Monday, July 30, 2012

An Ill Timed CEO Change at Supervalu

Supervalu has made value destroying customer and corporate acquisitions throughout its history, climaxing in those of Wetterau and Albertsons.  The 2009 decision to bring in a CEO who had served as head of Wal-Mart's North American operations for five years seemed a timely and appropriate choice.

For some reason, the board consented to make a monumentally ill advised announcement that all strategic options were being considered, including a sale of the company.  Nothing like inspiring confidence in what remains of the independent retailer customer base, your managers, employees and shoppers.

So, today's announcement that board member Wayne Sales, of Canadian Tire and Kmart, is taking over as CEO further adds to the strategic confusion.  Sales himself is reported to have said that the company's biggest enemy is "time."  Right.  If so, why waste more time and energy with a management shuffle?

Nothing in the new CEO's memo to employees sounds new.  I am so tired hearing about the expansion of Sav-A-Lot as being the linchpin of revival and growth.  I first came across Sav-A-Lot through meeting its founder Bill Moran in the early nineties when Wetterau had acquired his company.  Sav-A-Lot is a real estate driven strategy which needs an entirely different distribution model from Supervalu's core distribution centers.

The debt load, an ossified culture, and a history of not investing in integration of disparate acquired operations all conspire to make buying inefficient at Supervalu relative to its corporate scale. Just marking down prices in a race to the bottom isn't the answer by itself. If former CEO Herkert's pace of change was not fast enough, the board should have worked with him to make things go faster. Any barriers in terms of people or attitudes should have been ruthlessly pruned.

Given that the board, in different forms, was present during secular value destruction, it's not comforting to see this announcement when time and degrees of strategic freedom are not on the company's side.  Analysts, who are more interested in positioning their firms to participate in asset sales or sub-advisory roles, have had nothing illuminating to say about the announcement today.

This company, when I first came across it, was a 20% grower, with a high return on capital employed, a reasonable dividend, and an A1/P1 commercial paper rating.  It is a real shame that the board, through a long period of acquiescence and inattention, has let the company come to its current state.

Friday, July 27, 2012

A Moth Eaten Groupon and Other Issues

In June 2011, we were totally flummoxed by the market's enthusiasm for Groupon, Open Table and other similar businesses. We ended that post with the observation,
"It just feels like this euphoria for these types of businesses has to end badly.
Then, in October 2011, when Wall Street's marketing tanks rolled out, we wrote,
"With the powerhouse banks behind the deal, a deal will get done. Lucky flippers will have a nice payday. The Groupon model is not healthy for most restaurant businesses, but if this industry manages to get a footing, then it will take its profits out of the hides of their small business customers. In the meantime, I can't wait to see which mutual funds wind up listing Groupon as 2% of their fund assets. An absurd valuation is now merely ridiculous. Caveat emptor! "

I had put Groupon out of my consciousness until I received a received a communication from Uber-tech Guru Om Malik, reflecting on private versus public valuations of the "new" social media companies.  This chart is from Om. 

With the exceptions of some flipppers getting out early without their usual vigorish, it has been a Davos-quality ski slope downward.  It really drove home something I've always known, reinforced by some of the savviest mentors on the Street: "There's nothing new on Wall Street."  Or, put another way, "This time it's different."  It never is.

Even long-running Amazon, which had a few early naysayer credit analysts on Wall Street, reported better than expected revenue gains, but puny profits.  Net income per share of a penny compared with $0.41 per share last year, but its services business were said to be roaring, and it was going to put fulfillment centers on every corner.  It all sounds good, but how can an investor make a silk purse out of a sow's ear?  A penny isn't forty-one cents, end of story. 

Exxon Mobil's quarter was characterized as "challenging" by the financial press, and it certainly wasn't glorious by any means.  Their oil and gas production slipped, and their realizations were down.  However, they continued to invest in their core business which has very high returns on capital.  Their down stream refinery and chemical operations showed strong results according the New York Times, "Refinery profits increased by 14 percent, while net income for the chemical manufacturing business improved by 21 percent. Both units benefited from the lower gas and oil prices, the vital feedstocks for refining and chemical production"   Good, fundamental results in a difficult macroeconomic environment.

Now, Royal Dutch Shell, owned by some value investors, reported a pretty dismal quarter with some real warning flags.

With both these companies, a good analyst or investor can pencil their way through the extensive disclosures and come to a reasonably informed decision about their company's prospects.  With the "new" social media companies, it's not a wing and a prayer, just a prayer that there's an honest man or woman somewhere in the executive suite. 

Finally, a good former institutional customer sponsors a successful international equity mutual fund, and looking over their holdings, I noticed Alcatel-Lucent, S.A., owned in the Sponsored ADR form.  I haven't looked at this company since Carly Fiorina was working her magic at Lucent in 1999.  You don't have to be an electrical engineer to understand these businesses, although much of the foggy commentary about these companies, like Juniper Networks, is replete with capitalized acronyms.  I read the press release and was a bit distraught.  I then went to the company's website and listened to the conference call.  Wow!  This was truly a dismal performance, and the cash flows in the quarter were awful, especially given the reduced outlook for 2012, a large debt load, upcoming rollovers, and loss of revenues as the company leaves behind "legacy" technology and moves to "new platforms."  I went back to my fund's annual report, and they've taken a forty percent hit from last December to date.  Value investors may not get it right very time, but they probably can demonstrate their thesis with some numbers.  I may have to call my fund and find out.

As the Dow closes about 13,000, I just don't feel the buzz, but I'm happy not to be losing my shirt on "new" social media.


Wednesday, July 25, 2012

The Mortgage Lending Problem in A Nutshell

The New York Times had a quirky story giving notoriety to long-time bank analyst Richard X. Bove.  We see him getting upset about not getting good customer service from his bank, Wells Fargo.  I think that's like expecting a Big Tofu burger from McDonalds.  No big surprise. 

The story had this innocuous sidebar:
"He (Bove)  decided to write Tuesday’s note when Wells Fargo rejected his application to refinance his mortgage, even though he had already withdrawn the application."

Think about that for a minute.  Bove started on Wall Street in 1965, and has been a bank analyst and research director at firms like Shearson and Wertheim, and now Rochdale Securities.  He can't get a refi?

All of the talk about record low mortgage rates is just that, talk.  On the refinancing side, we've probably had burnout already.  Banks are very reluctant to lend to formerly conventional customers.  Fees are being added to formerly free services, and existing fee levels are being raised.  Lower provisioning for loan losses on the existing portfolio, expense reductions, and share buybacks can help to generate decent earnings without taking risks associated with mundane tasks like lending.

Housing is said to be recovering.  There is still a very large shadow inventory of existing homes which have not yet come on to the market, but there will be very few potential buyers who can qualify to absorb them given the disincentive for banks to change their underwriting stance.

This is a by-product of the distortions arising from monetary policy which has lost its rationale and focus. 

Tuesday, July 24, 2012

Exchange Traded Funds: Caveat Emptor

Some 1,476 exchange traded funds (ETFs) hold $1.2 trillion in assets, and this asset category has been among the fastest growing in the investment industry.  It's a category where the three leading ETF sponsors--BlackRock, Vanguard, and State Street--control about seventy-five percent of the assets in the funds.  The top ten ETFs comprise about one-third of the category's assets, suggesting an average of $40 billion per fund.

On the other end, one half of the funds have less than $50 million in assets, which is not a strong enough asset base to provide the infrastructure and analytical support to provide a sustained, superior value to the offerings of the Big Three.  It doesn't mean that there isn't a gem in here somewhere, but it's not very likely.  Most of these funds need to go away, and they probably will as the industry shakes out.

The emerging segment of active ETFs comprise a tiny sliver (0.6%) of assets under management, and it is this segment which really should be the playground for hedge funds and not for the individual investor facing informational disadvantages and mean-reverting market returns.

The Vanguard Standard and Poor's 500 Index ETF has about $102 billion in net assets at the end of 2011.  Its expense ratio is a pretty compelling five basis points! This product offering is the fulfillment of John's Bogle's gospel preached since he founded Vanguard.  The only thing an investor has to watch with this fund is the tracking error and some other simple statistics. Everything runs according to the manual, and there is a decent history over which the investor can monitor its performance.

Entering the land of active ETFs, there are plenty of mirages and land mines for the individual investor.  Pimco's actively managed Total Return Bond Fund (PTTRX) with assets of some $264 billion carries an expense ratio of 46 basis points.  Pimco's actively managed Total Return ETF (BOND) launched on March 1, and its assets are already at $2 billion from a standing start. An investor might reasonably assume that BOND would track PTTRX somewhat closely and that the portfolio composition and performance of the two funds should be close. 

The opposite seems to be true.  Since BOND is relatively tiny, Bill Gross who manages both funds, can be very nimble with the ETF, whereas with the Total Return Fund, he "is the market." As of July 16h, the Wall Street Journal reports that BOND returned 7.7% compared to an otherwise fine 4.2% for the open ended mutual fund PTTRX.  The correlation between the two funds is relatively low. 

The ETF is not permitted by the SEC to use derivatives, which are a big feature of PTTRX.  How should the investor compare the relative risk of the two funds?  In principle, PTTRX might be more or less risky, but the only picture the investor gets is a snapshot market value of all the swap, forwards, and futures positions as of the balance sheet date.  The out performance of the ETF could also reverse itself, since the portfolio compositions are meaningfully different enough. 

Also, the ETF reports its positions monthly, so this will lead to all manner of retail research advocating trading ETFs on some momentum-based strategies.  It will mean whipsawing the retail investor and raising her costs.  For hedge funds and portfolio lending, the ETF segment will provide some nice profit and arbitrage opportunities.

There is so much academic research and industry experience about the perverse, self-defeating behavior of individual investors in stocks and mutual funds.  With these new, more nuanced products, they need to take a cautious and jaundiced view. 

Sunday, July 22, 2012

Neil Barofsky Speaks Out

When Neal Barofsky, a Democrat named by the Obama White House as Special Inspector General for the TARP Program resigned his position in March 2011, Bloomberg News describes the White House as being "privately relieved."  The New York Times lauds his book as a "must-read," but I may pass it up, since I have followed his official and unofficial body of work as the Special Inspector General.

When Barofsky seeks counsel from other special inspectors general about how to conduct himself in the role, he describes the following advice,
“The agency should perceive you as a constructive but independent partner, helping to make things better for the agency, so everyone is better off.” He also learned, he  says, that success as an inspector general meant that investigations come second. Don’t second-guess the Treasury. Instead, “focus on process.”
There we have it from his handlers, focusing on process ensures that the agency and its constituents (the big banks) are better off and nothing of substance changes. 

TARP and HAMP, programs of the Obama White House and its Treasury Department, were abject failures which threw billions at policies that benefited precious few homeowners. First and foremost, these programs were hare-brained in their design and therefore doomed to fail from the start. We've written before about the unregulated mortgage servicing industry and it being a stone wall to any rational, large scale mortgage resolution effort.  Commentators like Joe Stiglitz described the public-private partnership idea for purchasing troubled mortgage assets as "ersatz capitalism." To let TARP and HAMP go forward without a legal plan and funding to bring the mortgage servicers into line with the government's objective was simply dim witted or cynical.

Barofsky to his credit was the most visible public official taking the Treasury to task for its conflicts of interest in applying the programs and for its abandoning Main Street for Wall Street. It was unfortunate that no Senate Democrats stepped up to give him cover.

The title of Barofsky's book is, "Bailout."  Which one?  We should not forget Lehman Brothers and AIG.  Anton Valukas' report on the biggest bankruptcy in history deserves to be read also. From Secretary Paulson's gift to the big banks through TARP and HAMP to current proposals to reward investment banks for bailing out California homeowners with public money, economic policy in the Obama White House, driven by its big bank-friendly Treasury Department has been one unending bailout.

Mr. Barofsky's passion about these issues is admirable, and policy makers on both sides of the aisle should try to come to a consensus about making some badly needed changes.  Unfortunately, this won't happen in an election year, and Mr. Barofsky is on the outside now. This probably makes it easier to hijack and distort his message for political ends.

Tuesday, July 17, 2012

CalPERS Investments Return 1 Percent.

CalPERS announced a one percent  return on investments for the twelve months ended June 30, 2012.  Fixed income and real estate investments led the way with good performance, with the rest of the asset classes showing dismal performance. Maybe CalPERS should stop focusing on "non-core" activities like hectoring public companies about their governance, political speech and executive compensation and look at their own operation of a $233 billion fund

The Wall Street Journal points out this could be bad news for California cities, "Calpers' 1% return for the fiscal year ended June 30 could force the state of California and its cities to contribute more to the $233 billion retirement system to make up for the investment shortfall."

Which gets us back to an earlier post about Californis municipal bankruptcies.  Wall Street municipal bond advisers sniffed about reading too much into Stockton's recent announcements, suggesting that problem cities would account for 1 percent of total municipal issuance.  No need to get alarmed, three problem cities do not make a trend.

The problem is that municipal bond issuers and buyers live in a world about as real as that of the Truman Show. None of the pension liabilities of municipalities are visible to a local bond investor.  Since these obligations are generally pushed up to the state plan, everybody can make believe skies are sunny in the land of Oz. 

Into the tulip-filled hillside steps, of all entities, Moody's Investor Services which reckons that U.S. states and localities have $2 trillion in unfunded pension liabilities.  The overall municipal bond market is $3.7 trillion.  Here's something that troubles me. If virtually all of these plans have contribution and benefit levels which cannot be reduced per legislative mandate, and the funds are backed by the full taxing powers of the states, then aren't these in fact riskless investments like U.S. Treasuries?  So, should we use a discount rate of 2.56%, say for the 30 year Treasury bond?  So Moody's liability estimate might be much higher. This is an aside, but a serious one.

Since Moody's can't afford to become a pariah in the credit ratings market, the ultimate effect of these announcements will be softened.  However, kudos to Moody's for taking this stand and for putting these issues squarely on the table.

Logically, Moody's notes the following potential effects of their new system,
"...because some liabilities in state pension plans that also cover localities will be allocated to the specific local governments. Currently, some of those liabilities might not be broken out by the individual city, town or school that is part of a state plan. The liabilities of all public pension funds, for both states and localities, could leap, as Moody's will also consider a revision of the rate used to calculate them"
Local voters should vote not just on current salaries and expenditures for municipal workers, but on the true employment costs which are dominated by health care and pension benefits, none of which are visible in the present system. 

Then, when municipal bond investors look at state  bond issues, they too can have a truer picture of the state's future obligations. States  need to have their balance sheets look like real statements of financial condition, not the current fantasy fostered by the GASB. 

So while government unions press corporations about their political speech, perhaps they should allow the antiseptic of sunshine to enter into their world of public pension liabilities.  Transparency and accountability are always for the "other guy," though.

Monday, July 16, 2012

Two Senators Torpedo Law of the Sea Treaty

Republican Senators Bob Portman (R-Ohio) and Kelly Ayotte (R-NH) torpedoed any chances of the Law of the Sea Treaty being ratified this year by sending a rambling and somewhat incoherent letter to Senate Majority Leader Harry Reid.

The Treaty is criticized for being long, cited as being 320 articles and 200 pages long.  The treaty's principles and articles are intended to cover all economic uses of the oceans beyond national jurisdiction: a pretty tall order. The Dodd-Frank bill was over 3,200 pages long, and it didn't even contain the actual rules and regulations, whereas the LOS Treaty describes the regulatory framework of the International Seabed Authority.  By comparison then, the Law of the Sea Treaty is like a Cliff's Notes for the oceans! 

The Senators want assurances that the treaty will be "enforced impartially and in a manner consistent with U.S. interests."  This is an example of incoherence.. The requirement that all disputes be resolved in a manner consistent with U.S. interests wouldn't be acceptable even if the treaty were signed only by the U.S. and the six biggest naval powers in the world.  Provisions of the dispute resolution process have been negotiated by multiple Administrations over decades. Like any treaty, they represent trade-offs our representatives felt acceptable because we gained what we wanted in other areas, such as international shipping and access to deep ocean resources for U.S. companies.

The authors make a big deal out of this Article: "Article 207 decrees that “[s]tates shall adopt laws and regulations to prevent, reduce and control pollution of the marine environment from land-based sources … taking into account internationally agreed rules.”

Realistically, I'm not sure that there are any internationally agreed rules governing ocean pollution from land based sources, so Article 207 could be disputed longer than patent claims between Microsoft and Apple. Also, the U.S. is active in UNEP and GESAMP (Group of Experts on the Scientific Aspects of Marine Pollution).  Both these bodies would have something to say in the actual implementation of Article 207, if and when it came to that point. A fear about this article is not reasonable in the prevailing institutional practice.

To take the other side of this argument,decades long overfishing of deep ocean stocks by former Taiwanese and Korean industrial trawlers and the subsequent pollution  from processing-at-sea was something that all nations, including the U.S, wanted stopped.  Without enforceable treaties, this economic abuse couldn't be addressed at all.

The two Senators make an unfounded claim that usual and customary practice in international law and bilateral negotiations are sufficient to maintain peace and defend our national interests.  The evolution of usual and customary practice relating to the 200 mile limit was made possible by the same multinational, consultative approach with they now decry. In fact, I believe that Chile and Peru were first to claim sovereignty over that limit, and U.S. declarations followed theirs as international law evolved.   What happens when Exclusive Economic Zones overlap?  If resolutions are always bilateral, what if the dispute, let's say, is between a nation like China and a nation like Vietnam?  Isn't it worthwhile to have an internationally accepted framework which governs the delineation of zones and disputes? 

We are headed to more and more of these situations. as pictured below:

Xinhua News Agency (China)

The picture, released to the Associated Press, shows a Japanese coast guard vessel (left) encountering a Chinese patrol boat near disputed islands in the East China Sea.  

I'm not saying by any means that having a treaty in place would create an oceanic Eden.  The current patchwork quilt of customary practice, bilateral treaties, military pacts, and aggressive assertions by Russia and China is inherently unstable. Our military leaders recognize this. 

In fact, as the Journal writes,
"One of the enduring mysteries of the treaty is how it has failed to even come up for a ratification vote given the breadth of support it enjoys from widely disparate groups. Former secretaries of State, both Republicans and Democrats, top civilian and uniformed Pentagon officials, the U.S. Chamber of Commerce, environmentalists, and former presidents George W. Bush and Bill Clinton have all been vocal supporters"
It's always better to throw some papers around in an international court disputing a boundary than it is to be firing rounds from a naval vessel in a far off sea.

Sunday, July 15, 2012

Goldman Walks Over a Client

Reading the Sunday New York Times is usually a pleasant, innocuous experience, since I generally skip the news and editorials, and go straight to Sports, Business and the Book Review. Reporter Loren Feldman has written a story about how two "two computer speech revolutionaries," Dr. Jim and Dr. Janet Baker hired Goldman Sachs to sell their company, Dragon Systems and its path breaking speech recognition technology to one of the many suitors who were peppering the couple with offers. 

Goldman came to the conclusion that Belgium's Lernout and Hauspie, a publicly traded company, was the best fit and offered $580 million.  I had to search the memory banks for this one, because couldn't find a Wall Street Journal story by a  reporter who actually went to one of Lernout's foreign sales offices; the reporter found a brass plate downstairs, and upstairs a receptionist sitting in an empty office filled with cardboard boxes.  At this point in time, the stock was an institutional darling and rated "strong buy" by a number of brokerage companies. 

At the same time, several financial analysts, not on the Wall Street buy or sell sides, were openly contemptuous of Lernout's accounting practices.  Most prominent among these was David Rocker, of Rocker Partners, which became Copper River Management. Rocker was short the stock and not shy talking about it. I have been a long time reader and admirer of Howard Schilit and his early book, "Financial Shenanigans."  Here is a chapter from one of Schilit's publications in which he talks about Lernout's accounting. Wall Street's sell side remained blindly committed to "the story."

In November 2000, the auditor for Lernout and Hauspie withdrew their clean opinion on the company's 1998 and 1999 financials, which it had previously blessed.  This, however, came about only after the company itself admitted prior accounting errors.  Meanwhile, based on the Journal reporter's story, Korean companies who had been said to be doing significant business with Lernout stated that they had never deakt with the company.

Lernout's offer for Dragon Systems was originally a half cash and half stock offer, which the Times reports was changed to an all stock offer.  Apparently, Goldman raised no questions about Lernout as a qualified buyer.  This came despite the fact that another arm of Goldman had refused in invest in Lernout after doing its own due diligence.  Goldman did not question the risks and inferiority of an all stock offer for a controversial company.  Bottom line, the Bakers got nothing, and their technology was trasferred in bankruptcy to Nuance Communications and subsequently transferred again. The Bakers and technology experts suggest that their inventions are part of Apple's Siri personal assistant app for their devices.

In 2010, the founders of Lernout and Hauspie were finally convicted in a Ghent court to five years in prison, of which they actually served little time. The Bakers are suing Goldman for about $1 billion.  The objections by Goldman attorneys and spokespeople reported in the Times are arrogant and infuriating.  The excuses are laughable.

Again, for this industry, we have FINRA, the SEC, and all manner of Federal agencies, and we can't get simple justice and fairness for entrepreneurs who were left high and dry by their bankers.  Oh yes, but we now have Dodd Frank.  I'll bet that's comforting to the Bakers.

Saturday, July 14, 2012

California Subprime Mortgages: A Bad Dream Won't Go Away

The state that spawned the California Gold Rush and "fool's gold," was the center of the subprime mortgage industry,  Although there was a spike in subprime mortgage issuance beginning in 2004, academic researchers have found that some of the worst mortgage products (option ARMs, 80/20 mortgages, and subprime HELOCs) and the absence of documented underwriting standards combined to account for high volumes of toxic products in 2006. 

In the second quarter of 2006, 8 of the 10 top subprime mortgage originators were located in California.  The top 10 orginators issued a staggering $110 billion of mortgages in the quarter, of which 82% came from the California issuers.  Ironically, Wells Fargo Mortgage was the biggest issuer in Q2 2006, with $27 billion, followed by New Century Financial with $14 billion in the quarter; Countrywide was number four with $11 billion in the quarter.  These data are contained in Bankruptcy Examiner Michael Missal's report, which we have cited before as required reading for any serious student of the mortgage crisis. 

New Century Financial writes in its disclosures, that the company is focused on "lending to individuals whose borrowing needs are generally not fulfilled by traditional lending institutions because they do not satisfy the credit, documentation, or other underwriting standards prescribed by conventional mortgage lenders and loan buyers." 

Separately, Professors Mian and Sufi of the University of Chicago Booth School of Business write, "Homeowners with low credit scores in areas with high house price growth from 2002-2006 have seen mortgage default rates climb from almost 4% to almost 15% from 2006-2008." 

In June of 2006, Missal cites an internal finance department email at New Century Financial stating that their weighted average loan to value ratio in the borrower portfolio (combining mortgage and home equity lines of credit) had reached 87%!  Missal notes that there were three CPA's on the Audit Committee, including the Board Chair. CFO Cathy Dodge was a CPA. New Century had built it's model on a foundation of "originate and distribute."  By 2006, loan quality had clearly been falling apart since 2004, and growing "kickbacks" of bad loans from securitized pools by investors threatened the ability to raise cash by unloading the toxic assets to investors, declaring a gain on sale and pumping up earnings.  All of the normal processes and reporting were in place, and yet neither internal audit, the audit committee, nor the external auditor raised any red flags. Everything was fine until the company was near death: then nobody knew what hit them.

Were the borrowers all innocent victims?  I hardly think so.  Most of the mortgages originated by New Century were stated income loans, in other words the borrower gave an annual income number with no verification and the company's independent broker originators did no due diligence.  In addition, this kind of market with this kind of lending attracts the professional fraudsters, who plague credit card companies, rent-to-own companies and direct marketers like Fingerhut. It is a Faustian bargain, because why should the homeowner turn down free money, and why should brokers turn down cash commissions, and why should the management turn down bonuses for reported EPS which is economically fraudulent? 

Professors Mian, Sufi and Trebbi produced a startling and original scholarly research paper in 2009, "The Political Economy of the Mortgage Crisis."    The 2008 "American Homeowner Relief and Foreclosure Prevention Act" passed under President Bush had a "Hope for Homeowners" program which gave strapped mortgagees access to $300 billion in federal agency insurance.  The authors show that while defaults rose in both Democratic and Republican districts, support for the Act by Democrats were "near unanimous" whatever the default rates were in their districts, where Republicans tended to vote in favor where they represented high default rate districts. Mortgage defaults draw lots of bipartisan legislative sympathy, as opposed to credit card debt or student loans, at least historically.  There are a number of interesting trends in their data which are would take too long to discuss in a post.

Expect the full court press to stay on the Mortgage Resolution Partners California bailout plan for the bad actor homeowners in California.  If the executives at the subprime lenders got a free ride, why not them?  And now we have the massively incompetent (or worse)  managers of San Bernardino adding their two cents,
"We are intrigued," said Gregory Devereaux, chief executive of San Bernardino County, which is east of Los Angeles and has one of the highest unemployment rates in the state. "Our economy in this county can't be turned around until a large proportion of the mortgage crisis has been addressed."

No, Greg, the municapal finance crisis can't be turned around until San Bernardino gets control over its employee salaries and benefits and scales services at a level consistent with an economically sensitive tax base.

Be afraid, as this giveaway is not going away. 

Thursday, July 12, 2012

Barclays Downgrades HP

HP closed at $19.35, close to its 52 week low of $19.02.  As we mentioned a while back, the chart looked awful.  Every newspaper reader knows the tech sector is challenged for top line growth.  The market also appears to be entering the summer malaise. 

Given how poor HP's technobabble guidance has been, analysts are realizing that there's absolutely no reward for being heroic about the upcoming third quarter earnings due out August 22nd.  So today, Barclay's analyst Ben Reitzes cut his rating on HPQ to "Equal Weight," whatever that means.  It doesn't mean, "buy," or "accumulate."

Reitzes' 2012 EPS estimate is cut from $4.04 to $3.99, a reduction of 1.2%.  So, since the market appears to want to price HP at 5 times forward earnings, it would suggest a $20 price, which is roughly where the stock is today.  The analysts is derisking his position.

His main reason for the reduction in revenue and earnings is pressure on the printing business.  That's all well and good, a reasonable conclusion which reflects the current realities with retailers, channel pricing, and promotions to fight off ink refills.The fear factor is a interesting tactic. Why is printing under pressure?

"Reitzes also notes that as younger workers join the workforce, they may be doing less printing (and more with mobile apps)."(Street Insider)

This is a demographic shift which is surely not taking place intra-quarter!   What measure would the analyst have for this shift?  I sympathize with him: he wants to cut his number to get closer to consensus and he needs a cover.  It sounds good, forward looking, and it goes with all the ads for people staring at their smart phones. 

This demonstrates again the limited value of Wall Street research and the lack of any real clarity from HP management in where their business is going and what will drive it.  Hopefully, HP has set expectations so low, with so much slop in their guidance, that there won't be an earnings warning between now and August 22nd.

Pershing Square and Regulatory Capture

I had to read the WSJ Pershing Square's taking an "activist" stake in Procter twice, and I'm still confused.  Here's the relevant passage, "Mr. Ackman's move became known via the Federal Trade Commission, which gave Mr. Ackman's hedge fund antitrust clearance to proceed with the investment. Moves by activists are usually made known by filings to the Securities and Exchange Commission. Buying enough stock to require a quick SEC filing—5%—would cost about $8.8 billion." 

So, in order to save Pershing Square time and money, the fund shops for clearance at the FTC?  Isn't this the kind of regulatory capture that we moaned about during the financial crisis?  Is Pershing Square planning on going into the global personal care business?  If not, what's the relevance of an antitrust clearance?  Shouldn't the FTC have said, "Sorry, go and get your blessing from my friends at the SEC?"  Also, with the FTC's blessing, it's not even clear to the Journal how much of a stake has been blessed.  Nice transparency for the equity market.

Incidentally, I really liked the quote from the Procter and Gamble CFO, "We welcome listening and learning from any investor."  Well said.  Let the fun begin.

Reality Starts To Hit California Cities: Feds To The Rescue

After the City of Vallejo, CA filed for bankruptcy protection in 2008, it was deemed a special case.  Presently, it is said to be in recovery, although given the state of municipal financial accounting, it's hard to say what this means. 

Fast forward to 2012, and the larger city of Stockton, CA files for bankruptcy protection. Surprisingly, Wall Street friends who are experts in this field write this off too.Now comes the report of the City of San Bernardino preparing for a bankruptcy filing.  Here is a quote from a Wall Street money manager's blog:
The financial failure of Stockton, California, is a sad tale of inflated expectations and poor decision making, but it’s not a harbinger of things to come in the US municipal bond market. Stockton is a unique case..."

The City's report, prepared by a new, Interim City Manager should raise at least as much ire as the continuing dust up about the LIBOR fixing issue.

The City of San Bernardino has a population of 211,674.  65 miles east of Los Angeles, it is primarily a bedroom community.  Local government agencies are the largest employer, followed by Cal State University San Bernardino and other non-profits.  This is not a great situation for the tax base.

The number one revenue source for the city budget are sales taxes, which of course respond most quickly to changes in income and consumer sentiment. Property taxes were only 13% of peak municipal revenues in 2007-2008.  This is true despite the fact that residential property represents 52% of taxable land use value in the City of San Bernardino, $5.3 billion.  Also, the average residential property value is about $118,000 which along with a statewide cap on the tax rate means there is no blood to be squeezed out of this stone.

Commercial property values are stated at 19% of assessed value, while industrial properties represent 15% of values.  The City already has a huge backlog of commercial property property owners who are fighting to have their current assessments reduced.  These property owners won't be able to provide any revenue relief for the city.

California unemployment rates are said to be 10.9% by the City of San Bernardino staff report. San Bernardino County's rate is 11.7%, while the City of San Bernardino's reported unemployment rate is 15.7%!  This is a shocking and depressing number. 

There's the background, now for the rest of the story.  Reserves in the City of San Bernardino's General fund were exhausted "years ago."  Reserves of other internal services funds are badly depleted.  In municipal accounting, these various funds are like cookie jars where "rainy day" funds can be accumulated.  In San Bernardino, there is no cushion and no rainy day funds which can be tapped.

What went wrong? Accounting errors. A lack of revenue growth. Deficit spending. Increases in personnel and pension costs.  The only real surprise in this list are the accounting errors, which is probably why there is a new Interim City Manager. 

City Staff had previously reported a General Fund balance of $2,044,100.  A recent, audited balance shows a deficit of ($1,181,603).  Do you think that municipal bond investors or capital markets analysts care about this kind of thing? 

73% of the city budget goes to Public Safety, namely police and fire services.  This is typical for most municipalities in the U.S., and these are the services that homeowner (and their insurers) want.  The problem is the cost.  There are news reports of San Bernardino police officers making north of $200,000 a year in salary and overtime.  This is vigorously denied by police spokesmen today as untrue.  It may be "technically" untrue only because a previous $10 million rollback of salaries stopped some of these particular abuses.  This kind of salary featherbedding is a fact of life in many municipal budgets.

Talking about potential cost saving measures, the City Manger's report suggests "the City have employees pay the employee portion of retirement costs."  Again, this is very common that municipal employees don't even contribute to their own retirement costs or health care costs.  This is not sustainable under any kind of rational economics or accounting.  Yet, it probably won't change, except at the margins.

San Bernardino becomes the third California city in a month to look at bankruptcy.

The mortgage welfare scheme put forward by Mortgage Resolution Partners and its investment bank partners is aimed squarely at reelecting the President by handing out taxpayer candy out to the L.A.-Riverside-San Bernardino market homeowners.  The legal authority cited for this shell game is a paper by Cornell Law Professor Robert Hockett.  He really twists himself into a pretzel to make an argument for connecting urban blight to eminent domain via underwater mortgages.

Allies in the financial press, like the New York Times, cite this scheme as a "last chance" to rescue housing.  It's nothing of the kind. If so, then do it nationwide! That was the original Columbia University Business School proposal years back, put forward by Glenn Hubbard, Chris Mayer and other professors.  We were in favor of that proposal, as blog readers know because though draconian, it didn't pick winners and losers. At this point, this program is clearly a reward to borrowers who bought homes they couldn't afford in the frothiest pre-crisis market, with mortgages originated by the biggest subprime abusers, like Countrywide, IndyMac, New Century and others.

All of this is a diversion from the real issue of the unstable and unsustainable nature of municipal finance in many cities in California. This is a state issue, not a federal one.  Cities and municipalities with unsustainable tax bases need to be better managed and, perhaps, combine with adjoining municipalities to get scale and leverage on expenses like police and fire. The folks in Sacramento need to wake up all the promises they have made but which cannot be kept.

Even the City of San Bernardino's report itself calls for a "change in compensation philosophy."  No kidding.

Tuesday, July 10, 2012

Public Education Can't Be Reformed

The ideology that drives our system of public education has deep roots, going back to the French Revolution and the Jacobins. The philosophical foundations were articulated by Jean Jacques Rousseau in his "Social Contract." Rousseau had the notion that education had little to do with books, but with inculcating into all students core ideas about the "commonweal." 

These ideas had a great influence on Horace Mann, the first Commissioner of the Board of Education in Massachusetts who went on to serve in the Massachusetts Senate and House of Representatives. His influence on American public education has been profound.  Charles L. Glenn's book, and its copiously footnoted sources, provides the best exposition of this history.

Mann felt strongly that the "common school" was to be the preferred instrument for eliminating idiosyncratic local cultural practices among immigrants of different national and religious origins, levelling them into one identity.  The large Irish influx in Lowell, MA came to work in the new factories.  Catholic religious orders set up schools to educate, as best they could, the large influx of new immigrants.

Meanwhile, as often happens in American society, there was another background social struggle among competing elites. From Mann's earliest days at the Board of Education in 1837, educational discussions were dominated by the property holding classes.  With the flowering of Rousseau and Danton's ideas, a new elite arose to dominate the discussion about the "common school."  Glenn describes this group as being comprised of lawyers, Protestant clergymen, journalists and self-styled commentators who saw the French ideals as a fertile new area in which to expand their influence by championing these quirky ideas.

When Horace Mann began his career, he was a relatively obscure lawyer, with few social connections. Mann found worthy allies in this new elite, and they would propel his ideas and career.  Together, they concocted the notion of a necessary state monopoly on education so that citizens could be educated about virtue, the need to combat indolence, intemperance, and even prevent the spread of crime among the new immigrant populations. 

The new ideas of the "educational reformers' also picked up support from Protestants in Massachusetts who were worried about the large Irish Catholic influx into Lowell's burgeoning industrial center.  They feared a conspiracy to take away a supply of new students from public schools.  Fearing the growing influence of what they libelously called "papists,"  they too joined the new educational elite to support the common school movement. 

From these deep roots in the American educational psyche, we had to pass through the debilitating effects of the Sixties and Seventies, where the common school became a giant, impenetrable, self-sustaining machine, stronger than the any corporate industrial machine.  Even the most powerful American corporations--pick your favorite example--can easily be felled by bad management, the business cycle, or by changes in their business paradigm.  The educational establishment is truly bullet proof because of its ties to the State and its tax and regulatory powers. 

It may make you laugh or it may raise your blood pressure, but go and find a catalogue from your local College of Education, whether in a private or public university. Read the course descriptions. Courses on teaching mathematics talk about how to connect to local resources, design assessments, integrate technology and plan lessons.  Courses in Human Relations will challenge students to produce environments in which diverse learners can experience learning which is "multicultural, gender fair and disability aware."  I know that elite schools in China are not spending any time with their students on these objectives. Then, we complain that we are behind Country X in math and science and therefore we need to spend more money with the failing public system.

There are many good teachers in public schools, but there are many more mediocre teachers who are merely punching the clock, and there is the other end of the curve which should be removed.  The teachers, however, don't operate in a vacuum.  Today's public school teachers have to deal with an administrative bureaucracy whose sole job is to monitor the incoherent and unattainable mandates put upon the school by the state and federal educational bureaucracies.  I have yet to meet a public school teacher who expresses respect, let alone enjoyment, at working for their district administration.

What these teachers are asked to do is totally ridiculous.  Andrew Coulson's recent article cited the disproportionate growth in the teacher population versus the student population nationwide. I don't know if this is the real problem.  I believe that it is relentless growth of educational mandates which teachers have to fulfill, which takes them away from the tasks which they enjoy and for which they joined the profession, namely to help young people succeed.

To serve all these mandates, there are way too many administrators, and specialists in all kinds of unnecessary endeavors, from cultural norms to bullying.  The state of Texas, one of the largest school systems in the country, is said to have a 1:1 ratio of administrators to teachers.  Thees positions have higher salaries and therefore much higher pension liabilities than do teacher positions. 

None of this can change, though because as long as states and the federal government can created new unfunded mandates, there is no choice.  Don''t comply and your school will be decertified or closed.

Have you ever gone to a local school board meeting?  Go with a Costco sized bottle of Tylenol.  It is even more inane, cynical and boring than the Senate.  Reform can never penetrate into this closed system. 

Private groups like Teach for America have contributed to better outcomes for students in troubled schools.  When they entered the Minneapolis market, the union funded PR guns fired out accusations about elitist outsiders who were unqualified to teach and doing nothing but padding their resumes.  They certainly didn't care for "the kids." 

Former Medtronic CEO Bill Hawkins wrote a letter to the local paper counteracting the propaganda:

"...the schools are getting new teachers from a talent bank that has never been richer. They come from the Ivy League, from the best colleges in Minnesota and from states around the country, with a grade point average of 3.6 (on a 4.0 scale) and majors ranging from industrial engineering to music. Sixteen percent of graduating seniors at Yale this year applied to teach with Teach for America, as did 450 seniors from schools in Minnesota, including the University of Minnesota, Macalester and Carleton.

Teach for America's expansion to the Twin Cities is funded with a $2.7 million grant from local businesses, including Medtronic and General Mills, as well as leading area foundations. This reflects our respect for the results achieved by the program in other cities and our commitment to addressing the alarming rate at which our state is failing to ensure a proper education for far too many young Minnesotans.

In a state renowned for academic prowess, it should concern us that one of our largest school districts is falling behind the rest of the country. A national study published last spring rated Minneapolis 45th among America's 50 largest cities when it came to our high school graduation rates. Equally troubling is what young people aren't learning while they're still in school. Less than half the students in the city school system are proficient in reading, and only 40 percent in math. The numbers are particularly discouraging if you single out math and science, the two areas most crucial to the future of our children and the future of the nation.

This is unacceptable. It's time to do something different"

I admire Teach for America and its objectives and achievements,  I don't think that it is the best model, and I certainly don't believe that it is the only model for really making education deliver on its mission.

No educational model delivers comparable outcomes at a lower cost, especially for inner city minority populations, than the system of Catholic schools.  I spent twelve years in a New York City Catholic elementary school and high school. I've volunteered in these schools most of my professional career. Many of their students are not Catholic, and many of them can't afford to pay the very modest tuition; but, no student is turned away. 

I agree with Bill Hawkins that it is time to do something different. Americans have a common interest in producing the next generation of educated, informed citizens and productive taxpayers. Any educational system that produces this output should be funded with public funds, since the future benefits attached to creating this citizenry accrue to all..  Parents and students should have choices. If certain systems are overburdened with bureaucracy and inefficiency and can't adapt, then they need to wither, just like W.T. Grant or Digital Equipment.  That is the only kind of real reform which will work: competition and choice.

Monday, July 9, 2012

Hyrdraulic Fracturing and Groundwater: A Connection

Engineers and scientists at Duke University and Cal State (Pomona) have published a paper in the Proceedings of the National Academy of Sciences which confirms my long-stated belief that the industry certainly doesn't know everything about the effects of hydraulic fracturing of deep shale gas formations and possible impacts on shallow, drinking water aquifers.

This paper is not a smoking gun for condemning the burgeoning shale gas industry.  What is its value?  It shows that there is a mechanism for hydraulic connectivity between shallow drinking water aquifers and deep-lying shale gas formations.  The researchers found evidence of a "strong geochemical footprint" in salinized water in the Alluvium, Catskill and Lock Haven aquifers in northeastern Pennsylvania. The salts are chlorides of the s-block elements, alkali metals and alkaline earth metals. 

They speculate about the conditions that might provide a pathway for the salinization of the aquifers, but it is an educated supposition.  Shale formations with extraordinary hydrodynamic pressures and a natural pathway might cause migration into the lower pressure areas of the aquifers.  Where, how, and why this occurs at some locations and not others is unknown.

Results on methane gas migration are sketchy in this sample.

The authors conclude,"The occurrences of saline water do not correlate with the location of shale-gas wells and are consistent with reported data before rapid shale-gas development in the region.

The research is in this paper definitely shows that continuing research is needed, and that industry and regulators should work together with conservatism and caution in well head designs, drilling techniques, and documentation of geological characteristics of the formations, integrated with existing data about the aquifers.  There is indeed a way in which methane and brines could migrate into drinking water supplies. 

Because such damage would be prohibitive to mitigate, the industry should make sure that the shale gas boom is not a California gold rush or a replay of early wildcatting of oil wells in Western Pennsylvania.  Meanwhile, this paper is a small beginning and far from the last word.

Thursday, July 5, 2012

Government Overreaching on Seizing Mortgages

The wicked never rest, and there is no rest for beleaguered citizens who are not fortunate enough to be chosen for government largesse.  The Wall Street Journal story about California cities contemplating an absurd, Kafkaesque use of eminent domain powers is truly "appalling," as described by Scott Simon, Managing Director at PIMCO.

Mortgages are private contracts between a homeowner/borrower and a financial institution/lender.  Eminent domain is typically used, for example, when a new public highway project requires a right of way which is now occupied by homes and private businesses.  The government entity's powers of eminent domain are exercised in order to construct a project which is in the interest of a larger population, including outsiders.  In exchange for exercising this right, the government entity must demonstrate need and come to some market driven settlement with the existing property owners exchanging value for giving up their homes and business locations, plus some value for the inconvenience and costs of moving.  All of this is subject to negotiation, in theory.

As it is, eminent domain powers are often abused and applied arbitrarily to property owners who don't necessarily want to play ball at the proposed settlement rates.  We have some egregious examples here in the Minnesota Nice Midwest.  The California proposal brings abuse of government power and eminent domain to  levels that should be laughed out of town or struck down in courts.  

Cities in the California case would seize individual underwater mortgage loans. After seizing the loan, via the eminent domain subterfuge, a City would use Mortgage Resolution Partners to pay a reduced amount to the lending institution.  Mortgage Resolution Partners CEO Graham Williams comes from a background of lending to low income borrowers through a program called "Neighborhood Advantage" and from subprime lender ITT Financial Services and later at Bank of America.  The smell testalyzer is flashing red already.  Mortgage Resolution Partners would then put the formerly underwater homeowner into a new, low interest mortgage insured by the FHA with equity requirements as low as 2.25% according to the Journal.  So, of course, taxpayers are again handing out a subsidy and taking risk.  In these transactions is a nice, upfront profit for the wizards who came up with the scheme.

Professors Mian and Sufi of Chicago Booth Business School did an original and well known analysis on the explosion of mortgage lending from 2002-2006 covering a sample of 238 U.S. counties. The top decile counties for the growth in household debt to income are in California and Florida.  The single largest growth in debt ratios occurred in Monterrey County, California.  The California counties had the frothiest growth in real estate values, and we know from companies like Countrywide and IndyMac, that these Zip codes were precisely the targets for aggressive mortgage origination.  Professor John Coffee of Columbia has testified about these abuses before Congress.  Now, all taxpayers will be asked to fund a bailout for these homeowners.  Why not for homeowners in the Midwest or in Westchester County or in Appalachia?

Did I mention that Roger Altman of Evercore Partners, one of the investment banks backing Mortgage Resolution Partners, served in the Clinton Administration and is raising funds for President Obama's re-election efforts?  I have to leave the room now because the smell test is over and the stench is too much.

Wednesday, July 4, 2012

Nokia: Microsoft's Private Label Provider

It seemed intuitively clear to us that Microsoft couldn't let Nokia go down the drain, and we wrote about it recently.  The website Seeking Alpha had an article which came to the same conclusion by looking at the industry dynamics among Microsoft partners, including Samsung, HTC, Nokia, HP and Dell. It's good reasoning.  Here's an excerpt from the blog:

"With Nokia and Surface, Microsoft achieves two important goals. First, there will be enough hardware support for Windows 8 in the categories that are the most important for Microsoft's expansion from PC to mobile devices. Second, these two products set the standard for Windows 8 based mobile devices. In order to stay competitive in the market, Samsung and HTC can no longer support Windows 8 half-heartedly, as they did with Windows Phone 7. Their Windows 8 smartphones will have to be good enough to compete with Nokia's. As pure play hardware companies, there is very little incentive for them to give up on Windows 8, but Nokia will ensure their full support. The similar goes with HP, Dell, and Microsoft's own Surface. It will be too dangerous for HP and Dell to stay out of the tablet market. Now they have to provide something capable of competing with at least Surface, and to some extent, Apple's (AAPL) new iPad and Google's (GOOG) Nexus 7.

In this sense, Nokia is Microsoft most important partner in its mobile strategy. Microsoft will not allow Nokia to fail, not within the first year of Windows 8's introduction anyway. It will not 'write off' Nokia." (Seeking Alpha)

There are some interesting articles in Vanity Fair from staff writers and an interview with Paul Allen.  The bottom line is that they lay the blame for the long-term malaise at Microsoft at the feet of Bill Gates for his insistence, according to the story, on choosing Steve Ballmer to run the business many years ago.  Overall it paints a very ugly picture of a Microsoft internal culture too weighed down by its Office/Windows franchise to the detriment of initiatives which would acknowledge and hasten the demise of the franchise.  No wonder the stock was a value trap in the past!

Can it still right itself?  The Windows 8 launch will truly be a big deal. 

Happy July 4th!

Tuesday, July 3, 2012

Don't Forget the IndyMac Debacle

While Countrywide Financial is back in the financial news, it's worth readers remembering IndyMac Bank and New Century Financial.  The linked post above still makes good reading, but I want to expand on IndyMac from the role of the CEO and his enabling board.  None of these folks are in jail either, as far as I know. 

IndyMac CEO Michael Perry began his career as a KPMG auditor, and was an inactive CPA during his tenure at IndyMac. After working in the mortgage business at Commerce Security Bank, he joined IndyMac when it had four employees. By 2006, the bank had about 8.000 full time equivalent employees.  Despite the complexity of subprime financial services Perry clearly understood subprime mortgage origination, and how the product affected the income statement and balance sheet.

The board of directors included Lyle Gramley, a retired member of the Board of Governors of the Federal Reserve System. Gramley's pronouncements about monetary policy, interest rates and banks had been very visible in the financial press for years.  Hugh Grant was a director who served as the Managing Partner for the Western Region of KPMG, where he worked for 38 years.  Retired California Senator John Seymour was a board member whose legislative career had centered on housing and finance issues. 

According to the 2006 proxy, the CEO's incentive compensation rested on EPS and ROE targets, both of which were subject to the highest degree of accounting manipulation in this subprime mortgage business.  IndyMac's reported earnings were of low quality, and its balance sheet reported inconsistently with its risk profile.  We've noted a few of thise points in the previous posts, and won't repeat anything here.

In 2004, the CEO expressed to his risk managers via emails his concern that credit quality was deteriorating.  Yet in the corporate culture of the firm, risk managers were routinely overridden by a network of roguish, non-employee mortgage originators whose only objective was to maximize their own commissions.  By 2006, the Office of Thrift Supervision's Inspector General noted that 75% of IndyMac's option ARM holders were making only the minimum monthly payments on their mortgages.  Yet, provisioning levels continued to be minimal, and reported earnings were high.

At the end of fiscal 2006, three sophisticated institutional investors held stakes that were reported in the proxy: Barclay's at 13%, NWQ (Nuveen) Investment Management at 10%, and Capital Guardian Trust at 7%.  Investors got what they wanted with outsized earnings growth, the share price outpaced the Russell 1000 Financial Services Index by a wide margin, and management paid itself handsomely, despite the fact that they had to have known that the reported numbers were of dubious quality and the business unsustainable.  These sophisticated investors apparently couldn't see through the numbers to the fundamentals either.   The problem is not about process. It almost never is, yet our regualtion only addresses layering on more process. It is all  about individuals being bad actors and not doing their jobs, for which there is no accountability. 

Sunday, July 1, 2012

Fixing the LIBOR

I remember one of the first references to LIBOR in a money and banking textbook describes a quaint process in London where market makers got together before the open to"fix the LIBOR."  The British use of the word "fix" wasn't meant to be nefarious, but the news of Barclay's settlement tells us that "fixing" refers to the same fixing that happens in Italian professional soccer games.

I read on one blog that the benefit to the brokers from some of the rate manipulations amounts to an estimated £46 billion.  In the case of insider trading scandals, the illegal profits are clawed back, along with fines on top of these amounts.  In the case of Barclay's the total fine amounts to a relatively paltry £163 million pounds.  Nobody from Barclays does any jail time. 

The rigging of the rate setting process was so widely known in the company that emails fly around routinely about rates being set at a level which "kills" some profit centers, or alternatively at a rate setting that generates a  "thanks for the favor."  Clearly a bad tone at the top if everyone knew about the rigging and carried it out routinely. 

Lord Turner has talked about the so called "financial innovation" process as producing products which only serve to enrich the City/Wall Street.  There can be no social benefit to "dark pools," another financial innovation.  Mark Cuban's describption of high frequency traders as the "ultimate hackers" is perfectly apt.  Another innovation that society doesn't need.  If we value transparency and a level information field as critical to our capital markets, there is no rational argument for supporting the long list of current abuses, none of which have been substantively curtailed as a result of Dodd Frank or other regulatory frameworks.