Cheaper Symbol, Risky Status

Apple on Tuesday will introduce two iPhones, including a new lower-cost model targeted at overseas countries where expensive smartphones are out of reach for many consumers.

The addition of a cheaper iPhone could help Apple sell tens of millions more phones. But it could also diminish its reputation as a premium brand.

Many luxury companies have faced this challenge before, with wildly different results. Luxury carmakers have introduced less expensive models, but many efforts have tripped up. Tiffany & Company found so much success with its cheaper “Return to Tiffany” jewelry, that it attracted too many teenagers. And Target has paired up with a variety of high-end fashion designers, often with considerable success.

For Apple, the devil will be in the details: just how much lower the price of the cheaper iPhone is, and just how much cheaper it looks and feels. If the iPhone is deemed cheap, it could get into the hands of so many people worldwide that it loses power as a status symbol and turns Apple into a maker of commodity products like Dell, Hewlett-Packard or Asus.

“It’s hard. It’s an art and a science,” said Milton Pedraza, chief executive of the Luxury Institute, a research firm. “It’s hard to know you’ve gone over the line until you do it.”

Makers of luxury cars have long struggled with how to increase their market share with less expensive models, while still retaining the brand’s cachet and exclusivity.

The marriage of Daimler-Benz and Chrysler failed partly because German engineers developing Mercedes sedans were opposed to sharing parts with mainstream Chrysler models made in the United States. While that preserved the integrity of the Mercedes brand, the company missed a golden opportunity to cut overall costs. Still, Mercedes is taking another stab at lower-cost models, introducing the CLA sedan later this year.

Toyota’s Lexus brand stumbled some when it introduced lower-priced IS sedans that lacked the high-end features and overall glitz of its signature models. Lexus has since addressed the issue by making its entry-level cars more powerful and sporty.

The fashion industry has also experimented with going more mainstream. Ralph Lauren offers lower-priced lines while also having a high-end product. But a partnership with Neiman Marcus and Target was a major failure.

Even the travel industry has tried extending luxury brands, like Starwood’s Aloft line of hotels, which is promoted as “a vision of W Hotels,” a top Starwood brand, and “style at a steal.”

Of course, many retailers try to drive up sales by lowering prices, and that effort has become only more prominent in the Internet era, when consumers have technology tools to browse an entire industry and compare prices in nanoseconds.

“This cheaper iPhone is just one part of a whole trend that is going on that is epically changing the face of this industry,” said Robin Lewis, chief executive of The Robin Report, a retail strategy newsletter. “It’s devaluing the definition of the word ‘value.’ And it’s going to affect every premium brand.”

Still, many analysts believe that if Apple can get consumers — particularly those in China and India — to buy a cheaper version of the phone, those people would be more likely to buy Apple’s premium products in the future.

“It’s going to be the TV, it’ll be the wrist watch, it’ll be the integration in your BMW — all these things later down the road that still carries the premium brand,” said Laurence Isaac Balter, chief market strategist at Oracle Investment Research, which has clients that own Apple shares.

Apple has crossed over into pushing nonpremium products before, and failed. In the 1990s, after Steven P. Jobs had been ousted from the company, Apple started a program offering its software to makers of generic personal computers, and some of those manufacturers were able to build computers faster and cheaper than Apple could. The company, having lost its value to consumers as a premium brand offering an exclusive product, almost went bankrupt.

Stephanie Clifford and Bill Vlasic contributed reporting.

DealBook: JPMorgan Chase Inquiry Reveals Status Quo After Financial Crisis

Daniel Rosenbaum for The New York TimesSenator Carl Levin, Democrat of Michigan.

People have learned their lesson.

We’ve been told that so many times since the near-death experiences of the financial crisis. Bankers and regulators have flipped roles: now it’s the bankers who are cautious and their overseers who are aggressive.

Details of JPMorgan Chase’s multibillion-dollar trading loss — brought to light by a riveting and devastating report from the Senate Permanent Subcommittee on Investigations — demonstrate what a sham that is. Bankers aren’t acting cautious and chastened. Risk managers aren’t in the ascendance on Wall Street. Regulators remain their duped and docile selves.

What we now know about the incident is that, as the cliché has it, the cover-up was worse than the crime. The losses out of the London office weren’t enough to take down the bank. But as they were building, JPMorgan traders fiddled with risk measures and valuations. The bank’s risk managers defended the traders and pooh-poohed the flashing red signals. The bank gave incorrect information to its regulator. Top executives then made misleading statements to shareholders and the public. All the while, the regulator served its typical role of house pet.

As JPMorgan got into trouble, traders and the responsible executives treated the valuation of trading positions, made up of derivatives, as a puppet made to do what they wanted. The traders pulled on this calculation or that to change the way they were valuing the position to reduce the losses.

Ina Drew, the head of the bank’s chief investment office, referring to how the positions were calculated, asked an underling if he could “start getting a little bit of that mark back.” She then asked if he could “tweak at whatever it is I’m trying to show.” She might believe it is exculpatory that she prefaced the comment by saying to do it “if appropriate” and that the tweak should come with “demonstrable data,” but any idiot working for her would know exactly what she meant: create some rationale to manipulate the valuations to make things look better than they really are.

This discussion did not make it into the bank’s internal report on the incident from January. Imagine that.

Yes, Ms. Drew was ousted. But her actions show that what financial executives do postcrisis when faced with trouble is no different than what they did precrisis. In testimony on Friday, in a quiet voice, she deflected blame up to Mr. Dimon and down to her traders, claiming she was kept in the dark.

The Senate report makes it clear that JPMorgan misled shareholders and the public, particularly on its April 13, 2012, conference call.

That call, which makes up a particularly damning portion of the Senate report, featured a haughty Jamie Dimon famously dismissing the problem as a “tempest in a teapot.”

Of course, it was no such squall. In the call, the chief financial officer at the time, Douglas L. Braunstein, made a number of what appear to be misleading statements about the trades. Mr. Braunstein said the trading decisions were made on a very long-term basis, when in fact the traders were shuffling positions almost daily to make profits and then to disastrously “defend” their positions from further losses. Mr. Braunstein reassured investors and analysts in the call that the trades were vetted by the firm’s top risk managers, when they were not (though top officials, including Mr. Dimon, knew about repeated risk-measure breaches).

This means “there was risk oversight” for the office that made the trades, and the trading “positions needed to comply with limits,” a JPMorgan spokesman, Joseph Evangelisti, said. “We were not aware at the time of all the deficiencies in the risk organization” of the trading group.

In the conference call, Mr. Braunstein also said that the trades were “fully transparent to the regulators,” but, in fact, watchdogs didn’t receive any regular reporting of the positions and received specific information only days before the call.

“What Doug said was accurate,” Mr. Evangelisti said. “No one in senior management at that time believed there was a larger problem in the context of the firm’s size and scale.”

In JPMorgan’s internal report, the call receives scant attention. In testimony before Senator Carl Levin, the Michigan Democrat who heads the Senate subcommittee, Mr. Braunstein fell back on the explanation that he was saying what he believed at the time.

Mr. Braunstein wasn’t available for comment, according to the bank.

Maybe regulators will think it notable that the chief financial officer of JPMorgan misled shareholders in his first extensive comments about the trading losses. Don’t hold your breath.

I don’t even expect much to come out of the evidence that the bank misled regulators. The bank stopped giving its regulator, the Office of the Comptroller of the Currency, important information. At one point, the bank told the agency that it was reducing the size of its positions when it was actually increasing those positions, according to the Senate report.

Despite JPMorgan’s smoke screens, the regulators deserve the public humiliation they have received. They were alerted to risk-measure breaches that should have warned them of problems. By April 30, 2012, just weeks after the trading debacle came to light and before any serious investigation, the Office of the Comptroller of the Currency declared the matter closed, according to internal minutes from a meeting. (At Friday’s hearing, officials from the agency disputed that it was, in fact, closed.)

So, yes, people have learned their lessons, the real lessons of the financial crisis. JPMorgan repeated the same misdeeds that other banks successfully pulled off at the height of the financial crisis: mismarking portfolios of assets and misleading the public. This was condoned by regulators. Regulators and prosecutors have been averting their eyes for years from rotted bank assets and rotted bank morals; why would JPMorgan expect any different reaction in this case?

Mr. Dimon and JPMorgan executives have all publicly donned hair shirts to demonstrate their contrition. Mr. Dimon and Mr. Braunstein even took pay cuts, going from earning many millions to some fewer millions.

JPMorgan argues that Mr. Dimon and Mr. Braunstein told regulators and the public only what they believed at the time. Mr. Dimon and Mr. Braunstein made mistakes, but they quickly worked to clean them up, fire those responsible and change their ways. The losses were small relative to the size of the bank and, if anything, demonstrate the strength of JPMorgan’s diversified business. After all, the bank made record earnings last year.

But I suspect that if you dosed JPMorgan executives with Pentothal, they would reveal they believed all of this attention was a media creation and political showboating — still a “tempest in a teapot.”

“Not true,” Mr. Evangelisti, the JPMorgan spokesman, said. “We acknowledged from the outset that we made significant mistakes, and we have repeatedly apologized for them. We do not blame the media or regulators for these issues. This was our fault totally. All we can do now is fix the problems and learn from them.”

As has happened so often in the wake of the financial crisis, we are left with the spectacle of bankers — here the well-compensated Mr. Dimon and Mr. Braunstein — insisting that they were clueless and incompetent, which would shield them from any allegations of intent to defraud.

As for many longtime officials at the Office of the Comptroller of the Currency, they may well think that this was merely a nuanced mistake that calls for nothing more than careful suggestions of remedies that don’t harm the bank too much. The new head of the agency, Thomas J. Curry, has begun to clean house and re-energize the place, but the overhaul that is needed looks too big for one person.

So let’s take a moment to celebrate a handful of American heroes, Mr. Levin and the staff members at the Senate Permanent Subcommittee on Investigations. Because of them, this corruption has come to light. Friday’s hearing served to emphasize how lonely Mr. Levin’s efforts are. Senator John McCain, Republican of Arizona and the new ranking minority member on the committee, did a yeoman’s job of asking a few questions. Senator Ron Johnson, Republican of Wisconsin, made a few incoherent statements using the au courant phrase “too big to fail,” then scuttled out of the hearing. None of the other senators, Democrats and Republicans alike, bothered to show up.

The 78-year-old Mr. Levin, peering over those glasses that seem surgically attached to the tip of his nose, soldiered on.

But let’s imagine what would happen if this report does what the senator hopes and puts pressure on the regulators to finish a simplified and loophole-free Volcker Rule, which would prohibit banks from making bets for their own profit using taxpayer-backed money. Why should we have the slightest confidence that big banks could be persuaded to follow it? And why should we feel reassured that, if they didn’t, regulators could or would enforce it?

We shouldn’t. And we don’t.

Elite Status on Airlines Loses Some of Its Appeal

Travelers with elite status in an airline’s frequent-flier program used to be rewarded with perks unavailable to the masses, like access to better seats, priority boarding and faster security lines.

But as carriers have begun selling these services to anyone willing to pay a fee, or offering them to customers who carry an airline-branded credit card, the status is losing some of its appeal — at least for frequent fliers on the lower end of the elite spectrum.

“I’ve definitely noticed an erosion in benefits since I became elite,” said Bill Wilkes, a Delta SkyMiles Gold member, the second-lowest rank in Delta’s four tiers of elites. “Pretty much anyone who gets approved for a SkyMiles credit card can get priority boarding and a free checked bag.”

Mr. Wilkes, who works for a Major League Baseball team, noticed on a recent Delta flight from Baltimore to Sarasota, Fla., that more than half the passengers lined up when priority boarding was announced.

He estimates that he gets a complimentary upgrade — arguably the most important benefit of elite status — on only 15 to 20 percent of his domestic flights, compared with 40 to 50 percent several years ago.

That shift can be attributed partly to the growing ranks of elites on any one airline, because of mergers like Delta’s with Northwest, as well as more ways to earn elite status through credit card spending, not just flying.

Program rules vary by airline, but travelers typically have to accumulate 25,000 miles in a year to become a bottom-tier elite, 50,000 miles for the middle tier and 75,000 to 125,000 miles for the top tiers. Most people have to requalify each year, and miles earned from credit card spending increasingly count toward the minimum required.

For instance, customers approved for Delta’s Reserve card from American Express can earn 10,000 elite qualifying miles after their first purchase. (There is a $450 annual fee.)

US Airways even sells access to its “preferred” status: a traveler who is short 1,500 miles to qualify for a particular elite tier can pay a $249 fee to close that gap. Prices vary depending on the mileage needed, but can run as high as $3,999 for 100,000 preferred miles.

While airlines do not disclose how many people are in each elite tier, Henry Harteveldt, a travel analyst at the consulting firm Hudson Crossing, said about 3 to 4 percent of a carrier’s frequent-flier members had elite status. Delta and United each have 90 million frequent fliers, and American has 69 million, which means anywhere from two million to four million elites a program (though the number may be higher).

“When you think about the scale of these programs, it’s an enormous volume and, of course, these people travel more often,” Mr. Harteveldt said. “When you’re on a hub-to-hub flight like United from Chicago to San Francisco, elites can sometimes make up between a third and half of the plane.”

There are some signs that carriers recognize this issue. Delta recently announced that starting next year, passengers can qualify for elite status based on miles earned (or segments flown) and by spending at least $2,500 on Delta tickets, not including taxes or optional fees. The spending requirement is waived for those who charge $25,000 a year using a Delta credit card.

“I expect other airlines are going to take steps to thin out their elite ranks by instituting similar spending requirements,” Mr. Harteveldt said. “The people who fly the most and spend the most will receive the benefits they value more often.”

But airlines also value the revenue they earn from selling some benefits to nonelite travelers, a growing practice as the industry seeks to maintain its profits.

For $10 a flight, JetBlue passengers can buy access to priority security lines typically reserved for elite and premium cabin passengers. American sells priority boarding for $18 round trip, as well as a “Choice Essential” package for $68 that includes priority boarding, a checked bag and a change fee waiver on a domestic round-trip ticket. Even Southwest, known for its “bags fly free” motto, recently began selling an early boarding option for $40 a flight.