Monday, November 30, 2015

This is Why We Need Tough Regulators

There actually IS a book called This Time is Different: Eight Centuries of Financial Folly by Carmen M. Reinhart and Kenneth Rogoff (October 2009):

I just finished reading Roger Lowenstein’s book, The End of Wall St. (April 2010) which tells the story of the subprime mortgage meltdown, the collapse of Wall Street’s storied firms, and the bailout that saved the banks, the thrifts, and the last of the mortgage market.

For those who REALLY DO believe that “this time is different,” take a very brief look at all the dregs that were left after the combined stupidity of the subprime market fiasco of 2007-2010.  And this does not include all of the economic collapse that has persisted to date.

In 2004, the U.S. housing market peaked with homeownership at 70%. By the 4th quarter of 2005, housing prices had fallen by 40%.

During February and March 2007, more than 25 subprime lenders filed for bankruptcy. In April, well-known New Century Financial also filed for bankruptcy.

July 17, 2007 - Bear Stearns High-Grade Structured Credit Fund had lost more than 90% of its $1 billion value, while the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund had lost virtually all of its $600 million investor capital.

July 31, 2007 – The two Bear Stearns hedge funds filed for Chapter 15 bankruptcy. Bear Stearns effectively wound down the funds and liquidated all of its holdings. Bear Stearns, an investment bank and brokerage firm, was acquired by JPMorgan Chase in March 2008.

September 6, 2008: Fannie Mae and Freddie Mac were in financial trouble, and the Federal Housing Finance Agency (FHFA) put the companies into “conservatorship”

September 15, 2008, Lehman Brothers filed for the largest bankruptcy in US history: $639 billion in assets and $619 billion in debt; 25,000 people lost their jobs. From 2003 to 2004, Lehman Brothers acquired 5 mortgage lending companies including two subprime lenders specializing in “Alt-A” loans (low documentation).

July 11, 2008 – IndyMac bank collapsed: taken over by the Office of Thrift Supervision and transferred to the Federal Deposit Insurance Corp.; the largest thrift to fail since Continental Illinois in 1984

September 14, 2008 - Merrill Lynch was sold to Bank of America

September 16, 2008 – US Federal Reserve Bank gave American Investment Group (AIG), the world’s largest insurance company, a bailout of $85 billion in exchange for nearly 80% of the firm's equity. Ultimately the Fed and the US Treasury invested over $150 billion to save AIG.

Other bailouts:

September 21, 2008: Goldman Sachs and Morgan Stanley, the last two of the major investment banks still standing, convert from investment banks to bank holding companies in order to gain bailout funding from the Federal Reserve.

September 25, 2008: After a 10-day bank run, the Federal Deposit Insurance Corporation (FDIC) seized Washington Mutual, then the nation's largest savings and loan, which had been heavily exposed to subprime mortgage debt. Its assets were transferred to JPMorgan Chase 

September 29, 2008:  Mitsubishi UFJ Financial Group, Japan's largest bank, invested $9 billion in Morgan Stanley for a 21% share of the company; Morgan Stanley borrowed $107.3 billion from the Federal Reserve – the most of any US bank.

October 3, 2008 – National Economic Stabilization Act of 2008 (a reworked TARP bailout plan) was passed by Congress, creating a pool of $700 billion authorizing the US Secretary of the Treasury to purchase distressed assets, especially mortgage-backed securities.

January 2008, Bank of America acquired Countrywide for $4 billion
All the Devils Are Here: The Hidden History of the Financial Crisis by Bethany McLean and Joe Nocera (November 2010).

May 7, 2006, Herb and Marion Sandler sold Golden West Financial and its thrift, World Savings, to Wachovia Bank
December 31, 2008 – Wachovia was acquired by Wells Fargo

In 2000, J.P. Morgan & Co. Incorporated merged with The Chase Manhattan Corp., effectively combining four of the largest and oldest money center banking institutions in New York City (J.P. Morgan, Chase, Chemical and Manufacturers Hanover) into one firm under the name of J.P. Morgan Chase & Co.

In 2008, JPMorgan Chase & Co. acquired The Bear Stearns Companies Inc.
In 2008, JPMorgan Chase & Co. acquired the deposits, assets and certain liabilities of Washington Mutual's banking operations.

Citibank received $25 billion bailout from the TARP

Goldman Sachs received $10 billion from Warren Buffet plus $10 billion from TARP; including Federal Reserve loans, Goldman Sachs received $782 billion 

September 11, 2015 - Credit default swaps lawsuit brought by the Los Angeles County Employees Retirement Association, hedge funds, university endowments and others.
Twelve defendant banks are: Bank of America Corp., Barclays PLCBNP Paribas SA, Citigroup Inc., Credit Suisse Group AG, Deutsche Bank AG, Goldman Sachs Group Inc., HSBC Holdings PLC, J.P. Morgan Chase & Co., Morgan Stanley, Royal Bank of Scotland Group PLC, and UBS Group AG.

Plus two industry groups: the International Swaps and Derivatives Association and data provider Markit Group Ltd. 

Agreed to $1.87 billion settlement, one of the largest antitrust settlements, over allegations that they conspired to rig the market for credit derivatives.

So, please don't point to the brilliant quants in the remaining companies or to the incredibly naive regulators who were asleep at the wheel.  These are not very bright people -- none of them.  The smartest guys/gals in the room actually are the authors of the books that tell the real story after the second shoe dropped.  This is why we need Dodd-Frank, Sarbanes-Oxley, and a Federal Reserve System that is not strangled by political hacks.

This Time Will Be Different?

What is the MATTER with you people?  Why can’t the regulators get this straight – easy sub-prime loans to poor credit home buyers is risky business?

Today’s Los Angeles Times reports that sub-prime lenders, graduates of Countrywide Financial, are rearing their ugly heads and once again providing low down payment loans to low credit record buyers. “After subprime collapse, nonbank lenders again dominate riskier mortgages” by James Koren.

In 2014, nonbank lenders produced 42% of all mortgages, up from just under 30% in 2013 and 20% in 2012.  For the previous three years, nonbank lenders represented about 10% of the market.  They are providing what is now called “AltQM" loans, as in “alternative to qualified mortgages.” FHA borrowers can put down as little as 3.5% of the loan amount and have a credit score as low as 580, which could signal a past bankruptcy or debts sent to collection.

Navigating the Digital Age

Navigating the Digital Age: The Definitive Cybersecurity Guide for Directors and Officers published by Caxton Business & Legal Inc. (Chicago, IL: October 2015) available for download as either PDF or a Kindle file:

This 369 page compendium brings together the insights of some of the most knowledgeable people in the field of cybersecurity. It is an essential reference for corporate board members.

The introductory seven contributors describe cyber threats in the digital age, providing a high level perspective on global security risks.

The first section, cyber risk and the board of directors, focuses on the legal duties and obligations of directors and is written almost entirely by lawyers with the exception of Ken Daly, writing on the NACD’s Action Plan for directors.

The second section describes building a corporate structure with the authority and capabilities to process cybersecurity information and responses.

Third is the regulatory considerations of cybersecurity legal risks, with ten contributions by major lawyers in the field.

Fourth is entitled “a comprehensive approach to cybersecurity” which includes strategy design, a “fusion center” to unify security responses.

Fifth focuses on designing best practices of breach prevention.

Sixth is cybersecurity beyond your network, looking at the supply chain, third-party outsourcing, insider hacks, and the internet of things.

Seventh looks at planning, preparing, and testing incident response practices, including forensic remediation and working with law enforcement investigators.

Eight is cyber risk management investment decisions, including consideration of cyber insurance.

Ninth is cyber risk and workforce development concerned with cyber education, collaboration/communication between technical and non-technical staff and qualifying the Chief Information Security Officer.

The final chapter contains contributor profiles of the almost 80 authors, with a fair number of women specialists in the cyber security field.

Thursday, November 26, 2015

Decline in U.S. Domestic Firms?

The decline in the number of domestic U.S. corporate listings on public exchanges has been a concern for governance professionals because it implies a shrinkage in the number of public company boards and opportunities for board service.

The trend has been noted  by  others since 2011,  including  “Wall  Street’s  Dead  End” by Felix Salmon in  The  New  York  Times  (February  13, 2011),

“Missing:  Public  Companies  –  Why  is  the  Number  of  Publicly  Traded  Companies  in  the  US  Declining?” by Alix Stuart in CFO  Magazine (March  22,  2011), 

“The  Endangered  Public  Company:  The  Big  Engine  that  Couldn’t” in  The  Economist  (May  19,  2012),

and  “The State  of  the  Public  Corporation:  Not  So  Much  an  Eclipse  as an  Evolution” by Conrad S. Ciccotello in the Journal of Applied Corporate Finance (Fall  2014)

The most recent report is “The U.S. Listing Gap” by Craig Doidge, G. Andrew Karolyi, and RenĂ© M. Stulz in their NBER Working Paper No. 21181 (Issued May 2015).

In all of the above instances, the data only goes as far as the S&P Factbook and the World Bank data reports up to 2012.  At that time S&P discontinued reporting on U.S. domestic exchange listed firms.

The World Exchange Federation took over the reporting and included foreign exchange listed companies in the totals.  Their data is as of January of each year and currently includes 2015 data.  What is interesting is that the shrinkage of U.S. domestic listed firms appears to have bottomed out in 2013 and showed a slight upswing in 2014 and 2015.  This slight uptick was also evident among foreign listed firms.

So, any analysis of the U.S. Listing Gap now needs to include an assessment of this most recent change in direction.  We shall see what January 2016 has to offer very soon.

Women Directors in 2016

In the November 15, 2015 issue of Fortune, the magazine forecast the 2016 projected number of women directors at Fortune 500 firms.  In an online article, Erika Fry detailed the number for 2015 as well.  The latest data from Catalyst was only to 2013, so we extrapolated the figures in an estimate for 2014.

Fortune and Ms. Fry continue to focus on the increase in women directors.  As we have reported on multiple occasions, we ought to be looking also at the overall decline in both total number of directors and the number of male directors.  While Fortune reports that 1,057 women represented 19.5% of the total of 5,415 directors in 2015 and 1,130 women will represent 21% of the total of 5,381 directors in 2016, this represents an increase of 6.9% in women directors at the expense of a decline of 3.9% for men and an overall decline in total number of directors of 1.8%.

Why has there been no focus on this trend which has continued without interruption since the early 1990s when Catalyst began reporting women directors at the Fortune 500 firms?  Why is this happening?  Is it because of increased turnover and attention to tenure of existing board members? Is it an indication of heightened risk due to cybersecurity concerns, activist shareholder suits, or the increased hourly demands on director time?

Even more fundamentally, do women understand what is happening in these long term boardroom changes?