The legal cost problem of American banks

Bank of America reported its earnings today. Their profit for the last quarter was $2.5 billion, up from $340 million during the same period last year. That came on the back of a drop in legal expenses from $1.6 billion to $1.1 billion. Yes, you read that right. One single bank spends more than a billion freaking dollars on just litigation costs every single quarter!

JPMorgan reported its earnings last week and the story behind its legal costs was even worse. They reported their first loss under the current CEO because they incurred $7.2 billion in legal expenses last quarter. They have set aside $20 billion since January 2010 towards legal and regulatory costs!

These numbers are simply ridiculous and indicates the extent of the waste of resources. We are spending billions of dollars every year in litigation because of the banks; the talent and money spent on which could otherwise have been put to productive use.

There are serious problems with the banking industry and its practices. Else, why would these banks need to spend billions of dollars in litigation every year? There is a need for a B-Corp type bank with fundamentally different vision and business model than traditional ones. However, computer programmers using lean startup technique by building incremental features is not going to solve the problem. (The result is a company like Simple, which does nothing more than add a layer on top of the existing model, strengthening it.) You will also need to work regularly with the regulators to solve the problems. The anti-government rhetoric of most people involved in tech will simply not work.

The billions of dollars saved every year by having a sound business model is a great opportunity for a new bank, built from the ground up. The rise of Bitcoin and crypto-currencies is very interesting since it is building a parallel model to the way traditional banks operate (think Clayton Christensen’s theory of disruption, or an analogy similar to MOOCs in education). I admit it is very early in the Bitcoin space to predict anything. Nonetheless, I cannot help but be excited about the potential in terms of the efficiency a banking model built around crypto-currencies could bring!


What the sale of Inter Milan to Thohir means for Italian football

Erick Thohir has bought a 70% stake in Inter Milan, the Champions League winners of 2010. Amidst falling revenue for Italian clubs, this change in ownership could prove to be the spark that Italian football desperately needs.

The main problem Italian football faces is almost empty stadiums for their games. The main reason fans go to watch games in a stadium is for the atmosphere. If there are few people at the stadium, it becomes less attractive as the atmosphere suffers. This attracts even less fans, thus turning into a vicious cycle with dwindling number of fans who go to the stadium to watch the games. This also hurts match day revenue. If you look at the revenue figures, it is self evident as the top Italian teams are heavily dependent upon TV revenue. Inter Milan is the most dependent with 60% of their revenue coming from TV rights. Compare that to the German teams whose revenue from TV broadcast rights average at 25% of the total.

The problem stems from the stadiums themselves. The stadiums are owned by the city and the clubs use it for their games. For example San Siro is shared by AC Milan and Inter Milan. The stadium has the highest capacity in Italy, at over 80,000. However, when you barely have 20,000 people attending the games, the emptiness of the stadium is detrimental to the atmosphere.

Since the city owns the stadium, the clubs cannot do anything to improve them. Thus, Juventus recently built their own stadium. Roma, which was taken over by an American consortium, has similar plans to build their own. There have been talks of Inter building their own stadium too. With Thohir as a new owner, he brings in resources to do that. Building single purpose stadiums for football owned by the clubs is imperative if Italian clubs are to make the game exciting and bring back fans to watch the games.

Billionaire owner of Chelsea Roman Abramovich ushered in a new era in English (and European) football by spending a lot of money to make Chelsea a force to be reckoned with, after his purchase of the club in 2003. That invited additional foreign investors and money into the English Premier League, making it the richest football league in the world. The recent purchases of PSG and Monaco FC by foreign owners has enabled the two teams to build a strong squad. This has catapulted the French Ligue 1 into limelight.

With increasing competition from other European leagues, the Italian league desperately needs additional investment to be competitive. The recent rise of clubs like Napoli and Fiorentina along with the great start to the season by AS Roma is great for the league. Investing in youth talent is definitely a sustainable way to build a team and a club as evidenced by the recent rise of Borussia Dortmund. However the infrastructure is also important. Dortmund consistently fills its 80,000 plus capacity stadium every single game! In the current state where the Italian government is broke, you need private investors to invest in the infrastructure. Hopefully Thohir’s purchase of Inter Milan will attract other investors in the Italian league and help it reclaim its spot as the best league in the world.