RITHOLTZ SAYS ZOMBIE BEARS ARE BEST IGNORED; IS OTHERWISE SOUND ON FUTURE

Posted on April 23, 2012 by Sara Hanks

In yesterday’s WaPo, Barry Ritholtz says “We had the rise of the End of Worlders and the Zombie Bears.  They are best ignored.”

I’m sure he’s not talking about my Zombie Bears, who only exist to give a helpful guide to how close to the end of the world we are.  Oh.  Oh well.

But the rest of his article is spot on.  It’s about the young entrepreneurs who take nothing for granted, who find that when the world guarantees them nothing, they need to forge their own guarantees.  Which they do.  Ritholtz says if you want to feel hopeful about the future, hang around with young entrepreneurs.  I do that on a regular basis, and not only do I feel all warm and fuzzy about young entrepreneurs, but about the Millennial generation in general.  Go to a ski resort, sit at the fire pit, buy the kids there a couple of beers and chat.  Are they different from us?  Amazingly so.  Are they still in their parents’ basements?  Some are.  But their meandering, non-linear career progression, and their emphasis on things other than money have something to teach the Generation Who Broke the World.  So Barry’s right on that, although I still wouldn’t want to turn my back on a zombie bear.

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TAIBBI: TOO BUSY YELLING TO READ?

Posted on April 13, 2012 by Sara Hanks

Earlier this week Matt Taibbi took a swing at the JOBS Act, but missed and missed hard.  Mr. Taibbi asks “how does a law exempting a Silicon Valley startup from independent accounting actually encourage investment?”  Well, it wouldn’t help encourage investment if that’s what it did.  It doesn’t.  No-one is being exempted from independent accounting.    Nor are they being permitted to go to market “without publishing real numbers.”  Still less are they being permitted to “make their projections up on the backs of envelopes.”

Mr. Taibbi is constructing a whole battalion of straw men and stabbing them to death with his Pointy Pen of Outraged but Inaccurate Populism.

Companies that go public still have to produce audited financial statements. That hasn’t changed.   An audit means that accountants go through a company’s financial statements and test the statements made by the company.  If it’s spent money on Vitamin Water coolers and ping-pong tables, an audit will generally bring that to light.  No-one’s saying that auditors are perfect, but no-one other than Mr. Taibbi seems to think they’ve been banished from the process.

Here’s what actually changed.  The provisions of Section 404 of the Sarbanes-Oxley Act of 2002 will not now apply to companies that are in their “emerging growth” phase.  What is this provision?  Well, it says that you have to have your internal accounting controls checked out by your accountants.   An internal control is something that affects a piece of information that goes into a company’s financial statements.  My favorite example is the clock in the loading bay dock.  Let’s imagine your company manufactures jet engines.  The accounting rules say you can count those engines as being “sold” when you load them on the purchaser’s truck.  Let’s imagine it is almost midnight on March 31.  The foreman notes that he slammed the door on the truck at 11:55pm.  But oh no!  The clock is running slow.  And that meant a very expensive item was recorded as being sold in the first quarter, when it should have been in the second quarter.  Your financials are not accurate.  This is the sort of thing that a review under SOX 404 will address and correct.  We all want financial statements to be as accurate as possible; however, having a bunch of accountants scampering around a growing company’s offices fiddling with the clocks is not the best use of the company’s limited resources.

Perhaps my loading bay clock example is specious, but it’s not as specious as Mr. Taibbi’s Vitamin Water coolers.  Essentially, Section 404 is a burdensome provision, and it is expensive to implement.  The SEC gave small businesses a series of exemptions from it for most of the decade after it was adopted, so it’s not like we are losing something we’ve been relying on forever for our information on start-ups.

Some provisions of the JOBS Act do raise genuine issues.  Let’s focus on those and not get outraged about stuff that isn’t happening.

[The foregoing originally appeared in my blog on  CrowdCheck.biz.]
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I CAN HAS JOBS? OR IPOs? OR CROWDFUNDZ?

Posted on March 27, 2012 by Sara Hanks

OK, time for some shameless self-promotion.  Although my first post on this blog was about doing away with general solicitation, and I have also blogged about likely changes to the small business capital raising process, I haven’t posted anything about the JOBS Act as it made its way through Congress.  That’s because the JOBS Act contains authorization for crowdfunding and I have founded a company that is going to do crowdfunding.  Because it’s such a natural segue from multi-billion dollar international IPOs on the NYSE to sub-million dollar start-up funding.  Because the only way I could find to make less money than a gummint job was to launch an internet start-up.  And because (and I’m actually being serious here) crowdfunding, done right, is a new and more democratic, more collaborative, form of capitalism.  CrowdCheck, Inc. (a bunch of business-friendly lawyers) will provide a funding platform for entrepreneurs seeking crowdfunding, provided they are willing for us to do due diligence on them.  We’re going to give crowdfunding investors the tools to avoid fraud (and believe me, there’s gonna be fraud).

Check us out at www.crowdcheck.biz

Like us on Facebook: CrowdCheck, Inc.

Follow us on Twitter: @saracrowdcheck; @crowdcheckbiz

Op-Ed in The Hill: http://bit.ly/GUMDee

Normal zombie service will resume shortly.

 

Posted in Securities regulation | 1 Comment

CONFUCIUS WEIGHS IN ON DODD-FRANK

Posted on February 17, 2012 by Sara Hanks

One of the most important things (among many) that the Office of Financial Research is working on is the creation of Legal Entity Identifiers (LEIs).  Which totally makes sense.  Once you know exactly who your counterparty IS, then you can measure counterparty risk, and if you don’t you can’t .  Simples.  Also, as Confucius pointed out many years ago, if you don’t get the names right, your disclosure and risk management processes are going to suck:

 

子路曰：“衛君待子而為政，子將奚先？”

子曰：“必也正名乎。”

子路曰：“有是哉，子之迂也。奚其正？”

子曰：“野哉由也。君子於其所不知，蓋闕如也。名不正則言不順，言不順則事不成，事不成則禮樂不興，禮樂不興則刑罰不中，刑罰不中則民無所措手足。故君子名之必可言也，言之必可行也。君子於其言，無所苟而已矣。”

 

Tsze-lu said, “The ruler of Wei has been waiting for you, in order with you to administer the government. What will you consider the first thing to be done?”

The Master replied, “What is necessary is to rectify names.”

“So! indeed!” said Tsze-lu. “You are wide of the mark! Why must there be such rectification?”

The Master said, “How uncultivated you are, Yu! A superior man, in regard to what he does not know, shows a cautious reserve.

“If names be not correct, language is not in accordance with the truth of things. If language be not in accordance with the truth of things, affairs cannot be carried on to success.

“When affairs cannot be carried on to success, proprieties and music do not flourish. When proprieties and music do not flourish, punishments will not be properly awarded. When punishments are not properly awarded, the people do not know how to move hand or foot.

“Therefore a superior man considers it necessary that the names he uses may be spoken appropriately, and also that what he speaks may be carried out appropriately. What the superior man requires is just that in his words there may be nothing incorrect.”

-          The Analects, book 13

Posted in Arts and culture, Dodd-Frank | 2 Comments

ZOMBIE BEAR INDEX: VADA A BORDA CAZZO EDITION

Posted on February 1, 2012 by Sara Hanks

See here for the introduction to the ZBI.

  1. Bank provisioning.   The “fauxclosure” settlement actually looks like moving ahead.  Good news for banks, then?  Actually not, since sooooooo many causes of action are looking like being excluded from the settlement.  So there’s still a huge amount of uncertainty out there on the litigation front.  Which may be increased somewhat by the new task force looking at the causes of the crisis.  There have been nearly as many investigations as there have been GOP debates, and none of them has come up with any super-villains to lock away, so I don’t think this is going to be much more than an annoyance to the banks, but it’s always possible that this one does come up with a way to prosecute Stupid, which none of the agencies or investigations have managed before.  So still not heading in the right direction on the certainty front.  Current rating: 9  zombie bears.
  2. Europe.  Here’s my theory: the Costa Concordia tragedy has jolted some sense into everybody over there and reminded them that faffing around has consequences and that they should all vada a bordo and sort things out like men.  And women.  (Or maybe I just love saying “vada a bordo cazzo”, which I think translates to MTFU.  What a wonderful language Italian is to swear in.)  In any case, are things getting slowly sorted over there?  All apart from the unworkable Tobin-obsession, that is.  Current rating:  6 zombie bears.
  3. Actuaries and pensions.Current rating: 5 zombie bears.
  4. Populist rage and financial illiteracy. Current rating: 4  zombie bears.
  5. Math/Algorithms.   We all know that 75% of all trading is HFT, don’t we?  Everyone knows that.  CFTC Commissioner Scott Malia reckons we should reach a consensus on the definition of HFT before we start throwing numbers around.  Talk about putting the horse before the cart.  Also, see this morning’s book review.  Your HFT algo is out to kill you.  Current rating: somewhere between one and an infinite number of zombie bears; variable.
  6. Hackers.  Let’s add Latvia to the list of places that host some serious hackers.  But let’s not forget that it’s much easier for hackers to hack WHEN YOU PROVIDE THEM ANONYMOUS AND UNFILTERED ACCESS TO THE US MARKETS IN VIOLATION OF SECURITIES LAWS.  Just scribble all your passwords on post-its on your screen while you’re at it, why dontcha?  Current rating: 8 sleeping (?) zombie bears; stable.
  7. Cross-border equity custody. Current rating:  one lonely zombie bear.
  8. Bitcoin or something like it. Current rating:  one zombie bear and stable.
  9. Megabank’s Boring Transactions Division. Current rating: no zombie bears for now.
  10. Commercial Real Estate. Current rating: no zombie bears; we are still pretending they aren’t there.

And if you can’t be bothered to read every book about the crisis, Andrew Lo has done it for you.

Posted in Zombie Bear Index | 2 Comments

BOOK REPORT: I’M AFRAID I CAN’T LET YOU DK THAT, DAVE

Posted on February 1, 2012 by Sara Hanks

So yesterday Amazon delivered me “The Fear Index” by Robert Harris.  I was slightly surprised, as I didn’t recall ordering it, but, hey, I had always figured that Amazon would become self-aware at some point and start sending me stuff it just knew I needed, just like my mum.

Boy, was that prescient.  The book opens with the protagonist receiving a book he hadn’t ordered.  And then it gets into some serious HFT algos-gone-wild stuff.  This is just what I’ve been warning you about, folks.  Math will find a way to kill you in the end.  I always knew the Flash Crash was something more sinister that what the SEC said.

Anyway, get the book (new here in the US; it’s been available over the pond for a while).  I read it straight through and then sat up sleepless all night, wondering whether I could truly trust my hair dryer.

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WHO WON 2011? HONEYBADGER DON’T CARE

Posted on January 1, 2012 by Sara Hanks

Bit of a meh year, right?  At least you could say that the world didn’t end, so that’s good?  Anyway, here’s 2011 in all its financial, political and pop culture glory.

Hoping for a more prosperous 2012.

 

Posted in Arts and culture | 3 Comments

ZOMBIE BEAR INDEX

Posted on December 30, 2011 by Sara Hanks

See here for the introduction to the ZBI.

I’m rearranging the top of the ZBI again.  Litigation taking the length of time it does, though, it will be three years before I’m able to say “I told you so.”  The good thing about all this happening in slow motion, though, is that maybe it gives the authorities on both sides of the Atlantic time to organize a coordinated international rescue/resolution regime before something large and hairy and international collapses all over the system.  Oh, but I forgot which authorities we were dealing with there.  So go ahead and panic, then.  I’ve panicked so much over the last year I have run out of capital letters.

  1. Bank provisioning. Somewhere out there, a junior associate at a plaintiffs’ law firm is putting together the papers that will finally lead to the disassembly of some of the world’s largest banks.  There are several categories of litigation arising from the financial crisis.  There’s the assembly and sale of the troubled securities, which has led to settlements among many of the banks and investors and is being litigated in several venues, although the SEC can’t seem to get a break on its settlements (which of course means continued exposure for the settling banks).  There are the suits arising from the processing of the assets in the securities which was where I originally thought provisioning was inadequate.  And then there’s the “fauxclosure” issue.  Add to these a whole new category of lawsuits.  The recent disclosures by the Fed of exactly what they lent to whom and when in the crisis may lead to more lawsuits from investors who purchased bank shares in the massive capital-raisings of 2009.  The claim would be, of course, that not including the words “WE ARE ON LIFE SUPPORT FROM THE FED”  in the Risk Factors and the Management’s Discussion and Analysis, in 18-point type in flashing red letters, possibly with glitter, amounts to an omission of information necessary to make the disclosures in the prospectus not misleading.  Current rating: 9  zombie bears.
  2. Europe. I’m downgrading the EU threat.  While the leaders of the European bits of Europe agreed to form an ever-closer union, the  ECB acted like a central bank and gave away free monies.  Yay Eurocrats!  Before this week if you needed Euros you’d be needing a special Argentine Euro-sniffing dog to find Euros.  Now you get Euros!  And you get Euros! Free(ish) Euros for everyone!   Current rating:  7 zombie bears.
  3. Actuaries and pensions. So I ran across the budget manager of our town at a Christmas party, poor guy.  He admitted that an assumed growth rate of 7.5% on the pension fund was pushing it a bit, although on a 30-year timeframe it may all come good and they were looking at alternative investments, and all that.  More importantly, a commission of local worthies had recommended changes to our pension system, which were going to be followed.  (One of the great things about being in the DC area is that you have bona fide national experts living in your town and willing to do stuff pro bono publico.)  And until the fund is fully funded, which I personally think is a generation away, we live in a prosperous town with money in the General Fund.  So our firemen are fine.  In some other towns, not so fine.  Current rating: 5 zombie bears.
  4. Populist rage and financial illiteracy. Current rating: 4  zombie bears.
  5. Math/Algorithms. Gillian Tett in the FT says the Flash Crash could return with a vengeance.  And she’s right.  The SEC and Treasury’s OFR need battalions of really serious mathematicians on staff, who understand super-complex systems.  Tett cites this study by Dave Cliff and Linda Northrop, which we all need to read.   Although I don’t recommend doing it on New Year’s Day.  Current rating: somewhere between one and an infinite number of zombie bears; variable.
  6. Hackers. Current rating: 8 sleeping (?) zombie bears; stable.
  7. Cross-border equity custody. Current rating:  one lonely zombie bear.
  8. Bitcoin or something like it. Current rating:  one zombie bear and stable.
  9. Megabank’s Boring Transactions Division. Current rating: no zombie bears for now.
  10. Commercial Real Estate. Current rating: no zombie bears; we are still pretending they aren’t there.
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ZOMBIE BEAR INDEX: EUROFAIL EDITION

Posted on December 4, 2011 by Sara Hanks

See here for the introduction to the ZBI.

The markets are clearly not getting it, so let’s look at where we are in zombie movie terms.  See, all the major indices got all excited about the fact that the various central banks are going to work together to provide liquidity.  That’s like the townsfolk cheering because the mayor has called in the Army to deal with the zombies and the Army brought its Armageddon machines that might destroy the world BECAUSE THE ZOMBIE THREAT WAS SO DIRE.  REALLY BAD.  SERIOUSLY, CHEERING IS THE WRONG RESPONSE HERE.  The correct response is to go to your local tavern, down several zombie bear cocktails and hope that the Vogons will be here soon.

Actually, the real correct response would actually be (a) cocktail, (b) leverage EFSF, (c) ringfence the PIIGS and probably France, (d) another cocktail, (e) provide massive liquidity to eurobanks (so this is actually happening a bit), and (f) work out what the frack you are going to do when one of the big banks actually fails.  As Ed Greene at Cleary Gottlieb is pointing out [hope I will get something to link to for you soon; he is spot on on this topic], on the US side we have authority to resolve but not rescue,  and in some of the European countries we have some rescue/resolution legislation adopted but it varies from place to place, and we have NO process in place to coordinate the international chaos that will ensue when something large and hairy and international goes down.  And something large and hairy and international WILL fail.

  1. Europe. The single scariest sentence ever,  from last week’s Economist: “The only institution that can provide immediate relief is the ECB.”   Cos the ECB isn’t going to save us, is it?  On account of it’s not really a proper central bank and only a real central bank could do what needs to be done now.  Which is buy French bonds.  (And the bonds of all the dominoes that fall before France.)   Dean Baker says the Fed should take over this role and you’ve gotta admit that someone has to.  (So is Europe really trying to prove that they are less capable of doing stuff than the SuperCommittee?  It’s not a contest.)  Current rating:  10 zombie bears.  When it really wouldn’t be that difficult to get to 2 bears.  Really.
  2. Bank provisioning. Current rating: 9  zombie bears.
  3. Actuaries and pensions. On a recent rainy day I spent some time looking at my own town’s budget, specifically its unfunded pension obligations.  The budget assumes a 7.5% annual return/discount rate, and a cash flow projection that predicts a 100% funding rate by 2018.  This is, of course, impossible.  Looking at “The Determinants of Actuarial Assumptions Under Pension Accounting Disclosures“, we see that for every 1% change in the discount rate a pension liability can change as much as 20%. [The actual book that proved this was printed in 1977 and I'm still waiting for the copy I bought used on Amazon.] So if you use a more reasonable 4-5% discount rate, my town’s obligations will be fully funded by, oh, say 2525.  And this is a AAA-rated municipality.  For now, the town will continue to fund the shortfall from the general fund, but we are in the lucky position of being in the DC area with modestly rising house prices and an employed populace.  Lots of other municipalities aren’t so lucky, and some won’t make it.  And the people who lose out (apart from bondholders) are the middle-class public servants who were relying on those pensions.  Long, slow, painful fail. Current rating: 5 zombie bears; rising.
  4. Populist rage and financial illiteracy. Warren in Offshore has pointed out to me the role that ignorant financial journalism has played in fanning recent panics.  It’s probably even broader than that; people who have vehement views on things they know nothing about are in charge of some important stuff.  More on this to come. Current rating: 4  zombie bears.
  5. Math/Algorithms. Current rating: somewhere between one and an infinite number of zombie bears; variable.
  6. Hackers. I liked this “top ten threats” guide.  But if I followed it I wouldn’t be able to mention cats or cocktails.  Or even zombies. Current rating: 8 sleeping (?) zombie bears; stable.
  7. Cross-border equity custody. Current rating:  one lonely zombie bear.
  8. Bitcoin or something like it. Current rating:  one zombie bear and stable.
  9. Megabank’s Boring Transactions Division. Current rating: no zombie bears for now.
  10. Commercial Real Estate. Current rating: no zombie bears; we are still pretending they aren’t there.
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WE’RE FROM THE GOVERNMENT AND WE ARE ACTUALLY HELPING

Posted on November 16, 2011 by Sara Hanks

Dinner on Saturday with friends including R, who is at the FDIC. Reminded me of something (one of the many things) that really bugs me about the whole “government as the enemy” meme. Many Saturday mornings (most Saturdays during the depths of the crisis) you’d open up the Business section of the NYT and read something along these lines: “The FDIC closed Swampybank after business on Friday. All five Swampybank branches will open as Itsybank on Saturday morning.” Just a couple of lines, but how much Good Government is hidden behind them? The monitoring, the smooth process by which Swampybank’s assets are moved to Itsybank, the speed in which it all happens, the fact that Swampybank’s customers can still swipe their Swampycards for coffee on Saturday morning, the absence of the need to prove to Joe that his money is all in Frank’s house? The markets still get disciplined (Swampy shareholders lose the lot) but nobody panics and money continues to move around and everyone treats it as perfectly normal and takes it for granted.  Not so easy to do in a purely Hayekian world.  Everyone at the FDIC deserves a hand, if not a raise.

Posted in Bank regulation | Leave a comment