Exit, Stage Left

Gary Brouse, ICCR and Mary Schapiro, SEC.
SEC Open Meeting, 2011.  Photo by William Michael Cunningham.

We note, with more than a little regret, Mary Schapiro's exit from the Securities and Exchange Commission. How her departure will impact the Dodd/Frank Section 342 initiative and Crowdfunding is unclear.

She was in a tough and thankless job. In her favor, she did save the Agency. The question is, save it for what? Will it take the more aggressive stance required to repair the financial system? It seemed to be moving in that direction.

My concerns with the Agency are well known, but Ms. Schapiro was cordial and professional every time I met her.

I thank her for her service and wish her well.

The SEC Steps Up

According to the SEC, "In coordination with the federal-state Residential Mortgage-Backed Securities Working Group, the Securities and Exchange Commission today charged J.P. Morgan Securities LLC and Credit Suisse Securities (USA) with misleading investors in offerings of residential mortgage-backed securities (RMBS). The firms agreed to settlements in which they will pay more than $400 million combined.."

What's interesting is that this represents a marked increase in the amount of money firms are required to pay, given the size of the estimated damages. According to the SEC, "J.P. Morgan received fees of more than $2.7 million, and investors sustained losses of at least $37 million on undisclosed delinquent loans. J.P. Morgan also is charged for Bear Stearns' failure to disclose its practice of obtaining and keeping cash settlements from mortgage loan originators on problem loans that Bear Stearns had sold into RMBS trusts. The proceeds from this bulk settlement practice were at least $137.8 million...J.P. Morgan has agreed to pay $296.9 million to settle the SEC's charges."

"Credit Suisse ..made $55.7 million in profits and losses avoided from its bulk settlement practice, and its investors lost more than $10 million due to Credit Suisse's practices concerning first payment defaults," and "has agreed to pay $120 million to settle the SEC's charges."

This is a significant differential. We calculated the total loss using proprietary Fully Adjusted Return® (FAR) Methodology. The Fully Adjusted Return® Methodology is trade secret protected and proprietary, so we have not provided full detail, but estimate that the total loss consists of the following:
a. Monetary losses.
b. Opportunity costs.
c. Transaction Related Social Returns (positive and negative).

The SEC's calculations come closer to our FAR ® calculations than any we have seen. It looks like the Agency is paying attention to our comments, specifically our Aug 13, 2012 "Friend of the Court" brief filed in a case currently pending before the United States Court of Appeals for the Second Circuit.

They just refuse to actually speak with us about the exact nature of the FAR ® calculations.

Until they do, it is likely they will continue to underestimate damages. 

Unemployment at 7.9%. We'll stand by our number..

According to the Washington Post,

"Businesses picked up their pace of hiring in October and the unemployment rate rose as more people started looking for work, according to new government data that offer a glimmer of optimism for the long-ailing job market on the eve of the presidential election.

Employers reported adding 171,000 jobs in October, beating both analysts’ expectations (125,000 jobs added) and September’s job creation (a revised 148,000). The unemployment rate rose to 7.9 percent, up from 7.8 percent, but the reason behind the uptick also points to an improved job market. Some 578,000 more Americans counted themselves as part of the labor force, and only 410,000 more people reported having a job. In one particularly welcome sign, the proportion of the population reporting that they had a job rose one-tenth of a percent to 58.8 percent."

We forecast a 7.7% rate. We'll stand by our number. As is often the case, the Fully Adjusted Return (TM) methodology is early. We have been early before. (On December 22, 2003 and February 6, 2006, we warned the S.E.C. and other regulators that statistical models created by the firm using the Fully Adjusted Return (TM) Methodology signaled the probability of system-wide economic and market failure).

Expect a 7.7% unemployment rate in November or December, even with the storm...