Fresh off a recent post on foreclosures, I was doing a final read of the Wall Street Journal when I came on their article about Bank of America's $40 billion mistake in acquiring Countrywide Financial.
Here is an excerpt that speaks to the issue of dealing with delinquent mortgages and eventual foreclosures. It is a mind boggling mental picture: "Countrywide saddled Bank of America with hundreds of thousands of delinquent borrowers, thrust it into the middle of a foreclosure-paperwork scandal and exposed the bank to countless lawsuits from mortgage-bond investors and insurers. The number of people handling poor-performing real-estate loans for Bank of America ballooned from 5,000 at the time of the Countrywide purchase to 50,000. Those people occupy at least 4.5 million square feet of office space around the country, the equivalent of 78 football fields."
What's really appalling is that all those horrible collectors and others occupying that 4.5 million square feet are dealing with real people whose lives are being turned upside down. I understand that many of the borrowers were gaming the system too. But none of this should have happened at this scale because Countrwide's underwriting should have been reined in by regulators, and it should never have been acquired by any kind of rational board of directors.
First question: if Raj Rajaratnam has paid millions in clawed back profits from a relatively puny insider trading scheme and been banned from the securities industry while spending eleven years in prison, why on earth is Angelo Mozillo not in the Federal pen on multiple life sentences? I am among millions of Americans who are asking the same question about Mozillo.
Finally, here's a laughable quote from Ken Lewis the former CEO of Bank of America: "The Merrill Lynch and Countrywide integrations are on track and returning value already." (from Wikipedia) His 2007 compensation was $20 million. Shareholders wanted earnings growth and management rewarded themselves for delivering a chimera instead.
Bank of America is the best performing stock in the Standard and Poor's 500 year-to-date! We talk about kleptocracies in a number of other countries, some of which claim decocratic processes. We need to have a serious look at the virus of a crony capitalism which is thriving in our own markets, untouched by any meaningful reform.
Friday, June 29, 2012
Foreclosures in New York
Bill McBride who blogs at Calculated Risk commented on CoreLogic's 63,000 completed foreclosures in May, flat with April and below the year ago level, with a degree of optimism. Like an iceberg, most of the inventory is below the surface, I suspect. Here in lower Westchester County, New York walking around my old neighborhood, there are many homes at various stages of descending into foreclosure. A flagship Mediterranean home in the neighborhood lay vacant for four years after the owner lost it. It was recently purchased by new owners, not investors. Most of the sales here are distressed, and the neighborhood is filled with homes not yet in the formal process. The inefficiency and incompetence of municipal governments further impedes a resolution process.
As I've said many times before, banks never thought that they would be in the business of foreclosing, especially on such a large scale. Banks can barely deliver core checking and savings accounts efficiently, and they certainly are not humane or efficient about foreclosures. The mortgage servicers as a whole are a fly-by-night group and they weren't built for this either.
CoreLogic does note that foreclosure inventories are still rising in states like New York and Connecticut. Believe it.
As I've said many times before, banks never thought that they would be in the business of foreclosing, especially on such a large scale. Banks can barely deliver core checking and savings accounts efficiently, and they certainly are not humane or efficient about foreclosures. The mortgage servicers as a whole are a fly-by-night group and they weren't built for this either.
CoreLogic does note that foreclosure inventories are still rising in states like New York and Connecticut. Believe it.
Thursday, June 28, 2012
Shareholder Primacy Myths
Equity shareholders can be a useful voice for all stakeholders in helping corporate managements to allocate capital better. For example, Walgreen's overspending to acquire a stake in Boot's or HP overspending to acquire Autonomy are recent examples. Big acqusitions, either for cash or for debt are not bond-holder friendly. Just read any credit report on a company. Yet, unless there are restrictive covenants attached to their instruments, bond holders can do little about free spending managements.
Equity shareholders can, and do, speak up directly and through analysts in the capital markets. To the extent that they shine a light on big acquisitions or even discourage them, they perform a valuable service for all stakeholders by lowering the risk level for future free cash flows.
Shareholders do not, however, have some divine right over and above other holders of corporate claims. Common equity holders have a residual interest in the company, after all other claims have been satisfied. The earnings can be retained or distributed as dividends, again not through some divinely communicated formula. Bond holders would prefer that no dividends be paid, because there would be more cash to settle their claims; shareholders reasonably have other expectations. The point is that the shareholder claim is a residual one.
We've written about the primacy of hedge funds within the shareholder base of many public corporations. Their holding periods may be days or weeks, and their interests are not generally in the long term interests of the corporation, which is "to be in business forever." (Those are Harvey McKay's words for McKay Envelope.) Short-termism and excessive risk taking have ruined too many public companies to list. In fact, we are still crying about the excessive risks that bank CEOs took during the financial meltdown.
Yet, they took those risks precisely to satisfy shareholders with unsustainable earnings growth, and to feather their own nests through rent capturing compensation. And we want to elevate shareholders by fiat to the top of the stakeholder pyramid?
Nell Minow has been part of creating a large industry around the shareholder primacy mantra. As a long time equity analyst and public company CFO, investors and shareholders were always important to me as customers and stakeholders. Over time, however, I got to see up close and personal how pernicious the influence of certain bad actor shareholders can be to the interests of companies. The other side of the aisle is represented by Lynn Stout of the UCLA Law School who writes on this issue in today's New York Times.
The shareholder primacy industry has just resulted in more mind numbing proxy boilerplate, more checklists for boards, more window dressing around egregious corporate compensation and has opened the door for meaningless, costly and sometimes harmful activism. That this springs from a misreading of corporate law needs to be addressed for the benefit of all stakeholders.
Managements should actively listen to their shareholder concerns by looking them in the eye, not from on their knees in fealty.
Equity shareholders can, and do, speak up directly and through analysts in the capital markets. To the extent that they shine a light on big acquisitions or even discourage them, they perform a valuable service for all stakeholders by lowering the risk level for future free cash flows.
Shareholders do not, however, have some divine right over and above other holders of corporate claims. Common equity holders have a residual interest in the company, after all other claims have been satisfied. The earnings can be retained or distributed as dividends, again not through some divinely communicated formula. Bond holders would prefer that no dividends be paid, because there would be more cash to settle their claims; shareholders reasonably have other expectations. The point is that the shareholder claim is a residual one.
We've written about the primacy of hedge funds within the shareholder base of many public corporations. Their holding periods may be days or weeks, and their interests are not generally in the long term interests of the corporation, which is "to be in business forever." (Those are Harvey McKay's words for McKay Envelope.) Short-termism and excessive risk taking have ruined too many public companies to list. In fact, we are still crying about the excessive risks that bank CEOs took during the financial meltdown.
Yet, they took those risks precisely to satisfy shareholders with unsustainable earnings growth, and to feather their own nests through rent capturing compensation. And we want to elevate shareholders by fiat to the top of the stakeholder pyramid?
Nell Minow has been part of creating a large industry around the shareholder primacy mantra. As a long time equity analyst and public company CFO, investors and shareholders were always important to me as customers and stakeholders. Over time, however, I got to see up close and personal how pernicious the influence of certain bad actor shareholders can be to the interests of companies. The other side of the aisle is represented by Lynn Stout of the UCLA Law School who writes on this issue in today's New York Times.
The shareholder primacy industry has just resulted in more mind numbing proxy boilerplate, more checklists for boards, more window dressing around egregious corporate compensation and has opened the door for meaningless, costly and sometimes harmful activism. That this springs from a misreading of corporate law needs to be addressed for the benefit of all stakeholders.
Managements should actively listen to their shareholder concerns by looking them in the eye, not from on their knees in fealty.
Germany and Shared Liability for Eurozone Debt
The German Finance Minister's remarks before today's summit gave encouragement to Eurocrats who see checks being written and more jobs being created for themselves. I was very surprised to read the headline, until I read this from the Wall Street Journal report itself:
"Mr. Schäuble said Germany could agree to some form of debt mutualization as soon as Berlin is convinced that the path toward establishing centralized European controls over national fiscal policy is irreversible. That (?) could happen before full implementation of treaty changes."
There is very much less here than hit the headlines, in my opinion. I don't believe that Spain, France, or Italy among many others are ready for any form of European control over their national fiscal policies. This statement by Schauble is a clever way of throwing things right back into the court of Hollande and the other Eurocommunards. If you want Germany to agree to some form of debt mutualization--probably not the one you're thinking about--then give up national sovereignty over fiscal policy.
If the Spanish government is too proud to accept a European bailout and too arrogant to accept aid to its banking sector through European regulatory intermediation, how could they accept this kind of scenario?
No, I don't believe that much at all has been conceded by Chancellor Merkel, her own words nothwithstanding. I don't read "concession" into the German Finance Minister's remarks. There is still a long way to go.
"Mr. Schäuble said Germany could agree to some form of debt mutualization as soon as Berlin is convinced that the path toward establishing centralized European controls over national fiscal policy is irreversible. That (?) could happen before full implementation of treaty changes."
There is very much less here than hit the headlines, in my opinion. I don't believe that Spain, France, or Italy among many others are ready for any form of European control over their national fiscal policies. This statement by Schauble is a clever way of throwing things right back into the court of Hollande and the other Eurocommunards. If you want Germany to agree to some form of debt mutualization--probably not the one you're thinking about--then give up national sovereignty over fiscal policy.
If the Spanish government is too proud to accept a European bailout and too arrogant to accept aid to its banking sector through European regulatory intermediation, how could they accept this kind of scenario?
No, I don't believe that much at all has been conceded by Chancellor Merkel, her own words nothwithstanding. I don't read "concession" into the German Finance Minister's remarks. There is still a long way to go.
Tuesday, June 26, 2012
Oil Prices Better Reflecting Economic Realities
Back on January 2012, we wrote: "We're still looking for reasons why the consensus 2012 oil prices shouldn't be closer to $80ish than $100+ for 2012." At that time, there were many bearish forecasts for oil, some of which related to fears about closure of the Hormuz Strait. Today, crude closed at about $79.43 on the NYMEX.
The consensus broker forecasts made no sense at that time, and the oil prices were inconsistent with other real economic components of the forecasts. From the intra-year peak to here, I can't piece together what drove us to the peak, as the Hormuz hype was just that. Technical issues with Brent v. WTI can't explain the runup either.
Oil price markets, like stock markets, often drift away from their economic underpinnings.
The consensus broker forecasts made no sense at that time, and the oil prices were inconsistent with other real economic components of the forecasts. From the intra-year peak to here, I can't piece together what drove us to the peak, as the Hormuz hype was just that. Technical issues with Brent v. WTI can't explain the runup either.
Oil price markets, like stock markets, often drift away from their economic underpinnings.
Monday, June 25, 2012
Taxpayers Don't Know The Promises They've Made
Just when I thought I understood something about the world of municipal finance, here comes a story from the New York Times about taxpayers being on the hook for promises made on their behalf, without their consent, by municipal bond issuers! Here's an excerpt:
"With many cities now preoccupied with other crushing costs — pension obligations, retiree health care, accumulated unpaid bills — a sudden call to honor a long-forgotten bond guarantee can be a bolt from the blue, precipitating a crisis. The obligations mostly lurk in the dark. State laws requiring voter pre-approval of bonds don’t generally apply to guarantees. Local governments typically don’t include them in their own financial statements or set aside reserves to honor them.
“These are debts that do not show up clearly, no matter how closely you look at the balance sheets,” said Carmen M. Reinhart, an economist at the Peterson Institute for International Economics who has written extensively about government debt. They “come out of the woodwork in bad times.”
In a number of communities, especially in New Jersey, Michigan and Washington State, local officials have recently scrambled to work out fiscal emergencies caused by guarantees and similar promises.." (New York Times)
In order to give the reader a respite from unrelenting municipal malfeasance, I want to make a musical link to the theme of promises. Below is a YouTube video of Eric Clapton playing "Promises." (nice slide guitar playing)
(At the 0:16 mark, you'll see a shot of John McVie and Eric from a session for "John Mayall and The Blues Breakers Featuring Eric Clapton," a great album I have on British Decca vinyl. Fantastic)
HP Breaks Support
We recently wrote about HP and about how the smart value investors at FPA got whipsawed. We noted the awful stock chart, and today the price broke $20 intra-day, a level which seemed to have decent support. John Dvorak in his widely read market column calls for HP to hire a "visionary leader." He describes current CEO Meg Whitman as being "a functionary." I understand where's coming from, but I think his characterization is a bit hard. I also disagree with his statement about vision. The company has had visionaries from Carly Fiorina on through today: hardware visionaries to software visionaries to the present CEO. Enough is enough about visions.
The world of HP external stakeholders definitely need much better communication about where the business is going, why and how fast. All of the non-GAAP to GAAP reconciliations are nice, but they leave all the fundamental questions unanswered and allow no real forward valuation of the company prospects. The limited sample of institutional research I see tells me the analysts don't know where the company is going in terms of cash flows and returns. Autonomy would be the logical place to start. Keeping mum yields no benefits, and any meaningful clarity would go a long way.
They also need focus on improving the portfolio as it is. Commit to standing shoulder to shoulder with their customers. assuring them HP will do whatever it takes to earn their trust, keep their business, and help them to grow their profits with HP technology and services. More vision will yield only more nightmares.
I do agree with John on a substantive point which he clothes in humor. He writes, "The last dumb move was the company’s purchase of Autonomy, a odd U.K. software company that seems to specialize in the creation of screwball corporate cliches using the word “meaning” as the cornerstone. For example, they engage in “meaning-based computing” and “meaning-based governance” and “meaning-based marketing.” I hear H-P is looking for someone to run the operation. How about Werner Erhard or Deepak Chopra?"
They do need to get rid of all this gobbledy-gook and write plain English in their disclosures. There is no need to impress customers or tech analysts with how smart the company is. Both Deepak and Werner would certainly bring vision....and a lower share price.
The world of HP external stakeholders definitely need much better communication about where the business is going, why and how fast. All of the non-GAAP to GAAP reconciliations are nice, but they leave all the fundamental questions unanswered and allow no real forward valuation of the company prospects. The limited sample of institutional research I see tells me the analysts don't know where the company is going in terms of cash flows and returns. Autonomy would be the logical place to start. Keeping mum yields no benefits, and any meaningful clarity would go a long way.
They also need focus on improving the portfolio as it is. Commit to standing shoulder to shoulder with their customers. assuring them HP will do whatever it takes to earn their trust, keep their business, and help them to grow their profits with HP technology and services. More vision will yield only more nightmares.
I do agree with John on a substantive point which he clothes in humor. He writes, "The last dumb move was the company’s purchase of Autonomy, a odd U.K. software company that seems to specialize in the creation of screwball corporate cliches using the word “meaning” as the cornerstone. For example, they engage in “meaning-based computing” and “meaning-based governance” and “meaning-based marketing.” I hear H-P is looking for someone to run the operation. How about Werner Erhard or Deepak Chopra?"
They do need to get rid of all this gobbledy-gook and write plain English in their disclosures. There is no need to impress customers or tech analysts with how smart the company is. Both Deepak and Werner would certainly bring vision....and a lower share price.
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