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Andrea M Psoras
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  • Banks etc: community banks, thrifts' power liftings reward investors in Russ2, IWM, KLD
    Since mid November I have been tracking a 'theoretical' portfolio of community financials' stocks . Recently while looking those positions and associated indexes I also  have been tracking, I noticed that the Russ 2 index has outperformed virtually everything out there.

    Actually it was something I saw while reading the Nov 17 "Hedge Fund Alert" the Russ 2 index ( 10.50% ytd) in which  names of community financials are among the components, outperformed virtually all other Bench marks for October and YTD.

    Other bench marks hedge funds used, and with reporting 'returns' at end of October and Oct ytd % are S&P500 7.84%, MSCI EAFE 4.72%, Barclays Aggregate Bond 8.33%.
     
    Russ 2 outperformed ALL Hedge fund types (remember, which is actively managed money) except "Event Driven Hedge" funds which returned Oct ytd 10.99%.

                        price   $pr      %chg            52wkhi-lo            %52         %52   
                       1/7/11   chg                                                       wk lo       wk hi
    Russell 2000
    787.83Up 1.45Up 0.18%N/A580.49 - 801.13Up 36.59%Down 1.03%

    Associated EFTs such as the IWM iShares Russell 2000 ETF and KLD iShares KLD Select Social Index Fund ETF also are up strongly over their 52 wk lows at year end of 34.9% and 30.21% respectively. I include the social ETF because community financial companies survive most SRI screens unless they're bullies in their communities and have CRA violations and bad reps.

    Since the 'crash' in later summer, early fall of 2008 I've been saying these names more than likely are in better financial condition than other financials and from those very deep lows one would more than hit a number of home runs it only a little bit of nail biting. Although have not been on the sell, but more on the buy side and not a public blogger until recently on buying stocks of financial names, it only took a little time before others decided to take me up on my observations.

    Now, when one saw demonstrated that community financial companies had balance sheets and financials in better health than their plundering, neo-feudal bigFinancial cousins, the smart money went to the aforementioned ETFs and/or also VB Vanguard Small-Cap ETF and VFH Vanguard Financials ETF or even  IJR iShares S&P SmallCap 600 Index ETF each up and respectively better 190.52%, 151.57% and 150.62% than their 52 wk los. 

    So one with 'risk-appetite' for financial names whose businesses are situated locally and which are power lifting in their local economies, as well as other mid and 'small' cap names such as mid and small sized manufacturers including government and/or national security related contractors, many of which are 'smaller' cap names, all would have had good financial and accordingly good stock price performance over the past year and going into this year.

    Try not to let yourselves get hijacked by maggotry spirits! and keep everything in perspective.


    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
    Jan 08 1:11 PM | Link | 1 Comment
  • Can’t Pretend You Can Catch a Falling Knife: Selling BigFinancials

    Can’t Pretend You Can Catch a Falling Knife: Selling BigFinancials

    It’s Not Your Dad’s Accrual Accounting - How They’re Using the Eroded Financial Reporting Model to Pirate the Time Value of Money

     Posted originally on Bankinnovation by Andrea Psoras on September 26, 2010 at 3:09am in Credit;  Nov 29, 2010 7:29 PM | about stocks: KRE, IAT

    http://www.bankinnovation.net/forum/topics/accrual-accounting-and-using

    This past week while reading through Woelfel's 1993, "Handbook of Bank Accounting" to improve my understanding of Statement of Cash flows for financial institutions, I stumbled on his comments about accrual accounting's need for "Cash flows"...which "are important indicators of a bank's profitability and viability. To be profitable and viable, a bank must have sufficient cash flows to make loans and investments, meet withdrawals, satisfy loan commitments, and meet other cash requirements."  Meanwhile, "Cash basis information provides critical support to accrual basis accounting (but does not replace the need for accrual basis accounting)".

    What would he say in a new edition about current erosion of Financial Reporting that has bigFinancials' funding using 1980's brain-dead thrifts' 2.0 version such as Asset backed securities, and repo-ing these and other assets, commercial paper and liquidity mechanisms the Fed, et al have surfaced from its bowels which Woelfel also listed on pg 32 and 33 as "Specific and detailed supervisory powers of the Fed through its Board include prescribing rules and regulations governing:".  Just as an aside, this list includes a number of mechanisms that Chairman Bernanke this past week at Princeton attempted to characterize as new, attempting to play on our ignorance about what the Fed (our model of European central banking)has done or  what it has among its supervisory powers.

    Although this doesn't directly relate to my concerns about any continued erosion from accrual accounting, with the abuse of fair value accounting corrupting the income statement, Fed actions, inactions, and its credibility is key. Perhaps the frequency of these Fed 'irregularities' is extremely limited, that the Fed has engaged in buying anything other than Treasuries.

    Although now  with more “fair value” in the reporting model, what was rare will now be more frequent; Treasury having provided Open Bank Assistance to bail-out the bankrupt BigFinancials and flush the financial system with voter money to give moving markets to the BigFinancials, likewise was rare rather than have the Fed or the FDIC engage in discretionary efforts. The FDIC administering Open Bank Assistance, also fires senior management of the assisted depository, however since it was Treasury that administered the  bailout, this huge scam enjoyed even more discretion AND impunity for moral hazard.

    With the Fed, the bigfinancials crafted their own enronesque collapse, and whatever representations the Fed makes always should be subject to second-guessing and the historical tests for cause and effect.

    Back to the reporting abuses, US GAAP's Conceptual Framework seemingly is esoteric in this fantastic financial 'crisis'. The Concept 6 definition for Revenue Recognition violates accrual accounting's need to recognize the financial effects of transactions, events and  circumstances having or ultimately affecting cash consequences in the period in which they occur (Woelfel p,20).  

    Accountants may recall this Concept Statement existed before attempts at harmonization of US GAAP  and IFRS (European accounting/reporting model, misrepresented as being a better financial reporting model for US commerce) or even before the push for the US to adopt IFRS, although it seems it was a more European way to claim a gain, or 'revenue'.

    In effect Fair Value is Concept 6 Definition of revenue recognition, management can revalue and in turn at the end of a period claim that asset or liability revaluation, running the revaluations -  the unrealized non cash gains or losses through the income statement as if these were a real revenues or expenses that realize to cash (or have cash consequences) when they do not, although many of the items and those associated operating activities in which the BigFinancial is engaging isn't producing sufficient positive operating cashflows against their cash demands - and thus I've deemed them as cashflow parasitic, and thus a form of agency self-dealing and bilking the enterprise. And because it's management at bigFinancials, this method of enjoying revenues via fair valuing period over period change of balance sheet items I likened to white shoe welfare, especially since over time Fed annually inflating the money supply 3% and of late with QE2, because this market support is subsidized by everyone else except bank management.  


    In effect, it's enabling management to claim gains from balance sheet items or contingent non CME issued and cleared 'contracts' such as a derivatives as if these are generating revenue, like an interest, rent, or dividend, although it isn't often the case. As long as a bank has engaged in commercial banking and related activities, those balance sheet items will produce true revenues that realize to cash in the earnings cycle, while those balance sheet items, not needing to be revalued but via Fair Value those revaluations also being run through the income statement as if those too were real revenues that realize to cash, when in fact these revaluations do NOT realize to cash, but via Fair Value WILL affect the bottom line WITHOUT improving operating cash flow.


    Via fair value of all its derivatives contracting, agency pretends these are highly profitable.  Running these bogus, faux, non cash producing 'profits' through the income statement give appearances the bigFinancial fiefs are enjoying positive earnings, when in reality their OTC derivatives contracting and 'trading' which if these are NOT cleared to cash, and are swapped for other securities and thus are 'barter', then bigFinancials are engaging in dotcom schemes.  By their bogus OTC derivatives activities they're claiming to be 'profitable' and in that deceit are obscuring the losses from their regular commercial banking activities, that they're barely engaging in providing banking products and services.  In that recessed way they're contributing to our collapsing economy.  

    Back to the accounting, in the Statement of Cashflows, where Net Income is key to the enterprise’s operating cash flows, non cash activity passed- through Income Statement and thus in earnings becomes a problem when earnings failing to realize to cash fouls the operating cash flow.  Reported in the Income Statement, banks' interest income now is being fouled with the Balance Sheet hedging which perhaps may have associated cash-flows but perhaps not, with non cash items combined into the interest revenues as well as the loan accounts on the Balance Sheet. 


    Again, fair value accounting has the unrealized non cash gains recognized in the Income Statement as if these were real revenues that would realize to  cash.  Moreover, insufficient quality lending now gamed with hedging on the loans and asset items has diminished cash in the operating section of the Statement of Cash-flows.


    This all seriously erodes the quality of accrual based accounting which is established as the framework of our US GAAP somewhat less discretionary reporting model to give us financial reporting that produces a stable economic picture of the status of the enterprise and whether its operations and activities are giving us earnings that realize to cash.  An enterprise that produces earnings that realize to cash is an enterprise that gives us superior quality earnings and has more than adequate means to pay its obligations.  Shareholders could argue that is wealth development.


    Consider also the impact of backing out interest revenues when management has mark down loans to non-accrual, while having to make provision for deteriorating asset quality - although provisions goose operating cashflows rather than penalizing management for poor asset quality.  AND all of this contracting -so called hedging and risk management - through which agency can fair value and enjoy bogus revenues for those, has hidden poor management decisions and in general poor managing at our bigFinancials.


    Aside from some contemporary version of feudalism, this Concept Statement and FV accounting allows management to pirate the time value of money without the need for either a transaction or a contract such as one that  generates income: a rent on real property, an interest on a loan or bond, or dividend on an equity. In their contractual forms these have their incomes and/or in the case of a transaction of these balance sheet items, also have associated consequences such as a capital gain or loss, or the true sale with the transfer of rights and/or responsibilities, privileges of ownership.


    But the most craven self dealing has been Agency's pirating the time value of money. We've been shouldering the burden of that cost for agency self dealing - and thus is white shoe welfare, while management hasn't actually been engaging in banking activities that are producing quality earnings or meeting our economy’s commercial banking needs.  Other than if we have deposits on which banks pay us interest to rent our money, we can only have access to the unlocked time value of money and associated impact on a balance sheet item when we transact in some honest way such as buy or sell.  


    Agency at the bigfinancials however have now found how to cripple the system and abuse the well crafted flaws to the degree where they can print money through their income statements merely by even inflating their balance sheets with this smoke ‘n mirrors, meanwhile with the appearance of having done their jobs.


    And remember, management can claim their contracts are worth more from one quarter to the next because in the 'fair value' of those contracts. Through the Income Statement they’ll run that non cash unrealized gain and because of our crippled financial reporting model which IFRS will not solve - it similarly is crippled (remember, Europe spawned feudalism) society is funding bank management's enterprises not producing real or sufficient operating cash flows, but via the income statement can report to society it's 'profitable'. In fact those cheesy, inferior quality earnings in 2008 gave bigFinancial bankruptcy we saved.  Nor will Dodd Frank improve the smoke ‘n mirrors situation. 


    Worse, their ability to abusively OTC derivatives contract, and their traders’ books fungible through their income statements enables them to 'print' money via their contracting and serving as management currency.  That is a piracy when and because it is subsidized by Society which has to meet accountability tests that the bigfinancials and Global corporates have been permitted to avoid.


    Traded derivatives contracts/contractual obligations by ISDA banks' plumed (cartel of bigFinancials which engage in derivatives contracting-writing and swapping/trading) against their enterprises' resources after Phil Gramm added the loophole for these in the Commodity Futures Modernization Act 2000. This plume related and contributed to the collapsing of the US economy for it to comply with the G20 agreements' constraints.  This contracting also contributed to smoke ‘n mirrors inflation of their balance sheets.  To shadow G20-Basel regs and EU banks in 2004 the SEC also had a program with the "Net Capital Rule" for the largest US investment banks which allowed them to suspend their leverage ratio constraints in conjunction with allowing their balance sheets to inflate a few times over. 


    Enron similarly inflated/collapsed under the same game plan. Enron wasn't a bank that was TooBigtoFail; Enron's self dealing by its management garnered public decrying and associated punishment with its senior management getting jail time. In the parallel with the bigFinancials however, with all the open bank assistance that saved them from their own enron, NONE of their managements were fired nor successfully litigated. What happened? What's wrong with this picture when what the bigFinancials pulled off their own enron, with impunity.

    Some also say Enron was a risk issue, that Enron didn’t do anything illegal which if one at that point understood the energy derivative contracts Enron was trading were legitimized under the CFMA2000, regardless, the inside job nature of its collapse is not justified by those arguments.


    Even speaking to the risk ‘issue’ – whether Enron’s or those of the BigFinancials, management also apologizes that it has problems measuring their risk exposures.  This software and hardware IT, and associated measurement matter, the IT sectors and agency over the last 20 years have wasted the computer's gift to wallstreet by failing to properly develop optimal uses for DOS and/or ascii related to enterprise (text) data and analysis.   Their IT systems CAN capture the impact of their contracting, and with proper programming their software can capture the costs and pricing for their contracting. 


    Where Microsoft has dominated software to focus on personal and desktop applications, however, the software industry had not developed dos and ascii to more sophisticated levels to capture, process and analyze text activity of the trading/bartering which is happening among the counter-parties which are 'raging over the penny'.  The Cartel's counter-parties now are not only worried about what's on their own Balance Sheets because Concept 6 and Fair Value accounting allowing agency to pirate the time value of money from the Balance Sheet into the Income Sheet, but what's on the books of their counter-parties exported to them by way of the trading/ swapping/ bartering - all which gives society this huge cost because of agency's abuse and regulators' capture, and the failure of our software IT companies to give us more effectively programs and programming to track all of agency's activity, and what those true revenues and expenses are of those enterprises.


    And toxic financial RISK alert! The netted' positions of the $680 Trillion notional OTC derivatives contracts gives us a $25Trillion moving target hole. It's a moving target – RISK - because each derivative is a unique obligation management has contracted with a single counter-party that obligates the bank's resources of one sort or another. These contracts have been traded around, however, these contracts do not 'off-set' cleanly because by their nature as contracts by banks' managements, the self interests of the writer give the contracts unique characteristics and thus are not a 'clean' off-set. This is the reason the net gives us a moving target hole and that cartel’s hole is ah, nearly 2 years of US GDP - $25T.


    But that $25T hole is a subject treated cautiously by the analysts at the largest financial players. One fixed income analyst at one of the world's largest banks said in effect, we have to look at a little tiny window of that and address this in small increments, rather than deal with a hole that could swallow 2 years of US GDP.


    This contractual over-proliferation is quite serious. Without that clean-wash- trade quality, such as a wash sale in a stock or a call or put option on a stock or commodities contract that is exchange cleared and closely monitored, rather than a unique contract written by bank management obligating bank resources notional in the many Trillions of dollars, each of the large ISDA banks' open exposures are netting ball-park to $20B to $40B depending on the players size.  Remember it's not a clean net, where the offset is clean like a common stock wash sale, nor without bank management obliged resources of the enterprises they manage. “


    Wallstreet taking-out Mainstreet-  these open, netted positions rely on stable, upward trending markets so that their companies' capital and liquidity doesn't circle down the drain like Lehman.  The summer of Lehman's failure didn’t have the other bigFinancials in better condition than their felled chum.


    Regardless, given the $25T otc derivatives hole, agency at the ISDA cartel have vastly over obligated the resources of their enterprises, with the balance of society enduring the costs and consequences of that via voter subsidized and backed liquidity mechanisms, voter backing of all ISDA agreements among the bigFinancials and the voter ultimately the beast of burden when an ISDA cartel member fails as in the Lehman case. If they're saying all the derivatives contracting has been honored, it's only because of all the voter subsidized liquidity mechanisms available and voters of sovereigns backing all ISDA agreements when management blows itself up, manages poorly and engages in abusive practices bilking their enterprises.


    Altogether this serious agency self dealing and abuse with their OTC derivatives contracting and 'hedging'  has enabled bank management to run the Fair Value unrealized non cash gains through their income statements, while producing insufficient cash flow other than from repo and other short term funding that except for the Fed would shut down and become unavailable if the markets got nervous. 


    They also say they're now inclined and have had written into Dodd Frank Act that they'll settle for exchange 'trading' and or 'clearing'. But these exchanges are virtually controlled by the bigFinancials which are members; these clearing organs are self-interested to have power and turf  in management's multi-trillion dollar heist of the voters' wallets. Nor have the bigFinancials the means or collateral to fund the clearing. So who picks up the tab for this?


    Understand what I've explained. These banks not only ARE NOT profitable, but that their activities are costing society while their managements are bilking their companies, the voters and non-management shareholders’ wallets while the reporting model and legitimizing legislation is permitting the pillaging. The Huns, the Vandels, the Vikings, you name the clan that sacked civilizations and we're not looking at the numbers of those petit beasts compared to the pirates today in suits and with pens. Short of some physical bloody slaughter, we're looking at a form of financial nuclear war perpetrated against the everyday American, and perhaps the everyday man even elsewhere around the world where his bank was legitimized to rape his economy.


    What a huge gravy train to bigFinancials' managements on which is added this ruse that there's regulatory oversight and transparency except to themselves. It may be Fed wheat receipts, but those feudal players get to enjoy the relative wealth affect while the assets have been purloined into the hands of those few from the hands of the many serfs - the voters and what was our individual, self-rule, shoulder to shoulder society that is supposed to exist for us under life, liberty and the pursuit of happiness.


    Consider again the real burden of management's piracy of the time value of money has serious  externalities: the abuse and piracy has fallen on the backs and wallets of other stakeholders in our financial system and society with the cost of all of this in a system to and in which WE must have accountability and we are expected to be accountable. As it were however, we are picking up the tab for the bigFinancials' agency abuse. Meanwhile it's not honestly providing us the goods and services of a banking system that should operate responsibly; the bigFinancials want our (depositor, 401(k), etc) wallets while the financial cartel are facilitating off-shoring jobs and production, and contributing to constraining the economy to meet the constraints for the US under the G20 agreements.  


    While agency at the BigFinancials has parasited between $10T to $16T of voter money *now via "QE2" * to flush the markets so that the bigFinancials can have stable and upward moving markets to revalue their balance sheets, these vast sums are now available for whom except the financial players and their 'capital markets' now crippled to serve their self interests with society feeding on the leavings?  


    It is agency shamelessly and insidiously engaging in their inside and self dealing with virtually no push-back or punishment by the regulators which now will 'supervise' via some committee of oversight that is stacked all with regulators and insiders that wallstreet and bigFinancials will be able to choose those at the table and via campaign contributions pay for legislation about how that oversight body will be structured, with little to no sunshine for push back against the cartel. 


    Dirty secret -not only are the bigFinancials  also paying more in cash taxes to the IRS than they actually owe - I suspect as 'hush' or go-away money, but Social-economic blowback has expanded along with managements' pay packages and financial schemes:  many others in our society have lost their jobs, homes, etc while the  bigFinancials have contributed to trampling the US economy. The BigFinancials had their hand in having our Congress agree to the G20 treaties, in which the US is to constrain its economy to meet G20 constraints for it.  And it has veiled a key reason for all of this: so that our economy either doesn't outgrow the German economy or out produce the German economy which relies on exports to keep and/or support its economy. No disrespect to my German colleagues, but why have our bigFinancials favored those interests over the voters' stake here in the US?


    For this reason- we went into aggressive non-tariff'd ie, 'free' trade agreements.  Before 1993, very little non-tariff'd ie, 'free' trade existed throughout most of our history after the colonies became a republic.  In doing so from 1979-2008, however, more than 15% of our GDP tied up in production we off-shored into Mexico, China and the former colonies of our European allies, all serving to contribute to seriously eroding our economy.


    Also used to collapse the economy for G20’s interests: dot com inflate/collapse and the current dotcom-esque problems with bigFinancials' barter with their trading. We thought with shedding slavery that we'd shed that inferior economic model characterized by barter. Or in having left Europe behind, also had enjoyed liberty from the Old World's feudalism that included barter and made very little available to the serfs of what was considered the universally acceptable unit of exchange known as money, be it gold or something else that was considered MONEY.  


    But again we're sort of there in part with this current kleptocracy and their hijacking of the reporting model devolving from accrual accounting while in their self-dealing ways management is lining its pockets with the regulators and congress looking to likewise feed from that trough via FV accounting and the bogus 'gains' through the Income Statement used to goose earnings and pretend profitability while the truth in the externalities hits the wallets of many others impacted by the externalities.  


    Between our Congress's problems and our domestic economic problems, as well as the self interest of the Europeans financials and their governments, our regulators haven't punished nor cease and desisted this sort of agency plunder now seriously into the public weal. That bigFinancial cartel fief and its Teuton-ized European chums will attempt to devour all of our society, except we who understand the problem and in turn condemn it, all of it, every conflicted participant in all of this and require their accountability to the voters-stakeholders here in our society. 


    Agency, Congress and our regulators are to draw back in horror at the systematic looting by agency of the bigfinancials, aided and abetted by the Fed and Treasury's regulators (OCC and OTS), with the FDIC also at that table as a the good cop in the good cop/bad cop routine that attempts to play everyone else for ignorant and/or fools.


    This all quickly will cease; God's hand is not too short for there to be a swing in the pendulum against corruption, a crippled system and those who shave value outside the rules or hijack the rules for self-dealing and self-interest while the balance of society again has to foot the bills and survive accountability tests.

    Action-ables

    1. Sell BigFinancials
    2. Shed Fair Value attempting to hi-jack the reporting model. Restore a reporting model that allows banks’ balance sheets to reflect stable, safety and soundness characteristics, with analysts and would-be investors reading through the RAP and GAAP materials for asset quality and drawing their own conclusions.  The balance sheets of banks which are to serve as safe places for depositor money aren’t sunk or inflated in a correcting or expanding ‘market’. Thus reporting at amortized cost rather than FV better serves the financial sector but definitely shedding those enterprises which have balance sheets full of contracting that screams management discretion which is code for agency self dealing fair-valuing their balance sheets rivening like maggots with smoke ‘n mirrors from contracting, swapping, bartering,.
    3. Cease and Desist agency OTC derivatives contracting and ‘hedging’, swapping, the like. All of that anyway covers for bad management decisions and is facile for management greed and expedience.
    4. Stepping back from G20 and any further US contraction for German, European and British managed competition.
    5. Requiring the US government to relinquish backing including any financial support for all ISDA contracts written by US based bank written. This will require bank management to write fewer and of those if they write, vastly more cautiously. This backing anyway was part of why Congress, the Administration via the Treasury and the Fed bailed out the banks while obscuring the truth such as this.

    Andrea Psoras



    Disclosure: selling bigFinancials, it's your call but I dislike pirates and piracy at the cost of the wallets of others.

     

     


    Disclosure: No Positions held, although urging finding good community banks, buying those stocks

    Disclosure: no positions
    Nov 29 7:29 PM | Link | Comment!
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