Big banks are trying to stick it to you one way or the other. Watch your statement. If new fees start showing up, fire them. Find a new bank. From the NYT:

Even the much-maligned debit usage charges have effectively been bundled into higher monthly fees on checking accounts. Bank of America abandoned its $5 a month debit card usage fee in late October amid a firestorm of criticism. Yet, it more quietly raised the cost of its basic MyAccess checking account by more than $3 a month earlier this year. Monthly maintenance fees now run $12 a month, up from $8.95.

Chase and Citigroup, which quickly distanced themselves from the debit card usage fee, ratcheted up the price of their entry-level checking products without the public relations nightmare. This month, Citigroup’s basic checking account jumped to $10 a month, up from $8. Chase raised the fee on its standard checking account to $12 a month in February; many of those customers were previously charged nothing at all.

This is from a February 13 Hancock column on bank fees:

It was the fee for confirming her balance that prompted her to write a letter to top bank officials. She needed the account information on bank stationery for her daughter's financial-aid application for college.

That'll be $25, said the branch folks.

"I've been with this bank since it was Union Trust," Foreman remembers saying, after she objected to the fee.

"Well, I'm a Wells Fargo employee, and you have to give me $25," replied a branch staffer, according to Foreman.

Whether or not this depicts the future of American banking depends on you, the customer. It certainly has the potential.

Posted by Jay Hancock at 11:36 AM | Permalink | Comments (1)
Categories: Finance
        

Sunday's column is about the Entrepreneur Access to Capital Act, which would exempt small stock offerings from oversight by the SEC or state regulators. As written the bill is nuts. It's an invitation to defraud small investors. But it's getting lots of bipartisan support. I'm not surprised that the right is in favor. Many conservatives favor almost any deregulation.

But some on the left are climbing on board, too. Check out this post, "Don't Occupy Wall Street, Ditch It!", at the Post Carbon Institute by Michael Shuman. The Entrepreneur Access to Capital Act (also known as the crowdfunding bill), in his view, is great because it would let ordinary investors bypass Wall Street:

If we were to legalize investment in local businesses, including co-ops, farms, and community investment funds, Wall Street would be history. And the good news is that it’s on the verge of happening... If we could overhaul securities laws that we enacted during the early Jurassic Period, local businesses could be fabulous investments. They are the most important job producers in the economy.

Apparently it's unconscionable for investors to be ripped off by the 1 percent. But if it's done by the 99 percent it'll be OK. Enabling crowdfunding of small businesses might be a good idea. But so far the legislation is dangerously free of anything that would provide oversight and protection to the public.

UPDATE: Jamie Smith Hopkins writes in today's paper about just the kind of entrepreneur who's likely to have access to your capital under this legislation:

Andrew Hamilton Williams Jr., 60, of Metro Dream Homes promised to pay off people's mortgages if they invested in his company, according to the U.S. attorney for Maryland. But it was nothing but a Ponzi scheme, prosecutors said. Williams and other company officials used some of the proceeds to enrich themselves, at one point hiring chauffeurs to drive them around in a fleet of luxury cars.

OK, so under the crowdfunding bill's "bad actor" section convicts such as Williams could be disqualified from participating. But the legislation would breed many future Williamses.

Posted by Jay Hancock at 9:14 AM | Permalink | Comments (2)
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Barry Ritholtz is tired of dumb media questions. (And when I say dumb media questions, I mean dumb stories assigned by editors and producers.) Ritholtz:

Whenever we get a day like today — down more than 500 points on the Dow at one point — my phone begins ringing with inquiries from various media.

They always ask the same question: What should investors be doing NOW?

That is the wrong question. The proper one is: What should investors have done in the past to prepare for an event like TODAY?

As answers, he provides various links.

Posted by Jay Hancock at 9:07 AM | Permalink | Comments (0)
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Meant to blog this earlier. Joe Nocera sends a well-deserved Valentine to M&T Banks Robert Wilmers:

On the other hand, it didn’t exactly surprise him [Wilmers]. In the run-up to the financial crisis, the giant national banks — which he viewed as a distinct species from the typical American bank — had done things that deserved condemnation. And, he added, “They are still doing things that I don’t think are very good.”

Such as? “It has become a virtual casino,” he replied. “To me, banks exist for people to keep their liquid income, and also to finance trade and commerce.” Yet the six largest holding companies, which made a combined $75 billion last year, had $56 billion in trading revenues. “If you assume, as I do, that trading revenues go straight to the bottom line, that means that trading, not lending, is how they make most of their money,” he said.

From my December 2008 column on M&T:

Meet the new American lender. M&T Bank Corp., which said yesterday that it will buy Baltimore's Provident Bankshares, will typify U.S. finance in the next few years.

Big. Based somewhere else. But something that looks like an old-fashioned bank, with branch offices and lollipops next to the teller. FDIC-insured.No investment banking division. No Masters of the Universe deal makers. No 30 dollars borrowed for every one dollar of capital. A lineup that recently would have seemed terribly dull for consumers as well as shareholders now looks very attractive. At the end of this cataclysmic year, tradition and safety are the most exciting things of all.

Posted by Jay Hancock at 10:54 AM | Permalink | Comments (0)
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Ellicott City money manager John Hussman, in his weekly commentary published May 30.

Despite the "lost decade" since the extreme valuations of 2000, valuations are now presently at about the same level from which prior secular bear markets have just started. There is no basis to expect a secular bull until we observe the valuations from which they have invariably started. Meanwhile, the recent cyclical bull market from the 2009 low has already run the same duration and slightly further than the typical cyclical bull in a secular bear.

So from a secular, long-term perspective, my impression is that investors are very likely to observe much better opportunities to allocate capital toward equities at better valuations and prospective returns in the years ahead. The cyclical case is driven by a large variety of other factors apart from valuations, and we can't express equal confidence about shorter-term outcomes. For us, the appropriate strategy is to allow for windows of moderate opportunity within that fairly unfavorable long-term picture.

Posted by Jay Hancock at 10:26 AM | Permalink | Comments (0)
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It's a nice thought. Maryland's ~$30 billion pension fund can supercharge the state's economy by disproportionately investing in Maryland. The wonks call it "home bias," and a couple academics at Northwestern find that it's pretty prevalent among state pension funds.

But they also find that the homer investments do a disservice to pensioners by significantly lagging behind the performance of other investments. And states with home-bias pension funds also tend to be states with high levels of corruption. Investment by Maryland's retirement system in Maryland companies, however, is quite modest. HT to Marylandreporter.com's Megan Poinski, who blogs about the study here.

From the paper's abstract:

Public pension funds’ own-state investments perform significantly worse than their out-of-state investments, an average of 3-4 percentage points of net IRR per year, and those that that overweight their portfolios towards home-state investments also perform worse overall. These underperformance patterns are not evident for other types of institutional investors, such as endowments, foundations and corporate pension funds. Overweighting in home state investments by public pension funds is greater in states with higher levels of corruption, although there is no positive correlation of underperformance with corruption for these investors. The overweighting and underperformance of local investments cost public pension funds between $0.9 and $1.2 billion per year, depending on the benchmark.

Posted by Jay Hancock at 10:31 AM | Permalink | Comments (2)
Categories: Finance
        

Computerized stock trading is insidious in several ways. It hurts the small investor, who gets whipsawed by flash crashes and such. It undermines the notion of ownership and property rights. When you "own" a share for a millisecond, the incentives and obligations that go with ownership disappear. And it causes systemic risk and volatility, all under the defense of liquidity, stipulating that if a liquidity factor of 100 is good a liquidity factor of a trillion is better.

So it's good to see that Barron's Jim McTague has written a history of program trading starting with the 1987 stock market crash: Crapshoot Investing: How Tech-Savvy Traders and Clueless Regulators Turned the Stock Market into a Casino.

Equity markets are now high-speed casinos rigged against individual investors. Now, Barron’s Washington Editor Jim McTague reveals the twin causes: high-frequency traders and blundering regulators. Learn why the Flash Crash happened (and will again)… discover titanic, uncontrolled forces driving market chaos… find rational strategies for profiting in this terrifying new environment!

The solution isn't to profit from the environment. It's to change the environment.

Posted by Jay Hancock at 8:43 AM | Permalink | Comments (1)
Categories: Finance
        

Tuesday's column was on the continuing struggles of Ed Hale and his bank, 1st Mariner.

If Hale can't raise capital or there isn't a major turnaround in 1st Mariner's profits, the bank is in danger of being seized by the government and forced to merge with another bank. The buyer could well be one of the "big, out-of-town banks" that Hale has railed against since founding 1st Mariner in the 1990s.

I thought the piece was pretty straightforward. The bank is in jeopardy. Its own accountants believe its future in its present form is in doubt. The newspaper has a duty to tell everybody who bought 1st Mariner stock what's going on.

Reader Alan Christian believes The Sun's coverage has been unfair. He writes:

Jay, I have always had respect for the Sun, but that feeling has been slipping away from me. The realities are clear. There still is a Sunpaper published every morning, but you would not wrap many fish in it. No further comment is necessary. First Mariner is a case in point. I have known Ed Hale for over 40 years and he has been right there when Baltimore needed him. Years ago, I was helping the DAV Thrift Stores market their stores. We had a golden opportunity tossed out way. Several of the hotels in Ocean City were going to change their mattresses and Box springs. One problem, we had to pick up the material in Ocean City and transport it to Baltimore.

Continue reading "Was column on Ed Hale & 1st Mariner too mean?" »

Posted by Jay Hancock at 6:13 AM | Permalink | Comments (2)
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Probably makes sense for M&T Bank to take over K Bank. M&T gets half a billion dollars in deposits and probably a good deal from the government on a similar amount of loans. M&T also took over Bradford Bank under FDIC supervision.

But M&T doesn't need the K Bank branches. All will be closed, an M&T spokesman told my colleague Lorraine Mirabella. Acquiring banks in these situations count on holding on to most of the deposits, even when they close the branches. Usually that's the way it works. But they know customers have a choice, so they typically work pretty hard to make the transition as pain-free as possible.

K Bank's Owings Mills branch is made redundant by M&T's Painters Mill office. K Bank's Ellicott City customers, if they choose to stay with the bank, will be using M&T's branch just down Route 40, at St. John's Lane. M&T also has several branches in Timonium/Cockeysville that customers of K Bank's York Road branch can use.

Likewise there's an Eldersburg M&T branch just down Liberty Road from the K Bank office that will close. And there are M&T backups in Perry Hall, Randallstown and Bel Air.

Posted by Jay Hancock at 7:53 PM | Permalink | Comments (1)
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K Bank has been teetering on the edge for a long time. We were hearing rumors about an FDIC seizure a year ago. Then again, the FDIC has been quite the busy agency. It beefed up hiring two years ago but still doesn't have nearly enough capacity to close all the zombie banks.

To see why K Bank was on their to-do list, look no further than its capital. This is a financial institution that had $538 million in assets as of Sept 30 but only $7 million in bank equity. Its Tier 1 leverage ratio was 1.02 percent. Tier-1 risk-based capital ratio was 1.53 percent, and total risk-based capital ratio was 2.81 percent. You don't need a finance degree to figure out that these are not ample equity cushions for a bank holding nearly $58 million in overdue mortgages and, hmm, only $6.5 million set aside to cover losses from uncollectible loans.

Cost to the FDIC's insurance fund of the K Bank closure and the M&T takeover: $198 million.

The average Tier 1 Leverage ratio for Maryland banks on Sept. 30 was 9.11 percent, according to the Federal Deposit Insurance Corp.

Posted by Jay Hancock at 7:18 PM | Permalink | Comments (2)
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Today's column is about 1st Mariner Bank and Chairman Ed Hale's attempts to save it. Hale is soliciting private-equity firms for capital to shore up 1st Mariner, which he founded in the 1990s. A couple other thoughts on the situation. Anybody putting in enough capital to make a difference for 1st Mariner is likely to want a substantial hand in running the bank. This year's secondary offering had the advantage of being spread among many passive investors. Under a new investor, Hale's influence may diminish, although he's a key part of the bank's persona and marketing image.

The second point is this: Many of the people Hale is talking to would probably contemplate cashing out at a later date by selling 1st Mariner to a larger competitor. Hale has been adamant about keeping the bank independent. This may be a complicating factor in the attempt to raise new capital.

Posted by Jay Hancock at 8:29 AM | Permalink | Comments (0)
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Throughout the recent drama over M&T Bank, Allied Irish Banks, Spain's Banco Santander and Pennsylvania's Sovereign Bank, M&T management has declined to comment. AIB had to sell a 22 percent stake in M&T to raise capital. To avoid having so many shares dumped on the market, M&T was in talks with Santander, according to news reports. Santander was going to buy AIB's stake in M&T, and M&T would transfer additional shares to Santander to buy Sovereign, Santander's U.S. subsidiary. But the talks reportedlly broke down over control issues: Who would be in charge? The Spaniards? Or M&T management in Buffalo?

Now, in a memo to employees today, M&T boss Robert G. Wilmers says that yes, there were talks to acquire "a large banking franchise in the northeastern United States," that yes, the talks are over and that yes, they broke down because M&T was "not going to agree to something that would change the nature of that relationship" -- the relationship with the owner of the 22 percent stake. When AIB was the owner it was passive. Santander would have been active.

Here are the relevant paragraphs from the Wilmers memo:

I’m sorry that, legally, we couldn’t comment on those stories, and I’m sorry that we couldn’t do anything to alleviate your concerns. I know that many of you and many of your employees were worried about those reports, and I know that your customers, families, friends and neighbors were worried too. While I wish I could have told you what was going on or told you when those stories were inaccurate, we’re obligated to follow the law, and the law prohibits us from disclosing information that isn’t available equally to all investors.

But there are some things that I can tell you now. Our negotiations to acquire a large banking franchise in the northeastern United States have come to an end. We were considering, over the past several months, a very significant and strategic opportunity for M&T Bank. Such a deal would have expanded our size and reach, generated many new jobs in our Buffalo headquarters and created exciting new career opportunities for our existing employees across the bank.
We looked at this for quite awhile. The situation was complex, as you can imagine, so there were lots of issues to consider. But the opportunity was so big—we thought it was well worth the time.

Throughout it all, however, we knew that if the right opportunity presented itself, we would be willing to take on a new partner—but not a new kind of partnership. In other words, for us to allow some other party to acquire the AIB shares, we would have wanted a relationship like the one we’ve always had with AIB. We were not going to agree to something that would change the nature of that relationship. In the end, we determined that we just couldn’t make it work in a way that remained true to our longheld principles, or in a way that we were certain would advance the long-term interests of our shareholders, our customers, our communities and our employees.

Posted by Jay Hancock at 5:54 PM | Permalink | Comments (5)
Categories: Finance
        

This sounds good. 60 Minutes continues to produce really great stuff. Their fall season has been of consistently outstanding quality. This piece looks like it'll stick to that standard:

New Jersey stock trader Manoj Narang says his firm has never had a losing week because his super computers are fast enough to capitalize on split-second opportunities in the market. Narang and other traders are using a legal but controversial technique called "high-frequency trading." It played a role in a 15-minute, 600-point market meltdown last spring now known as the "Mini Market Crash." Steve Kroft talks to Narang in a rare chance to see such a business up close. He also speaks to SEC Chair Mary Schapiro - who has high frequency trading in her regulatory sights - and others for a 60 MINUTES report to be broadcast Sunday, Oct. 10 (7:00-8:00PM, ET/PT) on the CBS Television Network.

Posted by Jay Hancock at 1:45 PM | Permalink | Comments (1)
Categories: Finance
        

An interesting thought experiment would consider the fate of Baltimore-based Allfirst Financial had currency trader John Rusnak not gotten into enormous trouble with the Japanese yen. Rusnak lost hundreds of millions of dollars and forced Allied Irish Bank to sell the place to M&T. It was another loss of a Baltimore-based banking company.

Allied Irish, of course, has had even bigger troubles recently. Ireland has perhaps been harder than anywhere else in the world beside Iceland by the global financial explosion. Today the Financial Times reports that the Irish government is taking a majority stake in AIB.

Had Rusnak behaved himself, AIB probably would have sold off Allfirst last year or this year as a result of the Great Recession. M&T or whoever bought it probably would have gotten an even better price. AIB does, however, continue to own something like a fifth of M&T stock. There are discussions to sell the stake to Spain's Santander bank.

Posted by Jay Hancock at 11:53 AM | Permalink | Comments (0)
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From Ed Yardeni's daily email blast. (No link available.)

Yesterday, I reviewed the outstanding performance of the market three months after midterm elections. I also noted that the third years of the presidential cycle tend to be very bullish. The fourth year of presidential terms, along with first and second years, tend to be much less consistently bullish than third years. Yesterday, I asked Joe, “How well does the S&P 500 perform from the midterm elections to the end of the third year of the President’s term?” The results are spectacular. Since 1962, there have been 12 such 14-month periods, and their average increase was 20.9%! Not one of them was down. Indeed, there are only two gains that are not in the double digits: 0.4% during 1986-1987 and 6.2% during 2006-2007.

Posted by Jay Hancock at 10:44 AM | Permalink | Comments (0)
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As Hanah Cho reports, an administrative law judge has rejected the Securities and Exchange Commission civil allegations that Ferris Baker Watts lawyer Theodore Urban didn't do his job with respect to rogue broker Stephen Glantz. It's a victory for Urban, who was FBW's general counsel.

Judge Brenda P. Murray's initial decision in the case, 57 pages long, gives the most publicly available background yet to the Glantz affair, which goes back to 2004 and earlier and preceded FBW's sale to RBC Dain Rauscher. Among other details, the opinion portrays Louis J. Akers, who was vice chairman and had previously been CEO, as something of a bully who helped enable Glantz's fraud. Judge Murray:

Akers was a big physical presence, a domineering personality, who was engaging to some and a bully to others. Tr. 416, 602, 970-71, 1602, 2202-03. Akers was aggressive towards everyone, he yelled at people, and he was always determined that his positions prevailed. Tr. 1602, 1648, 2203, 2685-86. Akers’s relationship with Patricia Centeno (Centeno), Chief Compliance Officer and Compliance Director in the period January 1, 2003, until March 30, 2004, was contentious and adversarial. Tr. 2628-29. Centeno testified of multiple incidents in which Akers thwarted her compliance efforts. Tr. 592-93. In an incident that occurred after she left FBW, but which supports her position, Akers described the Compliance Director as a member of Hitler’s Third Reich and a Compliance branch examiner as Frankenstein’s lab assistant, Igor, at a fairly large meeting of branch managers in 2005.

I called Akers, who has settled with the SEC for his part in the Glantz debacle and is out of the securities business.

Akers says he takes "full responsiblity" for not watching Glantz more closely when it was his job to do so. Was Akers a bully? "You can't be in this business and do anything without having some people who really like you and some people who really don't," he said. "If people want to say I was the boogie man, that's fine. But somehow when I was there the firm really prospered."
And, he says, "I'm not as imposing as I was because I lost 57 pounds."

More in the Sunday column.

Posted by Jay Hancock at 2:07 PM | Permalink | Comments (0)
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Here's a telling window onto the credit crunch, high unemployment and ongoing slump. Sitting on (ie., not loaning out) tons of cash, bankers are reluctant to bring in new deposits, reports National Mortgage News. Not long ago a lot of these guys were dying for deposits to stay liquid. Now, flush with TARP money in many cases and deposits from worried folks who want the FDIC guarantee, they're slowing down marketing efforts.

It's a sad commentary when you can basically get free money (ie., certificates of deposit paying 1 percent or whatever) and can't find anyplace to lend it or invest it profitably. National Mortgage News:

Now the primary options left for banks involve turning depositors away or housing deposits at the Federal Reserve.

In April, James Rohr, the chairman and CEO of PNC Financial Services Group Inc., said that deposits held at the Fed were "almost a nonperforming asset," given the negligible 0.08% PNC was getting for the holding. Though PNC has reduced such exposure, other executives expressed similar concern during recent quarterly conference calls.

"Excess liquidity has not dissipated as quickly as we had expected," said Beth Acton, the chief financial officer at Comerica Inc., during the Dallas company's conference call with analysts last week. Comerica had, on average, $3.7 billion parked with the Fed in the second quarter, which cost the company roughly 23 basis points on its net interest margin, she said.

Posted by Jay Hancock at 8:37 AM | Permalink | Comments (0)
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David Rosenberg of Gluskin Sheff (and formerly of Merrill Lynch) is one of the sharpest market strategists around. He has been bearish on stocks for a long time and has been right. He is still bearish. From Tech Ticker:

[Rosenberg] suspects jobless claims will soon be back above 500,000 per week and notes the latest manufacturing data from the regional Federal banks has been lackluster. “I think a lot of the earnings were front-loaded in April," he says. "They disguise, I believe, a slowing in May and June.”

Rosenberg also believes analyst earnings estimates for the S&P 500 as a whole are too high. Based on his projections, the S&P 500 should be trading a at least 20% lower. “I will start to more excited about the stock market once we get the S&P 500 down closer to 900 than 1100,” he says.

The whole story and video interview with Rosenberg are here.

Posted by Jay Hancock at 6:08 AM | Permalink | Comments (0)
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The latest "retirement readiness" study from the Employee Benefit Research Institute got a lot of coverage yesterday, The bad news justifiably got most of the press. Many, many Americans aren't saving enough for retirement. But there was some (relative) good news buried in the report. The portion of boomers and GenXers "at risk" of using up their retirement resources is generally lower than it was in 2003, when EBRI did a previous study.

The graph tells the tale. The red bars are the people who aren't saving enough in 2010; the blue bars are from 2003. Each group -- early boomers, late boomers and Xers, is sorted into income categories from low to high. 2003 is not a bad point of comparison because it was a similar stage in the economic and financial cycle. Ie., the stock market wasn't doing so great then, either.

Posted by Jay Hancock at 6:07 AM | Permalink | Comments (3)
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Ten-year-old Bay National Bank was closed by federal regulators this afternoon and will reopen its branches on Monday as Bay Bank, the FDIC said. It'll cost the Deposit Insurance Fund $17 million. This is the first Maryland bank closure in a few months but the fourth in two years. Says the agency:

Depositors of Bay National Bank will automatically become depositors of Bay Bank, FSB. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship in order to retain their deposit insurance coverage. Customers of Bay National Bank should continue to use their existing branch until they receive notice from Bay Bank, FSB that it has completed systems changes to allow other Bay Bank, FSB branches to process their accounts as well.

Here is the entire statement from the FDIC:

Bay Bank, FSB, Lutherville, Maryland, Assumes all of the Deposits of Bay National Bank, Baltimore, Maryland

FOR IMMEDIATE RELEASE
July 9, 2010 Media Contact:
LaJuan Williams-Young
(202) 898-3876
Email: Lwilliams-young@fdic.gov

Bay National Bank, Baltimore, Maryland, was closed today by the Office of the Comptroller of the Currency, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bay Bank, FSB, Lutherville, Maryland, to assume all of the deposits of Bay National Bank.

Continue reading "Feds close Lutherville's Bay National Bank " »

Posted by Jay Hancock at 4:19 PM | Permalink | Comments (1)
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Dow 10,000!! I remember the first time the Dow made 10,000, in 1999. We were sitting in the Sun's old newsroom on the 5th floor, watching the Dow fever line on the Bloomberg tube head into five digits. Now nobody can remember how many times the Dow has hit 10,000. Market strategist Ed Yardeni, in his daily email blast, says it's Groundhog Day. Yardeni:

Dow 10000! The DJIA rallied 274.66, or 2.82%, to close at 10018.28 yesterday. It reminds me of “Groundhog Day,” the 1993 comedy film, starring Bill Murray and Andie MacDowell. Murray plays Phil Connors, an egocentric Pittsburgh TV weatherman who, during a hated assignment covering the annual Groundhog Day event in Punxsutawney, finds himself repeating the same day over and over again. After indulging in hedonism and numerous suicide attempts, he begins to reexamine his life and priorities.

Like the weatherman played by Bill Murray, investors must be reassessing the meaning of life, or at least how much they are willing to pay for earnings. Valuation multiples tend to be highest when investors expect that stock prices will generate significant capital gains. This was the experience during the 1990s. Those days are long gone, and so are the capital gains. So valuation multiples have been falling.

Posted by Jay Hancock at 10:27 AM | Permalink | Comments (0)
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He does like one part, though!

MORTGAGE UNDERWRITING STANDARDS: Grade A

Establishes new minimum underwriting standards for mortgages. No more no doc, NINJA, or Liar loans. Lenders must verify income, credit history and job status. Would ban payments to brokers for steering borrowers to high-priced loans. Of all the regulatory changes passed today, this seems to be the only one that, if in place a decade ago, would have prevented (or at least dramatically reduced) the crisis.

Read the whole report card here. It's the best brief summery and analysis of the bill that I've seen.

Posted by Jay Hancock at 1:51 PM | Permalink | Comments (5)
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As Hanah Cho notes in the story on 1st Mariner Bank's Ed Hale hawking stock in Dundalk, 1st Mariner still hasn't hit the capital-ratio target that federal regulators have set. The bank has raised $25 million since last fall, including $2 million from Hale and $14 million from the sale of a consumer-loan outfit. Through Hale the company retired trust-preferred shares with a face value of $20 million, which helped the holding company's capital balance. But the bank is still about $10 million short of the regulatory target.

There are no guarantees, but I would guess that the FDIC will leave 1st Mariner alone for now despite the capital deficiency. Hale and bank executives have made strenuous, good-faith efforts to prop the place up. A government forced sale or seizure would impair the value of the investments that all those local folks just put in, which would look bad politically. And there are probably hundreds of banks that 1) haven't worked as hard as 1st Mariner to get right with the FDIC and 2) are in much worse shape financially. In the triage of wounded banks, the FDIC has many more urgent cases to attend to.

That said, Hale needs an economic recovery. He needs the loan losses to stop. He needs to keep making money on mortgage originations and the huge spreads being manufactured by Ben Bernanke. A double-dip recession would not be good for Edwin Hale Sr.

Posted by Jay Hancock at 7:59 AM | Permalink | Comments (5)
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Last year's credit-card reform law requires the disclosure of "affinity card" agreements that colleges and universities hawk to their alumni and sometimes students. Good piece by Ben Protess and Jeannette Neumann at Huffington Post, which finds that some schools offer card companies special access to school events and reap bonuses when cardholders rack up debt.

I have sent the following email to PR people at Johns Hopkins, Maryland Loyola, University of Maryland College Park, University of Maryland Baltimore County and Towson University.

Dear Higher-education spokespeople: Sorry for the mass email. I’m interested in disclosure requirements in last year’s Credit Card Accountability, Responsibility and Disclosure Act. Among other things, the Act amends the Truth-in-Lending laws to require disclosure of contracts between credit-card companies and colleges and/or their alumni associations. Given consumers’ problems with credit cards generally and the additional problem of students and young people piling up too much debt, I’m interested in seeing the contracts signed by your institutions.

The disclosure process as spelled out in the law is a bit roundabout. (See below.) From my read it sounds like the card companies have to submit the information to the Federal Reserve, which then makes it available to Congress and the public. I’m hoping that you can share the contracts with me directly. Googling and clip searches suggest that you or your alumni associations have all signed affinity-card deals with Bank of America. Could you please share the terms of your agreements, as specified in the law below, with me in the next couple of weeks? Thanks for your consideration.

Posted by Jay Hancock at 12:50 PM | Permalink | Comments (8)
Categories: Finance
        

Hotel Chocolate is a British cocoa grower and chocolatier that started as a catalog seller, began adding stores and now wants to further expand. So it needs financing. So it's issuing bonds in return for capital contributions. But there's a difference: The Hotel Chocolate bonds don't pay cash interest. They pay in chocolate. Buy a bond for 4,000 pounds sterling and you'll get a shipment of 13 boxes of chocolate per year, worth 233.35 pounds, the company says.

That's a 5.83 percent return. Tax free! Hotel Chocolate says it will pay taxes due on the interest to Revenue & Customs for basic-rate taxpayers. (The toffs in the higher brackets will have to look after themselves.)

The company says it wants to "let some of our best customers participate in the business and give them the benefits, rather than handing it over to a big bank." Of course, chocolate bonds should also generate great publicity. And they're real bonds. Although they won't trade on a market, the securities have a real prospectus with fine print generated by genuine lawyers and filed with the British version of the SEC. The bonds are callable anytime, but investors have to commit for three years. From the prospectus:

Chocolate Return which has accrued but has not been dispatched will be available, at the Bondholder's request, for dispatch following the redemption of the Chocolate Bond, for one year following the relevant repayment date.

Posted by Jay Hancock at 6:00 AM | Permalink | Comments (0)
Categories: Finance
        

Thanks as usual to Doug Short for the great comparison of four terrible bear markets. If you can't read the key, the gray line is stocks after the 1929 crash; the red is the 1970s plunge; and the green is the collpase of the tech bubble after March 2000. The blue is now: The S&P 500 down 30 percent from its peak is better than the S&P 500 down almost 60 percent from its peak.

Posted by Jay Hancock at 4:59 PM | Permalink | Comments (3)
Categories: Finance
        

Barry Ritholtz had accounts in 100 percent cash as of yesterday. One reason: "Ideally, if we get lucky, we will see a rally over the next week, with deteriorating characteristics — that sets up a better entry for shorting new positions," he said on his blog.

A rally is obviously not what's happening. Nevertheless, I highly doubt he's unhappy to be holding cash.

Posted by Jay Hancock at 3:43 PM | Permalink | Comments (0)
Categories: Finance
        

Good piece in the WSJ looking at people in Congress who "shorted" stocks and bonds during the financial crisis, thus profiting from mayhem. Shorting stocks or bonds is to bet on their decline. Folks in Congress have been blasting Goldman Sachs and hedge funds for making huge piles on short selling. Georgia Sen. Johnny Isakson has said: "We don't need those speculating in the marketplace to take unfair advantage of the values of equities that are owned by Americans all over this country for the sake of making a buck on a short sale," according to the Journal.

But, the Journal said:

On Oct. 8 and 9, 2008—as the Federal Reserve was bailing out American International Group Inc.—an account Sen. Isakson held invested more than $30,000 in ProShares UltraShort 7-10 Year Treasury and UltraShort 20+ Year Treasury, the records show. These are "leveraged short" funds, designed to gain $2 for each $1 drop in the daily value of U.S. Treasury bonds.

Yes, Isakson is a Republican. Yes, Democrats shorted America, too, especially Jonathan Gillibrand, the husband of New York Democratic Sen. Kirsten Gillibrand. Go read the story. It's not short-selling and put options that are the problem. It's letting firms like Goldman use their own capital to make short bets and rigging specially-designed, toxic time bombs for others to short.

Posted by Jay Hancock at 7:58 AM | Permalink | Comments (0)
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Interesting line of defense from fabulous Fabrice Tourre, the Goldman Sachs underling named in the SEC complaint.

Moreover, the securities referenced in the transaction did not underperform the other securities of that ratings class and vintage. All of the securities of that ratings class and vintage performed poorly because the subprime mortgage market suffered a broad collapse.

Sure, Abacus 07 AC-1 was a steaming pile of poisonous junk, and we worked hard to make it that way, Fabrice seems to be saying. But who knew? Everything else was just as toxic!

Barry Ritholtz has an amusing take on just what Goldman was trying to do with Abacus 07. Just like the guys in Mel Brooks' The Producers, Goldman was trying to create the worst possible product, hoping that its failure would earn the firm tons of money. "Its not much of a stretch," Ritholtz says, "to suggest that Abacus 2007 was Goldman Sachs’ “Springtime for Hitler.” "

Posted by Jay Hancock at 12:10 PM | Permalink | Comments (2)
Categories: Finance
        

News organizations getting previews of Obama's Manhattan speech today submit reports suggesting he'll fight hard for a "Volcker rule" in any reform bill. The Volcker rule would ban or sharply limit Wall Street banks using their own capital to gamble on the markets. The rule is one of five bullet points that the New York Times says will be in the speech. The others are roll-up authority for failing firms, pension reforms, derivatives "transparency" and "stronger consumer financial protections."

That last item sounds kind of wishy-washy. Republicans hate the proposed Consumer Financial Protection Agency. It sounds like the speech will not explicitly ask for the agency's creation, which suggests that Obama would be willing to dump the idea if he gets support on other measures. In any event the agency is less important than the Volcker rule, derivatives reform and roll-up power.

Posted by Jay Hancock at 8:21 AM | Permalink | Comments (3)
Categories: Finance
        

A weekend trip to Texas (hotel bill, local purchases) triggered Capital One's fraud alert, so I had to call the company and confirm the purchases were mine. Capital One, in my experience, has VERY sensitive fraud-detection protocols. This is maybe the third or fourth false alarm in three or four years. The woman I spoke with suggested that, in the future, I alert the company about all planned trips, even out of state, and not just overseas travel.

It's a hassle, but I prefer Capital One's false alarms to the customer service from my wife's FIA (M&T Bank private label) card, which took three weeks to discover a couple thousand dollars of fraudulent charges and a bogus address change last year.

Posted by Jay Hancock at 12:06 PM | Permalink | Comments (2)
Categories: Finance
        

Fixing Wall Street is complicated, but a piece at the core of Dodd's bill is very simple: Don't let these jerks ever again make bets with 2 percent capital and 98 percent debt. Leverage was the poison that caused the Great Recession, starting with home "owners" putting zero percent down and extending all through the system. Capital is what cushions everybody against unforeseen reverses. With no equity in the system in 2008, the whole thing collapsed.

Dodd says his bill will prevent another catastrophe by "imposing tough new capital and leverage requirements that make it undesirable to get too big."

Good idea. But it's hard to say at this point what that means. But it sounds like the Financial Stability Oversight Council would make "recommendations" to the Fed for ratcheting up capital requirements as companies get big and complex, "with significant requirements on companies that pose risks to the financial system." I'd rather see statutory or at least permanent regulatory capital requirements than some squishy advisory power, but this is hard to do in a global economy.

Posted by Jay Hancock at 3:13 PM | Permalink | Comments (0)
Categories: Finance
        

Currency-trade billionaire and Open Society Institute benefactor George Soros tells Davos Man that gold is due for a fall. "When interest rates are low we have conditions for asset bubbles to develop, and they are developing at the moment," he told the World Economic Forum in Switzerland, according to The Telegraph. "The ultimate asset bubble is gold."

Gold bubble talk has been with us for a while, and people listen to Soros. The problem is: What will burst the bubble? If the economy stays in the tank and central banks keep the money supply pumped up like Mark McGwire in 1998, gold should stay elevated. If the economy starts growing vigorously and refuels inflation, that could be good for gold, too.

UPDATE: Here is Soros, wearing a Dr. Zhivago hat, talking to Bloomberg in Davos.

Posted by Jay Hancock at 11:46 AM | Permalink | Comments (17)
Categories: Finance
        

Legg Mason boss Mark Fetting advanced an interesting thesis when he spoke to folks at Johns Hopkins' Carey School of Business Carey Business School this month. Places such as Baltimore, with clusters of smart folks geographically apart from the lemmings and group-thinkers in the mega-towns, can deliver superior ideas -- whether in investing, tech innovation, policy or other areas, he says. Email me if you want the whole speech. I can't find an online copy. UPDATE: Here's a link to a video.  

From the speech:

Leadership can not be limited to so-called global centers like New York, London and Tokyo. Because ideas don’t have zip codes or country codes global leadership also comes from a Baltimore, a Pasadena, a Melbourne, or a Sao Paulo. In fact, the traditional bastions of leadership may be a bit tarred or tired or even jaded these days, often blamed for today’s woes rather than being incubators of solutions.

Would we trust policy on financial reform that comes from Wall Street or is there more credibility if it comes from the Economic Opportunity Institute in Seattle? Would we be more open to a political perspective from the National Peoples Congress in China or from the independent International Peace Research Institute in Oslo? Do we look to Tokyo for new ideas or do we turn to the Silicon Valleys and incubators in mid-sized cities like Ann Arbor and Raleigh-Durham-Chapel Hill or the biotech and medical centers in Baltimore and Boston?

 

Continue reading "Baltimore: The Sundance Channel of investing" »

Posted by Jay Hancock at 8:45 AM | Permalink | Comments (3)
Categories: Finance
        

Here's a landmark in modernity. Centuries after Italian bankers started honoring paper drafts issued by faraway merchants, Britain's bank payment overseers have voted to phase out paper checks by 2018, reports Reuters.

"There are many more efficient ways of making payments than by paper in the 21st century, and the time is ripe for the economy as a whole to reap the benefits of its replacement," Paul Smee, the council chief executive, said in a statement.

Of course the use of checks in the United States is declining, too. It's a huge challenge for check-printer Harland-Clarke, which has a plant in Glen Burnie. Harland and Clarke used to be competitors but merged as the demand for checks fell. In the Reuters story, advocates for the elderly complained about abolishing checks, which is a legitimate concern. Many old folks as well as lower-income families don't use ATMs or debit or credit cards.

Harland-Clarke says checks are alive and bouncing:

According to popular lore, Mark Twain once called the reports of his death greatly exaggerated. The same might have been said about radio, back when TV made its appearance. Or about snail mail, when email became inescapable. But radio and the U.S. Postal Service are still very much alive, despite the invention of new electronic ways to communicate. It is no different for the good old-fashioned paper checking account, as new electronic payment options enter the scene. While the use of electronic payments has increased in recent years, the truth is that checks are far from obsolete.

Posted by Jay Hancock at 6:44 AM | Permalink | Comments (11)
Categories: Finance
        

The defense of the behavior of Wall Street bankers leading up to last year's collapse is to say that they didn't see it coming. After all, the likes of Dick Fuld & Co. had billions tied up in stock and options at their companies, so why would it be in their interests to take undue risks? They lost more than anybody in the collapse, so at least the incentive structure was properly aligned. Some profs connected to Harvard Law School give the lie to this idea by analyzing the dough banking execs pulled out of their operations before the music stopped.

The execs got away with so much loot beforehand (including bonuses based on "profits" that proved illusory), the study shows, that they were well rewarded for ruining the shareholders. Even if those shareholders included themselves.

In 2000-07, the top five executives at Bear and Lehman pocketed cash bonuses exceeding $300m and $150m respectively (adjusted to 2009 dollars). Although the financial results on which bonus payments were based were sharply reversed in 2008, pay arrangements allowed executives to keep past bonuses.

Furthermore, executives regularly took large amounts of money off the table by unloading shares and options. Overall, in 2000-08 the top-five teams at Bear and Lehman cashed out close to $2bn in this way: about $1.1bn at Bear and $850m at Lehman. Indeed, the teams sold more shares during the years preceding the firms’ collapse than they held when the music stopped in 2008.

Altogether, equity sales and bonuses over that period provided the top five at the two banks with cash of about $1.4bn and $1bn respectively (an average of almost $250m each). These cash proceeds considerably exceed the value of the executives’ holdings at the beginning of 2000 (which we estimate to be in the order of a respective $800m and $600m).

Posted by Jay Hancock at 11:22 AM | Permalink | Comments (2)
Categories: Finance
        

Good piece at Citibiz List by Doug Schmidt of Chessiecap on Stanley Works' buyout of Black & Decker. He's unhappy about the deal, especially about the millions being reaped by Black & Decker CEO Nolan Archibald as well as Stanley exects: The gist:

It is clearly legal, but it is one of the seedier sides of our markets that the SEC seems powerless to expose or control. Not only will Mr. Archibald receive a bonus worth scores of millions of dollars to make this deal work, the top two Stanley executives are also issuing themselves almost 1.8 million "merger equity grants." There is something for everybody in this deal as long as you work at the top.

As Schmidt points out, it's not just lower-level Black & Decker employees who are getting the shaft. Shareholders haven't done that well, either. Nevertheless,

In addition, Mr. Archibald has enriched himself enormously in his twenty years as CEO, becoming the largest individual Black & Decker shareholder with approximately 2.5 million shares or over 4% of the total ownership. He ranks as the 7th largest institutional shareholder behind funds such as Fidelity and AllianceBernstein. Even before the incentives and pay package provided in the transaction, Mr. Archibald's current stake is worth approximately $150 million. [Emphasis Schmidt's.]

UPDATE: That didn't take long. The time stamp on this post is 12:04. At 12:30 Black & Decker spokesman Roger Young was on the line, noting that Schmidt substantially overstated Archibald's pile by saying it's worth $150 million. Young is right. Archibald controls 2.5 million Black & Decker shares, but more than 2 million shares of this are in the form of options, with strike prices varying from $30 to $92. (An option gives you only the difference between the strike and the market prices.) Today BDK stock is about $62. So the options are worth a lot less than the $60 figure Schmidt used, and some are worthless. Still, they come to many millions. At the same time, it looks like Archibald owns BDK shares worth about $11 million. In any event you don't feel sorry for him.

Posted by Jay Hancock at 12:04 PM | Permalink | Comments (1)
Categories: Finance
        

Note to self: Do not ever again use the MetaBank "Get Cash Now!" ATM in The Sun's lobby. $4.25 in fees to get $100 in cash.

Posted by Jay Hancock at 2:59 PM | Permalink | Comments (2)
Categories: Finance
        

Ed Hale's 1st Mariner Bank has its headquarters in 1st Mariner Tower, but the building itself is owned by Hale's personal real estate company. Now that Corporate Office Properties Trust has bought the tower from the financially distressed Hale, where does that leave him? Hard to know exactly at this point. He has lost the tower, in which he may once have had equity of tens of millions of dollars, and the development potential of nearby land. He has to move out of the penthouse apartment that he claimed when he built the tower. (COPT says it's going to turn the pad into more offices.)

But Hale avoided foreclosure proceedings. The fact that he agreed to sell to COPT suggests that the deal was on terms more favorable than he would have gotten if he had lost the property involuntarily. We don't know the terms at this point. My guess: COPT paid off Hale's $84 million loan from Natixis at some slight discount and let Hale walk away with a minor amount of cash. Hale wasn't talking to my colleague Hanah Cho on Wednesday, but COPT chief Randall Griffin told her that "it's a win-win for everyone involved" and that "Ed gets to strengthen his financial position."

We may find out what that means during a COPT conference call today. In any event it seems doubtful that Hale will raise enough capital from the deal to rescue 1st Mariner, which is in its own difficulties.

UPDATE: Hanah Cho reports on the conference call. You can't tell how much Hale got out of the deal, if anything, because COPT, while it disclosed the gross price, won't break down which money went where. COPT did buy the Natixis note at a discount.

Posted by Jay Hancock at 6:50 AM | Permalink | Comments (8)
Categories: Finance
        

The stock market crash of 1929 got cranked up on Black Thursday, Oct. 24. But it really took off the following Monday. Investors read about the Thursday drop in Friday's papers, and they fretted about it over the weekend. On Monday they bailed. The Dow plunged 13 percent on Oct. 28 and another 12 percent the next day, says Wiki.

On dshort.com's graph below of four bad bear markets, the trauma of October 1929 can be seen at the far left of the gray fever line. As you can see, the pain had only just begun. The blue line represents stocks' performance in this particular crisis. We can be thankful that it has diverged from the pattern of 1929 and the 1930s.

Posted by Jay Hancock at 12:21 PM | Permalink | Comments (0)
Categories: Finance
        

Legg Mason, the money-running firm whose assets under management have fallen from $1 trillion to less than $700 million, billion, thanks to falling stock values and withdrawals from its funds, has entered a new phase. Underperforming public firms such as this are always under risk that an outside investor will decide he has better ideas about how to build shareholder value than the guys in charge.

Nelson Peltz, who has a long record of such agitation, has taken on that role at Legg. He has 4 percent of its stock now. Expect him to accumulate more. Financial types I talk to around town believe there is a decent chance that the firm Chip Mason built will not be independent in a couple years. If this turns out to be the case, Peltz's arrival will be the first step in this process.

But the sale of Legg is far from guaranteed. Legg is recovering on its own -- faster than the economy. Peltz may be satisfied with less-drastic outcomes. Here is part of today's column. Read the whole thing here.

The arrival of Peltz and his 4.3 percent ownership stake increases the uncertainty. Given what Legg has been through, it was hard to imagine that the pressure on Bill Miller and the firm's other money managers to perform could have been any greater. But it just intensified. "His appearance is not good news for management," says Charles M. Elson, a business professor and corporate governance expert at the University of Delaware. "But it may be good news for the shareholders."

Posted by Jay Hancock at 8:21 AM | Permalink | Comments (4)
Categories: Finance
        

The Dow Jones Industrials and the S&P 500 are diverging even more than usual today. As I write the Dow is up 75 points, or .8 percent, while the S&P is up only 2 points, or .2 percent. The difference is accounted for by only four Dow stocks, all of which are having a great day. 3M and Travelers are both up by about $2.50 per share. McDonald's is up $1.65 and IBM is up $1.20. Between them those four stocks account for 60 points in the Dow's increase today.

It's another example of how the Dow is a lousy indicator for the overall market. The S&P is a better gauge of what's going on with big-cap stocks.

Posted by Jay Hancock at 2:00 PM | Permalink | Comments (0)
Categories: Finance
        

Greedy Wall Street was the talking point for the White House on Sunday's talk shows. As America's unemployment rate approaches 10 percent, big financial companies sit comfortably on billions in taxpayer bailouts and bankers rake in what may be record pay, "the bonuses are offensive," David Axelrod told ABC's "This Week," according to the Washington Post.

"Not only do they come for a bailout," said Rahm Emanuel on CNN's State of the Union. "They're now back trying to fight a consumer office and the type of protections that will prevent another type of situation where the economy is taken over the cliff by the actions taken on Wall Street and financial market."

But nobody's really talking about doing anything about the pay. The White House is trying to use outrage over the bonuses as leverage to get finance-reform legislation passed. The unspoken offer: We'll shut up about pay if you guys stop blocking efforts to set up a consumer financial safety agency. Treasury Department pay czar Kenneth Feinberg gets lots of headlines but what he's doing is symbolic rather than substantial -- getting Bank of America's Ken Lewis to give back his 2009 pay, waving a stick at AIG, etc.

Go ahead, Goldman Sachs partners. Sign the contract on that mansion in Bimini. Those bonuses are money in the bank.

Posted by Jay Hancock at 8:44 AM | Permalink | Comments (7)
Categories: Finance
        

Finally Ed Hale has sold 1st Mariner Bank's consumer finance unit, which he badly needed to do to raise cash to bolster the bank's capital ratios.The stock market is unimpressed. 1st Mariner stock is up only a nickel, to $1.27, as I write this. On low volume.

That's because Hale has to come up with at least another $10 million by the middle of next year to avoid having the bank seized by federal regulators. It's not clear how he's going to do that. Earlier this year 1st Mariner officials and analysts who follow the bank were thinking Hale could get $20 million for the consumer unit. But no. To make up the other $10 million he probably has to sell new stock in the bank -- to board members or somebody else. But a price of $1.27 is not predicting big things for today's shareholders. $1.27 says they'll either get the heck diluted out of them when new shares are issued or wiped out when the FDIC steps in. Still, the stock has recovered from pennies territory earlier this year, which bespeaks some hope.

Posted by Jay Hancock at 3:50 PM | Permalink | Comments (2)
Categories: Finance
        

When big disasters happen we want a big solution. It's human nature to want a remedy that is seemingly proportionate to the disease. So after the terrorist attacks of Sept. 11, 2001, we didn't just ban box cutters from airplanes and rest assured that in the future no passengers would ever again allow their plane to be turned into a guided missle. (Even if terrorists overpowered the crew, passengers would gang up and thwart the mission, like the heroes on United Flight 93.) No. Instead we invaded two countries, spent more than $1 trillion, formed the Department of Homeland Security etc.

Little things can make a big difference, as Malcolm Gladwell taught us in The Tipping Point. Often they make a bigger difference than big things. The reaction to last year's financial disaster is big. We're talking about founding a consumer financial safety agency. We're going to regulate hedge funds, require new forms to be filled out, enable the hiring of even more lawyers etc. I wrote in favor last week.

But, reacting to the column, reader Mark Adams had another idea. How about if we just enforce the fraud and perjury statutes already on the books? The subprime mortgage crisis might never have happened, or at least it wouldn't have been as bad, without "liar loans'' -- borrowers and mortgage originators basically defrauding lenders by lying about their incomes and assets. Is it not astonishing that none or few if these lying borrowers are being prosecuted? Here is Mark:

Hi Jay,

The best financial regulation that could be created would be mandatory prosecution and jail time for perjury. None of the financial crises you spoke of could have been accomplished without multiple acts of perjury. In order for mortgage backed securities to go south, it took an entire network of perjurers -- borrowers, loan officers, appraisers, brokers, rating agencies. None of them ever gets prosecuted for perjury, unless a particular prosecutor is trying to leverage them for some other crime. The whole concept of having something called a "liar's loan," which originates with a sworn financial statement and application, is just insane.

When Bill Clinton was in the jackpot for perjury, I was one of the people who thought he should have been prosecuted. I voted for the guy...

Continue reading "Radical finace reform: How about enforcing the law? " »

Posted by Jay Hancock at 8:34 AM | Permalink | Comments (0)
Categories: Finance
        

Barry Ritholtz has the answer to the question that Nobelists, professors, economists and soothsayers have been asking for for 300 years. What drives the stock market?

Such is the result of giving two million primates lots of money and keyboards and a belief they can make a living based on numbers and letters moving around — on a screen, in a futures pit, on an exchange floor, or even under a buttonwood tree.

Posted by Jay Hancock at 11:20 AM | Permalink | Comments (0)
Categories: Finance
        

This week both New York City and Maryland's Prince George's County sold bonds subsidized by the February federal stimulus package. Bond blogger Accrued Interest poses a bond wonk's version of a zen koan: Assuming both paid the same interest yield, which is the better deal? Ie., which municipality is less likely to default?

Accrued Interest chooses PG, and here's partly why:

I like Prince George's better. First, much of the County's employment is based around the Federal government, which is the one part of the economy that is still growing. New York on the other hand is in the eye of the storm in terms of finance lay-offs. But more importantly to me, New York has a more complicated budget.

In reality, neither is likely to actually miss any bond payments. So the risk is a California-style budget battle, where the situation is unresolved for months and months causing spreads on bonds to widen dramatically. Isn't that much more likely to happen in the Big Apple? Prince George's just doesn't have a complicated enough budget to create this kind of problem. New York does. Hell, New York has gone through such budget battles multiple times in the past.

Posted by Jay Hancock at 10:16 AM | Permalink | Comments (2)
Categories: Finance
        

Federal regulators are turning up the heat on First Mariner Bank, which got blasted by the housing collapse and has been unable to rebuild its balance sheet to the extent wanted by regulators despite months of trying. Last week the bank got a cease and desist order from the FDIC and Maryland regulators, which it reported today to the SEC. It's not time to assume a federal takeover of First Mariner. The bank has a couple options that could end up raising the money it needs. Nevertheless, the feds don't seem to have seen any progress and are giving the bank and boss Ed Hale some deadlines.

It has 30 days to present a plan showing it can raise its Tier 1 leverage capital ratio from the 6 percent range to 6.5 percent by April and 7.5 percent by July. (First Mariner says it has already presented such a plan.) Early next year it also has to submit a plan on cutting costs and otherwise improving the bottom line on the income statement.

The key components of the order:

Within 30 days of the end of the calendar year 2009, the Bank shall formulate and submit to the Regional Director of the New York Regional Office of the FDIC (“Regional Director”) and the Commissioner for review and comment a written profit plan and a realistic, comprehensive budget for all categories of income and expense for calendar year 2010. The plan required by this paragraph shall contain formal goals and strategies, be consistent with sound banking practices, reduce discretionary expenses, improve the Bank’s overall earnings and net interest income, and shall contain a description of the operating assumptions that form the basis for major projected income and expense components.

Within 30 days after the effective date of this ORDER, the Bank shall submit a written capital plan to the Regional Director and the Commissioner. The capital plan shall require the Bank, after establishing an Allowance for Loan and Lease Losses, to achieve and maintain, on or before June 30, 2010, its Tier 1 Leverage Capital ratio equal to or greater than 7.50 percent of the Bank’s Average Total Assets and its Total Risk-Based Capital ratio equal to or greater than 11 percent of the Bank’s Total Risk Weighted Assets.

Beginning on March 31, 2010, the Bank shall maintain its Tier 1 Leverage Capital ratio at a level equal to or greater than 6.5 percent and its Total Risk-Based Capital ratio at a level equal to or greater than 10 percent.

Posted by Jay Hancock at 7:05 PM | Permalink | Comments (6)
Categories: Finance
        

Washington threatens to make reforming the financial system more complicated than it needs to be. The Treasury Department's white paper for reform is 89 pages long. The bills are a lot longer. True, there is much to tackle -- derivatives, executive pay, consolidation of regulators. But pols ought to start by focusing on two key factors -- capital ratios and transparency. If they do, much good will follow without needless small print.

Many causes went into last year's meltdown, but what made it deadly and cascading were numerous examples of excess leverage -- far too much borrowed money and far too little solid capital in the vaults. Banks are typically capitalized at a 10 to 1 ratio. Lehman Brothers was something north of 30 to 1. At 30-to-1 ratios it takes only a 4 percent loss on your invested position to wipe out the firm. The solution is simple. Don't allow 30 to 1. And really really don't allow 30 to 1 when the maturity on the debt can be measured in months or weeks, not years.

Second, regulators need to have quick and clear views of what giant financial firms are doing. This means greater disclosure by hedge funds and other private equity, to the extent that they are using significant borrowed money to invest. I would use debt -- leverage -- as a trigger for private-equity regulation both because debt often signals risk and because this approach would leave venture capital alone.

Venture capital is the investment that breeds innovation and creates economic engines such as Google or Microsoft. Venture capital employs little debt. Venture capital must not be punished with new red tape and expenses for the sins of AIG and Lehman. Under Treasury's white paper, it looks like it would be.

Posted by Jay Hancock at 7:00 AM | Permalink | Comments (1)
Categories: Finance
        

The inspector general looking into the SEC's baffling failure to investigate Bernard Madoff finds no corruption -- no strings pulled at high levels to call off the dogs, no bribes, no cronies helping cronies. It does find ridiculous, maddening and repeated failures to respond to extremely specific allegations, as far back as 1992. We knew much of this already, of course. But seeing it in print from the IG is still amazing. If the SEC and its nearly $1 billion budget can't respond to tips such as these, what the #&%!!*$ were they doing down there?

The first complaint, brought to the SEC's attention in 1992, related to allegations that an unregistered investment company was offering "100%" safe investments with high and extremely consistent rates of return over significant periods of time to "special" customers. The SEC actually suspected the investment company was operating a Ponzi scheme...

The second complaint was very specific and different versions were provided to the SEC in May 2000, March 2001 and October 2005. The complaint submitted in 2005 was entitled "The World's Largest Hedge Fund is a Fraud" and detailed approximately 30 red flags indicating that Madoffwas operating a Ponzi scheme, a scenario it described as "highly likely."

In May 2003, the SEC received a third complaint from a respected Hedge Fund Manager identifying numerous concerns about Madoffs strategy and purported returns, questioning whether Madoff was actually trading options in the volume he claimed, noting that Madoffs strategy and purported returns were not duplicable by anyone else, and stating Madoffs strategy had no correlation to the overall equity markets in oyer 10 years. According to an SEC manager, the Hedge Fund Manager's complaint laid out issues that were "indicia of a Ponzi scheme."

Continue reading "The SEC on Madoff: Corrupt? No. Incompetent? Yeah" »

Posted by Jay Hancock at 4:26 PM | Permalink | Comments (4)
Categories: Finance
        

Here in the newspaper business we're painfully familiar with comments pertaining to the editing process making it into final print. The Boston Globe is still famous for publishing a jokey headline that was intended only as a temporary placeholder on an editorial about Jimmy Carter: "MORE MUSH FROM THE WIMP." When I was an overworked editor at another paper years ago I once published a reporter's story without removing my notes from the copy: "WHAT DOES THIS MEAN?" and "??????" etc.

Never seen it with financial reports, however, until now. One of the accountants at NZ Farming Systems Uruguay apparently gave a helpful bit of advice to a colleague so s/he could make the books balance. In the table reconciling the income and cash statements, somebody wrote on the depreciation line: "fudge this to equal depn in FA note 11S 2391."

Oops.

NZ Farming Uruguay replied to regulators:

While the words in the comment were not well chosen, they were merely a prompt for the author of the Financial Statements to reconfirm the rounding difference expressed in an early draft of the Financial Statements where there was a minor rounding discrepancy.

HT Barry Ritholtz.

Posted by Jay Hancock at 9:12 AM | Permalink | Comments (0)
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Almost every Friday is failure Friday for the FDIC. This week it's Towson's Bradford Bank. The usual reassurances apply: deposits are safe up to the insured limits etc. etc. Here is the FDIC release. Now all we need is the haiku from Soylent Green is People.

Bradford Bank, Baltimore, Maryland, was closed today by the Office of Thrift Supervision, which appointed the Federal Deposit Insurance Corporation (FDIC) as receiver. To protect the depositors, the FDIC entered into a purchase and assumption agreement with Manufacturers and Traders Trust Company (M&T), Buffalo, New York, to assume all of the deposits of Bradford Bank.

The nine branches of Bradford Bank will reopen on Saturday as branches of M&T. Depositors of Bradford Bank will automatically become depositors of M&T. Depositors will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers should continue to use their existing branches until M&T can fully integrate the deposit records of Bradford Bank.

This evening and over the weekend, depositors of Bradford Bank can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.

UPDATE: As promised. SGP, who has become the poet laureate of bank failures, writes haiku for every institution seized by the federales.

Summer heat scorches
Three...four hundred...one thousand???
Bradford bank now toast.
by Soylent Green is People

Continue reading "Bradford bank fails; assets sold to M&T" »

Posted by Jay Hancock at 6:24 PM | Permalink | Comments (3)
Categories: Finance
        

The Securities and Exchange Commission has reached a $33 million settlement with Bank of America for allegedly misleading its shareholders about bonuses paid to Merrill Lynch employees late last year. Bank of America and CEO Ken Lewis asked shareholders to approve the purchase of Merrill as the financial markets caved, giving cooing reassurances about bonuses. In fact it was a bonus jackpot.

So: The government that pressured Lewis to go through with the Merrill acquisition is now penalizing Bank of America for allegedly hiding information that might have caused shareholders to reject the deal. Damned if BAC does/doesn't. Such is the legal confusion when the law is abused as it was last fall. And who has to pay the $33 million? Bank of America shareholders -- the ones who were suppoesdly the victims.

WASHINGTON (AP) — Bank of America has agreed to pay a $33 million penalty to settle government charges that it misled investors about Merrill Lynch's plans to pay bonuses to its employees.

In seeking approval to buy Merrill, Bank of America told its shareholders that Merrill agreed not to pay year-end bonuses without Bank of America's consent. But the Securities and Exchange Commission says Bank of America had authorized New York-based Merrill to pay $5.8 billion in bonuses.

Posted by Jay Hancock at 1:59 PM | Permalink | Comments (1)
Categories: Finance
        

Yet again we're talking about computerized trading, in this case "high-frequency trading" as described in various mainstream and trade media outlets. This sort of conversation has been going on since the 1980s, when program trading helped cause the 1987 stock market crash.

Here's the description from the NYT:

Powerful computers, some housed right next to the machines that drive marketplaces like the New York Stock Exchange, enable high-frequency traders to transmit millions of orders at lightning speed and, their detractors contend, reap billions at everyone else’s expense... Powerful algorithms — “algos,” in industry parlance — execute millions of orders a second and scan dozens of public and private marketplaces simultaneously. They can spot trends before other investors can blink, changing orders and strategies within milliseconds.

If trading firms are really "front running" their clients -- buying securities for which clients trades have been ordered but not executed, knowing that the price will rise when the client order is put in -- it's wrong and probably illegal. Even if they aren't, it's hard to believe rapid trading is economically efficient or fair. Short-term thinking is at the heart of too much of what's wrong with Wall Street and society. Fast trading is destabilizing and says nothing about the long-term returns of whatever is being bought and sold in milliseconds.

Tyler Cowen disagrees:

I'm not a believer in the strong versions of efficient markets hypotheses, so I do admit that high-frequency trading, like just about every other trading strategy, can bring short-run "whiplash" effects on market prices. But if you don't like it, you can trade yourself at much lower frequencies, which is probably what you should be doing anyway. At the same time high-frequency trading smooths out or shortens many other cases of price whiplash. High-frequency trading brings more liquidity into the market. Call it "low quality liquidity" if you wish, but it still looks like net liquidity to me.

Good for Andy Brooks at T. Rowe Price for voicing concerns about HFT in the NYT article:

“You want to encourage innovation, and you want to reward companies that have invested in technology and ideas that make the markets more efficient,” said Andrew M. Brooks, head of United States equity trading at T. Rowe Price, a mutual fund and investment company that often competes with and uses high-frequency techniques. “But we’re moving toward a two-tiered marketplace of the high-frequency arbitrage guys, and everyone else. People want to know they have a legitimate shot at getting a fair deal. Otherwise, the markets lose their integrity.”

Posted by Jay Hancock at 10:45 AM | Permalink | Comments (1)
Categories: Finance