Tuesday, March 31, 2009

Banks Repay Government Aid

According to the Washington Post, "Four regional banks have become the first financial firms to repay emergency aid from the federal government: Signature Bank of New York, Old National Bancorp of Indiana, Iberiabank of Louisiana and Bank of Marin Bancorp of California."

A good sign.

Active proxy season forecast

According to the NY Times, "This proxy season is already proving to be more contentious and active than last year.So far, 283 shareholder proposals have been disclosed, compared with 252 for the same period last proxy season. The rise is largely attributable to proposals on corporate governance issues."

Free tool that completely removes the Conficker/Downadup worm from home and business networks

"BitDefender has launched a free tool that removes all versions of the Conficker (or Downadup) worm on both home workstations and business networks."

Thursday, March 26, 2009

Treasury Outlines Framework For Regulatory Reform

The U.S Department of the Treasury today proposed a new set of rules and regulations governing activities and firms in the financial marketplace. We applaud and fully support this effort. It follow a regulatory structure we first outlined in 1998, and expanded in 2007. As such we are hopeful.

The proposal consists of four broad outlines:

1. "Addressing Systemic Risk: large, interconnected firms and markets need to be under a more consistent and more conservative regulatory regime.

2. Protecting Consumers and Investors: clear rules of the road that prevent manipulation and abuse.

3. Eliminating Gaps in Our Regulatory Structure: clear authority, resources, and accountability for key functions. A substantive system of regulation that meets the needs of the American people.

4. Fostering International Coordination: ensure that international rules for financial regulation are consistent with the high standards in the United States. Launch (of) a new initiative to address prudential supervision, tax havens, and money laundering issues in weakly-regulated jurisdictions."

According to the NY Times, "The (Obama) administration would require that all standardized derivatives be traded through a regulated clearinghouse." We noted this need in our comments to the Senate, and are happy to see this made part of the solution proposed.

Further, we note that on June 18, 1998, in a letter to Betsy White, Senior Vice President at the NY Fed, we said:

"Finally, it is our continuing belief that the Federal Reserve Board should be designated a 'Superregulator,' with broad responsibility for overseeing the activities of banks, thrifts, pension funds, insurance companies, mutual fund companies, brokerage firms and investment banks. We note our belief that financial institution convergence, driven by recent advancements in financial and computer technology, requires the creation of such a 'Super-regulator.' "

We, and others, no longer believe the Federal Reserve independent or objective enough to serve as "Superregulator" or as "Systemic Regulator." They are, thus, unqualified for the role.

This role should be filled by an entirely new entity.

According to Treasury, "In the coming weeks, Secretary Geithner will present detailed frameworks for each of these areas." These will require careful review.

Tuesday, March 24, 2009

Who will profit from PPIP?

According to CBS MarketWatch,

"Representatives of Pimco, BlackRock Inc. and Colony Capital all told MarketWatch that their companies intend to offer their services to work on the effort." Other firms lining up at the trough:

Goldman Sachs
Wellington Management Co.
Och-Ziff Capital Management
Fortress Investment Group
Avenue Capital Group
Marathon Asset Management
King Street Capital
Blackstone Group

What is needed is new perspective, new ideas, new ethics. Sadly, these are all in short supply at the firms listed above.

One thing is certain. You will not profit. You will, however, be left with the bill.

Monday, March 23, 2009

Public Private Investment Program (PPIP)

Treasury released details concerning the Public Private Investment Program (PPIP), the Administration's approach to dealing with "legacy assets", or the real estate loans and securities that caused the current financial crisis.

The approach relies, in large part, on the market. Unfortunately, these are the same institutions that created the problem. The issue is this: as the Fact Sheet Treasury released describing the PPIP Program notes,

"the financial system is still working against economic recovery." (No kidding.) As we noted in April, 2008:

"With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic."

Further, the solution outlined by the Administration relies heavily on the assumption that "these assets create uncertainty around the balance sheets of.. financial institutions." This is a false assumption: the behaviour of financial managers created the uncertainty. While we are not "in despair", as is, apparently, Paul Krugman, we recognize that any "solutions" that do not explicitly address the ethics and behaviour issues are, well, problematic.

The lack of recognition is problematic because it leads away from the long term solution. For example, the Fact Sheet states "excessive discounts embedded in some legacy asset prices." There are no excessive discounts. In this, Mr. Krugman is correct. Prices are what they are at a given point.

Further, we note a discussion about the "lack of clarity about the value of these legacy assets." There is no lack of clarity. Market participants are discounting asset values because of the fraudulent and highly unethical business practices used to create and distribute these assets.

Given the above, we can ask if the approach outlined by Treasury will, in fact, address the challenge. Three principals are outlined:
1. Private Sector Price Discovery
2. Shared Risk and Profits With Private Sector Participants.
3. Maximizing the Impact of Each Taxpayer Dollar

Private Sector Price Discovery is problematic. The fraudulent and unethical business practices used to create and distribute these assets will tend to interfere with price discovery. In addition, there is the asset selection problem: banks and investors will determine which assets to price. See our earlier comments. Better to have a regulatory agency do so.

Shared Risk and Profits With Private Sector Participants. The fact sheet notes that "Treasury and private capital will provide equity financing and the FDIC will provide a guarantee for debt financing issued by the Public-Private Investment Funds to fund asset purchases." This is fine, except that to participate you must have "capacity to raise at least $500 million of private capital, a minimum of $10 billion (market value) of Eligible Assets currently under management and experience investing in Eligible Assets." Sounds reasonable. It is not, since these requirements do nothing to address the core issue: fraudulent and unethical business practices. Better to have a solid ethics test that requires eligible firms to show that they testified in Federal Court on behalf of investors or perhaps that statistical models created by the firm signaled the probability (or even the possibility) of system-wide economic and market failure.

"Maximizing the Impact of Each Taxpayer Dollar" simply means that the Federal Government will multiply dollars provided by the private sector. In itself, this is appropriate.

All in all, we like this plan, and think it is another in a series of positive steps taken by the Obama Administration. This crisis will take time to work through. There will be a number of starts and stops. This is a bear market, and the best way to escape a bear is as follows:

"..do not run - slowly back away, always watching the bear, and do not turn your back on that bear. Make yourself look as large as possible, and as confident as possible."

We could not agree more.

Sunday, March 15, 2009

Big bonus plans at A.I.G., despite White House outrage

According to the International Herald Tribune,

"American International Group, the insurer that has received more than $170 billion in taxpayer bailout money from the U.S. Treasury and Federal Reserve, plans to pay about $165 million in bonuses to executives in the same business unit that brought the company to the brink of collapse last year.

The payments to A.I.G.'s financial products unit are in addition to $121 million in previously scheduled bonuses for the company's senior executives and 6,400 employees across the company. Mr. Geithner last week put pressure on A.I.G. to cut the $9.6 million going to the top 50 executives in half and tie the rest to performance.

The payment of so much money at a company at the heart of the financial collapse that sent the broader economy into a tailspin almost certainly will fuel a popular backlash against the government's efforts to prop up Wall Street."

Yeah. Right. Good luck with that backlash. Let me mention that we outlined a solution in September, 2008.

Still waiting...

Saturday, March 14, 2009

Why the market failed

For those of you wanting more of an explanation, read this.

"There weren’t enough Americans with shitty credit taking out loans to satisfy investors’ appetite for the end product. The firms used (financial bets) to synthesize more of them. Here, then, was the difference between fantasy finance and fantasy football: When a fantasy player drafts Peyton Manning, he doesn’t create a second Peyton Manning to inflate the league’s stats. But when (hedge funds) bought a credit-default swap, (they) enabled Deutsche Bank to create another bond identical in every respect but one to the original. The only difference was that there was no actual homebuyer or borrower. The only assets backing the bonds were the side bets (hedge funds) and others made with firms like Goldman Sachs and AIG. (Hedge Funds), in effect, were paying to Goldman the interest on a subprime mortgage. In fact, there was no mortgage at all."

“They weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford,” (Eisman) says. “They were creating them out of whole cloth. One hundred times over! That’s why the losses are so much greater than the loans."

From The End by Michael Lewis, Portfolio Magazine. December, 2008 issue.

One part of the puzzle. This is, actually, a positive sign, meaning we may start to work our way out of this mess. Here is, also, what this means: blaming the crisis on CRA or subprime lending is flat out wrong. Others are (finally) beginning to see the problem in full light: there simply were not enough subprime borrowers to cause a catastrophe of this magnitude. For that, you needed greed-induced leverage, a complete lack of ethics, and a set of parasitic financial institutions.

As we noted in April, 2008:

"With the development of toxic (derivative and subprime lending) financial products, the relationship between investment banks and the economy has turned parasitic."

You also need a compliant (non functioning) regulatory apparatus, something we warned about in 1998:

"“The nature of financial market activities is such that significant dislocations can and do occur quickly, with great force. These dislocations strike across institutional lines. That is, they affect both banks and securities firms. The financial institution regulatory structure is not in place to effectively evaluate these risks, however. Given this, the public is at risk.” WILLIAM MICHAEL CUNNINGHAM, UNITED STATES COURT OF APPEALS (CASE NUMBER 98-1459). OCTOBER, 1998.

Welcome to the solution, fellas...about time you got here.

Friday, March 13, 2009

Socially Responsible WalMart II

In an article originally posted on the Street Insight section of thestreet.com on 5/2/2006 at 12:15 AM EST, we made the case that Wal-Mart was becoming socially responsible. We said, "The firm's poor reputation no longer matches the new corporate reality."

Recent events confirm this perception:

According to the Chicago Sun Times, "As the Obama administration begins investing billions in health information technology, Wal-Mart plans to use its unrivaled size to bring high-tech medical records to U.S. physicians.

In recent years Wal-Mart, the world's largest retailer, has used its buying power to move into health care markets, negotiating steep discounts for prescription drugs and eye care products."

Having completed an in depth analysis of the massive $787 billion dollar Stimulus Bill, we believe this is a stunning and strategic move that bodes well for the company's stock. Our analysis reveals that, of all the publicly traded companies in the US, Wal-Mart stands to benefit most from the Stimulus Bill. We would be a buyer of the firm's stock.

And, if you need confirmation of the company's new direction, consider this:

"Wal-Mart Opening Two Supermarkets Targeted To Hispanics."

Smart. And socially responsible.

Thursday, March 12, 2009

Congresswoman With Ties to Bank Helped Seek Funds

According to the New York Times,

"WASHINGTON — Top banking regulators were taken aback late last year when a California congresswoman helped set up a meeting in which the chief executive of a bank with financial ties to her family asked them for up to $50 million in special bailout funds, Treasury officials said.

Representative Maxine Waters, Democrat of California, requested the September meeting on behalf of executives at OneUnited, one of the nation’s largest black-owned banks. Ms. Water’s husband, Sidney Williams, had served on the bank’s board of directors until early last year and has owned at least $250,000 in stock in the institution. Treasury officials said the session with nearly a dozen senior banking regulators had been intended to allow minority-owned banks and their trade association to discuss the losses they had incurred from the federal takeover of Fannie Mae and Freddie Mac. But Kevin Cohee, OneUnited’s chief executive, instead seized the opportunity to plead for special assistance for his bank, federal officials said."

See: http://www.nytimes.com/2009/03/13/us/politics/13waters.html?hp

Tuesday, March 10, 2009

Shareholder Approval of Executive Compensation

Congress passed, on Feb. 13, 2009, HR 1, the ‘‘American Recovery and Reinvestment Act of 2009’’. Section 7001 of the legislation states that:

“(e) SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION.—

(1) ANNUAL SHAREHOLDER APPROVAL OF EXECUTIVE COMPENSATION.—

Any proxy or consent or authorization for an annual or other meeting of the shareholders of any TARP recipient during the period in which any obligation arising from financial assistance provided under the TARP remains outstanding shall permit a separate shareholder vote to approve the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material).

(2) NONBINDING VOTE.—A shareholder vote described in paragraph (1) shall not be binding on the board of directors of a TARP recipient, and may not be construed as overruling a decision by such board, nor to create or imply any additional fiduciary duty by such board, nor shall such vote be construed to restrict or limit the ability of shareholders to make proposals for inclusion in proxy materials related to executive compensation.”

Thursday, March 5, 2009

Wall Street firms systematically cheated customers

As noted in the New York Times, "More than a dozen Wall Street trading firms systematically cheated their customers of millions of dollars by improperly slicing bits of profit from countless trades, federal regulators said on Wednesday. The Securities and Exchange Commission disclosed the allegations after negotiating settlements. The firms did not admit or deny the charges but agreed to pay a total of more than $69 million in forfeited profits and penalties.

The 14 firms named in the complaints are all “specialists,” trading firms that have a specific duty to maintain orderly markets by matching buyers and sellers and standing ready to conduct trades when buyers or sellers are scarce. They include units or subsidiaries of well-known Wall Street names, including E*Trade Capital Markets, Goldman Sachs Execution and Clearing, Knight Financial Products and TD Options."

SEC to Discuss Rules Governing Credit-Rating Agencies

According to the Washington Post, "The Securities and Exchange Commission is planning to announce Thursday it will hold a roundtable to discuss how to revamp the rules governing credit-rating agencies, according to people familiar with the matter.

This would be the first step toward addressing problems in the industry and the first public policy initiative taken by new SEC Chairman Mary L. Schapiro since she started at the commission.

Schapiro has raised concerns about credit-rating agencies, which are private firms that have been blessed by the SEC to judge the credit-worthiness of securities. Credit-rating firms gave high grades to many of the mortgage-related securities that turned out to be toxic and have wreaked havoc in the financial crisis.

The roundtable is scheduled for April 15. The three major credit- raters, including -- Standard & Poor's, Fitch Ratings and Moody's, -- and others have been invited to speak.

Schapiro has criticized the way credit-rating firms are paid. Currently, the issuers of securities pay the firms to rate them, which Schapiro has called a conflict-of -interest. She has said it might be better for financial firms to contribute to a pot of money that would be used to pay for calculating ratings."

Wednesday, March 4, 2009

Ex-Leaders of Countrywide Profit From Bad Loans

"CALABASAS, Calif. — Fairly or not, Countrywide Financial and its top executives would be on most lists of those who share blame for the nation’s economic crisis. After all, the banking behemoth made risky loans to tens of thousands of Americans, helping set off a chain of events that has the economy staggering."

See: http://www.nytimes.com/2009/03/04/business/04penny.html