Wal-Mart, Home Depot Come Under Fire Over Banking Plans

Small businesses will suffer if large retailers open their own banks, critics told a congressional committee.

Recent bids by Wal-Mart, Home Depot, and other big retailers to open their own banks are a threat to the nation's banking system and will hurt small business, independent bankers told Congress on Wednesday.

"The financial system's safety and soundness, integrity, and ability to serve local communities and small businesses are all at great risk," Terry Jorde, chairman of the Independent Community Bankers of America, a Washington-based trade group, said during a hearing with the House Subcommittee on Financial Institutions and Consumer Credit.

The hearing was called to examine a recent surge in applications for so-called industrial loan charters, or ILCs, which allow retailers, auto companies, and other non-financial companies to operate state-chartered banks.

Jorde and other critics say industrial loan charters undermine a long-standing policy to keep commerce and banking apart, setting up a clear conflict of interest.

A bank owned by Home Depot, they say, could deny home-improvement loans to customers who buy hardware from other stores, while giving its own costumers favorable rates -- putting unfair pressure on smaller competitors.

Retailers say banks operated by large retailers simply offer good customer service and are governed by the same strict regulations as any other financial institution.

A bipartisan House bill introduced earlier this week would sharply limit non-financial companies from entering the banking business.

About 60 commercial businesses, including Target, Volkswagon, and General Electric, currently offer banking services through industrial loan charters, together managing some $155 billion in assets -- compared to just $11 billion a decade ago, according to the Federal Deposit Insurance Corporation.

At least 14 other companies have pending applications with the agency.

Home Depot, which applied with the FIDC to acquire EnerBank, an industrial-loan bank in Salt Lake City in May, claims the move is aimed at boosting customer service by allowing contractors to offer home-improvement loans directly to clients.

The FDIC has yet to rule on the application.

"Affiliations between commerce and financial institutions have always existed," John Douglas, a lawyer representing the American Bankers Association, told members of the committee.

Douglas said industrial banks are subject to the same regulations as regular banks, and that the "existing framework is adequate."

On Tuesday, Reps. Barney Frank (D-Mass.) and Paul Gillmor (R-Ohio) co-sponsored a bill that would prevent companies earning less than 85% of gross revenue from financial services from receiving deposit insurance, which states typically require before issuing an industrial loan charter.

Trading Through A Market Maker Vs. An ECN

The foreign exchange market (forex or FX) is an unregulated global market in which trading does not occur on an exchange and does not have a physical address of doing business. Unlike equities, which are traded through exchanges worldwide, such as the New York Stock Exchange or the London Stock Exchange, foreign exchange transactions take place over-the-counter (OTC) between agreeable buyers and sellers from all over the world. Because this network of market participants is not centralized, the exchange rate of any currency pair at any one time can vary from one broker to another. (To get a complete overview of forex, see The Forex Market and A Primer On The Forex Market.)

The main market players are the largest banks in the world, and they form the exclusive club in which most trading activities take place.This club is known as the interbank market. Retail traders are unable to access the interbank market because they do not have credit connections with these large players. This does not mean that retail traders are barred from trading forex; they are able to do so mainly through two types of brokers: markets makers and electronic communications networks (ECNs). In this article, we'll cover the differences between these two brokers and provide insight into how these differences can affect forex traders. (To continue reading on this subject, see The Foreign Exchange Interbank Market, The Global Electronic Stock Market and Electronic Trading Tutorial.)

How Market Makers Work
Market makers "make" or set both the bid and the ask prices on their systems and display them publicly on their quote screens. They stand prepared to make transactions at these prices with their customers, who range from banks to retail forex traders. In doing this, market makers provide some liquidity to the market. As counterparties to each forex transaction in terms of pricing, market makers must take the opposite side of your trade. In other words, whenever you sell, they must buy from you, and vice versa.

The exchange rates that market makers set are based on their own best interests. On paper, the way they generate profits for the company through their market-making activities is with the spread that is charged to their customers. Spread the difference between the bid and the ask price, and is often fixed by each market maker. Usually, spreads are kept fairly reasonable as a result of the stiff competition between numerous market makers. As counterparties, many of them will then try to hedge, or cover, your order by passing it on to someone else. But there are also times in which market makers may decide to hold your order and trade against you.

There are two main types of market makers: retail and institutional. Institutional market makers can be banks or other large corporations who usually offer a bid/ask quote to other banks, institutions, ECNs, or even retail market makers. Retail market makers are usually companies dedicated to offering retail forex trading services to individual traders.

Pros:
The trading platform usually comes with free charting software and news feeds. (For related reading, see Demo Before You Dive In.)
Some of them have more user-friendly trading platforms.
Currency price movements can be less volatile compared to currency prices quoted on ECNs, although this can be a disadvantage to scalpers.
Cons:

Because they may trade against you, market makers can present a clear conflict of interest in order execution.
They may display worse bid/ask prices than what you could get from another market maker or ECN.
It is possible for market makers to manipulate currency prices to run their customers' stops or not let customers' trades reach profit objectives. Market makers may also move their currency quotes 10-15 pips away from other market rates.
A huge amount of slippage can occur when news is released. Market makers' quote display and order placing systems may also "freeze" during times of high market volatility.
Many market makers frown on scalping practices and have a tendency to put scalpers on "manual execution", which means their orders may not get filled at the prices they want.
How Electronic Communication Networks or ECNs Work
ECNs pass on prices from multiple market participants, such as banks and market makers, as well as other traders connected to the ECN, and display the best bid/ask quotes on their trading platforms based on these prices. ECN-type brokers also serve as counterparties to forex transactions, but they operate on a settlement rather than pricing basis. Unlike fixed spreads, which are offered by some market makers, spreads of currency pairs vary on ECNs depending on the pair's trading activities. During very active trading periods, you can sometimes get no ECN spread at all, particularly in very liquid currency pairs such as the majors (EUR/USD, USD/JPY, GBP/USD and USD/CHF) and some currency crosses.

Electronic networks make money by charging customers a fixed commission for each transaction. Authentic ECNs do not play any role in making or setting prices; therefore, the risks of price manipulation are reduced for retail traders. (For more insight, see Direct Access Trading Systems and the Electronic Trading tutorial.)

Just like with market makers, there are also two main types of ECNs: retail and institutional. Institutional ECNs relay the best bid/ask from many institutional market makers such as banks, to other banks and institutions such as hedge funds or large corporations. Retail ECNs, on the other hand, offer quotes from a few banks and other traders on the ECN to the retail trader.

Gravity Measurements Help Melt Ice Mysteries

                           Greenland is cold and hot. It's a deep freezer storing 10 percent of Earth's ice and a subject of fevered debate. If something should melt all that ice, global sea level could rise as much as 7 meters (23 feet). Greenland and Antarctica - Earth's two biggest icehouses - are important indicators of climate change and a high priority for research, as highlighted by the newly inaugurated International Polar Year. Just a few years ago, the world's climate scientists predicted that Greenland wouldn't have much impact at all on sea level in the coming decades. But recent measurements show that Greenland's ice cap is melting much faster than expected. These new data come from the NASA/German Aerospace Center's Gravity Recovery and Climate Experiment (Grace). Launched in March 2002, the twin Grace satellites circle the globe using gravity to map changes in Earth's mass 500 kilometers (310 miles) below. They are providing a unique way to monitor and understand Earth's great ice sheets and glaciers. Grace measurements have revealed that in just four years, from 2002 to 2006, Greenland lost between 150 and 250 cubic kilometers (36 to 60 cubic miles) of ice per year. One cubic kilometer is equal to about 264 billion gallons of water. That's enough melting ice to account for an increase in global sea level of as much as 0.5 millimeters (0.019 inches) per year, according to Isabella Velicogna and John Wahr of the University of Colorado, Boulder. They published their results in the scientific journal Nature last fall. Since global sea level has risen an average of three millimeters (0.1 inch) per year since 1993, Greenland's rapidly increasing contribution can't be overlooked. "Before Grace, the change of Greenland's ice sheet was inferred by a combination of more regional radar and altimeter studies pieced together over many years, but Grace can measure changes in the weight of the ice directly and cover the entire ice sheet of Greenland every month," says Michael Watkins, Grace project scientist at NASA's Jet Propulsion Laboratory, Pasadena, Calif. However, as anyone who has ever been concerned about his or her weight knows, a number on a scale is just the beginning. In the five years that Grace has been flying, scientists have found ways to make the most of this new set of observations. "Grace has a big footprint," says Watkins. "We can locate regions of greatest loss, but we can't see individual glaciers." However, Grace's spatial resolution is continually improving. In the most recent studies, he says, Grace has observed large ice losses in the southeast of Greenland, while other areas, such as the west coast, have shown losses as well. Purple and dark blue areas (on the browse size image) indicate areas of largest mass loss. While Greenland is losing ice, it's also acquiring some new ice through precipitation. Scientists at NASA's Goddard Space Flight Center, Greenbelt, Md., used Grace to determine that ice losses far surpass ice gains. A new way of analyzing the data allowed them to get a picture of regional changes. While snow added 60 cubic kilometers (14 cubic miles) of ice mass to Greenland's interior each year between 2003 and 2005, the low-lying coast areas of Greenland lost nearly three times as much ice - 172 cubic kilometers (41 cubic miles) - each year during the same period. To confirm just how much of the mass Grace detects in Greenland and Antarctica is due to snow and ice, scientists also have to determine the contributions from another source, Earth's changing crust. "When Grace sees a change in polar gravity," says Watkins, "part of it is today's ice melt and part is what is called post-glacial rebound." "A long time ago during the last ice age, this region was pushed down by even more snow and ice, and now this mantle wants to come back, or rebound," explains Erik Ivins, a JPL Earth scientist and Grace science team member. One way to look at the problem, says Ivins, is to imagine a bathtub filling up with water from a faucet but losing water from holes in the bottom of the tub. At the same time, the bathtub may be changing shape. Ivins and his colleagues are refining the computer models used to understand and predict post-glacial rebound. It turns out that beneath the ice sheet covering Greenland, the mantle isn't changing the shape of the ?bathtub" very fast. "This tells us that the large mass changes Grace detects in the southeastern region of Greenland aren't due to post-glacial rebound," says Ivins. As Grace celebrates its fifth birthday and begins its extended mission, "we're getting the picture into better focus," says Watkins, "and we're going to have a new wave of discoveries. Improving the post-glacial rebound model is going to help, especially in Antarctica, where post-glacial rebound has a big effect on the gravity signal. We're also going to be able to pinpoint areas of loss and better understand how the losses change from one particular year to the next. This will tell us more about the types and mechanisms of ice mass loss so we can make better predictions in the future." While Grace provides a new and independent way to study Earth's ice sheets, it will take a combination of different tools, including laser altimeters, radar, and field studies, to sort out more clearly what's happening. "All technologies have different strengths and weaknesses," says Watkins. "Grace is the new piece. It shows us the big picture, while other measurements look at a smaller scale. We need to use them all together." "We have to pay attention," Velicogna adds. "These ice sheets are changing much faster than we were expecting. Observations are the most powerful tool we have to know what is going on, especially when the changes - and what's causing them - are not obvious."

Doing the right thing: the importance of maintaining integrity in the workplace

In light of recent news reports suggesting that pharmaceutical giant Eli Lilly down-played the side effects of Zyprexa, their top-selling drug for schizophrenia, in internal memos to managers and sales associates, the question of ethics in the workplace continues to be a concern--with ramifications that extend beyond embarrassing media coverage. Ask Henry J. Bruen, a former top-level WorldCom executive who is still suffering from the stigma of having been an employee of that firm, now known for the biggest corporate fraud case in U.S. history.

"Questions of ethical behavior come up all the time, regardless of your position," he says. Bruen, an African American executive with more than 25 years of experience, was among those who testified against ex-WorldCom chief executive Bernard Ebbers, who was sentenced to 25 years for his role in the $11 billion accounting fraud.

But the satisfaction of seeing justice served does little to remedy how this scandal has affected Bruen on a personal and professional level. "Besides the loss of my savings, it takes a personal toll, both emotionally and physically. Bruen confesses that it was most difficult to listen to the news coverage of fraud at the company that had employed him. Professionally, he is also suffering. Bruen is still unable to find a job.

"Ethical behavior is essential if a business is to function effectively," says Frank Ross, a visiting professor at the Howard University School of Business. Ross adds that more and more business schools, including Howard, are incorporating ethics into business courses at the undergraduate and graduate levels. And with the passing of the Sarbanes-Oxley Act in 2002, publicly traded companies are required to disclose information about their accounting practices that would make it difficult to carry out this level of corruption in the future.

Still, when employees are faced with unethical situations on a day-to-day basis, choosing the best course of action can be difficult. "The truth is, and always has been, that black employees and businesses don't have the luxury of assuming that penalties will be equally and evenly applied when companies and industries decide to crack down on corrupt behavior," says Michelle T. Johnson, author of Working While Black (Chicago Review Press; $14.95). There are a few red flags to look out for when trying to determine if the tasks you are asked to perform are ethical: If a supervisor or co-worker justifies behavior by pointing out that everyone else is doing it, be careful. Being pushed to the extreme to achieve unrealistic goals might be another clue. And if it simply feels wrong to you, it probably is.

"When you someone asks you to be unethical, you can say, 'That's just not something I would do," Bruen suggests. "That's a hard line to take, but ... if your boss requires you to [act disreputably], you need to be looking at moving out of that chain of command."

Ross offers the following tips for maintaining ethics in the workplace

Develop a code of ethics and periodically check to make sure the code is being followed.

Establish a hotline where anonymous complaints can be made and make sure they are adequately followed up on.

Set the right tone from the beginning--you are serious about ethics and your actions always show the highest regard for ethical behavior.