WHO WON 2013?


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A continuing theme in this blog is that there is a huge need for financial literacy in the United States. After reading some of the comments on the SEC’s newly-proposed Regulation Crowdfunding I’m beginning to think that the need is just for regular literacy. Possibly also a need for some folks to repeat junior high civics classes.

Here’s the thing. The JOBS Act set some very specific constraints around securities crowdfunding and instructed the SEC to implement that legislative mandate. THE SEC CANNOT CHANGE THE LEGISLATION. If we did let an unelected government agency do that, it wouldn’t be very democratic, would it? So the legislators make the law, and the SEC has to implement it. That means when Congress imposes a $1 million limit on a crowdfunding raise, the SEC has to follow that. The SEC says so in its Proposing Release; people should read it.

So let’s be clear:

1. The $1 million limit on a crowdfunding raise was imposed by Congress, so anyone with problems with that should take it up with their Representative or Senators. In fact, the SEC is doing the best it can to expand that $1 million limit by saying that you can do an unlimited accredited-only raise at the same time as your crowdfunding raise, which I think is going to become standard practice.

2. Investor limits: also Congress’s idea, not the SEC’s.

3. No-one is planning to touch donation and rewards crowdfunding. If you’re not offering securities, the SEC is not planning to impose any regulations on you at all. You and your zombie movie are the FTC’s problem, not the SEC’s.

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You guys, this is so sad. We all know that sometimes it’s hard to be a rockstar engineer or coder in the Valley. Long nights, stale pizza, smelly t-shirts, worthless options. It’s hard to find friends of the opposite sex. But it’s even worse than we thought! Even the guys at Twitter don’t know any lady people! We know this because they didn’t find any to put on their board, despite the fact that it is 2013 and there are OODLES of qualified wimminz just ready to corporate governance the !^%$ out of TWTR’s audit committee. The problem might have been that the TWTRs didn’t go more than a Segway ride away from the cafeteria, but EVEN IN THE VALLEY there are qualified women. (Although why they don’t run away screaming I do not know.)

So let’s not call Twitter management lame, blinkered misogynists. Let’s do them all a huge favor and introduce them to some nice ladies who know all about finance, and tech, and corporate governance and risk management, and who they might be able to have a nice non-threatening relationship with.

Encourage them gently with the hashtag #TWTRXX.

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See here for the introduction to the ZBI.

Just when I thought I might retire the ZBI, Congress decided to push us to the edge of the cliff/abyss/insanity again. So yay for that, I guess. I’m promoting Ignorance to the number one spot as the biggest factor in driving us all to living on roadkill and bathtub gin.

1.  Populist rage and financial illiteracy amongst the populace, the populace’s representatives and the fourth estate. This is truly driving me nuts right now. The people, the people’s representatives and the people who explain stuff to the two former groups are (a) pig ignorant (b) wrong and (c) influencing other people. Oh lord. So let’s start with the People. Here’s how badly-informed the people are. (Actually the comments to that story are actually more depressing than the Stupid the data reports, which is remarkable. Oh, the apostrophe’s!) And then we have Congress, where some folks seem to think that you can say something isn’t a default and then it isn’t, on account of they are qualified large animal veterinarians or dentists and thus understand something about the international financial markets. I am a size 00 supermodel. (Damn, just saying it didn’t make it so, how does that not work?) See, Congressman CowDoctor, it is not you what decides whether something is a default, nor what will cause the markets to value Treasurys at some different price, nor what will determine whether or not said Treasurys continue to remain adequate collateral for major investment banks’ repo contracts which will determine whether we are going to have cascading margin calls all across the markets. What determines whether something is a default, in point of fact, is often a matter of contract law, made between private parties, and I’d think that you would respect that. But enough, you are qualified to pull baby cows out of mommy cows’ whatsits so who am I to judge? And then we have financial illiteracy promoted by the press. Oh, this is sad. I work in an area where legal research often consists of a Google search by some entrepreneur’s brother-in-law who is an immigration lawyer, so it is actually important that the financial press get it right now and then. But the NYT so totally mushed up a story on the JOBS Act that it was unrecognizable [even the correction to that one is wrong], and the WSJ published an interview on the JOBS Act that misstated the law without any factual corrections, so can the small biz folk trust the established media?  And online, here’s a couple of right doozies, from the same source. In what is supposed to be “analysis,” a commentator counts the words in the Risk Factor section on the Twitter IPO S-1 and asks whether Twitter is more risky than Facebook’s IPO because it has more words in it. But it’s a good comparison because he has taken extraneous words like page numbers out! Where to start? Actually, that’s easy. Reading the words rather than counting them, that might be a really good place to start. And the same source asserts that Microsoft’s hidden problem is its “ancient board“: how can old farts understand how to sell to youngsters? Let’s ignore for the moment that the board is there for reasons of corporate governance, not sales, and that the people who do the selling are in the sales department. Let’s just ask “Yeah, and with only two women on the board, how can they hope to sell to lady people, either?” [Actually, good question...] Current rating for financial illiteracy as the biggest threat to life as we know it: eleven out of ten zombie cows and rising by the minute.

2. Bank provisioning. So the banks are  recording humongous numbers for settlements, legal costs and oversight costs. But I STILL do not understand why some of the seemingly easiest lawsuits have never been brought. If you have an agreement that says Party A is responsible for making sure that Asset Pool X consists only of assets with the following attributes and it turns out that much of the stuff in the asset pool does not have anything like the attributes it’s supposed to have, there’s a cause of action against Party A, right? Right? [Sound of crickets...]  Current rating: 10 zombie bears, 5 years out.

3. Europe.  So Europe’s still essentially bust. In its chocolate-and-lace soaked heart, Europe still wants to impose the FTT. But it won’t work, also illegal, so at some point won’t they just give up and focus on proper banking union instead? Current rating: 5 zombie bears.

4. Actuaries and pensions.  Current rating: 5 zombie bears.

5. Math/Algorithms.   Current rating: somewhere between one and an infinite number of zombie bears; variable.

6. Hackers.  Still the greatest threat to markets, according to DTCC. Current rating: 8 sleeping (?) zombie bears; stable.

7. Cross-border equity custody. Current rating: one lonely zombie bear.

8. Bitcoin or something like it. Haha, my friends at SecondMarket made an ETF in bitcoins, so bitcoins are now mainstream among the FinTech crowd. I am still not buying any. If you buy gold, you like to know where the gold mines are and have some idea of the metallurgic likelihood of gold in various areas.  I am not qualified to know whether it is true that there is a limit on the number of bitcoins “mined” and I do not trust a fiat currency fiat-ed by someone who may or may not exist, or who may have a serial identity like the Dread Pirate Roberts. Plus, I do not need any drugs today, thank you. I am sticking to SPY like always. Current rating: two zombie bears; increased on account of now hipsters are going to invest in this thing.

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 maybe they aren’t, but if that were the case, why is so much office space in my neck of the woods still vacant?

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So the SEC adopted the rules that will (when effective in mid-September) permit offerings made in reliance on Regulation D to “generally solicit” providing all sales are made to accredited investors. Huzzah! I run a company that provides services to people doing the kind of online offering that will now be permitted, so I’m happy.

But we now need to face the fact that the ingenuity of the average American entrepreneur is limitless when it comes to promoting his or her company’s products, and now its securities offerings. Expect billboards, skywriting, ads on t-shirts, ads on t-shirts for dogs, songs about the offering, Vine clips, social media posts and when someone figures out how to do it, details of offerings singed into catbeards.

Offerings that are intermediated by broker-dealers will at least have the discipline of a FINRA-regulated entity that is subject to advertising and social media rules. But only 11% or so of Regulation D offerings use an intermediary. So independent issuers may be out there doing their solicitation completely unaware (and in a few cases aware but uncaring) that Rule 10b-5 applies to their solicitations and how ridiculously easy it is to violate 10b-5 when you make the kind of statements I see every day on the major crowdfunding donation/reward sites. So there’s chaos battlefield #1. An SEC statement along the lines of “when we said in the release that anti-fraud rules still applied, this is what we meant” would be an excellent idea.

The other type of chaos derives from the SEC’s proposal that issuers submit their general solicitation materials to the SEC for a couple of years so the SEC knows more about the market it has to deal with and the way in which issuers are communicating. Good idea in principle, but the manner in which it’s proposing to acquire this knowledge won’t work. There’s going to be an “intake page” on the SEC’s website whereby issuers can upload all their solicitation materials. Those materials are going to include all the various documents I mentioned above, in all the possible formats that can be used to create files. The processing system and database are going to have to be truly robust (and expensive) to be able to do that without crashing (and I speak as one who is writing very large checks for the development of a robust database). And is that money worth it for a temporary program? Especially in light of the fact that people don’t like the idea of giving the SEC offering information that is not otherwise required. (They think the SEC might use it for purposes other than its own education.) I predict that people will try to break the intake page by uploading catbeards as soon as it’s launched. The SEC would be much better off forming a subcommittee of one of its small business advisory groups to keep the Commission informed of market practices.

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Rational people (and I’m only talking about people who don’t comment on the intertubes here) know that the SEC has a hard job. Examples from this last week were the throwing out of its disclosure rule on payments to foreign governments for natural resources and a story in today’s WaPo about the delay in getting a rule done that discloses how much more CEOs get paid than their minions.

Who is to blame for these failures and delays? Congress.

Let’s revisit what the SEC is for: The mission of the U.S. Securities and Exchange Commission is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

So what part of the SEC’s mission is served by making it write rules that prescribe disclosure of payments made to foreign governments for oil concessions and the like? As an investor, I care about  total costs for royalties. As an investor, I don’t much care about the exact amount that goes to the Despot of Doodly. (As a human being I might care a lot, but that’s a different story.) And what part of the SEC’s mission is served by working out how much more the CEO of Squidbank gets than his average worker shrimps? As an investor, I care how much he earns, I care how much the company pays out in HR expenses, but I do not care about the ratio of CEO-to-minion paycheck measured according to some metric that must by its nature be totally arbitrary. (How do you calculate that? Do you include foreigners? Interns? Do you weight by seniority? By weight? It’s going to be totally meaningless and it’s clearly intended as an indirectly punitive measure.)

The SEC is there to protect investors and foster capital markets. It’s not an agent of social change. By requiring the SEC to undertake this kind of rulemaking, Congress perverts the SEC’s function and distorts the market. If you want to make things better in the Congo, use the State Department. If you want to express disapproval of overpaid CEOs, use the Department of Labor or someone. I’d love to have the SEC make companies disclose how badly they behave to animals, but that’s not what it’s for.

I’m not saying that getting this information is not a good objective; my favorite human charity, Oxfam, is strongly behind the rules that require disclosure of royalty payments and whether raw materials are sourced from conflict areas. But the SEC is the wrong instrument. (Sorry Oxfam, will increase my monthly donation for saying this.)

And making the SEC write rules that are not in its core area of competency distracts it from the tasks that are. Like getting crowdfunding rules written.

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See here for the introduction to the ZBI.

Hello, did you miss me? While I was tooling around running a startup in an industry that is taking its time to start up, empires rose and fell. Well, Cyprus and Bitcoin collapsed a bit. But on the positive side, goats started a Ponzi scheme. Which is nice because goats occupy such a small part of the intertubes these days.

1. Bank provisioning. Gretchen Morgenson correctly describes this as one of the most pivotal cases of the financial crisis. What I do not get, though, is why there are so few cases of this type. But it is clear that litigation of various types (and the accompanying legal fees) is a continuing drag on bank profits. Current rating: 10 zombie bears, 5 years out.

2. Europe.  Just when Europe was getting boring it got exciting again in the wrong way.  So depositors got landed with some of the bill in the Cyprus bail-out, which is not the way it’s supposed to work.  Moral of the story: don’t be Russian or bank where Russians bank.  On the good news side, the truth about the magic money from the banks that the FTT (won’t) bring in started to sink in.  Yes, it’s a terrible idea.  Current rating: 5 zombie bears.

3. Actuaries and pensions.  Commissioner Gallagher refers to “Armageddon” in munis and he’s not wrong. Muni bankruptcies will continue, and driving many of them are insane pension liabilities masked by laughable actuarial assumptions. Current rating: 5 zombie bears.

4. Populist rage and financial illiteracy amongst the populace, the populace’s representatives and the fourth estate. Current rating: 4 zombie bears.

5. Math/Algorithms.  Zero Hedge finds interesting comment letter on HFT, pre-flash crash.  While I was away Twitter broke the algorithms. Current rating: somewhere between one and an infinite number of zombie bears; variable.

6. Hackers. (Very necessary) Wall Street war games Current rating: 8 sleeping (?) zombie bears; stable.

7. Cross-border equity custody. Current rating: one lonely zombie bear.

8. Bitcoin or something like it. Yes, Bitcoin could pose a threat to the current structure of the state.  As I’ve been saying for nearly two years now. And although it’s too late now to draw anyone’s attention to the fact that a bitcoin ATM featured in the Cyprus meltdown, I thought you might be amused by this.  Current rating: one zombie bear.

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 maybe they aren’t, but if that were the case, why is so much office space in my neck of the woods still vacant?

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FB and FD

It’s not often that I disagree with Joe Grundfest, but I am going to take exception to one of the points he makes about the Netflix/Facebook disclosure.  As most people know, Netflix’s CEO made a comment about Netflix subscriptions on his Facebook page.  (He has more than 200,000 followers on Facebook.)  The SEC reckons that the comment was material, and therefore violated Regulation FD, which requires companies not to make selective disclosure of material information to shareholders and investment professionals.  Material information is supposed to be disseminated by a method reasonably designed to provide broad, non-exclusionary distribution of the information to the public.  In his otherwise excellent article, Professor Grundfest reckons that the Facebook post, which was picked up by other forms of social media immediately, was disseminated by such a method.

I don’t agree.

I don’t think we should ever treat a fee-based service as being compliant (“non-exclusionary”) dissemination under Reg FD, and Facebook is essentially a fee-based service.  It has a price.  You don’t have to pay cash but you do have to pay in terms of information, which is just as valuable.  Facebook requires you to sign up in your own name, and uses the information it gleans about you to sell advertising.  So that looks like contract “consideration” to me.  (There’s another price, which is the time you spend dealing  sifting through Facebook’s astonishingly high noise-to-signal ratio to filter significant information from the news that Freddie has a “complicated” relationship, Lee is growing pretend lettuces on an imaginary farm and Suzie “likes” Lee’s lettuces.)  The fact that you must purchase Facebook’s services with your identity distinguishes it qualitatively from other social media outlets such as Twitter, where you can sign up in the name of your cat, or someone else’s cat.

And what happens when Facebook inevitably becomes a has-been and other social media take over from it?  How do you know where to go to get information about the companies you follow?

I know I’m sounding seriously old-school here, especially for someone who operates in the world of Finance 2.0, but there is something to be said for (a) certainty in knowing where to look for breaking news about a company and (b) not having to pay the price of joining all the various networks where information might get disseminated.  I’m voting for material information needing to show up first on the company’s website, and on the SEC’s (admittedly antiquated) EDGAR system.  Possibly someone has created a free push service for filtered material corporate information or wants to get in touch with me so we can create the FeeD (FD Feed, get it?) together, but until that time, I’m with the SEC and its old-timey attitudes on social media.

Twitter: @saracrowdcheck

Facebook: not ever; who are you kidding?

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WHO WON 2012?

You know, there’s just something so appealing about government employees who get on with their job like grownups and do something really freaking cool like landing something the size of a phone booth on a planet millions of miles away exactly as they had planned it.  Also cool . . . private market scientists.  Who won 2012?  Scientists.  http://www.henleyhanks.com/WhoWon2012.pdf

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See here for the introduction to the ZBI.

So I was right not to include the Fiscal Cliff, right?  Was I right when I predicted that we’d head to the precipice and then create half-baked solutions kicking most of the cans down the road?  Sadly, that wasn’t a hard call.

ICYMI: Zombie houses.  Not a threat to the financial system, but very threatening to community stability.  Do zombie houses eat other houses’ heating systems or what?

1.  Bank provisioning.     Current rating: 10 zombie bears,  5 years out.

2.  Europe.    Europe just shifts from one kind of crisis to another.  Plus ca change.  Except that they are all going ahead with the FTT.  And it’s going to have some seriously weird effects.  Current rating:  5 zombie bears.

3.  Actuaries and pensions.       Good Economist piece on UK moves to address (not really deal with) the defined benefit pension problem.  Current rating: 5 zombie bears.

4.  Populist rage and financial illiteracy amongst the populace, the populace’s representatives and the fourth estate.   Current rating: 4  zombie bears.

5.  Math/Algorithms.      Rep. Markey (who has been in the House since the Jurassic age, or at least since I was a nipper) tries to get some SEC action on HFT.  “Clear and present danger,” he says.  Also, check out this totally awesome chart, which despite being awesome DOES NOT make the case for a financial transactions tax.  You do not tax something just because there’s a lot of it, or you don’t like it.  If you don’t like it because it’s dangerous, stopping it rather than taxing it would seem to be the way to go.  On the good news side is the SEC’s continuing ability to get people with serious numbers capabilities to come on board.  Chairman Schapiro started this promising trend.  On the other hand, maybe people with serious numbers abilities will just go off and become quant day-traders instead.  That can’t be bad, can it? 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.

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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