September ’17

The BAN Report: Equifax Under Attack / Inflation Too Low? / Irma Impact on Florida’s Economy / Dimon Trashes Bitcoin / Chemical Gets It-9/14/17

Equifax Under Attack

Last week, Equifax, announced a massive data breach impacting 143 million American consumers.

Equifax, one of the three major consumer credit reporting agencies, said on Thursday that hackers had gained access to company data that potentially compromised sensitive information for 143 million American consumers, including Social Security numbers and driver’s license numbers.

The attack on the company represents one of the largest risks to personally sensitive information in recent years, and is the third major cybersecurity threat for the agency since 2015.

Equifax, based in Atlanta, is a particularly tempting target for hackers. If identity thieves wanted to hit one place to grab all the data needed to do the most damage, they would go straight to one of the three major credit reporting agencies.

“This is about as bad as it gets,” said Pamela Dixon, executive director of the World Privacy Forum, a nonprofit research group. “If you have a credit report, chances are you may be in this breach. The chances are much better than 50 percent.”

Criminals gained access to certain files in the company’s system from mid-May to July by exploiting a weak point in website software, according to an investigation by Equifax and security consultants. The company said that it discovered the intrusion on July 29 and has since found no evidence of unauthorized activity on its main consumer or commercial credit reporting databases.

In addition to the other material, hackers were also able to retrieve names, birth dates and addresses. Credit card numbers for 209,000 consumers were stolen, while documents with personal information used in disputes for 182,000 people were also taken.

The US population is 326MM, and 24% are under 18, so that leaves almost 250MM Americans that have a credit profile, so it seems more likely than not that most people were impacted by this massive breach.   Senator Charles Schumer had some harsh words this week.

The Equifax Inc. data breach is “one of the most egregious examples of corporate malfeasance since Enron,” and the credit-reporting company’s chief executive officer and board should quit if they don’t act to address the situation within a week, Senate Minority Leader Chuck Schumer said Thursday.

It isn’t clear yet the extent of the breach, and what the hackers did with this information.   It’s hard to be sympathetic, as the credit bureaus for years have been known for sloppy behavior, and massive inaccuracies.

Inflation Too Low?

The Federal Reserve is grappling with a high-class problem: how can inflation and unemployment be so low at the same time?     Not surprisingly, the party poopers at the Fed are worried about this.

What looks like a dream economy could be a nightmare for the Federal Reserve chairwoman. Ms. Yellen’s worldview assumes that when unemployment is this low—4.4% in August—inflation should move up to the Fed’s target of 2%. Instead, it may have stabilized around 1.5%. That presents the Fed with some unpalatable options: deliberately overheat the economy for years to get inflation back up, then potentially induce a recession to stop it from overshooting; or give up on the 2% target, which could hobble its ability to combat future recessions.

This isn’t scaremongering: It’s the logical consequence of how central banks believe inflation operates. At the center of their model is the Phillips curve, according to which inflation edges lower when unemployment is above its natural, equilibrium level and putting downward pressure on prices and wages. Below that natural rate, also known as full employment, inflation crawls higher.

So, if the Fed continues to raise rates, could it push inflation even lower?     Inflation should be higher now, and the rate increases should be taming it.    There are three theories.

One is that the economy actually isn’t at full employment; either the natural rate has dropped or many unemployed aren’t being counted properly. But history and mounting reports of labor shortages militate against that.

The second, and Ms. Yellen’s preferred theory, is noise: One-off drops in prices such as for cellphone plans, prescription drugs and online purchases are masking the underlying trend. But one-off movements can’t explain years of undershooting. As Lael Brainard, a Fed governor, noted last week, some one-offs, such as drug-price hikes last year, must be pushing the other way.

That leaves the third explanation: Trend inflation has fallen. Until recently, Fed officials scoffed at the possibility. 

Pity the poor economists, as their beloved Philips curve may no longer be reliable.     Moreover, many have been preparing for a rise in rates that may never happen.

Irma Impact on Florida’s Economy

Hurricane Irma, which was fortunately less devastating than expected, caused significant damage to two important segments of Florida’s economy, tourism and agriculture.

Its citrus groves are littered with knocked-down fruit and felled trees. Beach hotels and restaurants are cleaning up after being shut for a week with forced evacuations. After the cancellation of hundreds of flights and numerous cruises, the state’s airports and seaports are just reopening. And on the Space Coast, home to the Kennedy Space Center, officials were still assessing potential damage and disruptions to launch schedules.

In the tourism magnet of Miami Beach, where the city’s roughly 22,000 hotel rooms stood virtually empty for a week, the lost revenue from that stream alone could top $25 million, according to city and industry tourism figures.

Losses in agriculture, the state’s second largest industry after tourism, are expected to be in the billions of dollars, according to the Florida Farm Bureau. In Okeechobee County in southern Florida, for instance, an informal evaluation cited by the Farm Bureau pegged the loss at $16 million.

Overall, the total economic cost of Irma, including property damage and lost economic output, could reach $83 billion, according to an estimate by Moody’s Analytics. That compares with a toll as high as $108 billion for Hurricane Harvey, which struck Texas last month, the firm said.

An executive at a beverage company told us that “due to the economics, we are evaluation 2018 business priorities and strategies, recognizing that some significant changes may be needed to correct against the crop shortage.”   Prices for orange juice, for example, could skyrocket.

As we discussed during Harvey, it will be weeks until the damages are quantified, and who is footing the bill?    Floridians have less home equity than Houstonians, but losses will be far more tied to wind damage, as opposed to the flood damage in Houston.     Nevertheless, we believe the long-term impact of natural disasters is generally positive after a short-term decline in output.

Dimon Trashes Bitcoin 

Jamie Dimon came out swinging this week against Bitcoin.

JPMorgan Chase CEO Jamie Dimon took a shot at bitcoin, saying the cryptocurrency “is a fraud.”

“It’s just not a real thing, eventually it will be closed,” Dimon said Tuesday at the Delivering Alpha conference presented by CNBC and Institutional Investor.

Dimon joked that even his daughter bought some bitcoin, looking to cash in on a trend that has seen it soar more than 300 percent this year.

“I’m not saying ‘go short bitcoin and sell $100,000 of bitcoin before it goes down,” he said. “This is not advice of what to do. My daughter bought bitcoin, it went up and now she thinks she’s a genius.”

In an appearance at a separate conference earlier in the day, Dimon said bitcoin mania is reminiscent of the tulip bulb craze in the 17th century.

“It’s worse than tulip bulbs. It won’t end well. Someone is going to get killed,” Dimon said at a banking industry conference organized by Barclays. “Currencies have legal support. It will blow up.”

Dimon also said he’d “fire in a second” any JPMorgan trader who was trading bitcoin, noting two reasons: “It’s against our rules and they are stupid.”

Predictably, Bitcoin prices plunged and are now down 25% since their September 1 high, due to Dimon’s comments and China’s steps to shut down exchanges.

Chemical Gets It

This week Chemical Financial, whose branch network swelled due to a series of accusation, announced a plan to slash branches.

The $19 billion-asset company disclosed in a regulatory filing Wednesday that it is in the process of closing 38 branches, or 15% of its network. It will also cut about 7% of its workforce, or roughly 235 jobs, by the end of this month. Among those leaving is Leonardo Amat, Chemical’s chief operating officer of business operations.

The effort should reduce annual expenses by $20 million, with some of the savings factoring into the bottom line in the fourth quarter. The cuts are in addition to the $52 million in annual expenses Chemical eliminated nearly a year ago in association with the Talmer deal.

Chemical said it plans to use some of the new savings to hire commercial lenders and pursue higher-yielding loans.

The company will incur a total of $18 million in charges during the third and fourth quarters, largely to cover severance and retirement expenses.

The latest initiative is “substantial,” Scott Siefers, an analyst at Sandler O’Neill, wrote in a note to clients, estimating that the targeted expenses represent about 5% of the company’s annualized core expense run rate.

We have complained for years that banks have been far too slow to adapt to changing consumer preferences, as branch visits have effectively free-fallen in the past decade.    Too many bank executives overestimate the value of their branch network and have not moved fast enough.    We think most banks could slash their branches from anywhere from 10-35%.    Kudos to new CEO David Provost for making a bold move

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