Saturday, August 22, 2009

Rx for Disclosure - Known, Knowable, Unknown & Unknowable

Chuck says "Talk to Me"
I reply "OK I'll try my best - you too".
"Let's have a two way conversation, some call it dialogue."

Then because I saw your ad I switched my account to your firm then...

When it comes to obtaining CASH in exchange for securities there is a fundamental issue.

Everyone knows what CASH is, it's money, it's currency and it's the ONLY legal tender.

Anything other than currency is not CASH.

There is no doubt there is more and more information collected today than ever before, no doubt financial institutions collect and analyze more information today than ever before; FACT: the estimated annual IT expenditures of the financial services and securities industry is over $360B (not a typo) see link here:

There is no doubt that an increasing share of that amount is devoted to what? Proprietary trading for the house' employee's compensation THEN what's left over the house' shareholders' profit. Public customers are not and are specifically excluded in the chain; Wall St is that great washing machine of obtaining CASH from customers in exchange for securities; yet when it comes to the trading of same the same firms batteries of computer aided trading wring every last fraction (reference hyper speed flash trading news of late) for their own pockets first.

To which this writer has asked which comes first? Public customers' interests or employees / agents and shareholders of the appliance maker? Isn't it all about the "beneficiary"?

When it comes to disclosable information the headline above applies.

When sellers / distributors of investments offer anything for sale; all aspects of the investment's or offering's prospectus, markets, AND ANY changes thereto should be prominently disclosed.
Brokerage firms and advisers have a duty to use care - such care requires initial AND ongoing diligence and investigation upon same.

After all, as many have pointed out this is a free country - to which I say correct; no brokerage firm or adviser is forced or compelled to offer or continue to offer (FOR SALE TO THE PUBLIC) ANY particular investment or service.

What's clear is this: the line needs to be more clear or cleared up as to what's available, offered, solicited, unsolicited.

The reference and inspiration for this piece was the recent Charles Schwab Op-Ed in the Wall St Journal regarding the Auction Rate Securities (ARS) inquiry initiated by David Cuomo, NY Attorney General - see link here.

Monday, August 10, 2009

Excess SIPC - six years ago and a missed Red Flag for Madoff victims

Today is August 10 , 2009 - six years ago yesterday, the NY Times reported "A long, free ride was ending". After 30 years of never having paid out on a claim some of the country's largest insurers including AIG announced their exit from underwriting EXCESS SIPC insurance for many Wall St securities brokerage firms. A quote from the AIG spokesman went like this - "Why is AIG exiting? It's too much exposure"....really I'm not making this up.

An excerpt..."But no other part of the surety bond business has been affected as extremely as coverage for the brokerage houses. The insurers have not trimmed coverage or raised prices; they have simply gotten out. ''It's too much exposure,'' said Joe Norton, a spokesman for the American International Group." The link to the NY Times full story

Huh? Too much exposure to what? Recently, FINRA, the former NASD has been running radio ads announcing, in so many words how they help protect investors accounts. To which one might ask when a group (AIG, Travelers, Radian), not just one insurer, ends insurance coverage whose sole purpose is to protect customers' accounts over and above the SIPC limits should the primary regulator inquire as to what prompted the withdrawal and what is the NEW cause for concern inside broker dealers that's "too much exposure?"...perhaps the NASD was on vacation that day...after all the story ran on August 9, 2003, a drizzly, overcast Saturday in the Business section, buried on page 5 at the bottom. When it was more relaxing to enjoy that warm cup of coffee then skip to the Weekend section. Maybe it was me or maybe I was lucky that my breakfast order was taking a little longer to arrive...I may have never flipped to page 5.

Why EXCESS SIPC matters to the Madoff victims.
Lack of it was one of a number of RED FLAGS.

Affluent investors, not just those of Mr Madoff who knowingly or unknowingly became "customers", would be concerned and generally aware of this type of insurance coverage, let alone professional, intermediary advisers including accountants, CPA's, lawyers, business managers and consultants. The lack of it, considering the sums many customers entrusted and turned over and the prominence of some customers, is one thing...astonishing. See the link to fiduciary liability exposure at

A FiduciaryALERT™ was posted in 2004 urging caution and review with hedge funds citing among other items, the above Excess SIPC insurance coverage cancellation.

Another facet of this story seems to have been unreported when it comes to AIG's FPG underwriting derivatives credit default swaps of many of the same brokerage houses proprietary (not customers) trading positions; perhaps, subject to proof, the very exposures AIG's Mr Norton, said were "too much". Yes too much for the regulated AIG insurance operation, but seemingly appetizing for the UNregulated AIG FPG.

Sunday, August 2, 2009

Congress should make self employment income tax free - for the unemployed - for now

Today the NY Times ran an article Unemployment Benefits expiring soon for thousands; and if emergency legislation is not passed over 1 million will be off the roles, however, for the convenience of certain elected officials that also means that they will NOT be counted in the Unemployment rate. 37 comments were posted - a few empathetic, several offered advice on how to cope but many lambasted and ridiculed some just less fortunate.

A modest Employment benefit proposal comes to mind - Congress, may consider this.
AMERICANS FOR TAX FREE SELF EMPLOYMENT. Everyone, especially those currently unemployed and each of their dependent children could perhaps be incented at the margin with zero, tax free income from self employment - knock on doors, every business needs more sales reps, you never know the places you'll go, what does it take to get started, gain a foothold, for kids - washing cars, mowing lawns, baby sitting, tutoring, teach someone for a fee especially older adults how to use software, or introduce them to all the new services, tools available on the internet, starting and promoting an internet business or someone else's business, creating a new service for others in their communities, organizing office files, shredding.

Think, what are you good at? What can you do better, faster and cheaper than everyone else?
If you're a master at certain video games - you could charge a fee to teach others how to play like you. Paypal makes it easy

What's the price or value of your service? Is it worth $10 or $30 per project? Since theres 20 working days each month that could be $600 extra each month and $7,200 a year.

Be a concierge for service for certain groups of people who have more money than time to do things - for example, pick up / drop off laundry, post office, dry cleaning, meds, groceries, be a reliable, available bike delivery / messenger for local restaurants or businesses, distribute menus, flyers for same. Advertise your new service on Craigslist for free, for example, to do research of whatever you are good at (don't worry about what others might be good at ok?).

Look up and visit with you local Chamber of Commerce officers at their business, knock on doors again - learn about how and why they started their business - learn their stories and you might find a connection to your feelings too. Be willing as many have, started in the "mailroom", worked harder than everyone else and rose to run a department or even their own shops.

Are you subtly letting the job market drive the bus of your life or is there perhaps a way for you to take a little more control, eventually take command and responsibility for your life and set a life long lesson in place for your kids to repeat or are you dooming them to a life of feelings of dependency upon others when self determination is always the best solution?

As a self employed person you decide who your customers are, how hard you will work to earn someone's business, when you work, how much you will work for and very importantly, you are in 100% in control of the quality of service. What's not to like about that and a Government that's willing to bootstrap you.

Is the desperation, despair and depression the governments' plan for your feelings or ....?
It's better than sitting home feeling helpless, hopeless, powerless, sorry for yourself and infected and under the control of the job market. You write your job description, you decide how hard you wnat to work, the feelings you have are caused by you, there is no law or rule that dictates your feelings - only you can decide to feel and act differently. Diversify your ideas a bit - try to get 2 or 3 ideas going - be open to change. So keep doing what you're doing and tomorrow do a little more and soon you might start feeling better. Of course, no one need wait for Congress - now is always the best time to positively change your life.

You're in business.
The simple IRS site to apply for and get instantly - yes instantly a taxpayers' business ID (EIN) is at,,id=102767,00.html

Saturday, August 1, 2009

Compensation - for the house or customers' benefit matters - Print "Pay BOX" on customers' account statements, what's to hide?

When it comes to parsing out the interests and compensation of ALL personnel in the financial services industry (FSI) including Wall St securities broker dealers, commercial banks, finance companies and insurance companies strongest consideration regarding compensation regulation, if any, should hinge on one question.

The question.
Whose interests are directly supposed to benefit from the activity?

If it's the "house" or as FSI describes it "Proprietary trading" or certain Off balance sheet, special purpose entities SPE's regulation, if any may be proscribed by requiring substantial personal skin in the game and any resulting incentive compensation be in the form of restricted stock, long vesting schedules, and in non transferable, non-diversifiable instruments -and certainly NOT cash. The payment of CASH compensation for asset - based investment gains at the margin of industry and market competition is tantamount to a form of illegal "conversion".

Again - ban CASH compensation for ASSET - based investment gains. Cash payment for salary (not incentive) is preferable - could start with an eye to the following as a guage - what is a reasonable living, city - indexed professional wage? Plus estimated growth in the US GDP, CPI inflation, and the FSI industry.

The unique nature of this industry MUST be understood to address the roots of the compensation question. Let us begin with all manner of principal - agent conflicts. Second, FSI measures and PAYS FOR (largely, but not exclusively when it comes to the "House" account) performance based on ASSET values, ASSET values are subject to marginal pressures, and can, as we have witnessed, leverage to the extremes. Third, the chiefs must be paid more than the warriors compensation philosophy needs to be exposed and subject to critical examination; as the chiefs generally, are popularly "elected" as only FSI's players understand, define and ultimately control the "bartering and negotiating- based" cultures. Said in the parlance of the street - make no mistake, NO FSI CEO has ever been promoted to that role or even along the way without the "blessings" of the most highly compensated talent ok? It's like what do you do when you get to a red light? Stop, it's just the way it is.

Based upon the foregoing at the end of the day, at the entity level, the inverted pyramids of compensation dollars paid compared to the aggregate talent pool must be understood.
And calendar - based "winner take all" compensation, like any new season in professional sports, is in many instances, not the appropriate measurement of performance.

If the activity is for and on behalf of public, arms-length customers, such activity should be subject to on-the-books-for-decades (for example, ERISA 1974, the Prudent Investor Act since the 1990's as has been adopted by over 44 states plus case law and regulatory opinions) fiduciary and or suitability standards of care.

And the dollar amount of any and all revenue recognized by the FS entity should be one and the same dollar amount PLAINLY printed in a box on the first page of each customer's account statement. This burden upon full disclosure will NOT take substantial time to comply. Why? For years all FS entities have disaggregated the river of revenue and rolled it up from each trade ticket, broker's book of business, each branch office, each regional office, each product or service area then up to the firms set of books. Substantial sums are and have been spent on management and accounting systems for years - so there is a robust group of data, systems and personnel to EASILY print the "Pay Box". Many of these firms participated in the SEC's 1995 Tully report, many of these firms participate today in the "McLagan"report to learn how they stack up against the rest of the players - hello to Bruce.

This brings us back to a more essential question.
When the various entities, interests participate in our "capital markets" which participants enjoy certain advantages? There are many, however, it's clear, on a comparative advantage basis that "public customers" are generally not possessed of advantages especially in light of the the broker dealers duty of best execution. Beginning with the proprietary concept I've called the "half life of information" of which Flash order trading and resulting "skimming" although technically "legal" is the most recent example. Additionally, for years the dollar amounts paid by public customers for bond mark-ups or commissions for certain mutual fund share classes, annuity, life and other insurance contracts are NOT plainly printed for the customer to see. Why - what's to hide?

Begin there - these are easy-to-require steps, which in the aggregate may begin to restore public investors' trust and confidence in the "system" heretofore known as the "Securities Industry" such that "Public securities markets evenly benefit ALL the public not just certain advantaged, less than public self interests"