Fast Track Advisors LLC

A simple math lesson

Let's do a little math on off-shoring, the practice of moving jobs currently in the US to cheaper locations. One investment bank refuses to use the word "off-shoring;" they prefer the euphemism "wage arbitrage!"

The investment bank in question has announced it is moving 2,000 operations jobs off-shore in the next 5 years, primarily to India. This represents almost all their domestic operations positions. In India, the average comparable worker is younger, better educated and works harder. I have a lot of respect for these people. Generally, I have found them equal or better than the people they replace in terms of raw ability.

However; did I mention the jobs being moved are currently in New York City, a high-cost environment for this company to work in? The average position being "arbitraged" pays $200,000 in total compensation; it's replacement position in India pays just $20,000. The savings to the investment bank; $360 million per year when the transition is complete.

To sum up: 2,000 high-paying jobs lost, 2,000 families disrupted, $160 million lost from the federal treasury, $40 million lost from the state and city, and 2,000 residences in the tri-state area abandoned, putting downward pressure on prices and property taxes. Plus, I am not counting increased unemployment, crime or relocation costs. Nor am I factoring in the other jobs lost as the firms that support the domestic operations have to follow their customers to India.

Hundreds of millions, if not billions, in annual tax revenues will be lost so that the bank can make an additional $360 million, on which, by the way, it will pay no taxes due to the increased profits being invested in a series of trading partnerships. Who will make up the tax shortfall? Why us, the few remaining employed. Don't expect a "Thank you" card from the Managing Directors.

Financial services are one of the few businesses left where the US has a competitive advantage due to its free, open and broad capital markets. Eventually, these benefits will accrue to a select few, while the majority of the work is done offshore. Sound familiar?

Will the last operations professional in New York City please shut down the mainframes and servers? They won't be needed here anymore either.

Wal-Mart: Are Community Banks Next?

Is Wal-Mart getting ready to do to community banks what they did to community hardware, toy and clothing stores? It appears that way. Initially, the new Wal-Mart Utah Industrial Bank will only process credit card & check transactions, but why should the world's most aggressive low-cost provider stop there? How about a bank for employees? Later on, all those leased bank locations in the over 2,500 U.S. Wal-Mart stores could become Wal-Mart Banks. Overnight, Wal-Mart would be one of the largest retail financial service providers in the US.

The good news is that consumers might get a better deal. Plus, there are no small manufacturers to squeeze. But the mere size of Wal-Mart gives them financial economies of scale that your local bankers cannot provide. Say "goodbye" to local banks sponsoring local non-profits and local higher-paying banking jobs (loan officers, operations managers, presidents, etc. – tellers are already paid Wal-Mart-like salaries). Their ATM network will be bigger than yours. Eventually, many branches near Wal-Marts will close.

This outcome is inevitable. The Utah Industrial Banking license, used by many other manufacturers, retailers and even financial services firms, will soon be granted to Wal-Mart as well. Politicians will rant, lobbyists will lobby, but eventually, Wal-Mart Bank will be a reality. After founding the bank, what is stopping Wal-Mart Asset Management from selling and managing mutual funds? There is certainly excess fees and poor performance to be rung out of that industry.

Is your bank or financials services firm prepared to compete with Wal-Mart? The smart ones are. The others will be road kill under the Wal-Mart steamroller.

Would you rather be the CEO of a bank or a credit union?

Naïve people think that banks are big impersonal organizations and that credit unions are the cute and cuddly koala bears of the financial services industry. Very often, the common perception can be wrong.

Many credit unions, thanks to more liberal membership rules, have become multi-billion dollar behemoths that dwarf the local community banks in their area. The reasons for the tax-free status of credit unions has been long documented, and banks will continue to attack the perceived inequities that favor credit unions over banks. If a credit union competes and grows to the disadvantage of the local banks, perhaps the value proposition of the credit union is better received by consumers, no matter the current rules.

Recently, however, a more insidious development has grown out of the tax benefits of member-owned credit unions. Today, entrepreneurs are using credit unions as a vehicle for creating personal wealth.

How? They first get a state or federal credit union charter under the auspices of serving an "under-served" community of financial service customers. Are there really any under-served financial service communities left in the US today? I would be hard-pressed to name one. But no matter. Nether the feds or the states have the power to challenge the application, or even turn it down unless there is an egregious problem. The credit union raises some start-up capital, the applicant appoints a compliant board, and away they go.

The credit union opens up. It has higher costs than the local banks because it is new and smaller, but don’t worry, it will still be more profitable. It outsources all of its operations to a super credit-union called a CUSO, or credit union servicing organization, itself a very profitable business. There is a guaranteed margin, and of course, the credit union pays no taxes! Where do all those excess returns go? Why, into the pocket of the credit union president whose compliant board grants him or her most of the excess profitability in compensation. And, it's members be damned. In more and more cases today, the local credit union president is making more, much more, than the president of larger shareholder-owned banks. And who is subsidizing that wealth transfer? Why, you and I, because again, the credit union pays no taxes!

Congress is aware of this "sham" and the bank lobbyists work hard against it, but they will never prevail. Whether the head of the credit union regulatory organization (who is often paid near seven-figure salaries) is a former senator from New Hampshire or a former congressman from Florida, the credit unions always win. After all, it must be un-American (or at least un-Australian) to question whether letting the koala go extinct might be a good thing.