Thursday, February 12, 2009

Summary of House Committee on Financial Services Hearing (Tian Weng, Debby Su)

1. Topic: TARP Accountability: Use of Federal Assistance by the First TARP Recipients
2. Date and Time: Feb 11, 2009, 10:00 am – 1:00 pm
3. Place: 2128 and 2172 Rayburn House Office Building
4. Chairman: Mr. Barney Frank, Chairman of the House Financial Services Committee
5. Witness List:
Mr. Lloyd C. Blankfein, Chief Executive Officer and Chairman, Goldman Sachs and Co.
Mr. James Dimon, Chief Executive Officer, JPMorgan Chase and Co.
Mr. Robert P. Kelly, Chairman and Chief Executive Officer, Bank of New York Mellon
Mr. Ken Lewis, Chairman and Chief Executive Officer, Bank of America
Mr. Ronald E. Logue, Chairman and Chief Executive Officer, State Street Corporation
Mr. John J. Mack, Chairman and Chief Executive Officer, Morgan Stanley
Mr. Vikram Pandit, Chief Executive Officer, Citigroup
Mr. John Stumpf, President and Chief Executive Officer, Wells Fargo and Co.

Eight bank CEOs from companies receiving the first TARP funds testified before the House Financial Services Committee. All testified that they distributed fund received in a manner that they thought would increase financial market liquidity, expand credits and lending in either residential or commercial loan markets, and generate enough revenues to allow them to return money to investors and US tax payers. All cited figures to confirm that they were distributing funds to the places they intended to. They denied TARP was used for dividend distributions or employee compensation.

Mr. Pandit, of Citigroup, pledged to cut his salary to $1 a year until the bank returned to profitability and took personal responsibility for the “mistake” of even thinking about buying a new $50 million private jet after getting government financing.

Mr. Lloyd C. Blankfein, Goldman’s chief executive, acknowledged “public anger at our industry.”

Mr. Lewis, CEO of Bank of America, who occasionally grew testy and red-faced at questions about lending, told lawmakers that his bank had “every incentive to lend.”

In the end, they all agreed to greater accountability on how they are spending money from the $700 billion fund.

Lawmakers struck hard on the lending issues, describing situations in which their constituents could not get loans and situations in which the rates for certain types of loans, such as credit card business and car loans, increased after the injection of the government funds intends to solve the liquidity problem. Several asked the bankers why there seemed to be a disconnect between their lending figures and the hundreds of ordinary people who continue to line up for loans. Some criticized bailout recipients like Bank of America and Merrill Lynch, who have continued to lobby--through trade associations--to block consumer protection measures, predatory lending regulations, and the Employee Free Choice Act, a measure that would ensure workers the freedom to form a union for a voice for improved wages, benefits, and working conditions.

Beyond the Troubled Asset Relief Program (TARP), some bailout recipients--who have failed to provide affordable healthcare or a living wage to their employees--are dipping into federal coffers through the backdoor, forcing thousands of employees to seek healthcare through taxpayer funded programs like Medicaid and forcing employees to apply for food stamps.

One lawmaker even suggested that banks paid fees to themselves for receiving TARP funds. Mr. Pandit denied such fee transaction. Another lawmaker pointed to the fact that top management at Bank of America received huge bonuses for the Merrill Lynch merger, when they were, in fact, actually responsible for losses that resulted from or were necessitated by the merger.

Tian Weng, Debby Su
George Washington University
Washington, DC

Tuesday, February 10, 2009

Plan to restore stability to "our" financial system

Today, Treasury Secretary Timothy Geithner introduced the Financial Stability Plan. Our comments below:

The main features are the creation of:

a. the Financial Stability Trust
b. the Public-Private Investment Fund
c. the Consumer Lending Initiative
d. the Foreclosure Prevention Plan
e. the Small Business Lending Initiative

The Financial Stability Trust is a "Capital Pool" designed to serve as a buffer to help absorb losses. (Funny, we proposed the same thing for community banks in an application we submitted to Treasury for New Markets Tax Credits. We were not, however, funded. Looks like we need to be, well, non-minority..and to have caused massive damage to the global economy in a thoroughly unethical way. But I digress..) This is a rebranding/repackaging of the current Capital Purchase Program (CPP). In fact, all bank investments made over the past few months will be held in the "Trust".

As part of this "Pool", banks over $100 billion will have to undergo a "Stress test". The good news: banking regulators will finally work together to carry out the "test". The bad news: the statistical models used to conduct these tests are biased and flawed. They did not, after all, prevent the crisis from occurring...

Public-Private Investment Fund. A fund to get private equity investors to take "bad" assets off the books of banks. Good news: well, none, really. Bad news: relies on the same broken private market mechanisms and entities (brokers and investment banks) that caused the problem. Public and private pension funds will be encouraged to if they haven't lost enough money already. Spreads the damage even wider. (Like opening the doors to Chernobyl.)

Consumer Lending Initiative. Repackaging/rebranding of a previously announced Fed initiative. Will now include Commercial Real Estate. Limits purchases to AAA securities. Good news: brings a previously announced initiative under this comprehensive umbrella. Bad news - relies on flawed and unethical rating agencies, extends into commercial real estate at exactly the wrong time.

All in all, we like this plan. Another reason to be hopeful.

We said in 2003, "Without meaningful reform, there is a small (but significant and growing) risk that our economic system will simply cease functioning." Unfortunately, we were right. And now, while the plan does not deal with the most critical issue, it is a very good first step: it builds on what was done recently and adds resources and rationality. The plan also restricts banks from paying dividends, repurchasing shares and buying other banks with the money. (Now, if we could only restrict entertainment expenses, we'd be all set...)

Friday, February 6, 2009

A People's Guide to the Economic Recovery Advisory Board

We note the Obama Administration named it's Economic Recovery Advisory Board today. While we are hopeful, we are not happy. This board will probably need to be modified before living up to it's potential. Here are it's members:

Chairman - Paul Volcker. Upside - Solid. The best there is. Should have remained Fed Chair. Downside - a little long in the tooth. (This is not age discrimination. Technology has much to do with this recession.)

Staff Director and Chief Economist. Austan Goolsbee - Probably not helpful. Chicago Economist...and they basically sank us into this mess. At least he is at the staff level.

Members - William H. Donaldson, Chairman, SEC (2003-2005). Solid. Called for market reform a long, long time ago. Ran a great firm, DLJ.

Roger W. Ferguson, Jr., President & CEO, TIAA-CREF. Solid. Next to Volcker, the best there is. The guy who saved the economy on September 11, 2001. (See "Bernanke's Fumbles Suggest Deeper Problems," originally posted on the Street Insight section of 5/5/2006 2:42 PM EST.)

Robert Wolf, Chairman & CEO, UBS Group Americas. Negative. (See Goolsbee - basically sank us into this mess.)

David F. Swensen, CIO, Yale University - Probably not helpful. Just some connected Yalie. Should be on staff.

Mark T. Gallogly, Founder & Managing Partner, Centerbridge Partners L.P. - Negative. Helped sink us into this mess...and made a fortune doing so.

Penny Pritzker, Chairman & Founder, Pritzker Realty Group. Neutral.

Jeffrey R. Immelt, CEO, GE - Positive. Has data and input from global sources.

John Doerr, Partner, Kleiner, Perkins, Caufield & Byers. Negative. Helped sink us into this mess...and made a fortune doing so.

Jim Owens, Chairman and CEO, Caterpillar Inc. - Positive. Actually makes something.

Monica C. Lozano, Publisher & Chief Executive Officer, La Opinion - Positive.

Charles E. Phillips, Jr., President, Oracle Corporation - Positive. Technology-centric.

Anna Burger, Chair, Change to Win - Unknown, but probably not helpful. Just some connected non profit. Another labor union, non-diverse at the executive level, whose base is made up of people of color. (See AFL-CIO, below.) Should be on staff.

Richard L. Trumka, Secretary-Treasurer, AFL-CIO - Negative. Non diverse organization at the executive level.

Laura D'Andrea Tyson, Dean, Haas School of Business at the University of California at Berkeley - Probably not helpful. Another connected academic. Should be on staff.

Martin Feldstein, George F. Baker Professor of Economics, Harvard University - Yikes! Former Chief Economist to Reagan (helped sink us into this mess before we knew we were sunk.) Highly negative and definitely not helpful. Another connected academic. Should be on staff.

All in all,

Solid - 3
Positive - 3
Negative - 5
Probably not helpful - 4
Neutral - 1

We are in trouble and this group probably will not help.

Tuesday, February 3, 2009

Minority Banks Recieving TARP Funding - Update

According to the US Treasury, "Among the most recent banks to receive Treasury funding was Legacy Bancorp of Milwaukee, Wisconsin, a CDFI founded by African-American women and one of the fastest growing community banks in the nation. CDFIs such as Legacy provide vital credit and financial services to low-income areas that are often unavailable from commercial banks." Our list of minority banks getting TARP Capital now includes:

Asian $936
Cathay General Bancorp $258
Center Financial Corp $55
East West Bancorp Inc $306
Pacific City Financial Corp. $16
Saigon National $2
UCBH Holdings Inc $299

Black $45
Broadway Financial Corp. $9
Carver Bancorp, Inc $19
OneUnited Bank $12
Legacy Bancorp, Inc. $5

Hispanic $1,551
First Bancorp $400
International Bancshares Corp $216
Popular Inc $935

Grand Total $2,532 billion
Funding to all banks $195,330 billion
as of 2/3/09

To date, no native American or Women-owned banks have received TARP Funding.

Friday, January 30, 2009

Plot to destroy Fannie Mae data

According to the Washington Post, "A fired Fannie Mae contract worker pleaded not guilty on Friday to charges he planted a virus designed to destroy all the data on the mortgage giant's 4,000 computer servers nationwide, according to federal prosecutors.

If the virus had been released as planned on Saturday, the Justice Department said the disruption could have cost millions of dollars and shut down operations for a week at the largest U.S. mortgage finance company.

Rajendrasinh B. Makwana, 35, of Glen Allen, Va., pleaded not guilty Friday in U.S. District Court in Baltimore to one count of computer intrusion, the U.S. attorney's office said."

Friday, January 23, 2009

TARP Capital to Minority Banks (Update)

Asian Banks $936 (0.48%)
Cathay General Bancorp $258
Center Financial Corp $55
East West Bancorp Inc $306
Pacific City Financial Corp. $16
Saigon National $2
UCBH Holdings Inc $299

Black Banks $40 (0.02%)
Broadway Financial Corp. $9
Carver Bancorp, Inc $19
OneUnited Bank $12

Hispanic Banks $1,551 (0.80%)
First Bancorp $400
International Bancshares Corp $216
Popular Inc $935

Grand Total $2,527 (1.30%)
Total to all banks $193,793

Amounts in millions US $
Percentage of total to all banks in parentheses
As of 1/23/09

Monday, January 5, 2009


[These minutes reflect discussion and debate at a meeting of a committee of the University of Minnesota Senate; none of the comments, conclusions or actions reported in these minutes represent the views of, nor are they binding on, the Senate, the Administration or the Board of Regents.]

PRESENT: Mani Subramani, chair, Joseph Marchesani, Jennifer Oliphant, Peter Hiniker, Brandi Hoffman, Richard Lidstad, Elizabeth Richardson, Benton Schnabel, Julia Washenberger, Carolyn Chalmers, Greg Schooler, Kenneth Heller, Catherine Jordan, Mira Reinberg

REGRETS: Todd Tratz, Amelious Whyte, Katherine Fennelly, David Fox, Ajay Skaria, David Gysbers

ABSENT: Craig Hassel

GUESTS: Professor Norman Bowie, Carlson School of Management; Bill Cunningham, social investment advisor, Creative Investment Research; Stuart Mason, chief investment officer, Office of Asset Management

I). Professor Subramani called the meeting to order, welcomed those present and asked members and guests to go around the room and introduce themselves. II). Professor Subramani thanked today's guests for their participation in today's meeting where the committee would be spending time thinking about and discussing the University's investment choices, particularly as it relates to its Sudanese holdings.

Bill Cunningham, social investment advisor, Creative Investment Research, began by providing the committee with information on his background and Creative Investment Research, a SBA 8(a) certified, socially responsible investment research, development and management firm.

To supplement his presentation, Mr. Cunningham distributed a PowerPoint presentation, which focused on divestment and the Sudan. Regarding the situation in the Sudan, Mr. Cunningham reported that on July 23, 2004 the U.S. Senate and House of Representatives acknowledged that a genocidal situation was occurring. Since that time, several universities and state legislatures have divested from companies that do business in the Sudan of which Mr. Cunningham cited several examples. He turned members attention to a California bill in particular, which permitted the state to divest of its Sudanese holdings. The reason he believes this bill is especially noteworthy is twofold:
1. It prohibits the state's huge public pension systems — the California Public Employees Retirement System (CalPERS) and the State Teachers Retirement System (CalSTRS) from investing in companies with active business ties in the Sudan.
2. It provides legal protections for the University of California, which guards it against liability that might result from divestment from Sudan.

In Mr. Cunningham's opinion, this law shows a growing sensitivity to issues related to divestment. Liability issues are very important considerations, which the University will need to examine should it decide to divest from Sudan. What is the level of risk the University would be exposing itself to should it decide to divest? While acknowledging that the University has an excellent investment staff, Mr. Cunningham warned that it can be difficult to get objective investment advise from many investment managers. Not all investment managers are incented to give truthful investment advice.

Should the University decide to divest he suggested it should follow these steps:
• Identify target companies.
• Conduct a risk/return analysis.
• Contact identified companies and give them three months to show that they have begun taking substantial action in response to the situation in Sudan.
• Proceed with divestment from unresponsive companies; complete this process within twelve months. According to Mr. Cunningham, companies that meet the following criteria may want to be targeted for divestment:
• Contribute to government revenue.
• Bestow minimal benefit to the country's underprivileged.
• Demonstrate no substantial corporate governance policy regarding the situation in Darfur.

Next, Mr. Cunningham turned members attention to lists of companies that meet this criteria as it relates to the situation in the Sudan. Mr. Cunningham went on to say that an organization's investment structure may not allow it to divest.

He explained different types of investment structures:
• Internally managed versus externally managed. Investments are either managed internally by an organization or externally by a fund manager. Most universities and cities and some state institutions use external managers; although naturally there are exceptions.
• Separately managed versus commingled accounts. Commingled accounts are accounts that contain other investors' money, and separate accounts would contain only one organization's money.
• Actively managed accounts are accounts where an investment manager actively selects which companies/investments will be in a fund versus passively managed investments where the manager chooses companies based on market index instead of scrutinizing how individual companies in a fund are performing.

It is most difficult to divest from actively managed, commingled investments, and easiest to divest from separately managed accounts and in-house investments. Another reason not to divest is that staying invested may actually allow the University to serve as a positive force for social change by using a collaborative approach with the companies that are invested in the Sudan. The University could dialogue with these companies to enlighten them about why they should not be doing business in the Sudan.

Regardless of whether or not the University divests its Sudanese holdings, it should:
• Maintain its objectivity and not be influenced by investment/research manager(s). Maintaining objectivity allows the University to learn about divestment without directly risking returns. A decision to divest will undoubtedly be controversial for the University.
• Act swiftly and effectively. The University is a little behind the curve in terms of having a broad impact on this issue as other institutions have already acted.
• Authenticate the University's position, and build on its reputation as a world-class research institution.

In closing, Mr. Cunningham thanked members for their time and attention. Professor Subramani asked Professor Bowie if he had any comments with respect to Mr. Cunningham's presentation. In Professor Bowie's opinion, it was an excellent presentation. He noted that when he served as chair of this committee it annually reviewed all shareholder resolutions involving social issues for which the University held stock and recommended votes on each of these resolutions.

Mr. Bowie stated that his research and teaching interest center around business ethics. With this said, there are certainly reasons for both divesting and not divesting. He noted the "harm" case is quite clear when it comes to the atrocities that are occurring in Sudan.

The Sudan situation is unlike movements to divest, for example, from Israel where the "harm" case is not clear.

Next, Professor Subramani asked Mr. Stuart Mason, chief investment officer, to provide the committee with an understanding of the University's financial involvement with Sudan.

Mr. Mason also thanked Mr. Cunningham for his presentation, which laid out the issues very well. Mr. Mason noted that since he was hired four years ago, the make-up of the University's portfolio has changed. During the 1990s and early 2000s, the University was heavily invested in the public stock and public bond arenas. Over the past four years the University has been attempting to reduce the public stock and public bond arenas to much lower portions of the portfolio. While the University still has exposure in the public markets, it does so in an enhanced index fashion.

Today, for example, the University owns no U.S.-based, large-cap public stocks. In terms of its international investments, the University has a mix of exposures in both large and small investments, which are invested in both developed and less developed countries. Many of these investments, but not all, are invested in actual stocks.

Before moving on, Mr. Mason made it clear to the committee that his comments are about the University's endowment. The University's endowment is a billion dollar pool of assets that funds University activities. He added that Board of Regents' policy dictates that all endowment investments are made through outside managers. This policy is very different from that of Harvard, for example, which largely manages its endowment internally.

Mr. Mason noted that four of the University's international stock managers factor into today's discussion. These include:
1. An actively managed, single account, which contains large-gap investments of a global nature in developed countries. This account contains no companies that are domiciled in Sudan and has no governmental exposure there. This account, by the way, excludes Total Elf Fin, which this committee recommended that the University not own.
2. A small cap stock portfolio, which is an actively managed pooled (commingled) account. The investments in this account are in developed countries, with no exposure to Sudan.
3. A commingled emerging markets account. This manager buys fixed income or bond securities and stocks in less developed countries. The University has a $20 million commitment to this manager. Because this manager owns Sudanese central bank notes the University does have Sudanese exposure here. This direct exposure was put on the books 6 – 8 years ago, and has since been frozen by the U.S. government; therefore, this manager is prohibited by law from selling its position. The University has had conversations with this manager who is looking for opportunities to sell this position whenever it can. Because this is a pooled account, should the University decide to divest from Sudan, it would be forced to stop investing with this manager.
4. An international large cap index account. Mr. Mason noted that because the University has a prohibition on investing in Total Elf Fin, this index is being replicated at a fairly considerable annual expense of approximately $34,000. In Mr. Mason's opinion, the committee should think about the parameters it wants to establish for approaching this issue and how narrowly or widely a position it wants to take should it decide to divest.

The University has investments with direct exposure to the Sudanese government (Sudanese central bank notes) and indirect exposure in companies with possible Sudanese ties (e.g. Siemens and ABB). In terms of companies with an indirect exposure in the Sudan, the committee needs to explore what impact they are having on the actual situation in the Sudan.

A member asked what is the total value of the Sudanese central bank notes held by the University. Mr. Mason stated that the University's exposure is just under $100,000, which the University considers a very small investment. This exposure is a government central bank bond, which cost .09 cents or .10 cents on par value, and the last time it traded it did so at .50 cents, thus the $100,000 value.

The investment thesis on this exposure is that the value will increase to $1 as the economy stabilizes and the University's $100,000 investment will turn into $900,000.

Mr. Mason reminded members that this particular portfolio, which is actively managed and commingled leaves the University with two options:
(a). convince others in the pool to sell this position once it can be sold or
(b). exit the account.

In the past few years this portfolio has had approximately a 30% return rate. In response to a question, Mr. Mason clarified that the University does not actually own the international large cap index portfolio (#4) he mentioned earlier. Instead, it owns a look alike because of the University's prohibition on owning Total Elf Fin, which is part of the account manager's international large cap index.

He stated that this portfolio gives the University more flexibility than some of its other accounts because of this replication feature. This portfolio contains approximately $200 million of the billion in the University's endowment, and represents about 20% of the University's endowment investments.

Mr. Mason was asked to explain why the Sudanese central bank bond, which is included in one of the University's portfolios cannot be sold. He stated that there have been a number of U.S. governmental actions, which have resulted in prohibitions or sanctions being placed on Sudanese activities; thus, this investment cannot be sold. To clarify, a member asked if there was any way the University could divest itself of this investment. Mr. Mason stated that the only way for the University to divest itself from this position would be to terminate the investment manager. He added that typically when the University hires a manager it interviews dozens. Through the evaluation process, this commingled emerging market manager was determined to be head and shoulders above the rest.

A member stated that divesting from government bonds really has no impact on a government. Yes, this statement is true. Now that this was clarified, the member asked whether the University has a policy of buying government bonds or investing with a manager that purchases governmental bonds. If not, maybe this is something that should be discussed.

In trying to measure the impact the University can have on this issue a member summarized what he heard thus far and stated that if the University divests its Sudanese government bonds it would be making a symbolic statement. He posed the question to the committee that maybe it should go on record opposing the purchase of Sudanese or other foreign governmental bonds. Would such a statement have the same impact as divesting?

Mr. Mason suggested the committee consider developing a policy that the University will not own securities in Sudanese corporations, banks, etc., and then from there decide how narrowly or widely this policy should be applied. For example, should it include other corporations that are major players in the Sudan?

Mr. Cunningham noted that there are proposed resolutions on the Sudan Divestment Task Force website, which can be found at the following URL:

He added that the committee may want to go on record taking a stand against the situation in Sudan. A member asked whether a statement from this committee or any of the other groups that have taken a stand on this issue would influence investment managers.

In Mr. Mason's opinion, these managers are reasonably sensitive, and he believes they pay attention. A member asked Professor Bowie to comment on how the situation in Sudan compares to what took place in South Africa and if there is a way for the University to make an investment in Sudan that could actually do good.

Professor Bowie stated that the issue in South Africa was that there were a number of companies that made the argument that if they would be permitted to stay they could make a difference by setting a good example and engage the country in developing antiapartheid policies. IBM is an example of a company that stayed in South Africa despite pressure to leave.

However, the situation in the Sudan is different. It seems virtually impossible for a company to set a good example because it is up against a brutal, totalitarian regime, which is committing genocide and reeking chaos. In some ways, according to Professor Bowie, there is more of an argument to do something that could affect the situation in Sudan over South Africa, but he is unaware of any company that feels it could be effective in Sudan.

Professor Subramani asked Professor Bowie if he had any suggestions at all for how the University could make a positive difference as was just mentioned. Professor Bowie stated that as part of today's discussion he appreciated hearing that the Office of Asset Management would be willing to work with the committee on this issue.

The committee will need to merge its opinions with the financial expertise that will provided by the Office of Asset Management in order to develop an effective strategy.

Professor Subramani thanked Professor Bowie for participating in today's discussion.

On the positive investing front, Mr. Cunningham mentioned that MercyCorps ( is the only group that is on the ground in the Sudan, and they have had problems getting in and out. American Friends, Lutheran Worldwide, and Catholic Relief Services help support MercyCorps. MercyCorps, however, is active in several third world countries.

As an investor, Professor Subramani asked Mr. Mason what the committee could do to make a positive difference. Mr. Mason stated that the situation in Darfur is very difficult, and, unfortunately, it is not the only place in the world where bad things are happening. He added that by virtue of what the University does and where it is located, etc. he did not readily see how the University's investment activity could impact the Darfur situation.

A member asked who supports the Sudanese government and/or its genocide policies. Mr. Cunningham stated, in his opinion, that the Sudan situation is a regional struggle involving the Middle East, particularly the oil producing regions, which have extended their reach down into the Sudan. Other factors that likely have played a role include Bin Laden's involvement in the region the differing philosophies of Arab Muslim Imperialism and Christianity.

In response a member stated if this is the case then maybe the University should consider divesting its holdings in Kuwait, Saudi Arabia, etc. Mr. Mason stated that the committee may want to make a statement that it does not want the University to invest in companies that would in any way support the Sudanese government e.g. PetroChina, Sinopec, Total Elf Fin.

While he does not want to tie the University's investment hands, this would be a way take a position and make a social statement about the situation. There are so many issues around oil and the Middle East a member stated; therefore, if a statement is made it should not be too broad because the purpose for making the statement would be lost. The only influence the University has is its public relations clout, not economic clout. Mr. Mason stated it is important that the University to be on the right side of high profile issues.

As the committee grappled with how best to deal with this issue, Mr. Cunningham made the following recommendations:
• Join the Sudan Divestment Task Force as a University/investment group. By doing this, it puts the University on the right side of the issue.
• Ask the Office of Asset Management to conduct a risk/return analysis. By conducting this analysis the University will be in a position to decide which companies it wants to invest in.
• Publicly go on record that the University has a positive investment strategy related to the Sudan, and explore new socially responsible investment options. In light of time, members quickly threw out ideas for what the committee may want to do in response to this issue. The following ideas were mentioned:
• Create, with the assistance of the Office of Asset Management, an "embargo"
list, which would be a list of companies that the University does not currently own, and does not want to own in the future.
• Create a social investing policy.

Instead of making a statement one country at a time, develop a broader policy. Mr. Mason stated that a broader policy would help the Office of Asset Management in its selection process. Professor Subramani noted that this discussion would be continued at the committee's next meeting on November 13, 2006. III).

Hearing no further business, Professor Subramani adjourned the meeting.

Renee Dempsey University Senate

Friday, January 2, 2009

Adams National (formerly Women's National Bank) Will Merge With W.Va. Bank

According to the Washington Post, "The investors who control Abigail Adams National Bancorp, the parent company of the troubled Adams National Bank, have decided to merge it with a West Virginia bank that they also control in a deal designed to ensure Adams National can weather the financial crisis.

Premier Financial Bancorp will buy District-based Abigail Adams for stock valued at $10.9 million, the companies said yesterday.

The largest shareholder in both companies is West Virginia businessman Marshall Reynolds, who specializes in buying troubled banks. Adams National is the third local bank to agree to be sold in two months, following the purchase of Chevy Chase by Capital One Financial and the Provident Bank's purchase by M&T Bank. Charlotte-based Wachovia, a dominant local presence, is in the process of being sold to Wells Fargo.

The deal means the end of a local bank founded in 1978 as Women's National Bank, an institution mostly owned and run by women that focused on lending to women and minorities. The bank moved to more traditional business and in the mid-1980s took the name Adams National to signal that shift."

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."


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