In the midst of all the quite frankly depressing stories about high gas prices and now increasing consumer prices, I ran across a story about MyGallons.com—a program that at first glance seemed like a good way to protect against rising gas prices, but has developed into quite a saga.

Mygallons.com allows you to pre-purchase gallons of gas at current gas prices to be used at a later date, avoiding the cost of any future increases in gas prices. Under the system, you pay an annual fee and receive a kind of debit card which allows you to pre-purchase as much gas as you want at a cost based on current gas prices in your area. You then use the card at participating gas stations. The number of gallons pumped is deducted from your account balance. However, regardless of the listed gas price, you buy your gas at your pre-purchase amount—Mygallons.com pays the difference.  According to the website, you can pre-purchase as much or as little gas as you’d like, there is no time limit on when you must use your gallons so long as you keep up the annual fee, and you can redeem any unused amounts. At first glance, it seems like a good way to protect against rising gas prices. SO . . . is there a catch?

To be sure, the system does not work unless gas prices increase sufficiently to cover the fees associated with use of the card. On the one hand, Mygallons.com notes that people who signed up for the program in April of 2008, saved lots of money as gas prices soared. To the extent we no longer see big prices increase, however, such savings may not occur. Of course, the ability to redeem unused gallons may minimize this concern. On the other hand, there are fees associated with the cards usage that may undercut any savings. First is the most obvious $29.95 annual fee. Second, however, if you purchase more gas than you have in your account, you must pay the actual cost of the gas plus a $15 overdraft fee. To protect against this possibility, you can enroll in an automatic repurchase plan for $39.95, which plan automatically repurchases more fuel when your balance drops below 15 gallons. In most cases there also appears to be a $1.95 re-loading fee when you buy more gallons. Then too, the pre-purchase price is for regular unleaded so if you buy premium you must pay the difference in cost. All of these fees reveal that consumers must be careful to watch their account balance to ensure that they reap more in savings than fees.

And then there is this concern—how exactly does this company make money? Indeed, the company seems to have to generate enough revenue to pay the difference between consumers’ pre-purchased price and the current price of gas as well as earn some profit or else it could go under, leaving cardholders with useless plastic. In this regard, the company will be able to make use of the upfront annual fees as well as the pre-purchased amounts, over 80% of which the company says will be invested in “money markets and U.S. government backed notes.” Hmmmm . . . 

And finally, the gas program does not work unless the cards are honored by gas stations. Unfortunately, shorty after the company's public launch, its provider of fuel card services indicated that it would not support the program, and hence apparently would not honor issued fuel cards. Because this appeared to be inconsistent with MyGallon.com’s claim that its cards would be honored across the country, the Better Business Bureau of South Florida (where the company is headquartered) gave the company an “F” rating.  Now, after talks with MyGallons.com representatives, the SFBBB has revised its rating to “NR.”  As of now, it appears that MyGallons.com does not have a vendor able to process transactions with gas stations, and hence has suspended acceptance of new membership fees until a vendor can be secured.  MyGallons.com apparently also has agreed to refund consumers’ cards and give them a free one year membership once a provider is located.

These developments suggest that this may be a program good in theory but difficult to implement.  And yet, it should be noted that apparently when the company first issued cards in April 2008, there was a vendor in place and cardholders did in fact reap some benefits.  So perhaps it is something that can work again, and that at least would be some positive economic news. 

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While Fannie and Freddie flounder, another Big Mac has flamed out.  On Friday, the FDIC seized control of IndyMac Bank, the mortgage lender founded by Angelo Mozilo and other Countrywide executives back in 1985.  This marks the first major commercial bank failure associated with the mortgage meltdown and the third largest bank failure in history.  With $32 billion in assets, the size of IndyMac's collapse is exceeded only by those of Continental Illinois in 1984 and American Savings and Loan in 1988 during the height of the S&L crisis.

IndyMac specialized in jumbo loans to folks with less than perfect credit histories.  Last year, it was the ninth largest US mortgage lender.  Its collapse will cost FDIC somewhere between $4 billion and $8 billion.  Ouch.  Note this represents a non-trivial portion of the FDIC's $53 billion deposit insurance fund.  Speaking of deposit insurance, of IndyMac's $19 billion in deposits, almost $1 billion of it is not covered by deposit insurance, which is capped at $100,000 per depositor.  Ouch again. 

One interesting twist:  regulators singled out Senator Charles Schumer for special blame in triggering IndyMac's collapse.  Said John Reich, head of of OTS:  "The senator made comments . . . questioning the viability of the institution.  When a member of the United States Senate makes such a statement, it frightens depositors."  Over the next 11 days following the senator's remarks, depositors withdrew $1.3 billion--over $100 million a day!

Personally, I can't ever remember a government official openly questioning the solvency of a specific financial institution. Certainly IndyMac's downward arc began long before Schumer's comment. OTOH, deposit taking is really a big confidence game.  We like to think of our bank as having a big steel drawer with our name on it, and if we just pull out the drawer, there's our money sitting safely inside the drawer.  But of course there is no such drawer.  The bank is just intermediating between savers and borrowers, and hopefully, payments by borrowers keep pace with withdrawal demands from savers.  Else the jig is up.  When a public official announces that the jig may be up, that surely improves the likelihood that the jig is indeed up.  Here, to the tune of several billion dollars.

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I just read Tyler Cowen's post on the Long Tail ("The Long Tail hypothesis is basically true, just don't sell to the Long Tail alone"), when I stumbled across this site ...

According to the Salt Lake Tribune:

Launched initially to provide Texas authorities with clothing for FLDS children in custody, the online store now is aimed at helping their mothers earn a living.

The venture, which has already drawn queries from throughout the U.S., is banking on interest in modest clothes, curiosity and charity to be a success.

They have a growth strategy:

And more enterprising efforts are in the works: The group plans to launch a site offering FLDS-made crafts in coming weeks. It will feature CDs of members like Jessop singing songs for children, children's books written and illustrated by FLDS members and cookie and recipe books.

Cute kids. But don't expect an IPO.

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Forbes has an article on Orlando Magic LA Lakers Miami Heat Phoenix Sun player Shaquille O'Neal's line of low-cost basketball sneakers.  The sneakers, called the Dunkman, sell for less than $40 a pair, a far cry from the $135 a pair of Shaq Atttaq shoes once endorsed by Shaq.  Last year I blogged about New York Knick baskbetball player Stephon Marbury's line of shoes that sell for $14.99 a pair.  Clearly given the amount of money most basketball stars can get for selling sneakers, both Marbury and Shaq are motivated by more than just profit (though it is hoped that what they lose in profit margin they will make up in higher volume).  Instead, both recognize that baskbetball shoes are often too expensive for the inner city schools that clamor to buy them.  And hence they both have decided to provide a cheaper alternative.  But do they sell?

To be sure, this is Shaq's third attempt at selling a low-cost sneaker.  The first time he apparently did not sell enough shoes and the second time his company got caught up in the dot.com meltdown. Some contend that teens simply will not want low-cost sneakers.  Then too, the shoes are not sold at the more traditional athletic shoe stores, potentially undermining their accessibility and attractiveness.  Hence, Shaq's Dunkman are available at Payless, while Marbury's shoes are only sold at Steve and Barry's.  Finally, there are many who question the quality of these low cost alternatives.  Both Marbury and Shaq claim that there is no difference in quality between their shoes and those priced at $100 plu a pair. And yet, others ask, is it possible that the $100 price differential only reflects profit and not higher quality materials?  Interestingly, although a Consumer Reports on the quality of one of Marbury's shoe gave it good marks and found it to be a good casual shoe, it also revealed that some players found some quality differences between the shoes and comparable basketball shoes.  To be sure, there are those who buy and wear basketball shoes without any intention of actually play basketball, and hence the issue of quality may not be relevant for all consumers.

In the end, it appears that both Marbury and Shaq have managed to turn some profit.  Moreover, it is refreshing that both Marbury and Shaq are providing low cost alternatives in shoe wear, particularly given their recognition that such shoes are often marketed and sold to many inner city kids who cannot really afford them.  And perhaps their example could influence other basketball players to enter the market and potentially impact the industry as a whole.  At the very least, it is a good start.

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Aren't Jack and Suzi Welch pretty rare?  He - well, you know who he is.  She - the former editor of the Harvard Business Review.  They - an active consulting practice supported by columns occasionally opining on the wisdom of the aged.  All told, it's a two-headed business guru, and though I confess plenty of unfamiliarity with the field, isn't that pretty rare?  Most paired business gurus consist of a CEO and a ghost, right?  We're not too sentimental at the Glom, but this week we like happy couples, and so we're willing to point you to those who posit that age is nothing but a number.

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Last Friday and Saturday I attended the Teaching Consumer Law Conference hosted by the University of Houston Law Center. There were a number of terrific presentations, but Christopher Peterson’s presentation on Mortgage Electronic Registration System, Inc. (MERS) really caught my attention.

MERS is a privately held company that “registers” mortgages. Ordinarily, the mortgagee (lender) must record its interest in the mortgage in the county land records. Any subsequent transfers of the mortgagee’s interest (for example, in the securitization process) must also be recorded. MERS short circuits this multiple recording process. Instead, the lender includes language in the Deed of Trust or Mortgage describing MERS as “a separate corporation that is acting solely as a nominee for Lender and Lender’s successors and assigns. MERS is the mortgagee under this Security Instrument.” MERS is recorded as the mortgagee in the county land records. Although MERS does not lend money, service the mortgage, or receive any of the payment stream from the mortgage, it remains as “nominee” through all future transfers. As a result, any subsequent transfers of interest in the mortgage are recorded only in MERS electronic system -- not in the county land records. According to MERS, it “now registers more than half the mortgage loans originated in the United States.”

Increasingly, foreclosure actions are being brought in MERS name. Professor Peterson questions whether MERS as “nominee” has standing to bring foreclosure actions. A few courts have agreed with him, but other courts conclude MERS has standing. (See here for a summary.) Professor Peterson believes that the MERS system may have other legal deficiencies. He questions whether subsequent transfers of the mortgagee interests are properly perfected if they are only recorded in the MERS system and not the county records. He also believes it may be appropriate to treat MERS as a debt collector under the Fair Debt Collection Act. I look forward to reading Professor Peterson’s completed article.

While I have not fully analyzed the legal implications of MERS’s business plan, it seems to me that MERS's innovation of electronically tracking mortgage interests was only a matter of time. It is cumbersome and costly to file and search in the paper land records in each county. States have already consolidated and digitized records for security interests in personal property. Of course, the personal property recording systems are still state government systems. In contrast, MERS is a nation-wide private company owned partly by some mortgage lenders. MERS will end up with a lot of bad publicity if a very large number of foreclosure actions are brought in its name, particularly if it appears that the MERS system was used to hide the ball from consumers.

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In recent months, both BusinessWeek and Inc.com have featured articles describing the explosion of merchant cash advances as a funding source for small businesses.  BusinessWeek reports that the size of the merchant cash advance industry “jumped 50% in 2007, to around $700 million.”  The industry even has its own trade association, the North American Merchant Advance Association. 

What are merchant cash advances?  Traditionally, banks have lent money to small businesses and taken credit card receivables as collateral.  As would be expected, the business pays back the loan over time with interest.  In many cases, the loan agreement specifies that payments to the bank will be taken directly from the business’s credit card collections.  Merchant cash advances are functionally very similar to credit card receivables lending – except that merchant cash providers are quick to point out that their agreements are not loans.  According to AdvanceMe, the industry leader, a merchant cash provider “purchase[s] a portion of … future credit and debit sales at a discount.”  For example, a merchant cash provider might give a business $100,000 in exchange for $130,000 of future credit card receivables.  Then the merchant cash provider collects “a fixed percentage of daily credit [card] sales” until the agreement has been satisfied.  Merchant cash providers claim they are supplying much needed liquidity to small businesses that have been squeezed by the credit crunch.

But the merchant cash advance industry is not without its critics.  Because merchant cash advances are structured as sales and not loans, merchant cash advances need not comply with state usury law.  Merchant cash advances are unquestionably more costly than traditional bank loan financing.  Inc.com reports a typical 25% fee, but other press has reported more costly advances. 

In addition, merchant cash advance agreements are treated differently from loans in bankruptcy proceedings.  Merchant cash providers contend that they can continue to collect from credit card receipts even after a business has filed for bankruptcy (when the automatic stay protects the business from most loan collection efforts).  Merchant cash advance agreements are not discharged in bankruptcy.

Of course, some courts may be willing to look beyond the form of the merchant cash advance agreement to find that the agreement is, in substance, a loan.  (Courts have long struggled to distinguish leases from loans and have generally tried to look beyond the form of the transaction to the economics of the agreement.)  If this happens, usury and/or bankruptcy laws could be applied directly to merchant cash advance agreements. 

It is also possible that the rapid growth of the industry will attract legislation.  I tend to favor free markets and believe that heavy-handed regulation here would be a mistake.  It seems to me that the case for usury laws here is weaker than for the average consumer loan because small businesses should have some financial sophistication.  Regardless of what happens, it should be interesting to watch this emerging industry.

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If you haven't seen it, this takedown of Dell Computer is a little business classic.

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One of my former Wisconsin law students, Troy Vosseller, reports: "A friend and I recently competed in the Burrill Business Plan competition at UW and won!"

The business: Sky Vegetables. Pretty cool idea.

By the way, if you don't know Steve Burrill, for whom the Wisconsin competition is named, you can meet this amazing fellow through this podcast.  

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I grew up eating at The Cheesecake Factory, so I was somewhat disappointed when I heard that the Calabasas, California company had attained the dubious honor of making CalPERS' 2008 Focus List of underperforming companies.  They sell great cheesecake, but according to CalPERS, the company has underperformed its peers by 140.5 percent over the last 5 years.  CalPERS objects to the company's staggered board and supermajority voting requirements for certain bylaw amendments, and the pension fund has a pending shareholder proposal to eliminate its staggered boards.  The four other companies that made the list--all with staggered boards that CalPERS opposes--are:

Hilb Rogal & Hobbs, an insurance brokerage based in Glen Allen, VA;

Invacare, a healthcare equipment supplier from Elyria, OH; 

La-Z-Boy (remember The Price is Right?) of Monroe, Michigan; and

Standard Pacific, which sells household durables and homebuilding supplies, from Irvine, CA.

Interestingly, according to a 2007 report by Wilshire Associates, Focus List companies have annual excess returns of -13.3% below their respective benchmarks for the five years before CalPERS involvement, but enjoy positive annual excess returns averaging 12.2% in the five years following.  Perhaps there is an investment strategy here?  See Riskmetrics for additional commentary.

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Just in time for March Madness, Sneaker Wars has just come out, recounting the modest origins of the now-multinational multi-billion-dollar sports shoe industry.  I just happened to catch the book review in this morning's WSJ.   The story begins with the Dassler brothers' little Bavarian shoe factory, started during the thick of WWII.  Fraternal rivalry caused the brothers Adi and Rudi to part company in the late 1940s, when Rudi walked across the river to the other side of town--the medieval town of Herzogenaurach--to set up a competing factory.  Adi Dassler's shoe became, of course, Adidas.  Rudi developed the Puma brand.  Together, the rivaling brothers and their rival brands came to dominate the world sports shoe industry for decades.  Adi and Rudi pioneered what are today's standard marketing strategies for sporting goods and other consumer goods, giving away free shoes to athletes and later paying stars to wear the logo.   

It's a treat for me to read about the history of Adidas.  Anyone who played grade-school basketball in the 70s remembers the dominant basketball shoes--Converse All-Stars and the Adidas Superstar, with the latter gradually overtaking the former both in the pros and in the school yard.  According to Wikipedia, three quarters of all NBA players in the mid-70s were wearing the Superstar.  I remember well getting my first pair.  They were navy felt with white stripes (I know, I know . . . but remember, this was the 70s).  I was a mediocre basketball player at best, but at least the shoes looked cool.

The sports shoe industry took a big jolt in the mid-80s, when Phil Knight signed Michael Jordon for Nike and launched the Air Jordan, which became the best-selling basketball shoe ever.  Nike has dominated the U.S. market ever since, though Adidas and Puma appear to be making comebacks.  You can read about Adidas' recent comeback efforts with its signing of David Beckham in the Prologue to Sneaker Wars.

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Yesterday a number of the local news stations extensively covered the story of the Sharper Image bankruptcy, with particular emphasis on the fact that Sharper Image is no longer honoring gift cards as a result of its bankruptcy. The story not only appears to reflect a sign of toughening economic times, but also re-affirms some of the problems associated with gift cards.

To be sure, it is nothing new that when a company declares bankruptcy, many are left holding claims that have no hope of being satisfied. Now gift cardholders are a part of that “many.” Interestingly, rival store Brookstone is offering a 25% discount for anyone who makes an in-store purchase and turns in a Sharper Image gift card—regardless of the face value of the card. The discount may be more than some creditors ultimately receive.

Yet the Sharper Image story reflects an additional reason why gifts cards may not be the “perfect gift.” Indeed, we have blogged before about some of the problems associated with gift cards, including the fact that they often go unused or otherwise expire quickly. While legislators have sought to respond to these kinds of problems, it seems difficult for them to respond to the bankruptcy problem, even though it appears to reflect a significant amount of money left on the table. And as some news stories suggested, it is a problem that may be exacerbated during an economic downturn. Thus, one research firm predicts that shoppers could lose some $75 million this year as a result of gift cards that are not honored because of store closings. Indeed, given the booming business that gift cards represent for some companies, many news stories speculated about other companies that could find themselves in the same predicament as Sharper Image. For example, one station speculated about Barnes and Noble, which sells lots of gift cards and yet recently forecasted weaker than expected earnings for 2008. To be sure, Barnes and Nobles does not appear to be in danger of declaring bankruptcy, but it is something to keep in mind with respect to purchasing gift cards.

In the end, perhaps you need to research the financial solvency of a company before purchasing a gift card. At the very least, the Sharper Image story underscores the importance of using gift cards sooner rather than later. And since I have a number of Barnes and Nobles gift cards tucked away in various envelopes, I will be making a trip to the bookstore this weekend.

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Starbucks’ chief executive will be stepping down, replaced by the company’s chairman Howard Schulz.  This announcement comes in the midst of concern about Starbucks’ declining stock price, which has taken a hit over the last year.  Of course, with a Starbucks on virtually every corner and in many major stores, it seems hard to imagine that Starbucks isn’t or won’t always be king of the mountain. Indeed, Starbucks managed to make a lot of money not just by responding to the previously untapped market of consumers desiring to pay more for “good” coffee, but also by encouraging a market for various gourmet coffees and drinks from caffé mochas to chai tea.   So what seems to be the problem?

One of the issues is the very fact that there is a Starbucks on virtually every corner, a strategy that may have been too aggressive.  In fact, Starbucks is planning to slow down the number of new stores being opened and close some poorly performing stores.  Another problem is one related to its brand.  Even Schulz has acknowledged that part of the reason for Starbucks’ decline has been things liked bagged coffee and automatic espresso machines which may have served to water down the Starbucks’ brand and the Starbucks’ experience. 

But perhaps the biggest problem may be the increase in competition from companies, like Dunkin’ Donuts and McDonald’s, offering low cost alternatives.  The Wall Street Journal just reported that McDonald’s is installing coffee bars with “baristas” serving cappuccinos, lattes and similar drinks in nearly 14,000 of its US locations.   While these alternatives may not satisfy the most discerning coffee drinker (who incidentally may scorn even Starbucks), such alternatives may be perfectly suited to the consumer who wants the Starbucks-like experience without the price tag.  To be sure, the changes at the helm of Starbucks do not reflect the end of Starbucks, but they do suggest a weakening of the company’s influence.  Such weakening, in turn, suggests a need to re-evaluate the company’s business plan. 

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With the subprime mortgage meltdown, things are looking pretty bleak for many homeowners and consumers.  Bankruptcy is becoming a more common option.  As if things weren't bad enough, it turns out that the bankruptcy discharge ain't what it used to be.  In particular, creditors are routinely collecting on discharged debt.  Often illegally.  This much is not news.  But what is news is that the practice is sufficiently common that there is now an active market in discharged debt! 

Hounding debtors for repayment post-discharge, an age-old strategy, is clearly illegal.  Another device some creditors appear to be using is the failure to report to credit bureaus when debt has been discharged.  Eventually, the debtor may need to clean up her erroneous credit report to, say, qualify for a mortgage.  If the creditor and credit bureau are not responsive--a relatively common problem, according to some bankruptcy judges--the debtor may have no choice but to pay off the discharged debt. 

According to FTC opinion letters, creditors are required to report discharged accounts as zero balance.  But the legal force of those opinion letters is apparently ambiguous.  Some bankruptcy judges are holding that a lender's failure to update is an improper collection attempt in violation of the discharge.  In any event, the existence of an active market for discharged debt speaks volumes about creditor leverage in consumer credit.

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Having followed the company's goings-on over the past few months (here and here), I finally got a pair of Crocs a few weeks ago.  I guess my little vote of confidence didn't do much good.  Last Wednesday, Crocs stock lost 36% of its value, slicing about $2.2 BB off its market cap.  Ouch! (again).  Crocs had reported that its inventories had quadrupled from a year ago, and it failed to increase its quarterly earnings forecast as it had consistently done in the past.  Traders apparently read this as a sign of slowing growth.  Sales have grown from $24,000 in 2002 to an expected $820-$830 MM this year.  Before Wednesday's bath, Crocs stock had soared to six times its initial offer price from February 2006.  Wednesday night, Crocs' board approved a program to buy back as many as a million shares of its common stock (out of 82 million outstanding). 

Careful.  Crocs bite. 

[Clip art licensed from the Clip Art Gallery on DiscoverySchool.com.]

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