Sunday, October 19, 2008

Turning DARKNESS into light = Office of Financial Stability / Bailout "POTS"

Much of what ails the financial markets WAS CREATED IN DARKNESS - hence disclosure in the "full light of day" and attendant scrutiny needs to dawn upon same.
  • Hedge funds and other similarly unregistered entities compete with a huge advantage, over Mutual funds, Investment companies.
  • Mutual funds, both open end, closed end and unit investment trusts (all Investment Company Act of 1940 entities) operate primarily in regulated "open" markets.
  • Hedge funds enjoy a veritable blanket of secrecy, undisclosed securities positions, borrowing / leverage, insurance, credit default swaps.
  • Having seen the trades that generated enormous profits at its hedge fund clients through Prime broker operations, certain banks / broker dealers, despite SEC, AICPA and FASB efforts in the 2004/5 era to rein in certain risky activities in off balance sheet  / so called special purpose entities  (think Enron) - SIVs special / structured investment vehicles being the most recent moniker, got into the leveraged spread trades, only in a much more leveraged fashion and as the music was beginning to fade (the end of the real estate asset bubble).
  • Hedge funds and the securities, insurance contracts CDS (Credit default swaps) in which they invest and real or synthetic (explicit or implicit) leverage thereon NEED to be exposed to the full light of day to address this most fundamental information imbalance.
  • As a result mutual funds, having to operate openly, are by definition placed at a competitive disadvantage due to having to disclose positions - twice a year;  causing an "information" drain of a portfolio managers "best ideas" - to the disadvantage of shareholders.   It's as if an NFL football team would disclose its playbook - long ago protected as trade secrets.  Notwithstanding the common lack of authority to short securities. 
  • I believe, although am a bit unsure, that few, if any mutual fund boards (not to mention the industry's lobbying arm Investment Company Institute) took any action to "protect" its funds' shareholders from the above information disclosure disadvantage; I'd be much obliged if any bloggers may have data to address this point (Max are you out there?)
  • I'd also be grateful if there is a data set that may show what if any deliberation(s) on this point may or may not have been part of any mutual fund board minutes.
  • Shareholders, all Americans, except those high net worth accredited investors,  in same - are negatively disadvantaged.
  • Importantly, the vast majority of 401k holdings are in mutual funds; in the "open" market.
  • All securities, contracts, CDS (whether registered or not) should be standardized to the extent possible and be required to trade on new or adapted open / regulated exchanges - not allowed to remain, and potentially subject to abuse by rogue OTC (over the counter) market makers and traders and or colored counterparties.
  • Technology exists to enable an "anonymous" reporting of same trades; open, transparent verifiable price discovery affords ALL market participants with indicators / sources of value; vastly reducing "judgment calls" implicit in mark to models and so called level 3 "difficult to value assets".

The future confidence of all investors from sovereign wealth funds to individual shareholders will benefit when they can truly see "what's going on"!   

Tuesday, October 14, 2008

What is the HALF-LIFE of the Bailout drug? 1-2-3 Back to reality…

When the temporary effects of the bailout drug placed into the hands of the doctors (Wall St and other financial services entities), the creators of this over leveraged, toxic debt induced time bomb wear off, or worse fail to perform the hoped-for-magic; what and how will Mr Paulson and Bernanke treat the patient aka the “real economy” consumer, consumption-dependent / capital expenditure-reliant corporate earnings?

POTS - Part of the solution:
DIRECT AID to the US TAXPAYER and to the underlying major asset class.
Tax support for renewed Real Estate investment as described in last blog.

Bailouts of banks and Wall St firms are NOT the solution to the REAL problem.
They band aid a fracture only, in fact, are nearly completely misplaced, misguided and misinformed use of US Taxpayer monies.

NEED we state the OBVIOUS again?
NOT ALL financial institutions are in trouble; most are / should be allowed to seize the present opportunities they (boards, management and shareholders) so patiently waited for by foregoing the illicit models and paper profits of yore and compensation thereon (2004 to 2007).

Repeating the CAUSE OF THE MAGNITUDE of this problem:
LEVERAGE - admittedly we would face a problem, more on the scale of OTS / Resolution Trust of the early 1990's; due to recent vintage homeowners having been allowed to own homes with no skin in the game required (i.e. no down payment).

TODAYS problem
WAS exacerbated BY WALL ST and related entities astounding piling on of debt / leverage to capture spread, in the relentless PURSUIT OF MAXIMUM PROFITS, regardless of the AAA credit quality assigned by the ratings agencies and or implicit Fannie Mae, Freddie Mac, Sallie Mae government-backed issuers. Oblivious (perhaps failed to or sorely and inadequately even performed due diligence) upon the true insurance capacity of the ultimate counterparty, major issuer of CREDIT DEFAULT SWAPS insurance; AIG.

With scant, if any attention to the fact that Real Estate, as an asset class, with a readily observable 200 year track record of low to mid single digit appreciation, that ejaculated beginning in 2004 and kept on ejaculating for 3 years - COME ON, GIVE ME A BREAK!

Where are (were) all the fans of ELVIS & Johnnie (Carson)?
Millions of Americans, listened to these artists with rapt attention FOR YEARS.
Did you realize the MOST IMPORTANT financial message was sent from their graves?
By their respective estate executors, in May 2006 both estates sold Real Estate - and it was noted in the proprietary "Fiduciary Alert" as a reminder to those in positions of fiduciary responsibility to assess, monitor and document the continued appropriateness (risk / reward) of
holding real estate; some "fans" may have been listening to "new, but fleeting" music.

It's not about being right, or lucky - IT'S ABOUT RECOGNIZING THE OBVIOUS, especially by those who know / and should have known better, with access to ALL the models, necessary information about asset-backed, mortgage-backed real estate-related securities; notwithstanding the stratospheric appreciation of homes in their VERY OWN NEIGHBORHOODS!! All the while, ignoring the dislocation, rather rupture of same value from jobs / job security, productivity and income.

Friday, October 10, 2008

Give me & the US Taxpayer a break (NOT them)!

Mr Paulson and Mr Bernanke stated we must commit US Taxpayer dollars for each of the previous "Once in a lifetime, extraordinary, critical rescues".
Bear Stearns $29B, Indy Mac (FDIC), Fannie Mae $100B, Freddie Mac $100B, Washington Mutual (FDIC), Wachovia (merged Wells Fargo), Lehman Brothers (allowed to file BK), Merrill Lynch ("encouraged" merger with BofA), AIG $85B + $37.5B (plus NY Ins Comm. ok'd dip into its Insurance reserves) PLUS Office of Financial Stability $700B

Today's date is Ocotber 10, 2008
According to Messers Paulson & Bernanke TODAY'S extraordinary, critical, must do is: "Equity stakes in banks, brokers, insurance companies"; when will it stop?

All of the above steps were direct aid to shareholders and bondholders and each necessitated further surgery. It's as if the Mr Paulson and Bernanke believe that the US economy was ONLY comprised of financial institutions which warranted commitment of US Taxpayer funds and which could not be allowed to fail, merge or fold; why not? What did they know and when did they know it?

Not all financial firms are in danger - in the past some chose (an action verb) despite investor and analyst pressures, to be prudent, forego profits from said risky behavior and should be allowed to seize new markets, business opportunities for their patient shareholders.
In the interim Part of the solution POTS
Requires NO immediate US Taxpayer funds:
The root aid that's required is to DIRECTLY enhance the UNDERLYING, temporarily impaired assets (NOT the securities, not bailout the institutions or investors of yore rather):
  • Real estate

  • Autos

  • Tax incentives for FUTURE investment in OLD assets; greater tax incentives the longer the holding periods.

  • As a jump start - NEW investments (as of a date in the near future for a 45, 60, 90 day period) qualify for tax free status; undoubtedly many are sitting on the sidelines waiting with CASH to invest for such an opportunity - at least it will stimulate a greater level of investment / risk capital activity.

  • Further any investments in repairs, maintenance, landscape, or capital improvements, labor costs for same would qualify for favorable tax treatment. If same are GREEN friendly could qualify for even further tax incentives.

  • Creates jobs, stimulates demand for the underlying assets and would be more Green friendly; what's wrong that solution? Its the American way! NOT BAILOUTS or EQUITY STAKES!

Thursday, October 9, 2008

Is a prudent fiduciary result at all possible? US Treasury - Crossing the LINE into partnership with TARP banks?

As a result do TARP recipients, the Big 5 banks, receiving good US taxpayer dollars for toxic assets owe a fiduciary duty to the US Treasury / taxpayer?

What is the US Treasury thinking, contemplating?
What is, if any, the training in fiduciary responsibility of civil servants at the US Treasury, Federal Reserve and TARP banks management?
What is the fiduciary capacity of all of our elected officials - federal, state, county and local?

If parties are not trained, educated and informed what result is likely to befall the taxpayer.

For example.
Upon receipt of US Taxpayer monies, is the Treasury requiring acknowledgement of a duty of undivided loyalty or is it arms-length, perhaps even an adverse relationship?