HOW TO GET THE SEC BACK ON TRACK? STOP ASKING IT TO DO DUMB STUFF

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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ZOMBIE BEAR INDEX: PLUS CA CHANGE…

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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ZOMBIE BEAR INDEX: LESS CRISIS-Y?

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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A HOLIDAY STORY: MIRACLE ON PENNSYLVANIA AVENUE

I am an old woman now, and many memories have faded.  But the clearest memories I have are of the events one Christmas that nobody quite agrees about.  All of us who were there know that something happened, but when we try to describe it, the facts and details slide through our minds and become insubstantial, inchoate.  Like things you see from the corner of your eye; when you turn, they aren’t there at all.  But let me try.

It was many years ago, at a time of extraordinary bitterness and partisanship.  You may think today’s politicians are divided, but our President goes on vacation with the family of the Speaker, a representative of a party that her party has no alliances with.  That would never have happened in the days of which I speak.

In those days, there were a series of battles between Congress and the Administration on fiscal matters. Over several years and a couple of sessions of Congress, the two (or many) sides would propose solutions to reduce the nation’s deficit, always totally unacceptable to the other side.  Equally unacceptable counter-proposals were proffered, and the arguments would continue until the markets became nervous and some inadequate compromise was reached.  At some point the compromise started to take the form of Government in effect taking a gun, pointing it at its own head and saying “don’t make me pull this trigger.”  It was stupid enough the first time it happened, when it was dubbed the “Fiscal Cliff,” but that was followed by the “Fiscal Chasm” and then the “This-Time-We-Really-Mean-It Fiscal Abyss.”

My story relates to the Fiscal Abyss.  The end result of the Chasm talks was that if no agreement had been reached on tax reform by the target date, government would effectively stand down.  Apart from those deemed essential and most of the uniformed services, government employees would be furloughed and most government services would cease.  And the target date was midnight on Christmas Eve.  It was believed that this was such a Draconian solution that it would focus everyone’s minds, and that the target date was an incentive to get people to work things out and enjoy the holidays.  Unfortunately, they forgot who they were dealing with, which was themselves.

Despite that, some progress was made.  By the end of the summer, a tax reform bill was roughed out.  Pretty much everyone hated something in it, and pretty much everyone loved something in it, but the one thing everyone loved was the fact that 1040s got much shorter.  The problem was, the tax reform bill was only part of the package that had to be sorted out by Christmas Eve.  The Chasm resolution was that both budget and Tax Reform Act had to be adopted at the same time as the debt ceiling was raised, so there was no wriggling out later.  And the budget was proving troublesome.  As fall turned into winter, the Tax Reform Act passed both House and Senate, but budget discussions were getting nowhere.

By Christmas Eve, things were pretty desperate.  Various government departments readied the furlough plans that they hoped never to have to use.  Families bought fewer presents, thinking that they might not be able to pay off the credit cards, and what presents they did buy tended towards the practical, like socks and Hamburger Helper.  Parents tried to get tiny tots with their eyes all aglow excited about the prospect of underwear from Santa.  “Black Friday” took on a new meaning that year.  The recovering economy headed south and when markets closed early on Christmas Eve, the Dow was down 11.9% for the year.  Yields on the 10-year T-bond reached 5%.

No-one had left town.  Congress had to stay till the last minute, in case a compromise was reached and they needed to vote on raising the debt ceiling.  Senior officials in the government departments had to oversee the closing down of their operations and the transition to emergency status.  I was at that time Deputy Assistant Secretary of the Treasury for Financial Affairs (Acting) and pretty much everyone at Treasury had been confined to their offices for weeks at that point, working round the clock.

In the late afternoon of Christmas Eve, the Secretary of the Treasury headed to meet with the Speaker of the House and the Majority Leader.  The meeting was billed as a last-ditch effort to reach agreement on the Abyss, but we all knew that it was pure political Kabuki as usual.  There was no hope of reaching a solution, but no-one wanted to look like they weren’t trying.

The Secretary of the Treasury must always be properly staffed.  He can’t just turn up on his own to an important meeting with Congress.  But all the senior Treasury staff were involved in emergency planning that afternoon, and I was already over on the Hill trying to work out the possibility of getting some revenues from a Financial Transaction Tax, so my boss, the Honorable Isaac Moran, Assistant Secretary of the Treasury for Financial Affairs, asked me to meet the Secretary at the entrance to the Longworth House Office Building and attend him to the meeting.

He was running late, of course, so I chatted to the security officers there.   The holders of true power in Washington?  Security staff.  Whether it’s the FBI Police or the US Capitol Police or the actual police Police, they are the people who can make or break your day.  They are capable of being total dicks to people who get dickish to them, but they can also save your life.  They are the people who may let you slip by them when you’ve left your ID on your desk, ignore the fact that the knife you are bringing in to slice up birthday cake might be regarded in some circles as a weapon, and look the other way when you need to smuggle a cat into one of the independent agencies, which happens more frequently than you’d think.

“You know the thing that annoys me most?” asked Warren, one of the officers, tall, athletic, tending to a slight paunch.  “It’s that our damn budget is tied up with the federal money.  There’s a whole bunch of things that aren’t any business of the Feds.  Stuff DC needs that no-one else in the country has to get approval from Washington to spend on.”  This was, of course, in the days before DC statehood.  It turned out that in his spare time, Warren ran a basketball program for orphans.  Orphans?  There are still orphans?  “Well, they ain’t exactly Little Orphan Annie type of orphans.  They’re big and some of them are kind of mean.  But they need help just as much.  These are kids with bad home situations, you know?  They come to us after school and we play a little ball and let them do their homework and talk a bit.  We call it the Four O’Clock Club.  But the finance for it has to be approved by the House.“  He looked around for a moment.  He was, after all, in the LongworthOffice Building.  “It just isn’t right,” he said, in a lower tone.  “I know there’s a problem with the whole budget.  But this isn’t even federal money.  It just needs to get approved by the Feds.”

At that point, the Secretary arrived.  The Secretary of those days was a pompous, formal man, still resentful of the fact that running a nation was nothing remotely like running a large oil company, and feeling that if somehow he could find and fire the right people in the entrenched bureaucracy, he could make the trains run on time.  We walked to the Speaker’s office, and found him ensconced in his personal conference room with the Deputy Whip, a weasel-faced woman known to want the Speaker’s job someday, so long as that day was soon.  They were drinking Old Roadkill, one of the best-known products from the Speaker’s district.  The Secretary and the Speaker, despite being from different parties, had no personal animosity.  They knew how the game was played.  The Congressfolk stood for the Secretary and ushered him to a chair.  The Speaker poured him a glass of Old Roadkill without asking.  He waved the bottle vaguely in my direction, neither expecting nor getting any reaction.  I took a seat on the edge of the conference room.

“Well, unless you got some news for me (the Secretary raised his empty palms) ain’t nothing getting done tonight,” said the Speaker.  “Just way too many open issues still.”  His Southern accent always got stronger under the influence of stress and Old Roadkill.  “You’d need to be ol’ Santy Claus hisself to sort out all this . . .”

His mouth remained open but words stopped coming out.

The Speaker, the Secretary of the Treasury and the Deputy Majority Whip were staring at the chair at the end of the conference table.  In it was sitting a bearded man of astonishing, exuberant embonpoint, dressed in a suit of red velvet with white fur trim.

“I was wondering when you’d work that out,” said Santa Claus.

The Speaker managed to close his mouth only to open it again.  “How did you get in here?” he asked.

“Of all the things you could ask, that’s the one you choose?” asked Santa.  “An officer called Warren let me though.  He seemed to think you people could use some help.  And you certainly could.   For centuries I’ve run the biggest logistics operation in the universe.  Demographics, estimates, assessments, transportation, inventory control, delivery, you name it.  There’s nothing in your budget that I can’t fix.  I just need a bit of time and a bit of cooperation.”

“But . . .” started the Deputy Whip, staring at the ornate clock on the credenza.  Santa followed her gaze.  “It’s OK, honey, I have good time management skills.  Quantum mechanics helps, otherwise I couldn’t be here and in Cairo right now.  Oh, I’m sorry, pumpkin,“ as she stared blankly, “are you from the party that doesn’t believe in science or the party that’s too dumb to understand it?”  The Deputy Whip had never in her life been called pumpkin, and it wasn’t clear whether it was that, or the sudden appearance of Father Christmas in the Longworth Building that was throwing her off.  She rose from her seat, sat down again, opened her mouth, closed it.

“OK,” said Santa.  “We’ll need the latest version of the budget.”  He tapped on the table and a huge, bulky laptop appeared.  He tapped again, and an abacus appeared beside it.  “Easier for quantum work,” said Santa.  “Ben,” addressing the Secretary, “Can you get the fat guy from the OMB over here, now?”

“Perhaps Mister Secretary’s staffer could contact Jack Harris at the OMB,” said the Deputy Whip, looking at me.

“Ben can make his own damn calls,” said Santa.  “I’ve known him all his life, and he’s a lazy SOB.  Been on the wrong List most of his life, this one.  I know if you’ve been bad or good, you know.”

Benjamin N. West, III, the 77th Secretary of the Treasury of the United States of America, turned a deep and unappetizing crimson.

“Oh, for goodness’ sake, not that,” said Santa.  “That’s perfectly normal.”

“OK,” said Santa.  “We’ll need the skinny guy from the CBO too.  We’ll be scoring this sucker.  You get him here.”  He turned to the Speaker.  “I’ll have a glass of Old Roadkill, too, and one of those Havana cigars in your desk.”

“They’re not from Hav. . . “ started the Speaker, but a raised white eyebrow silenced him.  Santa stood, threw off his jacket and rolled up his sleeves.  With bourbon in one hand and cigar in the other, he started pecking one-fingered at the laptop.  Within minutes, Jack Harris, OMB Director, arrived in the Speaker’s office.  He took one look at the figure sitting at the conference table and would have walked straight out of the room had not the Speaker blocked his exit.

“Yes, it’s me.  I’m real.  Christmas 1980.  You wanted a dog.  You got a chemistry set.  And wasn’t that the right decision?”  Santa beckoned to Jack to sit beside him.  “Sit.  I want to walk through some of these projections.”

While Jack was on the phone to his staff back on the other side of town, Mitch from the Congressional Budget Office arrived.  He showed absolutely no surprise at finding Jolly Saint Nick stripped down in the conference room of the Speaker of the House and working on Medicaid projections.  When you’ve worked at the CBO as long as Mitch had, working with imaginary figures is kind of par for the course.

For the next few hours, Santa smacked the beads on the abacus, entered numbers on his laptop, and called “his people” back at HQ for things like demographic growth projections for Texas and weather predictions for the Midwest for the next ten years.  “They’re mostly quants from CalTech and MIT,” he said.  “If it helps, you can think of them as elves.”  He summoned people from all parts of the Administration and all parts of the Hill.  And they came when summoned.   Goodness knows who they thought they were going to encounter, but Santa was able to convince them all of his credentials by reference either to gifts requested on some previous Christmas or to childhood misdemeanors.

On several occasions he snapped and yelled at people if their numbers weren’t solid.  The Speaker tried to intervene at one point.  “Look here, Santa, you can’t be treating people this way,” he said, as Santa ripped one particularly lame explanation of CPI adjustments to shreds.  Santa turned on him.  “Oh, you were expecting the jolly old elf,” he said, sarcastically.  “You know who gets to see the jolly old elf?  Good boys and girls, that’s who!  Now do you think there is the remotest argument in Hell that any of you wasters, you people who have pushed the world economy to the brink three times, are good boys and girls?  There isn’t enough coal in the Appalachians for you people.  Now sit down and shut it.”

It seemed that time was passing very slowly, but it was passing.  Several times I saw Santa look at the ornate clock.  He seemed to be relieved when he entered a final number into his laptop and said “OK.  Now it’s time to get folks to agree to some spending cuts.  Some pet projects here that need to be killed.”  He handed the Deputy Whip a list of names.  “Where’s your counterpart?  Here’s his list.  Get these people in here.”

He then threw everybody out of the room, so we never did hear the arguments he made about the programs he was cutting as each of the people on his list came into the conference room.  Nor did we how he persuaded all the Congressfolks to accept those arguments.  But you have to assume that when there are two parties to a negotiation, and one of those parties knows whether the other party has been bad or good since the day of birth, you’re dealing with a pretty severe case of information asymmetry.  No Congressperson was in that room for more than a minute.

It was eleven pm when Santa summoned the OMB and CBO guys back into the conference room.  “Just check these one more time,” he said, turning the laptop to face them.  After a couple of minutes, they nodded.

“Time to vote,” said Santa.  Everyone headed towards the corridor.  The Majority and Minority Whips, who were both with us at that point, exchanged glances.  Santa rolled his eyes.  “It’s done, you bozos.  All the paperwork is on every desk, in both Houses.  All you have to do is get your guys to vote.  Do. You.  Think.  You.  Can. Do. That?”  They nodded.  Suddenly all the clocks on the Hill lit up with the combination of lights that signal an imminent vote.

In the movie version of this tale, Santa would have addressed a joint session.  Or at least taken the floor of the House.  He would have talked of the eternal meaning of love, and how so long as just one person took the time to care about the orphans of the Four O’Clock Club, the true meaning of Christmas would prevail.  He didn’t.  He stood at the entrance of the House floor (others said they saw him in the Senate) and said to the Members, “for once in your pathetic , everloving, mothermunching lives, will you all just do your duty and get this done?”  Never had a vote happened so fast in either house.  And everyone there voted “aye”.

But time was running out.  Washington appeared to have a clock with a very large bell, and it was beginning to strike midnight.  How had none of us ever heard that bell before?  Of course, all the Abyss paperwork had to be signed before midnight.  By the President.  At the other end of Pennsylvania Avenue, sixteen blocks away.

“I got this,” said Santa.  He grabbed the paperwork.  He grabbed the Speaker.  And as I heard it from Warren, who was on duty at that exit, he sprinted from the Capitol onto the West Lawn, where twelve very large reindeer were happily destroying the lower branches of the Capitol Christmas Tree.  Yanking an evergreen bough from the lead reindeer’s mouth, and smacking the caribou upside the head with it, he leapt into the sleigh that the animals were harnessed to.  And it took off.  Into the Washington sky.  Even after the events of that evening, the people watching weren’t entirely ready for that.

The people who watch the skies from the roof of the White House have roughly nineteen seconds to react to any threat that veers off course from National Airport.  It’s even less when the potential threat comes from the Hill (although really, where do you expect the threat to come from?).  These days, thanks to the FOIA request filed by Wonkette, we know the nature of the weapons that sit atop the White House.  We have to assume similar weapons were deployed in the old days too.  The Duty Officer that night later stated that probably two seconds elapsed between the word “INCOMING” and the targeting of the airborne threat.  He knew that because somewhere above Washington, a clock (one he’d never heard before) was striking midnight.  Two seconds after that, he heard “NORAD SAYS STAND DOWN.  IT’S SANTA.”   And then he heard hooves smashing swingsets and tearing up lawns and saw a red and white blur head towards the Rose Garden.  And at some point he heard HO HO HO echoing over Pennsylvania Avenue, but things were getting pretty confused by then.

The photos of that night show the President looking cool but vaguely puzzled, the Speaker with his toupee askew and mouth open, and the Senate Leader staring at something blurry and possibly red and white.  The President only used one ceremonial pen to sign the tax reform legislation, as he signed exactly on the twelfth stroke of the clock, but he still handed out a couple dozen pens as usual.

Back on the West Lawn, we were hardly aware of Santa’s having left before he and his menagerie were back, divots flying.  “Now I have to get back to work.  Anyone want a ride home?”  And when one of the most recently-elected House Members said “But I live in North Dakota,” Santa didn’t sigh or roll his eyes, but kindly said “I’m going there anyway.”

I wish I could say that everyone got on after that.  We didn’t.  But things did improve a bit.  We tried a bit harder.  We never again drove the economy to the cliff, and we were never again downgraded by rating agencies.  None of the programs that Santa wrote out of the budget that year turned out to be the least bit useful or missed.   And the Four O’Clock Club?  Approved as part of the DC budget that year, and one of its most famous alumni is our current President.  Santa winked at Warren as he left that night.  He knew.

Merry Christmas to all who have done their jobs this year.

Posted in General Financial Failure | Leave a comment

ZOMBIE BEAR INDEX: POST ELECTION EDITION

See here for the introduction to the ZBI.

Yeah, we had an election.  Insert gay socialist potsmoker joke here.  Although as soon as we had the election we had a sex scandal involving a peerless general, a sleeveless biographer and a shirtless FBI guy.  So we were just getting into that and OMG look, it’s Europe!  It’s still there!  And it’s still . . . well, stumbling along.  Also, too, OMG look, it’s the fiscal cliff!  Or not a cliff, maybe just a bigger tax bill, and OMG look here’s a Gangnam Style done by cats.  ADD?  No, not us.

You’ll notice I’m not adding the Fiscal Cliff back to Top Ten Threats.  That’s because, like Europe, we’ll just keep heading to the precipice and then creating some half-baked solutions kicking most of the cans down the road.  I’m subscribing to the view that the Cliff is in reality not a single issue but a series of chronic issues (entitlements, a tax code that makes no sense whatsoever, etc.) that cannot be addressed before Santa gets here and we will have to do real, substantive bipartisan work on those issues later.

Here’s an interesting report on the financial crisis from the Committee on Capital Markets Regulation.  It argues that the problem in the crisis was primarily contagion rather than interconnectedness.  And on the topic of contagion, see #5 below.

1.  Bank provisioning.   There have been some “regular” bank lawsuits and settlements, but nothing unexpected recently that I’ve noticed.  Current rating: 10  zombie bears,  5 years out.

2.  Europe.    OMG.  Look, Europe’s still there!  And still faffing around!  And still thinking the Tobin tax might work!  Some random data from around the region suggests they might be rather wrong in that respect.  France’s FTT “appears to be missing its target“.  (Both the quantitative amount and the people it was supposed to be aimed at if you ask me.)  Also, not FTT but the same problem: Taiwan imposes securities transaction gains tax, traders move securities transactions to Hong Kong.  Fancy that.  Current rating:  7 zombie bears.

3.  Actuaries and pensions.     It took me a while to get round to ordering this book by John Bogle, but  I finally did it.  Mr. Bogle says that unless we reform the structure and the implementation of our retirement systems, we face a financial train wreck.  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.     Interesting paper on cross-asset liquidity contagion and the need for liquidity circuit-breakers.  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.  Bitcoin video.  There’s a piece in The Economist from a while back about using currency as a social medium by writing slogans on it (I still have a Venezuelan Bolivar note with “Viva Chavez” on it from the early 90s and Chavez’s first failed coup).  Put this thought and Bitcoins together and couldn’t we introduce customized messaging currency?  You could have “Candidate X sucks Bitcoins” or “Buy Google Bitcoins” which are interchangeable with traditional Bitcoins.  And “Congratulations Bill and Mary” Bitcoins instead of customized M&Ms.  Get on it, Bitpay.  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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HIRE A VET TO SAVE YOU FROM THE HACKERS (AND THE ZOMBIES)

I’ll update the ZBI tomorrow.  Earlier this week I was in Seattle, getting worried by this lady, who reckons we are in WWIII as far as information security is concerned.  But the good news (insofar as there is any, which there mostly isn’t; really, if you aren’t worried about this stuff you live in a cave) is the program that the University of Washington’s Center for Information Assurance and Cybersecurity has to train veterans to do cybersecurity.  (This is the best link I can find.)

And while we are discussing military affairs of great import, USMA’s Gangnam Style is WAY better than USNA’s. Go Army.  But thanks to all of you.

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ZOMBIE BEAR INDEX: POST-SANDY EDITION

See here for the introduction to the ZBI.

Nothing funny about the storm.  I hope my readers haven’t lost too much that they care about, but I’m aware of some friends with major losses.  Hugs.

The markets seemed to work quite well in the crisis, and I guess we may have learned some useful lessons for the next time.  Because there will be a next time, won’t there?  This might be a good time for us all to move to somewhere that is meteorologically and geologically boring and not too close to the coast.  Somewhere in Brazil that doesn’t have terrible traffic, maybe.  Curitiba?

What with Sandy and that election thing, financial chaos news seems not to be on the front pages, but I expect the Financial Nasties will return shortly after Tuesday.

1.  Bank provisioning.  More lawsuits and it’s still all the mainstream stuff that has been expected for yonks.  Current rating: 10  zombie bears,  5 years out.

2.  Europe.    Maybe a big part of the crisis is over, or maybe there’s just too much noise this side of the Atlantic right now.  They’re still playing with that wretched Tobin Tax, though.  Mixed signals from the French FTT.  Trading went down in August, especially among small-cap stocks but derivatives action went up.  But September trading recovered, so what lessons do we take from all this?  That people (me included) will extrapolate the result we want to see from mixed data, and people who like the Tobin tax will impose it, whatever dire results are predicted.  Italy’s still planning to cripple its own markets and make hedging more expensive.  Why?  Current rating:  7 zombie bears.

3.  Actuaries and pensions.   Some cities and counties that are going bust.  Not all due to unfunded pension obligations; some built sports stadiums.  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, but only because the Fiscal Cliff is weeks away.  Next week we can focus on the Financial Crazy again.

5.  Math/Algorithms.   The SEC’s considering kill switches and the like, but if/when SEC leadership turns over, will the new guys still be attuned to HFT problems?  And, ICYMI, this story, which I loved because of the statement “the motive of the algorithm is still unclear”.   It was just lonely, I guess.  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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25 YEARS ON

Happy “Market Break” anniversary everyone! Lord, I am old. (I am so old that my first introduction to high frequency trading was the debate in the NYSE when traders wanted to lug their 10-pound “cellular telephones” onto what used to be called the “trading floor”.)  I watched Black Monday as a young SEC attorney. Back in those days we did not have (a) smartphones, (b) computers at our desks (they arrived the following year) or (c) lolcatz, so the way we heard about the impending crash was in effect the same way it would have happened in medieval times, ie some kid from Market Reg running down the corridors shouting “Ye Ende of Ye Worlde is Nigh!” or something similar.  We all gathered on the Fifth Floor (where Enforcement had the only Quotron Machine) and someone from Enforcement read quotes off the Tickertape, joking that they’d open an investigation every time there was an uptick.  Ah, happy times.

From the Market Reg’s report on the Break: “We may never know what precise combination of investor psychology, economic developments and trading technologies caused the event of October.”  So nothing changes.

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