Rick Konrad

Citigroup Shareholders Meeting: Lessons in Corporate Governance

As Dick Parson commented at the meeting, perhaps I was overly harsh and unfair on some colleagues who had worked very hard to serve the firm and its shareholders. Nevertheless, as I said to him, it is time to separate results from good intentions.

Congrats to our CEO, David Jackson, for being named one of the top-five up-and-coming market movers. That's some pretty heady company, David. You deserve it.

Congrats David! Great to see you recognized for putting together this tremendous aggregation of market, economic, and stock news and views, and it just keeps improving and growing in features and content! Well done David and a tribute to all the SA folks who put it together.

Tech: ATM Sector Prospects Look Good

No question that disruptive technological change is part of the backdrop here. Yet, given what we have seen in the behavior of banks and their interest in consolidation, the branch model is far from dead.

The renewed interest in traditional branch banking that is evident in these mergers stands in marked contrast to the trends of the late 1990s, when technological innovations such as online banking and
call centers seemed to challenge the “bricks-and-mortar” method of delivering banking services.

Most of the recent developments in the ATM industry are related to the new technological developments and software. New features and utilities are being added to the ATMs. Regionally Asia has taken over the North American market which is reaching maturity, as the largest market and is also driving the overall market growth.

Beyond ATMs, there exist other retail kiosk potential uses for ATMs in my view.

Thanks for your comments.

FASB's FSP Decisions: Bigger than Basketball?

A terrific encapsulation of the subject. Thanks, Jack!

Of interest, I think is the thoughtful response by IASB, no doubt viewing FASB's response after merely two weeks of review and under considerable pressure, as "piecemeal" :

While the Trustees acknowledged the desire to achieve commonly accepted positions between US GAAP and IFRSs, they also urged the IASB to avoid piecemeal approaches that would undermine the ability to address broader issues related to accounting for financial instruments raised by the crisis. This was also the view expressed most frequently at the IASB’s public round tables.

Sir David Tweedie, Chairman of the IASB, reported to the Trustees that at their joint meeting last week the IASB and FASB agreed to undertake an accelerated project to replace their existing financial instruments standards (IAS 39 Financial Instruments, in the case of the IASB) with a common standard that would address issues arising from the financial crisis in a comprehensive manner. Though the IASB is consulting on FASB amendments related to impairments and fair value measurement, the Trustees supported the IASB’s desire to prioritise the comprehensive project rather than making further piecemeal adjustments. This project should result in a proposal being published within six months. The Trustees welcome this timetable and will monitor progress closely.

In Memory of Greg Newton

I am saddened by this news. Greg's wit and insight will be missed. His musings frequently railed against parts of the hedge fund world that he found to be quite naked and devoid of due diligence, well before the Madoff fiasco gained public notoriety.

My condolences to his family and friends. A life well-lived! Rest in peace.

Mark-to-Market Accounting: More Rules

Gtarras and user, I do appreciate your comments. User, I respectfully submit that you should re-read my original comment.

Rather than question my interpretation of FAS 157 or that of Gtarras, it is very clear that the FASB itself has stepped back to have another look at the entire reporting schema going back to fair value under FAX 107. Perhaps you should read the intro to the FASB staff position paper FAS 107(a)which asks the following questions:

1. Do you believe that requiring disclosure of different reporting measurement attributes (that is, as reported in the statement of financial position, at fair value, and at the incurred loss amount) for certain financial assets within the scope of this proposed FSP would (a) improve the quality of information provided to users of financial statements and (b) increase the comparability of financial statements under U.S. generally accepted accounting principles (GAAP) and IFRS? Why or why not?

2. Do you agree that the proposed disclosures should not include financial assets measured at fair value in the statement of financial position with changes in fair value recognized through earnings? If not, would you propose including such financial assets within the scope of this proposed FSP? Should financial assets measured at the lower of cost or fair value (such as mortgage loans) be included within the scope of this proposed FSP? Why or why not?

3. Do you believe that requiring disclosures of the pro forma income from
continuing operations (before taxes) for financial assets within the scope of this proposed FSP as if those financial assets were carried (a) at fair value with changes in fair value recognized through earnings and (b) at the incurred loss amount with changes recognized through earnings would improve financial reporting? Why or why not? Should the disclosure requirements described in the preceding sentence also be required for net income and shareholders’ equity? Why or why not?

4. Would including separate reconciliations of reported income from continuing operations (before taxes) to the proposed pro forma adjusted income from continuing operations (before taxes) under both a fair value basis and an incurred loss basis for financial assets within the scope of this proposed FSP be useful? Why or why not?

Obviously, though as you claim "most investors and many accountants" favor fair value accounting, the FASB staff is continuing to refine just how to define fair value, hence this call for commentary. Although there is little disagreement about the fair value of an asset or liability in an active market with orderly transactions, the challenge begins when those same markets are no longer active or transactions are complex or disorderly. Management would then use a valuation model designed to provide the best evidence of fair value. Since this model relies on management’s assessment of various factors, different companies may determine different values for substantially identical assets and liabilities. This leads to concern that management may use financial engineering to produce desired results or that the goals of Fair Value Measurements are compromised.

The SEC just yesterday delivered a report to Congress upholding mark-to-market accounting with a few provisos...exactly what I am Gtarras have described as important considerations:

While the report does not recommend suspending existing fair value standards, it makes eight recommendations to improve their application, including:

1. Development of additional guidance and other tools for determining fair value when relevant market information is not available in illiquid or inactive markets, including consideration of the need for guidance to assist companies and auditors in addressing:
o How to determine when markets become inactive and whether a transaction or group of transactions are forced or distressed
o How the impact of a change in credit risk on the value of an asset or liability should be estimated
o When should observable market information be supplemented with and/or reliance placed on unobservable information in the form of management estimates
o How to confirm that assumptions utilized are those that would be used by market participants and not just a specific entity


2. Enhancement of existing disclosure and presentation requirements related to the effect of fair value in the financial statements.

3. Educational efforts, including those to reinforce the need for management judgment in the determination of fair value estimates.


4. Examination by the FASB of the impact of liquidity in the measurement of fair value, including whether additional application and/or disclosure guidance is warranted.

5. Assessment by the FASB of whether the incorporation of credit risk in the measurement of liabilities provides useful information to investors, including whether sufficient transparency is provided currently in practice.

The report also recommends that FASB reassess current impairment accounting models for financial instruments, including consideration of narrowing the number of models under U.S. GAAP. The report finds that under existing accounting requirements, information about impairments is calculated, recognized and reported on basis that often differs by asset type. The report recommends improvements, including: reducing the number of models utilized for determining and reporting impairments, considering whether the utility of information available to investors would be improved by providing additional information about whether current declines in value are consistent with management expectations of the underlying credit quality, and reconsidering current restrictions on the ability to record increases in value (when market prices recover).

As is obvious from this string of comments, the debate continues among many market participants. The SEC has urged consideration of the impact of liquidity on market price, essentially questioning the validity of the measure in times of erratic and thin markets. The SEC has urged that fair value measures have some comparability (i.e. assumptions utilized are those that would be used by market participants and not just a specific entity.) Finally, FASB staff is bringing in a new concept of incurred loss to supplement fair value disclosure which would bring clarity to Gtarras example.

Mark-to-Market Accounting: More Rules

Hi 327894

Thank you for your comment.

Write-downs of credit instruments that reflect credit defaults are completely warranted and represent relevant and "honest" accounting. Hence, I agree with the notion that an asset whose value is impaired should be "tested" for impairment, and written down to the appropriate valuation.

However, what has taken place in the last year has been a write-down of many assets to current "market" prices due to erratic, sporadic, and in many cases,forced selling.

Such exaggerated markdowns and write-offs have forced what I view as unnecessary capital and regulatory consequences.

I do not advocate a whistling past the grave approach and maintaining book value of assets through thick and thin when defaults are coming fast and furious.

Fair value measures require (a) applying market prices regardless of how
erratic the market may be, or (b) referring to prices of similar securities. When neither of those alternatives exists, companies employ models to determine fair value. As of yet, there is little accounting guidance as to how these models are to be constructed and what factors should be considered.Valuing what at present are fairly illiquid assets is a subjective job filled with conflicts and some fearing sanctions and/or litigation under Sarbanes Oxley may simply write down these assets even if they are not impaired! In a stressed market, unanticipated and unprecedented discrepancy between price and value have exacerbated problems with valuing assets "properly."

Here is an interesting article from American Banker on the topic:
www.onwallstreet.com/a...

There is an excellent review on this debate from the Virginia Society of CPA's:
www.vscpa.com/For_Memb...

It would have been more correct for me to state that the amount of write-downs has been excessive rather than unnecessary. Clearly, the evidence for credit related defaults continues to develop. However, the underlying performance of many credit pools remains quite satisfactory and is subject to a growing pool of distressed asset buyers. Perhaps that is the only evidence that the marketplace may have driven these values down to too low a level.

Looking Inside the New Ben Graham ETN Baskets

I do appreciate the commentary from everyone.

Mr. Carson, I especially appreciate your commentary regarding some dividend paying ETNs. The unique features of some of these ETNs are certainly worth exploring. Thanks again!

What You Can - And Can't - Learn from Warren Buffett

An excellent point. Contrary to what most people believe, WB, the consummate value investor made most of his returns in large cap growth stocks. As the research paper indicates:

"Although beating the market in all but four years can statistically happen due to chance, incorporating the magnitude by which the portfolio beats the market makes a luck explanation extremely unlikely even after taking into account ex-post selection bias"

The frequency of the great picks versus turkey picks has little to do with the end results; rather, it is the magnitude and scale of the victories that has made shareholders wealthy.

TY for your comments!

What You Can - And Can't - Learn from Warren Buffett

Andydee...there are several Buffett books that I like. Robert Hagstrom's "Warren Buffett Way" provides some interesting case studies into the "why" of many Berkshire investments.

Charlie Munger's clarity of thinking is renowned. One of the best ways to access his wisdom and wit (in that order) is "Poor Charlies' Almanac," a title that WB bestowed on this book and of course Charlie hates. It includes many snippets of quotes from his writings and speeches.

Finally, a couple of other books I would recommend on investment thinking that lean heavily on Buffett and Munger. Peter Bevelin, a fellow Berkie shareholder and a brilliant thinker ( well, at least PB is a brilliant thinker) has written "Seeking Wisdom." Peter uses quotations from many authors to improve one's way of thinking. For example, on the topic of being wrong," A man should never be ashamed to own that he has been in the wrong, which is but saying , in other words, that he is wiser today than he was yesterday." Unfortunately, what most of us do is what Buffett describes, "What the human being is best of doing, is interpreting all new information so that their prior conclusions remain intact."

Another useful book in this regard is Lawrence Cunningham's "How to Think Like Benjamin Graham and Invest Like Warren Buffett." This is again a fairly enjoyable read. Cunningham is not a practitioner, but rather a teacher and professor. He admires these great investors "for their independence of thought, their utter and profound common sense, which led to their remarkable success."

I think you will find all of these books very helpful additions to your investment library.


On Jul 21 10:45 AM andydee wrote:

> Rick,
>
> Well written, fair review.
>
> My question: I have a couple of Buffett books, (Lowenstein's, "The
> W.B. Way", "Buffetology&quot.... "Of Permanent Value") and "Security
> Analysis" - but would like to round out my collection with a couple
> on Charlie Munger, and more of your favorite Buffet books - do you
> have any recommendations?

What You Can - And Can't - Learn from Warren Buffett

I appreciate everyone's comments. The success ratios for WB I suspect are well below 99%, my guess would be much closer to about 70%.

This truly is a fascinating business where mediocrity of 50% (random success) can be achieved by a blind-folded ape. Sadly, many professional portfolios cannot achieve even mediocrity. What differentiates great managers is not only the frequency of success but the size and scale of that success.

This is by its nature, a very humbling business where great managers have batting averages of .550 to .600. WB has a higher batting average but is truly a power hitter.

I think the comments about globalization and emerging markets are fair comment for WB and for many value managers. Familiarity and comfort with US GAAP accounting is part of the rationale. IASB principles have only come together in the last five years or so...standardization has helped a great deal. An even more important aspect of avoiding emerging markets relates to significant differences in corporate governance practice.

However, look to the record of Templeton who pioneered the practice of going global. Jean-Marie Eveillard is another champion of global value investing that I respect. Interestingly, though he currently has a bit of an aversion to U.S. stocks, Eveillard's largest position in the States is Berkshire Hathaway.

Thank you again for your kind comments!

Why Homogeneous Thinking is Dangerous to Value Investors

Thank you!

Rick