Friday, January 7, 2011

Another forecast confirmed

The Labor Department today announced..that "unemployment dropped to 9.4 percent—its lowest number since mid-2009—and employers added 103,000 non-farm jobs in December." We agree with Secretary of Labor Hilda L. Solis: “One thing is for certain: (Obama Administration) investments have reversed the trend of catastrophic job losses and put this country on the road to recovery.”

These unemployment numbers confirm our September 2, 2010 Fully Adjusted Return (tm) forecast: "unemployment will trend downward as payrolls and the economy gain strength."

Even with the outstanding unemployment numbers, as we noted in our December 31, 2010 Fully Adjusted Return (tm) Forecast, "most stock market forecasters expect equity markets to do well in 2011. While we expect certain sectors, like technology and energy, to do better than others, we are not as optimistic as most."

Thursday, January 6, 2011

Section 342 Forecast Confirmed. Probability of repeal placed at 25%.

We predicted during our webinar: The Election and Section 342, that "influential and wealthy tea party contributors will push repeal of financial reform effort first." On January 5th, Tea Party Caucus Founder U.S. Representative Michele Bachmann introduced a bill to repeal the Dodd-Frank Law:

"H.R.87 Latest Title: To repeal the Dodd-Frank Wall Street Reform and Consumer Protection Act. Sponsor: Rep Bachmann, Michele [MN-6] (introduced 1/5/2011). Cosponsors (4)

Latest Major Action: 1/5/2011 Referred to House committee. Status: Referred to the Committee on Financial Services, and in addition to the Committees on Agriculture, Energy and Commerce, the Judiciary, the Budget, Oversight and Government Reform, Ways and Means, and Small Business, for a period to be subsequently determined by the Speaker, in each case for consideration of such provisions as fall within the jurisdiction of the committee concerned."

That the Dodd/Frank repeal bill has been introduced BEFORE the Health Care repeal bill is indicative of Tea Party's true (revealed) priorities. As we said in our webinar, despite vitriolic rhetoric concerning health care, the wealthy backers of the tea party movement are primarily focused on financial issues. They are controlling the Tea Party's agenda and movements.

We now estimate the probability of full Dodd-Frank repeal at 25% (0.25). Specific estimates of the probability of repeal are detailed in the Webinar.

Tuesday, December 21, 2010

OPAL Public Funds Summit, 1/12-14/2011

The Public Funds Summit will address the issues that are critical to the investment success of senior public pension fund officers and trustees. Although attendance is not limited to those in the public sector, the conference takes aim at topics that are of particular relevance to public pension funds.

We will closely cover the processes for selection and evaluation of investment managers, review legal concerns with fund investment and management policies and explore the benefits and pitfalls of a wide variety of investment strategies.

The Summit will take place on January 12-14, 2011 at the Phoenician in Scottsdale, Arizona. The preliminary agenda can be seen at:

Tuesday, December 7, 2010

Recent economic data releases: what's really going on

Two recent releases economic data releases raise grave questions. We refer to the following:

A. "The Fed cuts US economy growth estimate for 2011 and ups unemployment. The Federal Reserve has cut its 2011 growth forecast for the US economy, newly released minutes of its last policy committee meeting reveal. The Fed expects growth of 3-3.6% next year, down from its previous 3.5-4.2% estimate. It also forecasts higher unemployment and lower inflation than before."

B. "After holding steady for three months, the U.S. unemployment rate rose to 9.8 percent in November, according to the U.S. Bureau of Labor Statistics.The report out Friday was a letdown for the country’s economics, many of whom had predicted much larger job growth figures. The disappointing news was another sign that the nation’s economy remains in a fragile state."

What's really going on.

The Federal Reserve faced a firestorm of criticism after implementing QE2, or Quantitative Easing Number Two. We forecast that unemployment would decline in November. So, what happened? Nothing. Unemployment actually fell. It is not yet reflected in the numbers for several reasons:

1. The Fed does not want economic indicators to show progress, at least not yet. To do so would raise questions about the timing of QE2. We expect the November unemployment numbers to be revised downward in January or February, 2011.

2. Likewise, GDP growth of 3.5% to 4% would, again, raise questions about the appropriateness of QE2.

Why would the Fed do this?

Economic policy in this day and age is all about managing expectations. By showing higher unemployment and lower growth, the Fed justifies QE2 and sets the stage for "surprising" increases in economic growth and "unanticipated" declines in unemployment during the first half of 2011.

We stand by our forecast: we expect U.S. employment to grow, unemployment to fall, and spending to recover over the coming months. (We do note, however, certain portions of our long term social and financial return forecast, the Fully Adjusted Return ® Forecast, have changed. Specifically, our forecast concerning the U.S. banking sector has turned markedly negative. Click here to review our track record with respect to the market crisis.)

Tuesday, November 30, 2010

Opal Alternative Investing Summit - 5-7 December, 2010

Alternative Investing Summit - 5-7 December, 2010. The Ritz-Carlton, Laguna Niguel, Dana Point, California

The Alternative Investing Summit will bring together trustees and representatives of institutions as well as money managers and consultants to explore the roles of alternative opportunities and strategies. Participants and delegates of this alternative investing conference will investigate a range of critical investment issues, including discussion of the risks and benefits involving private equity, investigating the risks and rewards involved with hedge funds, examining means of cutting costs associated with implementation of absolute returns strategies, reviewing the future of commodities and surveying the landscape of emerging international markets.

The label "alternative" describes a nebulous investment class to many investors, especially those in the institutional world who have strict ethical and fiduciary obligations to their organizations. However, pursuing alternative investments is essential to maximizing returns while maintaining proper asset allocation in plan portfolios of endowments, foundations, family offices, and public and corporate funds.


Saturday, November 6, 2010

A Comparison of CSR Methodologies (Angela Liu, GWU, MSF, 2011)

In the posting below, CIR Intern Angela Liu, (GWU, MSF, 2011) compares two recent papers on CSR.

A web article from Ioannis Ioannou, Assistant Professor of Strategic and International Management at London Business School, asks "Is there a link between a company's social responsibility and its profitability?" The second study reviewed is the Boston College 2010 Corporate Social Responsibility Index.

A Comparison of CSR Methodologies

Both studies focus on how to measure and value corporate social responsibility (CSR). Both show how difficult it is to precisely measure the exact economic value of CSR, but both also use methods that highlight the intangible value that social responsibility might actually bring to a given firm.

External and Internal Aspects

The research from the London Business School mainly focuses on the internal aspects of CSR. The authors have collected data since 1990. They use this data to study the key ways that a firm can transfer CSR information to capital markets in an attempt to increase economic value. In this research, the authors suggest there should be a number of intermediaries and institutions involved in the CSR information dissemination process. They found that sell-side analysts are an important information intermediary and found a vast set of literature examining sell-side analysts' role and their impact on stock prices: sell-side analyst recommendations and long-term growth forecasts reflect, at least to an extent, expectations about value-creation at a given firm. These forecasts are starting to include CSR related data.

The LBS research shows there are three key ways to measure the benefits of CSR: better understanding of the firm, providing more detail on resources and explaining CSR initiatives.

Better understanding. An analyst consistently follows and does research on a firm; with added CSR related information, he or she might better understand a given firm's long run strategy. Further, he/she may be able to better understand how the firm's CSR strategy can benefit the firm.

Resources. The larger a given firm, the more resources it can provide to analysts seeking to include CSR related data in the valuation process. For example, a given firm might purchase CSR related data from other professional institutions or hire experienced CSR professionals to help integrate and disseminate the data.

CSR initiatives. Analyst CSR awareness may be based on the total number of firms an analyst is following and how CSR-sensitive she/he is. If CSR awareness is high, the analyst will be able to better value and describe how CSR benefits of a firm.

The Boston College 2010 Corporate Social Responsibility Index

The Index uses external data to measure the marginal value to a firm from making social responsibility-related activities part of its operational strategy. The authors believe that a firm gains from social responsibility-related activities because these activities help reinforce a more positive general reputation. Reputation is evaluated by collecting and reviewing information concerning external views of the firm, rather than via analyst measurements from internal sources.
The corporate social responsibility index contains seven elements: Products/Services, Innovation, Workplace, Governance, Citizenship, Leadership, and Performance. According to this research, the relationship social responsibility and reputation is positive; the relationship between reputation and consumer support is positive. Therefore, if a firm has higher social responsibility, it obtains a better reputation and more consumer support. This also implies that social responsible behaviour on the part of a firm can generate actual economic benefits.

In their evaluation model, the Boston College researchers use a survey tool, a questionnaire, to determine the reputation of a firm. A higher score means the firm posses a higher, better reputation. As a final step, the authors use the survey results to determine the link between social responsibility and economic value.

Pros and Cons




l Internal Information on a Company

l Longer-term Observations

Experienced analysts

l Bigger firms have more precise measurement of CSR benefits

l Information Credibility

l Can’t show the short-term effects when company adopts a social responsibility policy

l Credibility of Analysts

l Not suitable for small firms



l Based on external reputation

l Once a year

l Firm can improve via marketing

l Questionnaire are easy to collect and score

l Only bigger firms included (selected by total assets)

l Short-term rating and performance of firm

l Biased Marketing

l Possibly unreliable questionnaire

l Can’t apply to small business

Wednesday, November 3, 2010

Federal Reserve Board QE2 - $600 billion, $75 billion at a time...

According to the Fed, "To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities. The Committee will maintain its existing policy of reinvesting principal payments from its securities holdings. In addition, the Committee intends to purchase a further $600 billion of longer-term Treasury securities by the end of the second quarter of 2011, a pace of about $75 billion per month. The Committee will regularly review the pace of its securities purchases and the overall size of the asset-purchase program in light of incoming information and will adjust the program as needed to best foster maximum employment and price stability."

$600 billion is $100 billion larger than anticipated and $75 billion per month seems reasonable. This is an appropriate response and stands every chance of being effective, especially since economic activity has been strengthening in the weeks leading up to this announcement.

From a social investing perspective, the Fed's new focus on employment (as opposed to inflation) is a welcome change. Monetary policies that primarily seek to limit inflation risk (inflation targeting) tend to serve the needs of asset holders, since inflation first impacts and reduces asset values. These type of asset focused monetary policies are inappropriate and ineffective in the current, ongoing crisis. Why? With a record number of foreclosures, there are fewer and fewer asset holders. Income inequality is increasing rapidly as assets are being concentrated in fewer and fewer hands.

A concern with an "increase in long-term inflation expectations that could destabilize the economy" is misplaced. The larger, more immediate and significant risk for society and the economy resides in the possibility of an increase in both short and long-term unemployment, since this could destabilize both the economy and the political system (as we saw last night). Better to seek to increase social return/benefits by putting people in a position to acquire assets. This is done through employment.

Wednesday, October 6, 2010

Racial predatory loans fueled U.S. housing crisis: study

(From the Firm Grasp of the Obvious Department at the American Sociological Review as reported by Reuters....)

"Predatory lending aimed at racially segregated minority neighborhoods led to mass foreclosures that fueled the U.S. housing crisis, according to a new study published in the American Sociological Review.

Predatory lending typically refers to loans that carry unreasonable fees, interest rates and payment requirements.

Poorer minority areas became a focus of these practices in the 1990s with the growth of mortgage-backed securities, which enabled lenders to pool low- and high-risk loans to sell on the secondary market, Professor Douglas Massey of the Woodrow Wilson School of Public and International Affairs at Princeton University and PhD candidate Jacob Rugh, said in their study.

The financial institutions likely to be found in minority areas tended to be predatory -- pawn shops, payday lenders and check cashing services that 'charge high fees and usurious rates of interest,' they said in the study.

'By definition, segregation creates minority dominant neighborhoods, which, given the legacy of redlining and institutional discrimination, continue to be underserved by mainstream financial institutions,' the study says.

Redlining is the practice of denying or increasing the cost of services, such as banking and insurance, to residents in specific areas, often based on race.

The U.S. economy is still struggling with the effects of its longest recession since the 1930s, which was triggered in large part by the housing crisis, which was in part triggered by the crash of the subprime loan market.

Subprime lending refers to loans made to consumers with poor credit and others considered higher risk. They tend to have a higher interest rate than traditional loans.

The study, which used data from the 100 largest U.S. metropolitan areas, found that living in a predominantly African-American area, and to a lesser extent Hispanic area, were 'powerful predictors of foreclosures' in the nation.

Even African-Americans with similar credit profiles and down-payment ratios to white borrowers were more likely to receive subprime loans, according to the study.

'As a result, from 1993 to 2000, the share of subprime mortgages going to households in minority neighborhoods rose from 2 to 18 percent,' Massey and Rugh said.

They said the U.S. Civil Rights Act should be amended to create mechanisms that would uncover discrimination and penalize those who discriminated against minority borrowers.

The study is published in the October issue of the journal."

See: and for our take on the matter.

Wednesday, August 25, 2010

Proxy Access Granted! (Sandy Wu, CIR Intern and MSF program, GWU)

The Securities and Exchange Commission voted this morning to adopt changes to the federal proxy and other rules to facilitate director nominations by shareholders by allowing shareholders to more easily nominate directors to corporate boards.

This will definitely change the balance of power between general investors and management at many U.S. companies. This is the fourth time the SEC considered questions about proxy access over the past few years.

The Dodd-Frank Wall Street Reform and Consumer Protection Act finally confirmed the Commission’s authority to resolve the issue. “The proxy is often the principal means for shareholders and public companies to communicate with one another, and for shareholders to weigh in on issues of importance to the corporation,” said SEC Chairman Mary L. Schapiro.

The rule was passed on a 3-2 vote, with two Republican commissioners, Troy Paredes and Kathleen Casey, opposing. “The rule is fundamentally and fatally flawed, and it will have great difficulty surviving judicial scrutiny..the SEC's staff will be burdened with the unenviable responsibility of brokering disputes between shareholders and companies every board-election season,” Ms. Casey predicted.

The matter, debated at the SEC for years, had dogged two prior chairmen, Christopher Cox and William Donaldson. "Proxy access" would force public companies to print the names of shareholder-nominated board candidates directly onto corporate ballots if certain conditions are met. Under the new rule, "proxy access" will be available to a shareholder, or group of shareholders, who own — and have owned continually for at least the prior 3 years — at least 3 percent of the company's voting stock. The Commission decreased the ownership threshold for small companies from 5 to 3 percent. The Commission increased ownership thresholds for large companies from 1 percent to 3 percent, and increased the period of required ownership for companies of all sizes from 1 to 3 years. In order to reduce uncertainty, the final rule includes detailed provisions on how to calculate these requirements.

During the deferral period, the Commission will monitor how these new rules have been implemented at larger companies and will continue to assess the distribution of stock among holders of smaller company shares.

Under the new rules:

  • Shareholders who otherwise are provided the opportunity to nominate directors at a shareholder meeting under applicable state or foreign law would be able to have their nominees included in the company proxy materials sent to all shareholders.
  • Shareholders also have the ability to use the shareholder proposal process to establish procedures for the inclusion of shareholder director nominations in company proxy materials.

Application of the new access rules for the smallest public companies — those defined as "smaller reporting companies" under SEC rules — will be deferred for three years.

Generally, the new rules will become effective 60 days after their publication in the Federal Register. (Adopted from

We think the SEC’s adoption of the Proxy Access rule is a huge move forward for investors. The rule shifts the balance of power toward shareholders and away from company management and boards. It will certainly give rise to more competition among Board candidates: this is actually healthy. We believe proxy access will invigorate shareholders and force boards to be more vigilant in their oversight of companies.

Thursday, July 29, 2010

Section 342. Office Of Minority And Women Inclusion

Much recent attention has focused on Section 342 of the Financial Reform Bill (Dodd-Frank Bill). The section calls for the creation of Offices of Minority and Women Inclusion at all Federal financial institution regulatory agencies. While most blog comments on the Section have been negative, there has been a lack of accurate information about just what this section calls for and why.

Let's start with why. As we noted in 2003 and 2006:

"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." (2003);


"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." (2006).

On April 22, 2009, we noted that "Commercial and investment banks used their size and money to..evade any meaningful effort to impose common sense and transparent risk controls in the public interest, known as regulation. Markets are ruled by two emotions: fear and greed, and these institutions got greedy, very greedy. They created financial products that served no real purpose, other than to generate profit for the bank. To keep customers (their only regulator) from understanding the bank’s true intent, they made these products horribly complicated. These products were, in part, simple bets. These bets were layered on top of each other until only the product designers had any hope of realistically estimating what little value actually existed in the products.

Commercial and investment banks came to act as if they understood that giving these products a veneer of social utility would help them hide their true motivation, so they tied a small fraction of these bets, now known as 'derivatives,' to subprime lending and passed the bundle off as the invisible hand of the free market at work. Subprime lending products allowed white banks to engage in highly negative and discriminatory practices. Such practices 'intentionally assigned black customers subprime mortgages while giving whites better rates.' " On June 24, 2009 Wells Fargo was sued by the City of Baltimore for "discriminatory and predatory lending."

As we said on March 14, 2009, quoting an article by Michael Lewis, "There weren't enough Americans with (bad) credit taking out loans to satisfy investors’ appetite for the end product. (Investment banks) used (financial bets) to synthesize more of them..they weren’t satisfied getting lots of unqualified borrowers to borrow money to buy a house they couldn’t afford..they were creating them out of whole cloth. One hundred times over! That’s why the (financial crisis) losses are so much greater than the loans."

None of the blogs we read on Section 342 mentioned these facts.

Section 342 is actually called for by Adam Smith, who said, in The Wealth of Nations that, "To promote the little interest of one little order of men in one country, it hurts the interest of all other orders of men in that country, and of all men in all other countries." The section seeks to broaden "one little order of men in one country" to include minorities and women.

What the section actually says.

Section 342 does not declare "that race and gender employment ratios, if not quotas, must be observed by private financial institutions that do business with the government." It does not insert "race and gender quotas into America's financial industry." There is no language in the section that would make either of these statements reasonable.

Section 342 calls for the development of "standards for—
(A) equal employment opportunity and the racial, ethnic,and gender diversity of the workforce and senior management of the agency;
(B) increased participation of minority-owned and women-owned businesses in the programs and contracts of the agency, including standards for coordinating technical assistance to such businesses; and
(C) assessing the diversity policies and practices of entities regulated by the agency."

The term "standards" is key. Here is what the legislation says about them: "The standards and procedures developed and implemented under this subsection shall include a procedure for (making) a determination whether an agency contractor, and, as applicable, a subcontractor has failed to make a good faith effort to include minorities and women in their workforce."

This seems reasonable. While "Section 342's provisions are broad" there is no reason to assume that they "are certain to increase inefficiency in federal agencies," unless you assume all women and minorities inefficient, a biased and bigoted assumption, to say the least.

Likewise, to suggest that "the federal government is moving from outlawing discrimination to setting up a system of quotas" or that "the only way that financial firms doing business with the government would be able to comply with the law is by showing that a certain percentage of their workforce is female or minority" is wrong. This is the kind of fear mongering heard after Brown v. Board of Education. It was wrong then. It is wrong now. No quotas are called for, and a firm can certainly comply with the law even without having a single women or minority of staff, assuming it has made a good faith effort to include minorities and women in their workforce.

We recently calculated that the dollar Section 342 potential for minority and women owned firms totals $136 million. To order our full Section 342 report, see:

Wednesday, July 21, 2010

Creative Investment Research, Inc. testifies at the Joint Public Hearing on CRA

Sponsored by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency and the Office of Thrift Supervision (The Agencies), the Joint Public Hearing on the Community Reinvestment Act Regulation was held in Arlington Virginia on July 19, 2010. We provided testimony for the hearings.

Congress passed the Community Reinvestment Act (CRA) in 1977 “to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low and moderate income neighborhoods, consistent with safe and sound operations.”

Our testimony follows a series of warnings we have issued since 1998:

- In an October 1998 brief filed with the Court of Appeals for the District of Columbia Circuit, we objected to the Citigroup/Travelers merger. We cited evidence that growing financial market malfeasance greatly exacerbated risks in financial markets, reducing the safety and soundness of large financial institutions. We went on to note that: “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.”

- On June 15, 2000, we testified before the House Financial Services Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises (GSE’s) of the US Congress. We suggested the GSE’s (Fannie Mae and Freddie Mac) be subject to a thorough “Social Audit.” Had they been subject to this audit, certain flaws in their operation, including ethical shortcomings, may have been revealed earlier and in a better market in which to make corrections.

- On December 22, 2003, we warned regulators that statistical models created by the firm using the Fully Adjusted Return ®Methodology signaled the probability of system-wide economic and market failure.

- On Monday, April 11, 2005, we testified before Judge William H. Pauley III in the U.S. District Court for the Southern District of New York on behalf of investors at a fairness hearing regarding the $1.4 billion dollar Global Research Analyst Settlement.

- On February 6, 2006, we warned regulators that statistical models using the Fully Adjusted Return® Methodology confirmed that system-wide economic and market failure was a growing possibility. See page 2:

- On June 18, 2010, we released a comment letter sent to Mr. Phil Angelides, Chairman, Financial Crisis Inquiry Commission, outlining our Transaction Cost Theory of the Financial Crisis. See: ...

Our CRA testimony focuses on:

- The best approaches to evaluating the geographic scope of depository institution lending, investment and/or deposit-taking activities under CRA. We seek open and market based CRA performance evaluation standards.

- We suggest the Agencies conduct a “credit needs” based review, subject to financial institution lending and service capabilities. In other words, we suggest they look at total credit needs in areas served by large and small institutions, calculate the potential impact that the institution has in meeting those needs, calculate the actual impact (number and dollar amount of loans provided), and use this metric as part of the CRA review process.

- We suggest the agencies revise CRA regulations to require that bank examiners routinely consider activities by affiliates.

- We suggest that the Agencies focus on opportunities to encourage "green" community development loans, "green" investments and "green" services to support projects that have a significant impact on a neighborhood.

- We suggest that the agencies’ evaluations of evidence of discriminatory or other illegal credit practices as outlined in the CRA rules are inadequate.

- We suggest the creation of a single online access point for CRA ratings, HMDA and small business data, accessible online, covering all regulated financial institutions and all affiliates, across regulatory agencies (OCC, OTS, FDIC, FRB, SEC, CFTC, etc.). We believe this would streamline CRA disclosures and performance evaluation reports, simplify compliance, improve consistency and enhance clarity.

- Finally, we suggest the agencies consider using the social networking sites (Facebook, Linked-In, etc) to collect public comments on the CRA performance of banks.

Wednesday, July 14, 2010

Minority firm part of $1.85 billion FDIC asset sale

An article by Ling-Ling Wei in today's Wall Street Journal noted that: "A partnership between Tom Barrack's Colony Capital LLC and a minority-owned investment firm won the bidding for a $1.85 billion portfolio of distressed commercial real-estate loans auctioned off by the Federal Deposit Insurance Corp.

The deal, the second-largest bulk sale of commercial-property debt under a public-private partnership, is expected to be announced Wednesday by the FDIC.

This deal is the first public-private setup in which a minority-owned firm has taken a stake, albeit a small one, during this economic downturn. Cogsville, an African-American-owned firm, contributed $16 million to the $218 million investment, for a 7% stake in the portfolio.

Over the past year, there have been complaints on Capitol Hill and among smaller financial firms, especially those owned by minorities and women, about the lack of minority-firm participation in various public-private investment programs.

'A lot of minority-owned firms have been angry because they haven't been included in a lot of deals,' said William Michael Cunningham, an investment adviser who tracks minority-owned financial firms.

In response, the FDIC started its minority-and-women outreach program this year, conducting seminars to facilitate participation by firms in its asset sales, FDIC officials said. The move also comes as politicians are ratcheting up pressure on regulators and financial firms to boost minority firms' chances of participating in various asset-management and bank-rescue programs sponsored by the government. These programs are expected to generate millions of dollars in management fees and investment opportunities for private companies."

Socially responsible?

"The Colony-Cogsville group intends to work with borrowers when possible as opposed to foreclosing on them. If a borrower defaults, the group may modify the terms to make the loan current. It would make money as long as the borrower stays current on modified terms. In some cases, the group may sell the debt back to the borrowers for more than what it paid."

Sunday, July 11, 2010

Another Black-owned bank closes

According to the FDIC, "On Friday, July 9, 2010, Ideal Federal Savings Bank, Baltimore, MD was closed by the Office of Thrift Supervision, and the Federal Deposit Insurance Corporation (FDIC) was named Receiver. No advance notice is given to the public when a financial institution is closed. As a convenience to local depositors, the FDIC has made arrangements for the insured funds in demand accounts, savings accounts, NOW accounts, insured CD's, and any other transactional accounts to be transferred to the Manufacturers and Traders Trust Company ("M&T") located at 715 N. Howard Street, Baltimore, Maryland. M&T Bank will also accept the failed bank's direct deposits from the federal government, such as Social Security and Veterans' payments through Saturday, September 4."

The institution was established as Ideal Federal Savings Bank on April 4, 1920. As one of the original Black owned financial institution in the United States, the bank had a storied history of providing mortgage loans to working and middle class blacks.

Sunday, July 4, 2010

Minority and Women-owned Company Small Business Financing Guide and Workbook, 2010 Edition is pleased to announce the publication of the Minority and Women-owned Company Small Business Financing Guide and Workbook, 2010 Edition.

The Guide and Workbook are designed to provide actionable information minorities and women can use to obtain small business financing. The Guide and Workbook consists of two sections: The Guide provides detailed business financing information of specific relevance to Minority and Women-owned Businesses. The Workbook is an electronic document with blank loan applications, grant forms, business planning and financial reporting templates, IRS Forms and other documents.

The Guide and Workbook will be of specific interest to those seeking to finance a new firm and/or start-up. It has special sections on financing a Day Care Center, financing a Beauty/Hair Salon, financing a Music/Film business.

Specific sections of the Workbook provide detailed information on:

How to complete a Bank Loan Application (completed sample application included).

Why there are NO specialized grants for Minority and Women-owned Small Businesses. What programs exist and how you can benefit from them.

How to complete a Grant Application (completed sample application included).

Banks: Do they hate Women and Minority-owned Small Businesses or do they just hate small businesses in general?

Has your business credit lines been reduced or revoked? How to find both short-term capital financing and long-term business financing.

Why you should avoid Venture Capital and Private Equity firms. If you must deal with them, here’s how.

How to work with the Small Business Administration (SBA), the Minority Business Development Agency (MBDA), and other Federal, State and local Agencies, if you must.

The Guide includes separate chapters on the following topics: • Financing a Franchise • Buying an Existing Business • Financing a Day Care Center, Beauty/Hair Salon, or Music/Film business • Funding Sources: Credit Unions, Community Development Financial Institutions, Community Development Entities, Microcredit Funds and Peer-to-Peer Lending.

To order see:

Sunday, June 27, 2010

Creative Investment issues comments for the Small Business Federal Contracting Forum

Creative Investment Research, Inc. issued comments for the Small Business Federal Contracting Forum public meeting to be held on Monday, June 28, 2010. The purpose of the meeting is to encourage public comment on small business issues.

On April 26, 2010, President Obama established an Interagency Task Force to develop proposals and recommendations for enhancing the use of small businesses in Federal contracting, including businesses owned by women, minorities, socially and economically disadvantaged individuals, and service-disabled veterans of our Armed Forces. The Memorandum establishing the Task Force is available here.

Creative Investment has long been familiar with the problems that small and minority businesses encounter when attempting to contract with the federal government. We reviewed our experiences in our comments. In addition, we noted which Federal agencies are doing the best job in their small business outreach strategies.

We noted that doing business with the Federal government would be easier and more attractive if the Government could facilitate direct access to equity capital for qualified small businesses, including businesses owned by women, minorities, socially and economically disadvantaged individuals, and service-disabled veterans of our Armed Forces. Our recommendation for government and private action to facilitate small business equity capital formation is detailed in our comments.

Thursday, May 20, 2010

Financial Reform passes!

In another stunning victory for the Obama Administration, the US Senate passed the financial regulatory reform bill by a vote of 59-39 on Thursday night. (A summary of the legislation can be found on the Senate Banking Committee website.)

We are optimistic that this legislation will begin to address the "trust issues" that now dominate the equity marketplace. It was these "trust issues" that caused a 1,000 point intra-day fall in the Dow Jones Industrial Index on May 6. Until now, rational, fair or effective solutions to the practices that caused so much turmoil in 2007, 2008 and 2009 had not been enacted in any Western economy or market system.

Market mechanisms are simply stressed to the breaking point, given the sharp rise in transaction costs. Transaction costs increased as marketplace ethics decreased. Financial market institutions, recognizing that a decline in ethical standards eventually leads to a decline in trust and an increase in transaction costs, attempted to use financial innovation to deal with the ethics/trust issue. They did so via derivatives: these and other financial market "innovations" were designed to counter a growing lack of ethics in the marketplace. (This is why AIG Group was a key factor in the crisis: insurance policies they sold on financial transactions were supposed to eliminate the need to be concerned with unscrupulous (see Goldman emails) actors. These "insurance policies" proved ineffective, however, and only served to increase transaction costs further.) These increased transaction costs precipitated and caused global market failure in 2007 and 2008.

While we would not be surprised to see the market fall significantly over the next few weeks, markets will recover once transaction costs are lowered. Transaction costs will be lowered when ethical standards, and the trust that results from them, are increased. The financial reform legislation, championed by the Obama Administration and passed by both the House and Senate, is an attempt to do so. While additional legislation will be required, we think this a good first step.

Wednesday, May 19, 2010

ShoreBank's Rescue Gives Community Lenders Hope

Summary version from The American Banker Newspaper. Wednesday, May 19, 2010. Story by Robert Barba.

Sources said early Tuesday that the struggling $2.3 billion-asset lender had secured $140 million in capital commitments, well exceeding the $125 million it needed to become eligible for a $75 million investment from the Treasury Department.

Though most of the companies on the roster have been solid supporters of community development financial institutions, Goldman Sachs Group Inc. and General Electric Co.'s GE Capital were two newcomers. They also were among the biggest investors in the group, kicking in $25 million and $20 million, respectively.

Another headline investor in ShoreBank is Citigroup Inc., at $20 million. Others include Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., U.S. Bancorp, Morgan Stanley, Northern Trust Corp. and PNC Financial Services Group Inc. Also on board were State Farm, the Ford Foundation and the John D. and Catherine T. MacArthur Foundation.

Though the commitments could signal renewed interest in helping out institutions serving the neediest communities, William Michael Cunningham, a social-investing adviser and the founder of the minority bank fund MBF LP in Washington, said the unit of ShoreBank Corp. is the only struggling bank in the country likely to secure such aid.

"This just shows the power of their brand," Cunningham said Tuesday. "It is so impressive that they were able to get these guys to pony up. For other institutions … it would have been an impossible task."

ShoreBank, which has been described as the darling of President Clinton, has deep political ties, including with the Obama administration. Several sources, however, rebuffed speculation that the investments stemmed from political pressure. For instance, Bank of Montreal's Harris Bank said in an e-mail that it has "long recognized and supported ShoreBank's role in the Chicago community and can confirm that we are also assisting with their recapitalization effort."

Still, Cunningham said implicit political pressure, as well as reputational pressure, was probably exerted.

Whatever the investors' motivations, Cunningham said, without the investment, ShoreBank would not have survived. "If you are ShoreBank, you don't care if it is out of good public relations or if they are angels; they are doing it," he said.

For a year ShoreBank's credit problems have been eating away its capital. At March 31, it had $360 million in nonperforming assets and its total risk-based capital ratio had dwindled to 3.36%, leaving it critically undercapitalized. Rumors had begun to swirl in Chicago that regulators were starting an auction for its assets.

Analysts have said that a $200 million investment would be enough to solve ShoreBank's capital issues and give it room to absorb losses in its credit portfolio.

Copyright, 2010, American Banker Newspaper/Source Media.

Friday, May 14, 2010

Corporate Governance Research

Pursuant to Request for Proposal No. 2009-5330, the California Public Employees’ Retirement System intends to award the contract for Corporate Governance Research Spring-Fed Pool to: Creative Investment Research, Inc. See:
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Investment Trends Summit

Opal Financial Group's Investment Trends Summit is designed to meet the needs of senior pension fund officers, trustees and other institutional investors who prefer smaller, more structured programs. By limiting the number of managers in attendance, participants will be able to more carefully examine a distinct set of topics specifically tailored to their interests.

This year's Summit will take place June 16-18, 2010 at the fabulous Four Seasons Resort, The Biltmore, in Santa Barbara, CA.

Topics of Discussion Include:
• Challenges Institutional Investors Are Now Facing
• Post Crisis Hangover - Lower Risk or Raise Returns?
• Real Asset Investing
• The Changing Regulatory Environment
• Ongoing Education for Plan Fiduciaries and Participants

Register here. Institutional investors registrations are complimentary.

Wednesday, May 5, 2010

Punishing Goldman Sachs

According to news reports, most prominently a report by Charles Gasparino, Goldman Sachs is looking to settle SEC charges that the firm willfully mislead and defrauded investors in selling an investment product based on subprime mortgages. This is, of course, the smart thing for them to do, if they can. I am not sure that the SEC will let them off the hook lightly. Even a billion dollar fine would be of little consequence to the firm. What to do? Here is what I said in 2005:

"One thing I would note about the (Global Research Analyst) settlement itself is our belief that the penalties should have been income based. I know that's a settled point, but our suggestion would have been that the settling firms be stripped of all income for a 12-month period as a way of ensuring that they would not engage in these egregious actions again. What you do is let the firms run themselves for a 12-month period, you take a look back at how much money they made, and you take all of that money out of the firm as the penalty for the actions they engaged in.

We believe that these firms are critical to the future of democratic capitalism and that fraud is very, very damaging and that it risks -- basically what happens is, as you get these types of egregious actions and fraud, you risk wrecking the system in its entirety, and that's a risk that we don't believe should be borne by the public. It's a risk that we don't think is appropriate."

From testimony by William Michael Cunningham at the Global Research Analyst Settlement Fairness Hearing. April 11, 2005. Before Judge William H. Pauley. In the U.S. District Court for the District of New York.