much longer, because Red Lobster is teetering on the brink of bankruptcy.

What happened to Red Lobster, which was once a successful business? As is usually the case with corporate failures, it’s a complicated story, and it didn’t happen overnight. Often, it is the last bad decision that gets blamed–but in reality that decision is just the final domino to fall in a chain that began to topple long before.

In Red Lobster’s case, the bad recent decision was to make “endless shrimp”–which had been a promotion offered only for a limited time–into a permanent menu item. Red Lobster hoped that “endless shrimp” would attract more customers, but instead it just attracted people who consumed enormous quantities of shrimp. If you’ve ever planned a party and included a shrimp bowl, you know this result was entirely predictable. Some people just lose all control at the sight of a shrimp bowl and shamelessly load their plates or camp out at the bowl until every last shrimp is gone, before the ice in the bowl is melted. It’s hard to believe that anyone in the food business would not know this basic truth–but that apparent lack of management experience in the food business has been part of Red Lobster’s problem.

By any measure, the “endless shrimp” option was a disastrous decision–one that Red Lobster itself blamed for the company losing $11 million in the third quarter of 2023, followed by $12.5 million in losses in the fourth quarter. But, as the Business Insider article linked above shows, the shrimp fiasco was just the tip of the iceberg.

The roots of Red Lobster’s current struggles started long before, when a private equity firm bought the company, sold its real estate to create a quick return, then had the company enter into leases for that same property–leases that required rent payments that quickly became a drain on the company’s revenues. Add in the company being shifted around to different investor groups, changing customer tastes, a failure to adapt to new competition, and a tough economic environment, and you’ve got a recipe for a business poised to go into the (lobster) tank. .

The American economy is fast-moving, fueled by the ever-changing tastes and habits of American consumers. Past profitability is no predictor of future success, and a series of bad decisions, often caused by a desire for short-term gain, can lead to eventual doom–endless shrimp or not.

Fast Food Sticker Shock

Back in the ’70s, when I first began working as a “bag boy” at the Big Bear supermarket in Kingsdale Shopping Center in Upper Arlington, I would get off work on a Saturday afternoon, head to the nearest McDonald’s, and get a quarter-pounder with cheese, regular fries, and a Coke for pocket change. The prices were like those shown in the photo above, and the entire meal cost well under $2. That is true no longer–especially in California.

On April 1 California implemented a new minimum wage of $20–but only for fast food workers. That’s a hefty increase from the prior minimum wage for such workers, which was $16. No surprisingly, fast food chains responded by increasing the prices of their offerings. Since April 1, fast food prices have gone up an average of 10 percent–causing patrons of the restaurants to experience what the Wall Street Journal described as “sticker shock.” At Chick-fil-A, for example, the price of a spicy chicken sandwich has increased from $6.29 to $7.09. The price increases further increased the gap in prices between California, which already had among the highest fast food prices in the country, and states like Ohio.

At Chipotle, the increase in the fast food minimum wage represents about a 20 percent increase in its labor costs in the California market. That chain responded by increasing the prices of menu items across the board by 6% to 7% in its 500 California outlets. The new prices apply only in California, incidentally. One Chipotle fan posted that the same double steak bowl they get in Nevada for $17 now costs $39 (!) in California.

My fast food consuming days are behind me, I’d never pay $39 for something from Chipotle, and I don’t live in California, so I don’t expect to be much affected by what California is doing. It seems weird, however, that a minimum-wage hike would apply only to workers in one specific part of the economy. It makes you wonder if, under the guise of providing a “living wage” in what used to be an entry-level job for kids who still lived with their parents, California–which isn’t shy about trying to legislate healthy living and environmentally friendly activities, isn’t actually trying to get people to eat less fast food thanks to the price hikes.

If so, I expect California might be in for a surprise. Some people will shy away from the higher prices for a burger and fries, and some will grit their teeth, pay the higher prices, and complain about it. But don’t expect fast food restaurants to sit idly by while California legislators and regulators mess around with their price points. Expect California to see new experiments in self-serve ordering, robotic workers, and other activities that can restrain escalating labor costs. The workers who are currently getting $20 an hour for flipping burgers may soon find themselves out of a job.

Full Service

Yesterday we went to a retail establishment looking to purchase some important items that were outside the norm of our standard purchases. We picked a specialty shop that featured the items and were soon helped by a knowledgeable and attentive salesperson. She went through the different options, carefully explained how the items worked, gave us helpful demonstrations of different features, and patiently answered a bunch of our questions.

We weren’t rushed, and we weren’t pressured to make a purchase. To the contrary, our salesperson conveyed that she understood that we were making a significant decision, respected that fact, and just wanted to be as helpful as she could be. Her explanations helped to clarify the options and ultimately made our decision an easy one.

There aren’t many stores that have salespeople on the floor anymore. Most retail operations that used to employ salespeople–like the shoe stores of days gone by–have long since gone to self-serve models. Self-serve makes sense when you are talking about pumping gas, or buying items at the grocery store, buying new sneakers, or in many other everyday settings. In those places, you probably don’t need–or want–a salesperson dogging you as you make your choices. But when you are making a decision on whether to buy something significant that you are unfamiliar with, it sure helps to have a friendly salesperson to help you in the process.

I’m sure we could have gone to many “superstores’ to shop for the items we were looking for yesterday, sifted through the offerings, and made a decision on our own. But having more information and getting our questions answered by someone who knew what they were talking about certainly made us more comfortable and confident in our ultimate decision, and I think resulted in a better decision than we would have made otherwise. I’m glad there are still full-service stores out there, with capable salespeople ready to help their shoppers.

NYC’s “Congestion Pricing” Proposal

New York City has come up an interesting approach to trying to ease congestion on Manhattan’s famously jammed streets: the Metropolitan Transportation Authority (“MTA”) has proposed assessing a fee on people who drive into the city’s core business area. The congestion pricing proposal would charge commuter cars $15 a day for entering the Central Business District below 60th Street, place a surcharge on cabs and for-hire vehicles, and charge trucks from $24 to $36.

The MTA says the proposal will generate billions of dollars in revenue that will be used to modernize New York’s aging subway system. The MTA is accepting comments and will hold virtual and in-person hearings on the plan, which is considered the first “congestion pricing” plan to be proposed by an American city. The comment period will extend until March 11. 

Some people in the area aren’t waiting for the hearings and comment period to voice their opposition to the plan. Several lawsuits have been filed, including a recent lawsuit by Lower East Side residents who say the plan will have a devastating environmental impact on their neighborhoods. Other objections to the plan have been voiced by elected officials who represent constituents in NYC “transit deserts,” where there are no viable public transit options and commuting by car therefore cannot be avoided, while others question the MTA’s ability to carefully spend the billions of dollars it forecasts will be generated by the fees.

The MTA says a thorough environmental analysis has been done; opponents say it was a rubber stamp of the proposal. You also have to wonder just how the MTA can accurately forecast what the impact of the fees will be. Manhattan’s commercial real estate market has been devastated already by the COVID pandemic and the shift to work from home policies; making those who are commuting to work pay $75 a week for the privilege of driving on Manhattan’s clogged arteries isn’t going to help that trend. Moreover, if more businesses shift to remote work approaches because employees don’t want to pay the added commuting costs, how is that going to affect the viability of the restaurants, bars, and storefronts that are key elements of the NYC economy? 

That distinct possibility makes you wonder whether the MTA forecasts of billions of dollars in revenue are actually going to be realized, or are based on assumptions about commuting that will prove to be baseless in the face of changes that companies and their employees might implement in response to the tax. And even if significant revenue is generated, given the cost overruns we’ve seen in large-scale American public works projects, can New Yorkers really count on the MTA to spend the money wisely and complete subway update projects on time and on budget, without concerns about politicized sweetheart deals, inefficiencies, disruption, and delays?

We’ll see how this all plays out, but for now I know one thing: I’m glad I don’t live in a city where I’m taxed for simply going to work.

A New Method For Manipulation

People have been trying to manipulate financial markets and make a quick buck ever since financial markets were first created. The concept is so ingrained in our economic culture that it became part of the plot of a funny movie, Trading Places. But last week we saw a new approach to market manipulation, updated to the internet age.

On January 9, a tweet appeared on the X (formerly Twitter) account for the Securities and Exchange Commission that stated: ”Today the SEC grants approval for #Bitcoin ETFs for listing on all registered national securities exchanges.” The financial markets quickly reacted to the announcement about the SEC’s approval of Bitcoin exchange-traded funds, resulting in millions of dollars of activity. There was only one problem: the tweet wasn’t true. Some malicious actor gained access to the SEC’s X account, published misleading information, and presumably made some money as a result. 

It isn’t clear what happened here; people initially assumed that the SEC account had been hacked, but the SEC’s chairman has said: ”While SEC staff is still assessing the scope of the incident, there is currently no evidence that the unauthorized party gained access to SEC systems, data, devices, or other social media accounts.” That’s not exactly reassuring, because if a hacker didn’t send the phony message, some “authorized” person must have. And after the incident occurred, the X platform stated that the SEC had for some reason decided not to use two-factor authentication on its account, which would have required any user to verify their identity through two inputs and might have prevented the fake tweet.

Congress is looking into what happened here–as it certainly should. Financial markets are delicate and reactive, and too many people have too much money at stake to take any manipulation attempt lightly. If you are going to make important announcements via tweet, then obviously basic security techniques, like two-factor authentication, should be used. 

But lawmakers and the SEC might also consider a more basis issue–how should important decisions that might affect the markets be announced? Is a tweet, with the attendant risks of misuse by “authorized” or “unauthorized” persons, really the best way to disseminate a key decision? Would it make sense, from a security standpoint, to go back to the days when such announcements were made by real, known authorized people at a briefing at a governmental location that has been scheduled in advance for that specific purpose? That might be slower and more old-fashioned, but it is a lot harder to fake.

Airbnb And Airbnbust

One of the big changes in our new, gig-oriented economy is the movement of tourist dollars from well-known locations chock full of hotels to less well-known places where a traveler can stay in a rental unit secured through Airbnb or vrbo. The renter gets to see a new area, the new area enjoys more tourist spending than it would have received otherwise, and the landlord gets the rental income.

So far, so good. But what happens when Airbnb rentals virtually take over a town?

Business Insider has an interesting article about that phenomenon in Hochatown, Oklahoma, a town of less than 300 permanent residents located on Broken Bow Lake about three hours from Dallas, Texas. Before the pandemic, there were 400 rentals in the Hochatown area, now there are 2,400.

The town seems to welcome the influx of travelers. It collected $456,000 in tax revenue associated with rental users in September, and hopes to hit $1 million a month in the future. But the town needs to spend money to accommodate the visitors, including paving roads, shoring up its water supply, and figuring out whether it needs to employ professional police, firefighters, and garbage collectors. And you wonder how many of the permanent residents wonder wistfully whether the increase in tax revenue generated by all of the visitors to the area during the tourist season is worth the changes to the lifestyle they once had.

It’s a bit of a mixed bag for rental property owners, too. At first, sale prices of properties in Hochatown shot up. One property sold for $590,000 in 2020, $1.1 million in 2021, and then was listed again in 2022 for $1.299 million–but it hasn’t sold, and now the asking price has been cut to $899,000. Rental owners are fearful that, as new rental options come on line, the supply of rentals may be exceeding the demand–a situation some call an “Airbnbust.” The people who got in late may be looking at a haircut.

Hochatown is not alone in facing these issues. At quaint and scenic locations across the country, many people hope to make extra cash through rentals. It works for some; others realize they don’t like the hassles of booking visitors, dealing with cancellations, cleaning up after departed guests, and addressing damage that might be left behind. And some towns are limiting rentals because of the impact on the local lifestyle. But underlying it all is the question of whether notoriously fickle Americans might change their minds and decide they want to go somewhere else for their vacation. The risk is that you might end up with expensive roads and infrastructure–and lots of vacant cabins.

The Treasury Bond Rout

If you don’t think inflation is really that big of a problem, here’s something that might make you think again: since March 2020 U.S. Treasury bond market has experienced an historic sell-off that is approaching the drops the stock market sustained during the dot.com and Great Recession crashes. During that time period, Treasury bonds with maturities of 10 years or more have fallen 46 percent, and the 30-year bond has fallen 53 percent. Those numbers are comparable to the 49 percent dot.com bubble stock market drop and the 57 percent freefall in the stock market in the midst of the Great Recession.

People always seem to pay less attention to the bond market than the stock market, so this collapse may not have hit your news feed–but there are important real-world causes and consequences. The principal cause is obvious: inflation continues to be a problem, with rising oil prices leading the way. The Federal Reserve has responded to the inflation in the economy by raising interest rates by more than 5 percent over the past year and a half, and the Fed has indicated that it will maintain its high interest rate, restrictive monetary policy approach for the indefinite future, until inflation gets back down to the Fed’s 2 percent target. Current data has inflation at just under 4 percent.

What does it all mean? The fall in bond prices means an increase in bond yields, which is likely to lure at least some investors from the uncertainties of the stock market to the bond market–which means the “invisible hand” will put pressure on stock prices. It means it will be more expensive to borrow money, whether to buy a car or to carry a balance on your credit card. And mortgage interest rates are leading the way, with 30-year fixed rates recently hitting their highest level in 21 years. That’s not good news if you are a young person looking to buy your first home.

In short, the lesson is pretty simple: inflation isn’t something to be pooh-poohed. Keep an eye on that usually quiet U.S. Treasury bond market. It’s like the canary in the coal mine.

Laying The Nest Egg

One of the hardest lessons to learn when I was a young person and just beginning my career was the value of immediately saving money for retirement. At the starting salary level, money is so tight, the amounts that can be put toward retirement are so small, and the earliest possible retirement is so far into the future, it’s easy to rationalize deferring the commencement of retirement savings until next year–or the year after that. And even if you do follow the advice of retirement planners when you are in your 20s, the periodic reports of the balance in your retirement fund show very small amounts and very modest increases, and you wonder if you will ever get to the point of having enough for retirement.

But if you keep your head down, and keep at it, and make that monthly contribution standard practice–and, hopefully, you see the benefits that can come when your retirement fund is boosted by a few good years in the stock market–you realize that your elders were right. As the likely date for retirement draws nearer and nearer, and the end of your work career comes increasingly into focus, you see the value of those modest payments you made way back when–and even more important, the value of checking the box to start that retirement plan withholding and then accepting those regular paycheck deductions in the first place.

That’s why it is sad for me to see a report on CNN about falling 401(k) balances. The latest annual report by Vanguard, an investment firm that manages retirement plans for millions of people, states that average 401(k) balances fell from $141,542 in 2021 to $112,572 in 2022. That’s a 20 percent decrease, caused largely by the poor performance of the equity and fixed income markets last year. Even worse, the median balance in 401(k) plans–the median being the point at which half of all plans have a higher balance, and half have a lower balance–fell from $35,345 in 2021 to $27,376 in 2022. And most troubling of all, the number of people who are making hardship and non-hardship withdrawals from their retirement savings accounts increased, too. Those people are eating their seed corn.

From these statistics, it’s not hard to imagine the people starting out in these careers seeing their retirement fund balances go down, feeling dispirited, and wondering whether the immediate sacrifice is worth the hoped-for future gain–or whether it wouldn’t be better to just use the money now, when times are tight. I hope those individuals have people in their lives who can advise them that a little belt-tightening now will pay significant dividends later, and that you need to take the long-term view, and recognize that the markets will have down years and up years. It’s wise not to become too exuberant during the flush times and too despondent during the down times.

As any hen would tell you, laying a nest egg is hard work. But if you start early, and keep at it, you’ll be surprised at what you can accomplish. Your older self will thank your younger self for the sacrifice and for being the ant, and not the grasshopper.

The $6 Billion Team

Yesterday the parties to the transaction announced that a new ownership group would be buying the Washington Commanders, a National Football League team. The announced price tag for the transaction is a staggering $6.05 billion–a new record for the sale of a professional sports team. The proposed deal now goes to NFL owners for approval,

The Commanders have been pretty dismal lately. The team hasn’t won a playoff game in 18 years, and the franchise, and its owners, have been mired in controversy. Nevertheless, the eye-popping $6.05 million price tag for the team blows the previous record for an NFL team–set by the 2022 sale of the Denver Broncos for $4.65 billion–out of the water. If you’re an NFL owner, you’d presumably be highly motivated to approve the proposed sale, if only to establish a new comparable that can be cited when you decide you are ready to cash in and put your team on the market. If an underperforming team like Washington commands that kind of price, just imagine how much might be paid for more successful franchises, like the Kansas City Chiefs or the New England Patriots?

In case you’re interested, the group that is selling the Commanders paid $800 million for the Washington pro football franchise in 1999. In less than 25 years, the market value of their ownership interest has increased by a factor of more than six–and that doesn’t account for any amounts the ownership group has received from TV contracts, ticket sales, and merchandising deals during the period of their ownership. Seeing the market value of an investment increase more than six times is a pretty good return.

It’s not just NFL teams that have been gold mines at the auction block lately, either. The $6.05 billion price tag for the Commanders edges out the prior record for a professional sports team, which was $5.3 billion paid for the Chelsea F.T. club in the English Premier League last year. Billions of dollars also have been paid for teams in the NBA and Major League Baseball over the past few years.

So, there’s no doubt that professional sports teams have been a pretty good investment recently–but you wonder how long this can last, and whether we’re simply witnessing a huge sports franchise bubble, like the crazed spike in home purchases that helped produce the sub-prime mortgage collapse that led to the Great Recession, or the infamous Dutch tulip market bubble in the Netherlands in the 1600s. It’s not as if sports franchises have lots of tangible assets or obvious intrinsic value, and the continued success of the NFL, which has been bedeviled by concerns about concussions and general player safety problems, among other issues, is by no means assured.

At some point, will liability concerns cause regulation of the sport that changes it so significantly that its current broad appeal falls off–and the owners who paid billions to sit in the owners’ box and wear gear with team logos are left with a stadium, some player contracts, and logos for merchandise that no one wants to buy? If that happens, the ownership of the Commanders could end up being like possession of a fistful of costly and unwanted tulip bulbs in Amsterdam centuries ago.

Back To The Buffet

Some people thought that COVID-19 would mean the demise of the all-you-can-eat buffet. That was a reasonable prediction, because pandemics and social distancing aren’t really compatible with a business concept that puts strangers in close proximity, shuffling through buffet lines and using the same implements to dig into common platters of food. And, in fact, some buffet chains went out of business in response to COVID restrictions.

But now, apparently, buffets are back, and in a big way. The three largest buffet chains–Golden Corral, Cicis, and Pizza Ranch–are reporting growth that is leaving other kinds of restaurants at the end of the line. The sales at those three chains in March were up 125 percent from January 2021, and Golden Corral’s sales last year had increased 14 percent from pre-pandemic levels. The demand for all-you-can-eat buffets is so strong that Golden Corral has plans to eventually add another 250 locations in the U.S.

Why are people flocking to restaurants where they will be dealing with sneeze guards and warming tables groaning with food? The economy is a big part of the reason. All-you-can-eat buffets are seen as an inexpensive way to have a big meal out–with chocolate pudding for dessert, too!–and the chains cater to customers whose income is below the national average. With inflation and rising food costs causing people to feel economic strains and search for value, a trip to an all-you-can eat buffet restaurant helps to stretch the family food dollar. That notion resonates with me, because I remember going with friends to the Swedish Buffet in Columbus when I was a cash-strapped college student and the buffet allowed for maximum food consumption at a minimum price.

The surging popularity of buffets is another sign that Americans are over the pandemic–or at least are willing to accept the risk of infection in search of a bargain and a full stomach.

The Demise Of The Cheap Car

One of the first cars I ever drove was a brown Ford Maverick. The Mav, shown in a sales poster above, looked pretty good, seated four people reasonably comfortably, got decent gas mileage, and had a bit of get up and go to it. Marketed as “the simple machine,” the Ford Maverick retailed for $1,995. It was one of many examples of the cheap cars that were available at low end of the automotive market.

There aren’t many cheap cars left. In fact, if you are a cheapskate like me, you’d say there are none. The average price paid for a new car in March 2023 was a stunning $48,008, according to the Kelley Blue Book. In fact, only three cars on the market sell for less than $20,000, and the cheapest of those–the Nissan Versa sedan–is listed at $16,925. The cheapest new vehicle offered by one of Big 3 American manufacturers is the 2024 Chevy Trax SUV, which is offered at $21,495. In effect, Ford, GM, and Chrysler have turned away from the affordable car end of the market, where they used to offer cars like the Maverick.

Why isn’t Detroit competing for the buyer looking for cheap cars? Part of the reason is inflation, of course, and some of the cost increases are due to safety features and expensive gadgetry that would never have been added to stripped-down cars like the Maverick. In large part, however, the reason is simply that car manufacturers find it a lot more profitable to build vehicles–primarily SUVs and pick-up trucks–that are loaded with bells and whistles and high-end features and that retail in the upper five-figure range. That’s what is driving up the average price of new cars to that mind-blowing $48,008 number.

Can it really be that there are not budget-conscious young people out there who want to save up their hard-earned wages, make a down payment, and buy a brand-new “simple machine,” like the Maverick, that gets them from point A to point B, without all the bells and whistles, for an affordable price? I find that hard to believe. As it is, that segment of the market must forsake their chance to take deep breaths of that wonderful new car smell, and focus on the used car market instead.

The Fed Looks In The Mirror

Yesterday the Federal Reserve issued an interesting report on the collapse of the Silicon Valley Bank. The most interesting part of the report is its conclusion that the Fed, itself, was partly to blame for the bank’s failure.

To be sure, the report concluded that the primary cause of the downfall of SVB was mismanagement by the bank. SVB had an increasing amount of uninsured deposits–which made it especially prone to the panicky, social media-driven bank run that brought the bank down–and inadequate safeguards against a sudden change in interest rates. The report noted that executive compensation at the bank was tied too closely to short-term profits and the SVB stock price, whereas there were no pay incentives tied to sound risk management and the bank had no chief risk officer during a period when the bank was growing quickly.

But the Fed report also determined that it was partly to blame, too. The report noted that regulators were slow to recognize the problems at SVB and, once those problems were identified, did not effectively press SVB management to change its approach to the issues and lower the bank’s risk profile. A separate report by the FDIC similarly noted that its oversight was not as rigorous as it should have been. According to the Fed report, the passive approach was due in part to recent efforts to loosen regulation of banks, like SVB, with assets of less than $250 billion. As the news article linked above demonstrates, the report is sure to touch off a renewed banking regulation/deregulation debate.

While that never-ending debate rages, the key question to be addressed at this point is: who will be held accountable for the losses sustained by the taxpayer in insuring accounts above the previously identified $250,000 limit and otherwise addressing the rotten fruits of SVB’s mismanagement? The compensation of SVB’s executives soared during the years immediately before the collapse, as the bank followed its risky course, and the bank’s CEO also made millions in SVB stock sales over the past few years. Wil bank officers be required to contribute to cover the losses? And will the regulators who didn’t vigorously push for changes in bank practices after identifying problems keep their jobs?

Waiting For The Axe To Fall

McDonald’s recently announced that it would be implementing layoffs. Earlier this week, it temporarily closed its U.S. corporate headquarters, in Chicago, and asked all HQ employees to cancel in-person meetings and work from home as the company distributed layoff notices. It isn’t clear how many employees will be laid off; world-wide, McDonald’s some 150,000 employees in corporate roles and working in company-owned restaurants.

According to an internal email obtained by the news media, McDonald’s told employees it was distributing layoff notices remotely to ensure the “comfort and confidentiality” of its employees. In short, McDonald’s evidently believes that employees would rather wait for the axe to fall and then react privately at their homes, rather than hanging out for the possible visit from the Grim Reaper in the office, with their fellow corporate employees.

I’m not sure that is the case. If I knew my job was potentially on the chopping block, I would rather wait for the news coming down from the C suite in the office, with my co-workers. Being alone at home and wondering if every ping announcing a new email was the one that would determine your fate would be too nerve-wracking. At least if you were at the office, you would have some company while you bided your time, and as the news was distributed you’d have a better sense of who got the pink slip, and how widespread the distribution was in your area. That way, the Band-Aid would be ripped off, everyone would know the news, and people wouldn’t have to come into the office the following Monday and repeatedly, and sheepishly, announce their fate as they encountered their individual co-workers.

The McDonald’s news is interesting, and not just because of its decision to briefly close its corporate offices while layoffs are announced. McDonald’s net income has increased recently, but the company’s CEO thinks its structure and organization are outdated, and he says that “we will evaluate roles and staffing levels in parts of the organization and there will be difficult discussions and decisions ahead.” Some wonder whether the layoffs at McD’s are part of an ongoing “white-collar recession,” as companies that are pessimistic about the current economic outlook get rid of corporate jobs while retaining production-level workers.

Who knows? If we are in the midst of a “white-collar recession,” we may see a lot more companies having to make decisions, as McDonald’s did, about where employees should be as they wait to hear about their jobs.

Bailouts/Non-Bailouts

As the fallout continues from the abrupt collapse of the Silicon Valley Bank and the closure of Signature Bank, the federal government’s response to those developments raises some serious questions.

Over the weekend, the Federal Reserve, the Treasury Department, and the Federal Deposit Insurance Corporation announced that all of the depositors in SVB and Signature Bank will be repaid in full, even if they kept more than the $250,000 federal deposit insurance limit in their bank accounts. In addition, the Fed announced that it would offer banks loans against the face value of their Treasury bills and notes and other holdings, even if inflation has eroded the actual worth of those investments.

The government contends that these actions don’t represent a “bailout,” technically, because the banks have been closed and those who owned stock in the banks will lose the value of those investments–but the actions sure smell like a bailout to many people. Some will praise the government for acting swiftly to avoid a potential panic and runs on other banks, but others will wonder about where we now draw the line on the full faith and credit of the U.S. government being employed in the wake of a bank collapse and whether the government’s action was motivated, even in part, by the fact that powerful people in California and elsewhere apparently had relationships with the banks.

President Biden, quoted in the Times article linked above, made an important point when he said that investors in the two banks “knowingly took a risk, and when the risk didn’t pay off, investors lose their money. That’s how capitalism works.” That is unquestionably true, but those who kept more than $250,000 in the banks also took a risk, because $250,000 is the limit for federal deposit insurance. Why should those people and entities be protected against what was a known, avoidable risk? And if the U.S. government is making every depositor whole, what is the point of having an announced limit for federal deposit insurance? Does this mean that, from now on, every depositor will be protected in full, irrespective of how much they have in their accounts? If not, what’s the distinction? And doesn’t this decision encourage risky practices by depositors and banks?

Left unsaid at this point is how the federal government is going to pay for acting as a backstop–again–for troubled banks. Banks have to be permitted to fail, and depositors have to understand that there is risk in going over announced deposit insurance limits. Otherwise, there is no point to having announced limits, and we are left in the untenable position of the federal government insuring every dollar deposited in a bank.

The Pulverizing Power Of Panic

Yesterday a bank failed. Silicon Valley Bank, one of the most prominent lenders to the tech industry and the 16th largest bank in the country, was shut down by the California Department of Financial Protection and Innovation, and the Federal Deposit Insurance Company took over operations as the bank’s receiver. The collapse of SVB is the second largest bank failure in U.S. history.

Bank failures are never pretty. They often recall Ernest Hemingway’s famous observation that there are two ways to go bankrupt: “gradually, and then suddenly.” Banks operate on a foundation of trust in their stability and integrity, and when that foundation is undercut, failure can occur with breathtaking speed. That appears to be what happened with SVB.

As an interesting CNBC article recounts, SVB’s downfall took less than two days. On Wednesday, the bank advised investors that it needed to raise $2.5 billion. At that point, the bank was apparently still reasonably well capitalized; at the end of December, it reported $209 billion in assets and $175 billion in deposits. But underlying issues with the American economy had caused some start-up depositors to withdraw their assets to stay afloat, the bank found itself short of funds and was forced to sell the bonds it had available for sale at a loss, and when it announced it needed to raise additional funds the blood was in the water. The bank’s stock price plummeted, the tech investment community spread the word that deposits should be removed from the bank, and customers withdrew an astonishing $42 billion in less than 48 hours, leaving the bank with a negative cash balance of $958 million. With the bank insolvent and unable to find a buyer, regulators stepped in.

The CNBC article quotes one fintech investor as saying that the failure of SVB was “a hysteria-induced bank run” caused by venture capital firms. That’s often what happens–and the sad thing is that the people who panic, withdraw their funds, and precipitate bank failures usually end up safe, whereas the people who leave their money in the bank and trust that all is well often end up sorry. In the case of SVB, the people who kept their deposits in the bank will now have to deal with the FDIC, which insures deposits up to $250,000 per depositor. If you’re someone who had more than $250,000 on deposit at SVB, you might well find yourself out of luck.

For all of our thin veneer of civilization and sophistication, people are still prone to panic–especially panic about money. Let’s all hope that the failure of SVB, coming on the heels of cryptocurrency collapses and other recent negative financial developments, doesn’t provoke a stampede.