Wednesday, December 31, 2008

Reasons to be hopeful about 2009

Advisor Perspectives Magazine interviewed John Bogle about prospects for 2009. Bogle, 79, "is the Founder of The Vanguard Group, Inc., and President of Vanguard’s Bogle Financial Markets Research Center. He created Vanguard in 1974 and served as Chairman and CEO until 1996 and Senior Chairman until 2000."

A sample:

"Q - What worries you the most about the economy and the markets?

A- My number one concern is the freezing of the credit markets, but I am equally concerned with the slapdash way the Treasury is trying to fix the problem. The troubled asset relief program (TARP) should have been called the toxic asset relief program, but they have yet to buy a single asset. They are injecting capital into banks, but are doing so at a very high price.

Q - Your book discusses the characteristics of good leadership: nurturing the 'soul' of the organization, focusing on values, and 'pressing on, regardless.' Which leadership skills will be most important for President-elect Obama once he takes office?

A - There is not a generalized set of leadership skills. When crew members at Vanguard meet with me, I advise them not to attempt to emulate anyone other than themselves. Be who you are and use your own style. I believe Obama has exactly the right credentials and temperament. He is highly intelligent and an excellent communicator – both in writing and orally. He possesses the integrity, sincerity, hope, and confidence this nation needs. That is why I voted for him."

Suggest you read the whole thing.

Thank us later.

Friday, December 26, 2008

Lending facility for mortgage servicers

We note that, according to a recent article in Black Enterprise Magazine, "Through Urban Trust Bank (a black-owned bank), (Robert) Johnson created a new entity, Homeowners First Bank. Homeowners First is an advanced lending facility or a bank designed specifically to provide temporary, advance funding to mortgage servicers. Mortgage servicers are the middlemen, who may or may not be the same company as the lender, but who retrieve money from borrowers on behalf of lenders."

We feel this effort may be an attempt to profit, as the Washington Post noted, from the "unprecedented wave of foreclosures, charging distressed homeowners for help negotiating better loan terms -- a service provided for free or for a nominal fee by many nonprofits."

We should remember that Mr. Johnson has a history of not living up to promises made to the black community. Since it is irrelevant to the current discussion, we will ignore historical charges against the man, and focus on the bank.

Urban Trust recently abandoned efforts to maintain a banking presence in black neighborhoods of Washington, DC, preferring to concentrate on more profitable suburban Maryland banking markets.

But as we suggested earlier, we believe black and minority neighborhoods would not have been so heavily and negatively impacted by the subprime lending crisis if Urban Trust had moved to head the crisis off at the start, by offering responsible, non-subprime loans in minority communities. At least one black owned bank, Carver Federal, launched a special effort to do so in 2006, 2007 and 2008.

Bottom line: we see this as a likely-to-be-ineffective attempt to profit from troubles in the Black community. We base this statement on our experience in
helping create a refinancing plan for victims of predatory lending in Minneapolis.

Tuesday, December 16, 2008

Minority Banks See Clients Through Tough Times

"Tell Me More, December 16, 2008 · Although the federal government is pouring billions of dollars into the nation's banks, minority-owned financial institutions serving African-American and Latino communities face their own unique challenges, such as higher unemployment rates and less access to credit. Bill Cunningham, of Creative Investment Research and Luis Pastor, of the Latino Community Credit Union, discuss helping their clients through economic crisis.


Audio for this story will be available at approx. 12:00 p.m. ET today."

Friday, December 12, 2008

Haven Trust Bank of Duluth, Ga. (Asian) Fails

"SAN FRANCISCO (MarketWatch) -- The Federal Deposit Insurance Corporation said late Friday that Haven Trust Bank of Duluth, Ga., was closed by the Georgia Department of Banking and Finance. The failure not only marks the 24th bank failure of the year, but the fifth in the Atlanta area. The FDIC was named receiver, and Branch Banking & Trust of Winston-Salem, N.C. will assume the deposits. As of Dec. 8, Haven Trust had total assets of $572 million and total deposits of $515 million. The FDIC said that BB&T agreed to assume all of the deposits for $112,000 and assume all of the failed bank's assets for about $55 million."

Wednesday, December 10, 2008

Minority Banks Receiving TARP Capital - Update

We have updated our listing of minority banks receiving TARP funding:

UCBH Holdings, Inc. (Asian)
San Francisco CA
Preferred Stock w/Warrants

Broadway Financial Corporation (Black)
Los Angeles CA
Preferred Stock w/Warrants
$9,000,000 Par

East West Bancorp (Asian)
Pasadena CA
Preferred Stock w/Warrants
$306,546,000 Par

Cathay General Bancorp (Asian)
Los Angeles CA
Preferred Stock w/Warrants

Popular, Inc. (Hispanic)
San Juan PR
Preferred Stock w/Warrants

Total to minority banks: $ 1,807,283,000
Total to all banks: $165,306,798,000
Percentage: 1%

Friday, December 5, 2008

Advisory Board Member Howie Hodges mentioned

In an article on the Black Enterprise Magazine blog about the nomination of New Mexico Gov. Bill Richardson as Obama Administration Commerce Secretary, Creative Investment Research, Inc. Advisory Board Member C. Howie Hodges, "who was an assistant director for the department’s Minority Business Development Agency during Clinton’s first administration" noted that,

"Richardson had a very good strategic team and I have no doubt that he will put in place a very capable combination of savvy business people who will also have the political skills to help execute Obama’s mandate to create economic and job growth,' says Hodges, who is currently a senior vice president of One Economy Corp., a global nonprofit that delivers access to technology and content to low- and moderate-income households.

In addition, says Hodges, during the Clinton administration, the agency actively aimed to expand opportunities for minority and women-owned businesses in the private and international trade sectors. Under the leadership of the late Secretary Ron Brown, who died in a plane crash over Croatia, the agency led trade missions to several foreign nations for those businesses and helped them form strategic alliances with such major corporations as Disney, Kodak, and Lockheed Martin.

Because MBDA works with federal agencies across the board, adds Hodges, despite not having a direct appropriation, during the Clinton administration it was able to establish memorandums of understanding with various agencies to form joint ventures with cities and private-sector corporations and explore a variety of international trade opportunities. 'Everybody kind of honed in on what their agency could do to promote these very broad goals. Access to capital wasn’t just at SBA; it was at all of the federal agencies. Access to emerging markets wasn’t just through Commerce, it was also through Energy, which saw tremendous growth in working with minority and women owned businesses,' explains Hodges.

Under Richardson, Hodges believes that minority businesses should seek both increased access to capital, which is always a critical component to success, and access to markets and opportunity. Small business loans, expanded credit, encouraging venture capital companies and minority venture capital companies to invest in minority business will be paramount to the abilities of mid-tier companies’ to build capacity and start-up firms to create new business.

“When you look at job growth and taking our economy from a recession to one that’s growing, a lot of that growth is going to come from new businesses hiring people,” says Hodges.

The important role that green jobs and businesses, environmental sustainability, and energy efficiency will play in rebuilding the nation’s economy is another reason why he thinks Richardson’s past experience at Energy will be an asset in his new role. At the same time, he cautions, it would be unwise to underestimate the importance of technology, another area over which Commerce has oversight.

'Richardson and Obama’s administration need to look at creating a national broadband strategy to help America continue its global competitiveness that will enable it to provide a catalyst for economic growth and job creation,' says Hodges. 'MBDA has been underutilized and a lot will depend on the administration. If it has a priority and focus, the agency will.' "

Wednesday, December 3, 2008

SEC Approves Measures to Strengthen Oversight of Credit Rating Agencies

The SEC today "approved a series of measures to increase transparency and accountability at credit rating agencies, and ensure that firms provide more meaningful ratings and greater disclosure to investors.

The new measures impose additional requirements on credit rating agencies, whose ratings of residential mortgage-backed securities backed by subprime mortgage loans and of collateralized debt obligations linked to subprime loans contributed to the recent turmoil in the credit markets. The SEC also proposed additional measures related to transparency and competition concerning credit rating agencies."

We think these reforms are important first steps, and are mindful of the fact that politics and regulation are the "art of the possible."

As we said in 2005, fradulent practices by credit rating agencies

"threaten the integrity of securities markets. Individuals and market institutions with the power to safeguard the system, including investment analysts and NRSRO’s, have been compromised. Few efficient, effective and just safeguards are in place. Statistical models created by the firm show the probability of system-wide market failure has increased markedly over the past eight years. Investors and the public are at risk."


Monday, December 1, 2008

3rd Annual Forum on Responsible Investing

This annual forum, produced in association with Foundation & Endowment Money Management, Money Management Letter and the Social Investment Forum, continues to grow every year along with the industry itself.

Once again we will bring together a unique mix of pension funds, foundations, institutional asset managers, Wall Street firms, fund managers and ESG experts, providing a must-attend educational and networking platform for sharing the latest cutting edge trends and strategies for achieving ESG integration.

New for 2009, the forum has been expanded to two full days including a half-day workshop, offering an even more action-packed program of lively panel discussions, real-world case studies and interactive Q&A sessions.

3rd Annual Forum on Responsible Investing
Union League Club, New York City
January 12-13, 2009

Thursday, November 20, 2008

TARP Oversight Hearing 11/18 (Tian Weng)

The Bush administration last week announced its plan to abandon the original $700 billion economic rescue plan (Troubled Asset Relief Program (TARP)) and launched a new initiative to inject $250 billion directly into financial institutions. This is to be accomplished by buying bank stock. The thinking is that this will help thaw frozen credit markets and get skittish banks lending again.

On Tuesday November 18th, Members of Congress held a hearing titled “Oversight of Implementation of the Emergency Economic Stabilization Act of 2008 and of Government Lending and Insurance Facilities” in 2128 Rayburn House Office Building. Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke and FDIC Chairman Sheila Bair testified before the House Financial Services Committee. Our overall opinion: the hearing led to plenty of blame being passed around concerning this unanticipated policy shift.

In his statement, Treasury Secretary Paulson defended his decision to change the focus of the bailout plan. He told the panel that Treasury assessed how best to use the TARP funds thru this period. "The U.S. has 'turned a corner' in averting a financial collapse, but more work needs to be done to get things back to normal", Paulson said.

Then he explained why the administration switched bailout strategy. He indicated that, given the severity and magnitude of the situation, an asset purchase program would not be effective enough, quickly enough. Therefore, Treasury decided to forgo its initial plan to buy illiquid assets from banks and other entities and instead developed a plan to inject capital directly into banks. The rationale for developing the capital injection program rests on the assumption that “by investing only a relatively modest share of TARP funds in a Federal Reserve liquidity facility, we can improve securitization in this market and have a significant impact on the availability of consumer credit.”

Many Congressmembers complained about the administration's “180 degree change in policy”. Purchasing trouble assets was the cornerstone of the financial market rescue plan and was almost the entire focus of Congressional debate in the period leading up to legislative enactment. But, as soon as Treasury received the money, it decided that giving capital to banks in return for preferred stock was a better use of the funds. This, some members felt, was obviously deceptive. Members felt that they were fooled by Treasury policy makers.

Paulson argued that Treasury couldn't pursue its initial strategy because after investing $250 billion in banks, Treasury didn't have enough left to have a meaningful impact. An emphasis on capital seems the better strategy going forward. Paulson said he believed that “more capital enables banks to take losses as they write down or sell troubled assets. And stronger capitalization is also essential to increasing lending which, although difficult to achieve during times like this, is essential to economic recovery.”

However, one of Congressman, a gentleman from Pennsylvania, expressed his disappointment that the Administration has been flip-flopping and that Treasury did not inform Congress immediately of the change. “Do we have a plan? Where are we going?” He asked. “There is no playbook for responding to turmoil we have never faced,” Mr. Paulson responded. “We adjusted our strategy to reflect the facts of a severe market crisis.”

Congressional Democrats questioned the management of the bailout program, stating "Congress gave you the authority you requested, but the economy has only gotten worse." Mr. Paulson suggested not all the news was bad. “Our system is stronger and more stable than just a few weeks ago," he said. And Mr. Paulson pointed out that the financial rescue legislation was not meant to be a panacea for all our economic difficulties. "It will take a while to get lending going and repair our financial system" he said. “This won’t happen as fast as any of us would like, but it will happen much, much faster than it would have had we not used the TARP to stabilize our system.”

(Tian Weng,
Master of Economics' 09
George Washington University)

Monday, November 17, 2008

Minority Banks participating in the U.S. government's capital purchase program

"Company: Broadway Financial Corp. (BYFC) (Black owned)
Participation: Broadway received a $9 million investment and issued warrants to buy 183,175 common shares at $7.37 each. Date of disclosure: Nov. 14. Notes: Broadway's risk-based capital ratio was 11% and its tangible capital ratio was 7.65% at Sept. 30."

"Company: East West Bancorp Inc. (EWBC) (Asian owned)
Participation: East West received preliminary approval for $316 million of additional capital Date of disclosure: Nov. 14. Notes: East West's total risk-based capital would increase to 16.20% from 13.12%, and tangible equity to tangible assets ratio would increase to 10.73% from 7.95% as of Sept. 30."

"Company: UCBH Holdings Inc. (UCBH) (Asian owned)
Participation: UCBH issued $298.7 million in preferred shares and warrants to buy up to 7.84 million common shares at an exercise price of $5.71 a share. Date of disclosure: Nov. 14. Notes: The new capital will boost UCBH's risk-based capital ratio to 15% from 12.5%. UCBH announced preliminary approval Oct. 27."

"Company: International Bancshares Corp. (IBOC) (Hispanic)
Participation: Board believes the bank would be eligible for up to $200 million under the program if it secures amendments to allow it to issue preferred stock. Date of disclosure: Oct. 28. Notes: On Oct. 27, the bank's board approved resolutions to amend bank by-laws in order to allow it to issue preferred shares and called for a special shareholder meeting to approve the move."

Note: No Native American or Women-owned banks have received an investment yet.
Source: US Treasury, Dow Jones Newswires, CNN Money

Saturday, November 15, 2008

Hedge Funds and the Financial Marketplace (E.M. Chang)

The Oversight and Government Reform Committee of the US House of Representatives held a hearing titled, “Hedge Funds and the Financial Market” on Thursday, November 13, 2008. The hearing examined systemic risks to financial markets posed by hedge funds and considered regulatory and tax reform proposals. Among the topics, the panels discussed three major issues:
1. What role have hedge funds played in our current financial crisis?
2. Do hedge funds pose a systemic risk to the financial system?
3. What level of government oversight and regulation is appropriate?

Over the last decade, hedge fund holdings reportedly increased five-fold, to more than $2 trillion. The role of the hedge fund industry in the current financial system is becoming more important given this dramatic growth trend. However, hedge funds are virtually unregulated, and not required to report any information on their holdings, their leverage, or their strategies to any government agency. The opacity and non-transparency characteristics of the hedge funds industry hides uncertainty and potential risk to the financial market.

Panel members agreed that hedge fund activities do make positive contributions to capital formation, market liquidity, price discovery, and market efficiency. However, negative impacts might occur when losses cause them to liquidate market positions, resulting in downward pressures on the asset classes they are selling. Given the huge positions that hedge funds hold, the failure of this industry will lead to systemic risk.

The Federal government and SEC can regulate hedge fund relationships with their investors, but these is no explicit rule giving the SEC or the government the power to monitor and assess the effectiveness of hedging activities, especially those that might create systemic risk. During the hearing, Professor Ruder argued that “through legislation or (via) the use of available power, efforts should be made to determine the risk positions being taken by various participants in hedging and derivative trading activities.” However, most panel members also mentioned that “government regulation of financial market systemic risk is a necessity, but government control over market activity should be avoided.” We still need to encourage financial innovation and encourage creative thinking.

Furthermore, the complexity of financial markets is straining the capacity of regulations to keep up with innovations. Professor Lo, director of MIT Laboratory for Financial Engineering, pointed out that “the committee and other parts of government should refrain from reacting too hastily to market events, but deliberate thoughtfully and broadly to craft new regulations for the financial system of the 21st century. However, the financial crisis may be an unavoidable aspect of human behavior, and the best we can do is to acknowledge this tendency and be properly prepared.”

The other important issue the Committee addressed during the hearing concerned tax rules. Currently, most hedge fund managers are compensated in two ways. First, they receive a management fee, typically 2% of the fund’s assets. Second, they receive a profit percentage; typically set equal to 20% of the fund’s profits. The profit is sometimes referred to as "carried interest" and is taxed as capital gain (15% tax rate.) Compared to the tax rate on ordinary income, 25% for most hard-working people, hedge fund managers seem to benefit from an unfair and inefficient tax code. One member argued that “the fund managers do not perform the same functions or face the same risks as entrepreneurs.” Therefore, hedge fund managers should be subject to higher tax rate for capital gains. Some senators and panel members agreed and suggested that we need a new, more fair and efficient tax code to eliminate this unfair tax treatment. However, and not surprisingly, the participating hedge fund managers did not agree with this point of view. They asserted that most of their compensation is taxed as ordinary income. They don’t think there is anything wrong with paying a lower tax rate on capital gains, since all who receive capital gains will subject to the same tax rate.

Furthermore, most hedge fund managers participating in this hearing did support regulations to increase transparency and decrease systemic risk. However, they don’t think hedge funds added to or directly caused the current financial crisis. In fact, they believe there is not enough information to draw conclusive inferences about the systemic risks posed by hedge funds. Mr. Soros, Chairman of Soros Fund Management, argued that the housing bubble and lax credit policy were the main causes of the current financial turmoil. However, for most hedge funds, equity is too small to support the assets of the funds. Congress and most scholars participating in the hearing proposed regulation to control leverage and monitoring to control systemic risk.

In sum, most panel members agreed with new regulation and new organization to increase transparency and help build required risk monitoring systems for the hedge fund industry. However, these regulations should not stifle the market innovation and most wanted to keep their trading strategies confidential. In addition, we still need to examine current tax rules to increase fairness and efficiency of our tax system. There is no reason to penalize wealthy people with a higher tax rate just because they earn much more than others. But it is also unreasonable to grant hedge fund managers favorable tax rates. We expect the government to revise the tax code to eliminate unfairness and restore accountability.

Panel 1 Profile:
Professor David Ruder, Northwestern University School of Law
Professor Andrew Lo, Director, MIT Laboratory for Financial Engineering, MIT
Professor Joseph Bankman, Stanford University Law School
Houman Shadab, Senior Research Fellow, George Mason University

Panel 2 Profile:
John Alfred Paulson, President, Paulson & Co., Inc.
George Soros, Chairman, Soros Fund Management, LLC
James Simons, President, Renaissance Technologies, LLC
Philip A. Falcone, Senior Managing Partner, Harbinger Capital Partners
Kenneth C. Griffin, CEO and President, Citadel Investment Group, LLC

Monday, November 10, 2008

What we said...

Someone recently asked about our track record with respect to the market crisis. Here, from 2003 and 2006, are a few of our comments:

SEC Comments. Page 6: "Envy, hatred, and greed have flourished in certain capital market institutions, propelling ethical standards of behavior downward. Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." December 22, 2003.


SEC Comments. Page 2: "Together these practices threaten the integrity of securities markets. Individuals and market institutions with the power to safeguard the system, including investment analysts and rating agencies, have been compromised. Few efficient, effective and just safeguards are in place. Statistical models created by the firm show the probability of system-wide market failure has increased over the past eight years.

Investors and the public are at risk." February 6, 2006.

Tuesday, October 28, 2008

Hearing on the Role of Federal Regulators (Xinyu Zhang)

The Waxman Committee held a hearing titled, “The Financial Crisis and the Role of Federal Regulators” at 10:00 a.m. on Thursday, October 23, 2008, in 2154 Rayburn House Office Building. The hearing examined the roles and responsibilities of federal regulators in the current financial crisis. This is the fourth hearing into the ongoing financial crisis. Testifying were Alan Greenspan, former Fed Chair, John Snow, the former secretary of the Treasury, and Christopher Cox, the current chair of SEC.

This hearing was the first concerning with the role of the public sector. Based upon what legislators learned from previous hearings, the hearing reflected growing suspicion of the government’s role in the crisis. Specifically, if the government had intervened earlier, the crisis would likely be prevented. This led to today's review of actions and inaction before the crisis.

Committee Chairman Henry Waxman admitted that there has been a de-regulatory atmosphere throughout the financial system, which led to handing over almost all regulatory responsibility to the supposedly infallible market. All branches, including the Congress, are responsible for the crisis. The Committee summoned the three testifiers to learn about what in the past had not been done correctly, and what the government should do to fix the flaws of the system.

The testimony began with Mr. Greenspan. He outlined the sources of the crisis and government policies that could best address the turmoil going forward. He discussed what he has learned during the past year. He said the most important factor that would lead to the end of this crisis is the stabilization of home prices, because this would increase the values of mortgage-backed security collateral. But, unfortunately, he sees this as “many months in the future.” Between now and then, to avoid severe retrenchment, financial intermediaries should get rid of insolvent assets. He believes that 700 billion dollars would be adequate.

He also said that the failure of the self-interest of lending institutions to protect shareholders’ equity left him in a “state of shocked disbelief.” He emphasized that those who issued securitized products should be restrained from doing so in the future. He also suggested changes in regulations, particularly with respect to fraud, settlement, and securitization. He finnaly suggested that regulators eek to reestablish a more sustainable subprime mortgage market, as home and small business owners depend upon these.

The second to testify was Mr. Cox. He said the lesson of the crisis is that a strong SEC is needed, which is “unique in its arm’s-length independence from the institutions and persons it regulates.”

He agreed with Mr. Greenspan that all of the activities that “made financial institutions and the broader economy seriously vulnerable to a decline in housing prices,” such as the securitization of bad loans, led to the crisis. He presented three lessons for legislators: first, eliminate the current regulatory gap in which there is no statutory regulator for investment bank holding companies; second, recognize each agency’s core competencies; and third, ensure that securities regulation and enforcement remain fiercely independent.

The last one to testify was Mr. Snow. He thought that policy makers need to avoid saying or doing anything that could decrease confidence, increase market volatility, or undermine ongoing efforts by those in responsible positions to address the situation.

Xinyu Zhang
GWU, BS, Economics, 2009

Thursday, October 23, 2008

Credit Agencies grilled on the Hill (Tian Weng)

Members of Congress held the third in a series of hearings on the financial crisis titled “Credit Rating Agencies and the Financial Crisis.” The hearing, held on Wednesday in 2154 Rayburn House Office Building, examined the roles and responsibilities of credit rating agencies in the current financial turmoil. Top credit rating agency executives also testified before the House Committee on Oversight and Government Reform.

In his opening statement, Committee Chairman Henry Waxman briefly outlined the sequence of events which lead to today’s crises. “The story of the credit rating agencies is a story of colossal failure,” Mr. Waxman said. He pointed out that leading credit rating agencies are essential financial gatekeepers. However, the agencies assigned triple-A ratings to securities and CDOs backed by risky subprime mortgage loans. As a result, the entire financial system is now at risk.

The three largest credit rating agencies - Standard & Poor’s, Moody’s, and Fitch Ratings control over 90% of rating market. They contributed substantially to the financial crisis by failing to warn investors of risk. They cannot evade their responsibility. The three current executives of the leading rating agencies were subject to major criticism:

Unsound rating and model failure. Undoubtedly, ratings are key. The methodologies used for rating CDOs are complex, arbitrary, and opaque. Credit rating agencies rely primarily on quantitative models to develop these ratings. However, these quantitative models cannot accurately reflect the specific credit characteristics of a particular security or issuer. A number of the assumptions they used were not realistic. A representative questioned agencies’ rating methodologies and assumptions because the CDO model seemed far from capable of capturing true risk. The witnesses responded that the business model they were using failed and definitely needed adjustments, but they explained the models were very complex, and hence had to go through several empirical tests. A Democrat read a message from an unnamed S&P's employee: “We rate every deal. It could be structured by cows and we would rate it.” Mr. Egan, Managing Director of another rating agency, admitted that’s ridiculous. “If you don’t understand it, then don’t rate it.” He said.

Fraud. There is an inherent conflict of interest in the industry. Agencies were paid by bond issuers whose debt they were rating instead of by investors who use and trust their ratings. This inhibits agencies from providing accurate and honest ratings. Someone posted questions to executives, “Investment banks got high ratings. Credit Agencies got investment banks’ fees. What did investors/taxpayers get?” Another Democrat cited profit charts of big agencies to strengthen her argument. It showed that S&P’s revenue from US RMBS and CDOs ratings drastically increased, by 25% to 35% as a percentage of total rating revenue, since 2002. Moody’s revenue from structured financial transactions skyrocketed over the same time period. Hence, it is clear that profits play a huge role in rating. But the three executives of credit agencies denied that conflicts of interest had impaired their judgment on mortgage securities. Mr. Fons, former executive of Moody’s, claimed that the analysts took their responsibilities seriously and demonstrated high moral character.

Another concern addressed was next steps going forward to ensure a crisis like this would not happen again. Efforts are needed to restore faith in the system. Rating Agency executives acknowledged that their companies' reputations had been harmed. Nevertheless, they expressed their fervent belief that substantive reforms can restore the integrity and stature of the bond rating industry.

(Tian Weng,
Master of Economics' 09
George Washington University)

Tuesday, October 14, 2008

10th Annual Endowment and Foundation Forum

The 10th Annual Endowment and Foundation Forum will cover the issues that are most relevant to endowments and charitable foundations today and will provide participants with opportunities to network with investors and fund managers in a relaxed setting. The forum will cover the need for non-profit governance for endowments, means of capturing alpha, methods for choosing money managers and the pros/cons of investing in a variety of products.

This event will coincide with the world's largest two-day rowing event, the Head of the Charles Regatta, held on the Charles River adjacent to the Hyatt Regency. Join us and over 300,000 spectators to watch 7,500 competitors from around the globe compete in this prestigious event.

Topics Covered Will Include:
• Trends in Asset Allocation for Endowments and Foundations
• Managed Accounts: A Safer Route to Hedge Fund Returns
• Challenges facing Endowments and Foundations, past, present and future
• Socially Responsible Investing
• Incorporating Alternatives and Emerging Asset Classes into a Smaller Plan

Register and Save!
Register and save $100 off the standard registration rate! Registrations for representatives of endowments and foundations are complimentary.

Thursday, October 9, 2008

SEC Disclosure Initiatives (E.M. Chang)

Modernizing the Securities and Exchange Commission’s Disclosure System

Yesterday, the SEC hosted a roundtable meeting to discuss the 21st Century Disclosure Initiative. The Initiative seeks to examine the basic purposes of disclosure, from the perspectives of investors and markets. The SEC hopes to create a comprehensive plan for overhauling the current disclosure system, EDGAR.

In the first panel, panelists talked about the kinds of information and data format that the market and investors really need, given this dynamic market environment. Most panelists argued that investors need summarized information rather than whole financial statements.

A summary of panelist comments would be:

"Most individual investors access company information using third party services, like Yahoo Finance, Bloomberg, etc… The issue is that people don’t really have time and ability to figure out where is the number they want by looking at the hundreds pages financial statements in the EDGAR system. However, XBRL technology might help improve the usefulness of the new disclosure system by providing a more efficient information distribution. However, one member pointed out that the nature the information is much more important than the way we distribute it. We still lack much important information under the current filling system, like the off-balance sheet transactions, unregulated financial products, especially the credit default swap transactions. We still need to force the companies to disclose this material information to help investor to understand the risk they are facing and further to make their investing decisions."

In addition, some members suggested that the SEC should consult with an top level information provider, like Bloomberg or Morningstar, to figure out what kind of information format and summary most investors need, how to present the data, how to create useful graphs and summary tables.

One panel member stated that: “the information in the EDGAR system is a national treasure, but we need to present it in a more attractive way to our audience, or we might not have people to appreciate it and take a look at the treasures."

In the second panel, panelists provide suggestions for a future disclosure system. The goal of the system is to reduce filing cost and to provide more timely information to investors.

One panelist stated that the goal of the new system is “not to find a way to make the candle burn longer but to create a light bulb to replace the candle.” “The SEC should control the technology to do the job, instead letting the technology bind them.”

There are several challenges to developing this system. Some outlined were:

How to make sure all material information is disclosed in this system?
How to transfer some important footnote information or qualitative information into this new system?
How to disclose the information about unregulated products, like credit default swap?
How to broaden the scope of the information without increasing the burden for companies?

These issues were raised during the panel as was the need for further discussion to find solutions.

We see that the nature of the information is still the most important issue in this new disclosure system.

One member argued that “we want a real time disclosure system, but that is a little bit unrealistic.”

“We still need periodic report filing system to force companies to disclosure their information to increase transparency. But the goal is to force these companies to think about where they are and where they should go in the future,” said by one member in this panel.

In sum, we need to find a way to make the new disclosure system more useful to both institutional investors as well as individual investors. As one panelist noted: “We should not only make it work for the Wall Street, but also make it work for the Main Street.”

The 21st Century Disclosure Initiative seeks not only to creating a more sophisticated system for investors, but also to prevent future financial market turmoil.

As SEC Chairman Christopher Cox mentioned in his opening remarks: “The investors have a right to know the truth — and the risks — about the securities that trade in our public markets.”

Communicating these truths to investors and forcing companies to disclose these truths via this new system will be the main consideration for this new disclosure initiative.

E.M. Chang
MA, Economics (2009)
George Washington University

Tuesday, October 7, 2008

Stunned… again… and we’re not the only ones…(Deanne R. Upson)

We wrote on September 22, 2008 that we were stunned to learn that banking and financial market regulators were considering using taxpayer funds to finance the creation of a separate entity to hold "toxic" financial instruments. We thought this would be a dangerous suggestion that will not solve the problem.

We wrote on April 3rd : With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic.

We wrote: "To protect the public and the markets, these newer derivative contracts should be extinguished. To put the fire out, put the fire out."

Apparently, we’re not the only ones who saw this coming, raised the alarm, and were ignored. In his Commentary in the New York Times on Sunday, September 28 Ben Stein notes similar concerns and the need to “annul” financial gambling run rampant by the financiers who peddle derivatives, including the impossible to value “credit-default swaps.” Stein notes, “These derivatives are “weapons of financial mass destruction,” in the prophetic words of Warren Buffett.” Stein questions, “Why is this [correction] causing so much anguish? It must be the side bets, the credit-default swap bets, multiplying the effect of the housing downturn many times over.”

Socially responsible investing principles require that the perspectives of high, low- and moderate-income people are taken into account. We noted that on Friday, September 26, House Financial Services Committee held a public hearing titled, “The Future of Financial Services: Exploring Solutions for the Market Crisis” on Wednesday, September 24th. At the hearing one member noted her worries concerning the adverse impact of the current situation on women and minority owned businesses. Mr. Paulson replied that he got her message but would work through the Treasury plan first.

Right. It may be that impacts on owners of minority and women owned businesses – let alone homeowners and small businesses – are of little concern, since these are not people that members of the Wall Street Buddy System know, and therefore come after the people and financial markets they do know.

We noted in our posting Wednesday October 1, SRI Provisions of the Bailout Bill, that SRI principles are included in Sec 103 Consideration (of social issues):
(1) Protect the interest of taxpayers
(2) Protect American jobs, savings, and retirement securities
(3) Keep their homes and to stabilize communities
(4) Providing financial assistance to financial institutions, including those serving low and moderate-income populations and other underserved communities.

SRI Principles are also considered in Sec. 107 Contracting (social issues):
The Secretary shall develop and implement standards and procedures to ensure the inclusion and utilization of minorities and women, and minority- and women-owned business, in that solicitation or contract, including contracts to asset managers, servicers, property managers, and other service providers or expert consultants.

We urge Secretary Paulson and Mr. Kashkari to heavily utilize SRI principles and MWBEs considerations in the implementation of the Bailout Plan. There needs to be a bottom up approach to augment the top-down approach. This, hopefully, will create a path to new prosperity.

Deanne R. Upson
Sustainability Advisor

Thursday, October 2, 2008

Top Ten minority owned banks in the US

Below, we feel, are the best minority owned banks in the US (as of 6/30/08):

LIBERTY BANK & TRUST CO, New Orleans, LA (Black)
INDUSTRIAL BANK, Washington, DC (Black)
CARVER STATE BANK, Savannah, GA, (Black)

Yes, we know there are a lot of Black-owned banks on the list. Here's why:
Black banks have always had relatively higher levels of nonperforming loans, so they know better (than, say WAMU) how to survive with these types of loans on the books. We think this skill will serve them well in the current credit cycle. Thus, they are rated a little higher than other minority banks.

We think smaller banks will do well over this part of the credit cycle:
1. They should be able to gain deposits from the big guys.
2. They did not make a lot of subprime loans, so they should have relatively fewer loan defaults.
3. They did not buy a lot of CDO Swaps, or other derivative products.

One cautionary note: if a small bank gets in trouble, it will go down quickly (see: Douglass National Bank of Kansas City). Keep an eye out...(or ask us to do so for you...)

Wednesday, October 1, 2008

Social Investing Provisions of the Bailout Bill

Emergency Economic Stabilization Act of 2008

Purpose: To provide authority for the Federal Government to purchase and insure certain types of troubled assets for the purposes of providing stability to and preventing disruption in the economy and financial system and protecting taxpayers, and for other purposes.

Title I-Troubled Assets Relief Program

Sec.101 Purchases of troubled assets:

Secretary (of the Treasury) shall publish program guidelines, including the following:
(1) Mechanisms for purchasing troubled assets
(2) Methods for pricing and valuing troubled assets
(3) Procedures for selecting asset managers
(4) Criteria for identifying troubled assets for purchase

Sec.102 Insurance of troubled assets.

Sec 103 Consideration (of social issues):
(1) Protect the interest of taxpayers
(2) Protect American jobs, savings, and retirement securities
(3) Keep their homes and to stabilize communities
(4) Providing financial assistance to financial institutions, including those serving low and moderate-income populations and other underserved communities.

Sec 104 Financial Stability Oversight Board(FSOB) (governance issue):

(1) FSOB shall responsible for reviewing the exercise of authority, making recommendations, and reporting any suspected fraud, misrepresentation.
(2) FSOB shall meet monthly and may appoint a credit review committee for the purpose of evaluating the exercise of the purchase.

Sec 105 Reports:

(1) Monthly basis. Must provide detailed financial statement
(2) Provide Regulatory Modernization Report no latter than April 30, 2009.

Sec. 106 Rights; management; sales of troubled assets; revenues and sale proceeds
All the proceeds shall be paid into the general fund of the Treasury for reduction of the public debt.

Sec. 107 Contracting(social issues):

The Secretary shall develop and implement standards and procedures to ensure the inclusion and utilization of minorities and women, and minority- and women-owned business, in that solicitation or contract, including contracts to asset managers, servicers, property managers, and other service providers or expert consultants.

Sec. 108 Conflicts of interest (governance issue):

The Secretary shall issue regulations or guidelines necessary to address and manage or to prohibit conflicts of interest.

Sec. 109 Foreclosure mitigation efforts (social issue):

The Secretary shall encourage servicers to or may take direct action to minimize foreclosures or facilitate loan modifications and restructuring.

Sec. 110 Assistance to homeowners:

(1) Use the HOPE for homeowners Program under section 257 of the National Housing Act or other available programs to minimize foreclosures
(2) Modifications
(3) Tenant protections

Sec. 111 Executive compensation and corporate governance (governance issue):

Any financial institution that sells troubled assets to the Secretary under this act shall be subject to the executive compensation and corporate governance requirement.

Sec. 112 Coordination with foreign authorities and central banks.

Sec. 113 Minimize of long-term costs and maximization of benefits for taxpayers.

(1) The Secretary shall minimize any potential long-term negative impact on the taxpayer.
(2) The Secretary can purchase the assets by using market mechanisms or through direct purchase depending on the market circumstances.
(3) Conditions on purchase authority for warrants and debt instruments to minimize the long-term costs or maximize the benefits for taxpayers.

Sec. 114 Market transparency (governance issue):

(1) The Secretary shall provide the description, amounts, and pricing of assets acquired under this act to the public.
(2) For each financial institution that sells troubled assets to the Secretary, the Secretary shall determine whether the public disclosure required for these transaction.

Sec. 115 Graduated authorization to purchase (governance issue):

(1) Effective upon the date of enactment of this act: $250B
(2) The President submits to the Congress a written certification: $350B
(3) The President provide written report detailing the plan: $700B

Sec. 116 Oversight and audits (governance issue):

(1) The performance of the TARP: foreclosure mitigation; cost reduction; provided stability to the financial markets; protect tax-payers.
(2) Reporting regularly no less frequently than once every 60 days.
(3) Annual audit.
(4) Internal control.
i. The effectiveness and efficiency of operations.
ii. The reliability of financial reporting.
iii. Compliance with applicable laws and regulations.

Sec. 117 Study and report on margin authority:

(1) An analysis of the roles of government institutions to monitoring leverage and acting to curtail excessive leveraging.
(2) No later than June 1, 2009.

Sec. 118 Funding.

Sec. 119 Judicial review and related matters (governance issue).

Sec. 120 Termination of authority.

Sec. 121 Special inspector general for the troubled asset relief program (governance issue):
(1) Conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets by the Secretary of the Treasury.
(2) Need to provide reports every calendar quarter.

Sec. 122 Increase in statutory limit on the republic's debt to:
(1) 11,315,000,000,000.

Sec. 123 Credit Reform:

The cost of troubled assets and guarantees of troubled assets shall be calculated by adjusting the discount rate for market risk.

Sec. 124 Hope for Homeowners amendments.

Sec. 125 Congressional Oversight Panel (governance issue):

(1) The oversight panel shall review the current state of the financial markets and the regulatory system and submit relevant reports to Congress.
(2) The oversight panel shall consist of 5 members:
i. One by the Speaker of the House of Representatives
ii. One by the majority leader of the House of Representatives
iii. One by the majority leader of the Senate
iv. One by the minority leader of the Senate
v. One by all of the above.

Sec. 126 FDIC authority.

Sec. 127 Cooperation with the FBI.

Sec. 128 Acceleration of effective date.

Sec. 129 Disclosures on exercise of loan authority
(1) Once every 60 days

Sec. 130 Technical corrections.

Sec. 131 Exchange stabilization fund reimbursement:
(1) The Secretary shall reimburse the Exchange Stabilization Fund for any funds used for the temporary guaranty program.
Sec. 132 Authority to suspend mark to market accounting
(1) The SEC shall have the authority to suspend, by rule, the application of statement number 157 of the financial accounting standard board for any issuers or with respect to any transaction if the commission determines that is necessary or appropriate in the public interest.

Sec. 133 Study on mark to market accounting:
(1) Conduct a study on mark to market accounting standards as provided in statement number 157 of the FASB
(2) Shall submit to Congress before the end of the 90 day period beginning on the date of the enactment of this act.

Sec. 134 Recoupment:

If these are any shortfalls after a 5 year period, the President shall submit a legislative proposal that recoups from the financial industry an amount equal to the shortfall in order to ensure that the TARP does not add to the deficit or national debt.

Title II-Budget-Related Provisions.

Title III-Tax Provisions.

Cheng-Chung Chang
George Washington University
Masters, Economics, December, 2008

Friday, September 26, 2008

Cash for Trash (Revised)

President George W. Bush last week laid out a $700 billion Wall Street rescue plan ostensibly aiming at preserving the nation’s overall economy. Dubbed "Cash for Trash,” the plan has sparked a sharp debate. The House Financial Services Committee held a public hearing titled, “The Future of Financial Services: Exploring Solutions for the Market Crisis” on Wednesday, September 24th at Rayburn House Office Building. This was a legislative hearing to examine the Bush Administration’s financial services proposal. Secretary of the Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke explained the proposal at the hearing.

The hearing started at noon and included two parts. At the beginning, members of the Committee were given an opportunity to note their concerns and to comment on the bailout plan. Most did not endorse the plan: they thought it would be a mistake to rush such a huge expenditure, one that would boost the national debt to over 70% of GDP.

Committee members addressed four major sticking points. First, the lack of communication with the public before the plan came out. Members indicated that the Administration should tell the American people what happened and why the plan is needed. The second concern centered on benefits to the taxpayers, and members suggested that "people must be the first priority - we should protect taxpayers. It is absolutely unfair to use taxpayer funds to fix a hole Wall Street firms dug. Taxpayers should share in the benefits of this plan." Third, some members suggested that “robbing Peter to pay Paul” will not solve the problem. From a long-term development perspective, the country may experience a long and painful recession. Last but not least, members stated that public oversight of the Treasury rescue operation is required, especially in light of the lack of financial asset transparency. Members were concerned that someone may receive a unfair windfall using taxpayers’ money.

In the second part of the hearing, after 2:30pm, Mr. Paulson, and Mr. Bernanke tried to convince Congress that a $700 billion plan is the only way out of the current crisis. Mr. Paulson acknowledged the severity of the problem and stated that he understood the concerns raised, but explained the plan seeks to “avoid a continuing series of financial institution failures and frozen credit markets that threaten American families’ financial well-being, the viability of business both small and large, and the very health of our economy”. He clarified that the $700 billion program was an “asset purchase program” instead of a “government spending program” because these assets would ultimately be resold with proceeds coming back to the government. He also pledged to protect the taxpayer to the maximum possible extent possible and to ensure transparency and oversight while implementing the program. Moreover, he is convinced that, although this approach may look bold and risky, it would be a far less costly approach than other alternatives. Finally, he expressed a desire to have Congress and the Administration work closely together to get through the difficult period. “Many of you also have strong views, and we must have that critical debate, but we must get through this period first,” he said.

The Fed Chairman Mr. Bernanke outlined the threat to the economy from the home mortgage crisis and argued that inaction would produce an even larger catastrophe, hence, the Federal Reserve's strong stand in favor of Treasury’s proposal to buy illiquid assets from financial institutions. He argued that having the government steps in would help restore normalcy to the market. “It’s possible for the government to buy these assets, to raise prices, to benefit the system, to reduce the complexity, to introduce liquidity and transparency into these markets and still acquire assets which are not being overpaid-for in the sense that under more normal market conditions, and if the economy does well, most all of the value can be recouped by the taxpayer.” Mr. Bernanke said in his testimony.

One member noted her worries concerning the adverse impact of the current situation on women and minority owned businesses. Mr. Paulson replied that he got her message but would work through the Treasury plan first.

(Tian Weng, Master of Economics' 09
George Washington University
Washington, DC 20052)

Monday, September 22, 2008


We are stunned to learn that banking and financial market regulators are considering using taxpayer funds to finance the creation of a separate entity to hold "toxic" financial instruments. This is a dangerous suggestion that will not solve the problem. At best, this is akin to moving a fire from, say, your living room to your dining room. At either location, the fire will continue to grow. The proposed separate entity simply provides more oxygen to the fire, wherever it is.

We will be spending all of our reserves:
1. to purchase a set of financial instruments with limited information on what, exactly, we are buying,
2. to purchase a set of financial instruments with limited value,
3. to purchase a set of financial instruments with unlimited risk,
4. to purchase a set of financial instruments with virtually no information on how long we will have to hold them to "turn a profit." (Note that these contracts will never turn a profit. They are not designed to...) and,
5. to do all of this under severe time pressure.

Thus, the plan has the added disadvantage of eventually forcing the US Government to follow Wall Street into bankruptcy. A spectacularly bad deal.

These toxic instruments were created not to stabilize markets, since clearly, they have failed to do so. These newer derivative contracts and products were created to evade regulatory safeguards and to maximize commission revenue. They did so by being opaque and hard, if not impossible, to value. Few serve any truly useful function. We note that, for 100 years, standardized futures contracts and options (derivatives) have been used to stabilize markets. We would not think of buying all outstanding futures contracts traded on the Chicago Board of Trade. Why are we being asked to do so for a private exchange run by a group of firms in New York? This confirms what we wrote on April 3rd: With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic. Using all of the reserves at the Federal Reserve to bail these firms out would be a foolish waste of money.

To protect the public and the markets, these newer derivative contracts should be extinguished. To put the fire out, put the fire out. Again, they serve no purpose but to generate revenue for brokerage firms and investment banks. Even in that, over the long term, they failed. The best way to extinguish these instruments is to create a database showing the transaction chain (seller, buyer, intermediary) for each and every financial derivative contract, something the State of NY is moving to do with credit default swaps. We note that this is the role of an exchange. The transaction database should includes information on prices and commissions paid. Instruments should be reviewed one-by-one by a panel of objective experts to determine economic value and utility. Legal contracts supporting those without either should be vacated immediately by the SEC, operating with the consent of the US Congress. Note that we are not opposed to the creation of an entity holding assets backed by real property or loans.

Finally, there should be a 14 day "cooling off" period before anything is done. If this means forcing banks to lend (short term) to corporations, so be it. This is cheaper (and better) than the alternative, spending $700 billion at once.

We are deeply concerned.

Thursday, September 18, 2008

Christopher Cox

Christopher Cox is still, without a doubt, the best financial regulator appointed thus far by the Bush Administration. We base this on performance. Mr. Cox knew the situation. He came in at a time of unprecedented corporate and market institution fraud and malfeasance. Things got worse, of course, but it was bad when he walked in the door. As soon as he took over, he increased staff and started investigating Wall Street broker/dealers, something many did not believe he would do, given his close ties to the Street. His Office of Interactive Disclosure is a masterpiece, and shows he understands the role technology will play in preventing future crises. The Office created an online tool that enables investors to easily and instantly compare what 500 of the largest American companies are paying their top executives, an Internet Web page that enables investors to more easily read, analyze, and compare the information provided by mutual funds related to fund cost, risk, and past performance, Financial Explorer, an open source tool to help investors quickly and easily analyze the financial results of public companies, and a web tool that permits investors to obtain information directly from company disclosure documents about their business interests in countries the U.S. Secretary of State has designated 'State Sponsors of Terrorism (later taken down because of objections from business lobbyists).

The problem is not at the SEC, as we noted on 5/5/2006.

Wednesday, September 17, 2008

Money market fund breaks a buck

Forget everything else you have heard about the financial crisis. Focus on this. According to USA Today,

"The share price of the Reserve Primary fund, a money market mutual fund, has fallen below the sacred $1 mark, thanks to the Lehman Bros. meltdown.

Money market funds have been the fund industry's haven for more than three decades, and investors often view them the same way they do bank checking accounts. The funds' safety record has attracted more than $3.5 trillion in assets.

Until now, no money fund open to the general public has ever allowed its share price to dip below a dollar — "breaking the buck," as it's called. (A small institutional money fund, Community Bankers Money fund, broke the buck in 1994.)

Money market funds have long feared that if they broke the buck, thereby shrinking investors' principal, people would shift their money into bank money market accounts or ultrasafe Treasury securities. The question now is whether other money funds will follow the Reserve fund in dipping below $1."

Let me answer that for you: yes. What do we suggest? Two things:

One - Treasury Direct. Now.
And two - Pray. Hard.

Monday, September 15, 2008

10th Annual Endowment and Foundation Forum

The 10th Annual Endowment & Foundation Forum will cover the issues that are most relevant to endowments and charitable foundations today and will provide participants with opportunities to network with investors and fund managers in a relaxed setting.

Topics Covered Will Include:
• Trends in Asset Allocation for Endowments and Foundations
• Portfolio Construction and Implementation, Developments and Advances
• Challenges facing Endowments and Foundations, past, present and future
• Socially Responsible Investing
• Incorporating Alternatives and Emerging Asset Classes into a Smaller Plan
• Manager Selection

Sponsorship and Exhibiting Opportunities are Available!
Please contact or call 212-532-9898, ext. 275.

Register by visiting us online here! Registrations for representatives of endowments and foundations are complimentary.

Monday, September 8, 2008

Fannie and Freddie

Of course, the US Treasury forced Freddie and Fannie into "Conservatorship."

According to FHFA Director James B. Lockhart and the Treasury, "Conservatorship is a statutory process designed to stabilize a troubled institution with the objective of returning the entities to normal business operations. FHFA will act as the conservator to operate (Fannie and Freddie) until they are stabilized.

There are several key components of this conservatorship:

First, Monday morning the businesses will open as normal, only with stronger backing for the holders of MBS, senior debt and subordinated debt.

Second, the Enterprises will be allowed to grow their guarantee MBS books without limits and continue to purchase replacement securities for their portfolios, about $20 billion per month without capital constraints.

Third, as the conservator, FHFA will assume the power of the Board and management.

Fourth, the present CEOs will be leaving, but we have asked them to stay on to help with the transition.

Fifth, I am announcing today I have selected Herb Allison to be the new CEO of Fannie Mae and David Moffett the CEO of Freddie Mac. Herb has been the Vice Chairman of Merrill Lynch and for the last eight years chairman of TIAA-CREF. David was the Vice Chairman and CFO of US Bancorp. I appreciate the willingness of these two men to take on these tough jobs during these challenging times. Their compensation will be significantly lower than the outgoing CEOs. They will be joined by equally strong non-executive chairmen.

Sixth, at this time any other management action will be very limited. In fact, the new CEOs have agreed with me that it is very important to work with the current management teams and employees to encourage them to stay and to continue to make important improvements to the Enterprises.

Seventh, in order to conserve over $2 billion in capital every year, the common stock and preferred stock dividends will be eliminated, but the common and all preferred stocks will continue to remain outstanding. Subordinated debt interest and principal payments will continue to be made.

Eighth, all political activities -- including all lobbying -- will be halted immediately. We will review the charitable activities.

Lastly and very importantly, there will be the financing and investing relationship with the U.S. Treasury, which Secretary Paulson will be discussing. We believe that these facilities will provide the critically needed support to Freddie Mac and Fannie Mae and importantly the liquidity of the mortgage market."

Freddie and Fannie common stock is, basically, worthless. If you own the stock, I would hold onto it, but recognize that it is now a long term investment. A VERY long term investment.

On June 15, 2000, I testified before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises (GSE’s) of the US Congress. I suggested that the GSE’s (Fannie Mae and Freddie Mac) be subject to a through “Social Audit.” A Social Audit is an examination of the performance of an enterprise relative to certain social objectives. It also includes a review of ethical practices at the firm.

Had they been subject to this audit, certain flaws in their operation, including certain ethical shortcomings, would have been revealed earlier, in a better market in which to make corrections.

At best, conservatorship is a half measure, designed to, as noted above, stabilize the patient. It is life support, nothing more.

The patient is still, however, in the ER.

Thursday, September 4, 2008

Chief of Adams National Resigns Bank Faces Rising Real Estate Losses

According to Washington Post,

"The chief executive of District-based Adams National Bank (Woman owned) resigned on the eve of a meeting scheduled for today with federal banking regulators to review the company's financial condition. Jeanne Delaney Hubbard also stepped down as chairwoman and chief executive of the bank's parent company, Abigail Adams National Bancorp.

Adams National faces mounting losses on real estate loans and this summer disclosed that it had been classified as "troubled" by its regulator, the Office of the Comptroller of the Currency, subjecting the bank to greater scrutiny. Last week, the Abigail Adams board voted to suspend quarterly dividend payments to shareholders."

Wednesday, September 3, 2008

SEC Charges Two Wall Street Brokers in $1 Billion Subprime-Related Auction Rate Securities Fraud

According to the SEC:

"Washington, D.C., Sept. 3, 2008 — The Securities and Exchange Commission today charged two Wall Street brokers with defrauding their customers when making more than $1 billion in unauthorized purchases of subprime-related auction rate securities. The SEC's Division of Enforcement in 2007 formed a subprime working group, which is aggressively investigating possible fraud, market manipulation, and breaches of fiduciary duty that may have contributed to the recent turmoil in the credit markets.

The SEC's complaint, filed in federal court in Manhattan, alleges that Tzolov and Butler, while employed at Credit Suisse Securities (USA) LLC in New York, deceived foreign corporate customers in short-term cash management accounts by sending or directing their sales assistants to send e-mail confirmations in which the terms 'St. Loan' or 'Education' were added to the names of non-student loan securities purchased for the customers. Tzolov and Butler also routinely deleted references to 'CDO' or 'Mortgage' from the names of the securities in these e-mails. As a result, the complaint alleges that customers were stuck holding more than $800 million in illiquid securities after auctions for auction rate securities began to fail in August 2007. Those holdings have since significantly declined in value."

SEC Charges Former CEO of Kellogg, Brown & Root, Inc. with Foreign Bribery

According to the SEC:

"Washington, D.C., Sept. 3, 2008 — The Securities and Exchange Commission today charged former Kellogg, Brown & Root, Inc. (KBR) executive Albert Jackson Stanley with violating the anti-bribery provisions of the Foreign Corrupt Practices Act (FCPA) and related provisions of the federal securities laws. The Commission alleges that over a 10-year period, Stanley and others participated in a scheme to bribe Nigerian government officials in order to obtain construction contracts worth more than $6 billion. The contracts were awarded to a four-company joint venture of which The M.W. Kellogg Company, and later KBR, was a member."

Tuesday, August 26, 2008

OCC Interim Final Rule Encourages Public Welfare Investments by National Banks

According to the Comptroller of the Currency,

"WASHINGTON — The Office of the Comptroller of the Currency (OCC) issued a banking bulletin on an interim final rule to implement the changes to national banks’ public welfare investment authority enacted in the Housing and Economic Recovery Act of 2008 (HERA), which the President signed into law on July 30, 2008."

Public welfare investments are investments that promote the public welfare. (Sorry to be circular, but it is what it is.) These are investments that primarily benefit low and moderate income individuals, low and moderate income areas, or other areas targeted for redevelopment. They include debt or equity investments that finance small businesses, provide credit counseling, job training, community development research. We believe the law and resulting regulation timely.

The OCC goes on to state that "This provision in HERA restored national banks’ full authority to make investments designed primarily to promote the public welfare, including in low- and moderate-income communities, communities affected by
foreclosures and targeted for revitalization, designated disaster areas, and underserved rural communities. The OCC recognized the need to implement this provision promptly.

Although there is a 30-day public comment period, the interim final rule became effective on August 11 when it was published in the Federal Register. The comment period closes on September 10, 2008."


Monday, August 25, 2008

China Construction Bank

BEIJING/HONG KONG (Reuters) - "China Construction Bank , the country's second-largest lender by assets, said on Monday it expects local currency lending to grow 10 percent this year, implying stepped up activity in the second half, but warned of slowing profit growth.

Construction Bank, which on Friday posted a 71 percent jump in first-half net income to 58.7 billion yuan ($8.6 billion), said growth in lending would be driven in part by loans to small and medium-sized enterprises and agricultural businesses."

We have created a set of reports covering the financial and social performance of the top five Chinese banks.

Thursday, August 21, 2008

Social Responsibility Can Be Profitable

According to the Wall Street Journal, “Andrew Bischel believes green-minded, socially conscious investors don't have to sacrifice returns to have a portfolio they feel good about.”

“‘There's a belief that the effect of shrinking the universe through constraints either causes you to lose return opportunities or it increases volatility because you don't have diversification,’ Mr. Bischel says. ‘We believe we know how to manage within a constrained universe. It is true that good companies can be good stock -- they perform well over the long term because they are less likely to have disasters down the road.’”

“Socially responsible funds came into vogue and prospered through the 1990s, but not necessarily because they were well-managed, Mr. Bischel says. For the most part, such funds were heavily weighted in the then-booming technology and telecommunications sectors because those companies had a sterling reputation among the social-responsibility crowd. When the bubble burst on tech stocks, those funds sank with them.”

Angela Wang

Public Calls for Ethical Investment from Charities

According to Fair Investment Company, “Nearly all respondents [of a survey of 2,000 UK adults] – 91 per cent – agreed that charities should be ethically and socially responsible when it comes to investment, a sign of the growing interest amongst the British public in where their money is going and how it is used by charities.”

“Just 55 per cent of large UK charities had an ethical investment policy in 2006, and charities risk their reputations and income if they do not make investments which are conducive with their objectives.”

“Many charities are concerned that the credit crunch will have an adverse affect on their income, both from monetary gifts and in the form of donated goods to sell in their shops; thus it is more important than ever for charities to insure that they do not jeopardise income by going against the principal foundations of the organisation, the EIRS said.”

Angela Wang

Sunrise Community Banks To Offer Remote Deposit Capture Service From Kodak And CFC Technology To Business Customers

According to ECM Connection, “Twin Cities based Sunrise Community Banks announced it is expanding its EZ Deposit service to business and nonprofit customers nationwide. This service allows customers to save time and energy by making electronic deposits from the convenience of their offices.”

“EZ Deposit stands for ‘energy efficient and zero waste,’ which complements Sunrise Community Banks' socially responsible business model.”

“‘Collectively, we're recognized as ‘Minnesota's Socially Responsible Banks®,’ having demonstrated our ability to make a difference in our urban communities,’ said David Reiling, CEO, Sunrise Community Banks. ‘Our Socially Responsible Deposit Fund allows depositors to dedicate funds to be targeted toward affordable housing projects, small business and community investment programs in low and moderate income areas of the Twin Cities.’”

Angela Wang

Wednesday, August 20, 2008

Freddie, Fannie and Socially Responsible Investors

Here is what we think happened.

Freddie and Fannie became arrogant, in that way that says: we know more that you do, we know more that you ever will, we are smarter, better paid and better looking than you. They were right, for a time. But time always runs out.

They were "socially responsible" companies of long standing, the originals, immune to either criticism or improvement. Their attitude, financial and reputational strength gave them great power, power they misused.

Deregulation supported them on the upside and failed them on the downside. They should have stopped abusive home mortgage market lending practices, as we suggested in 1995 and 2001, but found themselves turning up the heat on a housing market mania that required fraudulent practices. Generating income and increasing "shareholder value," became the order of the day. Managers at Freddie and Fannie were caught up, too. They wanted their share of the American Pie, even if that meant turning the oven up way too high. GSE managers stopped being anything other than greedy. Of course, anything smacking of long term social concern was driven out, also.

With no regulators to fear, with little competition, operating within a maniacal market that forgave all sins (except missing earnings estimates), they forgot their role in setting ethical home mortgage market lending standards.

Ironically, other, more powerful and greedier groups were angling for profit. A new set of players stood at the ready. Hedge funds, eying $5 trillion dollars of potentially distressed MBS and other debt, operating in the dark, took advantage of a lack of both GSE oversight and hedge fund regulation. Enjoying freedom from concern about society, and able to use fraudulent and unethical business practices, hedge funds may drive the companies into bankruptcy. Once there, Funds would have a field day, buying GSE debt and MBS securities for pennies on the dollar, waiting for the housing market to rebound, earning 2 and 20, easily.

Yet and still, we believe in the social mission these companies set out to achieve. The bottom line: Socially Responsible Investors might consider buying Freddie and Fannie stock at these levels.

Friday, August 15, 2008

Positive second qtr 2008 results for Carver

Carver Bancorp, Inc. reported earning $700,000, or 27 cents per share, in the second quarter of 2008. The bank declared a cash dividend of 10 cents per share. This compares favorably to the mammoth writedowns, and the resulting hits to income, large banks are reporting this quarter. For example, according to,

"Salt Lake City-based Zions' Bancorporation..closed down 14.3%, becoming the top loser among financials after a rapid tumble.. The fall in the bank's share price comes after Moody's Investors Service said it was reviewing the company for a downgrade.

Wachovia reported a second-quarter loss of $9.11 billion, or $4.31 a share, last month. Wachovia ended 12% lower as traders beat down the stock on news that the bank is revising lower its second-quarter loss by $500 million pretax. This was to reflect a hit it is likely to take from settlement discussions with regulators of investigations relating to auction-rate securities."

Thus, small, minority banks will, we believe, outperform their larger, non-minority counterparts for the balance of the year.

At Carver, net interest income declined by $400,000, and non-interest expense climbed by $800,000. Non interest income increased by $600,000, and the bank generated an income tax benefit totaling $500,000.

One worrying sign: Carver increased provision for loan losses - non-performing loans at the bank increased. And bank assets fell to $788.7 million, driven lower by declines in cash and cash equivalents.

Carver Bancorp is the holding company for Carver Federal Savings Bank, the largest African American run bank in the United States.

Thursday, August 14, 2008

Mythbusters: Ethical Funds Equal Poor Returns

According to, “While some advisers may still be warming up to the idea of ethical or socially responsible investment (SRI), research shows clients are increasingly demanding it. But despite what some may fear, investing in line with a client’s principles does not have to mean the death of decent returns, particularly if advisers choose funds with care.”

“Research released by the Association of Independent Financial Advisers in May revealed that close to a quarter of advisers saw increased consumer interest in ethical investments last year. Meanwhile, figures from Ethical Investment Research Services (Eiris) show that as of December 2007, there were nearly 100 green and ethical retail funds available in the UK with investment at a record £8.9 billion.”

“Eiris head of responsible investment development Stephen Hine said experience shows that over an extended period, ethical, SRI and sustainable funds can perform as well, if not slightly better, than their non-ethical, non-green peers.”

Angela Wang

Thursday, August 7, 2008

"Green" Sections removed from the Housing Bill, replaced with the "Green Act of 2008" (Amy Rosenthal)

The recent passage of the housing bill brings relief to those suffering from foreclosure, but recent changes to the bill bring disappointment on the clean energy front. Title X of the bill, passed in the House then struck down in the Senate, was not included in the final version of the bill which recently emerged from conference. Title X included key tax incentives for energy efficiency, such as tax incentives for the production of clean energy from solar and geothermal processes, as well as tax incentives for incorporating efficient energy usage in housing. It extended tax credit for new energy efficient homes through 2010, and extended the tax credit for energy efficient appliances, such as dishwashers and refrigerators, through 2009.

All is not quiet on the clean energy front, however. While the housing bill might serve as a setback, another bill titled the GREEN Act of 2008, sponsored by Colorado Representative Ed Perlmutter and 41 other co-sponsors, focuses on providing incentives to green building. This bill includes an overhaul of the current energy efficient mortgage process to help provide oversight for the current program, as well as expand it. The bill also expands regulations on energy efficiency in building, and provides community reinvestment aid for supporting energy efficient housing.

Amy Rosenthal

Wednesday, August 6, 2008

Looking for U.S. based Minority Business Enterprises/Entrepreneurs

VHCDC-MBE Capital Connect™ is looking for U.S. based Minority Business Enterprises/Entrepreneurs with innovative, marketable solutions within the Business Products and Services, Consumer Products and Services, E-Commerce, Energy, Entertainment/Media, Internet, Telecommunications, and Technology industries to enter the Top-MBE Business Plan Competition to win a spot to pitch their business opportunity to active angel investors, lenders, and venture capitalists. Pitching sessions will be conducted Friday, September 26th during the 2008 MBE Capital Call. Entries will be evaluated against the same criteria used by active investors to screen potential investment opportunities.

Interested parties must register to be considered. Logon to: today to register.

James R Taylor, Director
VHCDC-MBE Capital Connect™
757.671.8333 VM

Tuesday, August 5, 2008

Investing in Water: Bringing Water to the Sea

According to, “For socially responsible and green investors, investing in water can support a double bottom line of earning returns while supporting the environment and communities. A number of indices, accompanying ETFs, and mutual funds follow global water companies.”

“Christian W. Magoon, President and Senior Managing Director of Claymore Securities, told, ‘Water is the only commodity for which there is no replacement. Can we replace oil? Yes. Oil we can replace. Same with lumber or soybeans. There is only so much water on earth, but the demand for water itself is not affected by inflation or tax rates,’ Magoon said.”

“Water companies span a wide range of sectors and industries including infrastructure, utility, clean water production, efficiency, filtration, purification, monitoring, waste water treatment and pollution control. Sectors that can have a significant impact on water include chemical, steel, manufacturing, and agriculture.”

Angela Wang

Monday, August 4, 2008

Top Canadian Equity SRI Funds (Angela Wang)

According to, “More environmentally-conscious Canadians are looking at socially-responsible mutual funds as a way to invest using a "green" approach.”

“There are now almost 50 SRI mutual funds and ETFs available in Canada and the major players are starting to realize that there is something happening that merits their attention. Within the past year, three of the big bank fund groups have launched SRI entries. Last July, RBC created the RBC Jantzi Balanced Fund, RBC Jantzi Canadian Equity Fund, and RBC Jantzi Global Equity Fund. Two months later, we got the TD Global Sustainability Fund and in February of this year the Scotia Global Climate Change Fund appeared. If you sense a trend here, you're right.”

Angela Wang

Pax Fined for Failure to Screen Investment Funds (Angela Wang)

According to the Associated Press, “Pax World Management Corp. has agreed to pay a $500,000 fine because it failed to follow its own socially responsible investing criteria over a five-year period, when two of its mutual funds invested in off-limits industries such as gambling and liquor, and oil and gas exploration.”
“Portsmouth, N.H.-based Pax, a pioneer in the growing socially responsible investing niche, agreed to pay the penalty to resolve civil charges announced Wednesday by the Securities and Exchange Commission.”

“Pax said the portfolio managers that had overseen the two funds at which the SEC found violations are no longer employed by Pax. The firm's head of social research at the time of the failures also has left, along with the chief compliance officer.”

Angela Wang

Wednesday, July 30, 2008

Socially Responsible Investors and the Housing Bill (Amy Rosenthal, Peter Murray, Angela Wang)

We anticipate that the Housing Bill will impact socially responsible investors via it's impact on low and moderate income communities. Mortgage borrowers will win; lenders will suffer some losses. Several sections in the law (for example, rules concerning disclosure) will now force lenders to fully explain to borrowers exactly how mortgage loan payments work. In addition, new borrower counseling programs are created to provide advice to borrowers.

The bill’s first impact on social investors will come in the form of block grants given to the states. These block grants are meant to spur investments in troubled neighborhoods. Many times, foreclosed homes drive down property values in the neighborhood, leading to more foreclosures. The grants are targeted to areas with large amounts of foreclosed properties, and will help to prevent domino effect cited above. Low to moderate income communities, which have been hit hardest by the increase in foreclosures, should specifically benefit.

Several tax provisions also included in the bill. One section extends the net operating loss carryback period for businesses to four years from the current two year period. This means that losses recognized this year can be negated by taxes paid in prior profitable years, which would then allow the government to refund taxes paid in the past. The title also provides billions of dollars for new cheap mortgages as well as money to make currently foreclosed homes cheaper and therefore more likely to be taken off the market.

The bill also seeks to help certain targeted populations. It provides relief to people affected by the 2005 hurricanes as well as those affected by recent violent weather in the mid-west. Title IX of this bill is designed to aid veterans. Large amounts of funds will be allotted to maintain disabled or injured soldiers’ homes.

From a socially responsible investing standpoint, Title X is one of the most interesting parts of this bill since it not only helps homeowners keep their homes but it also encourages homeowners to be more eco-friendly. This title introduces the Clean Energy Tax Stimulus Act of 2008. The Act extends tax credits for using renewable resources in your home or business. The deadline for tax credits for investing in solar energy, fuel cells, and micro turbines is also extended by this act. Although this particular title does not directly address foreclosures, it will move homeowners to buy energy efficient appliances and heating systems. These tax breaks will also certainly bring on the development of a new wave of eco-friendly mortgage products. As more people begin to adopt these green technologies, the appliances and heating and cooling systems will become cheaper. Homeowners with these mortgages will also be less likely to default since the energy saving appliances and heating and cooling systems will reduce the monthly electric bill, which in turn would make the already low mortgage even more affordable.

The final part of the bill targets Fannie Mae and Freddie Mac. First, the bill establishes new regulatory oversight for the GSEs, now regulated by the Office of Federal Housing Enterprise Oversight. The new authority will presumably enforce tougher and stronger regulations, and will establish new capital standards to ensure the financial security of the GSEs. Second, the bill creates a temporary FHA program, called HOPE for Homeowners, to help certain borrowers who are at risk of foreclosures refinance their mortgages. Lenders voluntarily agree to participate in this new program. The program will be funded by Fannie Mae and Freddie Mac. According to the Congressional Budge Office’s most recent analysis, the new legislation will cost Freddie and Fannie approximately $710 million in 2009. Thus, the bill leans heavily on Fannie Mae and Freddie Mac to pay for the subprime mortgage bailout; the government is putting a big responsibility on the two corporations to pull the economy through this financial turmoil.

Amy Rosenthal
Peter Murray
Angela Wang

Tuesday, July 29, 2008

Expect other small banks to fail

From Alumni Connections, No. 44 - March 2008. Alumni Connections is a sampling of alumni news gleaned from media online and in print, including news submitted to Chicago GSB Magazine.

"William Michael Cunningham, Social Investing Advisor of Creative Investment Research, linked the failure of African-American-owned Douglass National Bank to the global mortgage crisis, according to a January 28 article in U.S. News & World Report. The bank, which originated in the 1940s, lost $1.3 million in 2007 and $4.3 million in 2006, the article said. Bad commercial real estate loans, not residential mortgage loans, led to recent losses, the article said. “It’s this secondary and tertiary impact of the crisis in the subprime market that’s beginning to impact smaller institutions mainly through [the slowdown in] consumer spending,” Cunningham told the magazine. He said he expects other small banks to fail, as a faltering economy inhibits borrowers’ ability to repay loans. Douglass is the fourth bank to fail since February 2007, the article said."


Sunday, July 20, 2008

Foreclosure Prevention Act of 2008 (Peter Murray)

The Foreclosure Prevention Act of 2008 is currently being debated and molded by members of Congress. The bill is a response to the escalating housing crisis which has had damaging effects on the economy as a whole. It was introduced by members of the Senate in February in hopes that foreclosure rates could be brought down and the rippling effects of these foreclosures could be averted.

The first step that this bill plans to enact is better access to Federal Housing Administration (FHA) loans for families in risk of foreclosure. This will provide safe, fixed-rate mortgages as well as counseling services to homeowners.

Struggling homeowners would then be able to refinance into lower cost, government insured mortgages. The influx of funds to the counseling program could potentially help as many as 500,000 Americans receive advice on how to better manage their home. This government spending also acts as a stimulus to fiscal policy which may consequently help the economy.

Under this bill, a bankruptcy judge would be able to examine how much a debtor owes and then appropriately modify their mortgage.

Peter Murray

Saturday, July 19, 2008

Federal Reserve Chairman Ben Bernanke’s Monetary Policy Report to the Senate Banking Committee (Emerson Bluhm)

In his semi annual Monetary Policy Report to the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke spoke about the current troubles in the economy, the future outlook and the FED’s plans to help the economy return to health. With an average of 94,000 jobs lost per month over the last six months, unemployment at 5.5%, home prices falling, rising inflation, soaring commodity prices and trouble at Freddie Mac and Fannie Mae, Bernanke was less than optimistic about the economy over the next year, forecasting extremely slow growth. While he claimed that the U.S. is technically not in a recession by a textbook definition, he acknowledged the hardships many Americans are facing with extremely low consumer confidence, declining wealth, and rising food and energy costs.

According to the Chairman, the housing crisis and rising commodities prices are at the center of the current economic problems. Bernanke told the committee that he believes the Treasury Department’s plan to backstop the Government Sponsored Enterprises (GSEs), Freddie Mac and Fannie Mae, is a step in the right direction to help the housing sector regain his footing. Bernanke expects the housing sector to bottom out by the end of the year and explained that once this happens, he feels the rest of the economy will largely fall into place. As the economy recovers, he believes that the dollar will strengthen. He expects inflation to rise further in the near term but moderate in 2009 as international growth slows and the commodity market cools down but acknowledged that this outcome is highly uncertain. While slowing international growth could hurt U.S. exports that have been vital to U.S. growth, he claimed it would be a net positive if it could help lower commodity prices. Bernanke cited rising demand and a shortage of supply as the reasons for rising oil prices. Several senators asked about the role of speculators in oil prices, to which Bernanke replied that they have had no role in the increase in oil prices and defended their role in the marketplace. Proposals to regulate the futures markets would have no effect on the price of oil.

Treasury Secretary Henry Paulson spoke to the Senate Banking Committee as well, defending the administration’s rescue plan for the GSEs. With Fannie Mae and Freddie Mac now touching 70% of mortgages and representing the only secondary market for mortgages, Paulson and Bernanke both claimed it was essential to provide a capital backstop to these companies to ensure a recovery in the housing market. The rescue plan calls for an 18 month window where the Treasury has unlimited funds to provide liquidity through a line of credit as well as unlimited funds to buy stock in the two companies if they see a need to raise capital. The plan also calls for reform that will give the FED consultative authority to the GSEs in order to reduce systemic risk.

Several members of the Banking Committee expressed their displeasure with the idea of giving the Treasury Department a blank check from taxpayers, questioning why the current $2.25 Billion line of credit would not suffice. Mr. Paulson responded that this $2.25 Billion was set in 1971 when the GSEs had a market capitalization of only $1 Billion. He explained that this was not enough today as “markets have changed but the architecture has not” and told the committee that the authorization to use unlimited funds shows confidence to the market and makes it less likely that he will have to use them. If Congress wants all the funds to be used, they “can make it small enough and it will be a self-fulfilling prophecy”, claimed Paulson who also likened the funds to a bazooka in the Treasury’s pocket. With the entire world watching the current economic situation in the U.S. very closely, Paulson urged a quick passage of the proposals to help restore confidence.

Securities Exchange Commission Chairman Christopher Cox faced many questions from the Committee about their role in enforcing and investigating claims of manipulation in the marketplace. With encouragement from many members of the committee, Cox also explained the SEC’s recent emergency decision to curb naked short selling in the equities of several financial firms. Concerned that short sales may be pushing the financial sector down too far, Cox said the SEC would move to immediately put an end to naked short selling in the GSEs and 17 financial firms for the next 30 days. The SEC is also considering extending this to the entire market. Cox also updated the committee on the SEC’s investigations and prosecutions of investors spreading false rumors to drive down stock prices, charges that he claimed were the first of their kind. He also described a desire to increase regulation of credit rating agencies and require more disclosure of off balance sheet items.

July 15, 2008. Emerson Bluhm.