First let me say that this has nothing to do with me, but given my interest in all things financial and the government during this financial crisis, I read with interest the Office of Inspector General’s Report to Congress regarding the SEC. The SEC deserves credit for casting such a critical eye at itself. It should happen more often in government.

First the humorous side of the report, the SEC apparently has issues with Porn usage among employees.

Now the Serious.

It never crossed my mind that it would be legal for employees of the SEC to trade stocks. Not that they shouldn’t have rights to own whatever they want in a trust. They should. Trading individual stocks and bonds. Wow.

There is a SEC policy in place regarding trading and what employees can and can’t do according to this report, but if you know about actions of one company, even if you don’t trade that company, doesn’t that provide you insight into an entire industry ?

But wait there is more. According to this report,

” we have determined that the Commission’s current system in place to report the ownership and
trading of securities is insufficient to prevent and detect insider trading on the part of
Commission employees or violations of the Commission’s rules.

The OIG investigation has found that the reports that employees are required to file when they buy, sell or own securities are not meaningfully reviewed or sufficiently checked for conflicts of interest.  Moreover, there is currently no system in place for the Commission to detect if an employee who has traded or owns a security failed to properly report such transaction.  “

Double wow.

And then there is this:
Allegation of Retaliatory Investigation
The OIG is investigating an allegation that Commission staff engaged in a retaliatory investigation of a company after it publicly complained about naked short selling.  During this reporting period, the OIG took extensive sworn, on-the-record testimony of the complainant and reviewed certain relevant documents.  The OIG plans to interview additional witnesses identified by the complainant and to take the sworn, on-the- record testimony of the Commission attorneys who worked on the matter.

If you want more information about Naked Shorting, this is one of my posts on the subject

The OIG report makes for interesting reading with ALLEGATIONS of intimidation, perjury, falsifying data to a court to get a judgment, and lots of abusive behavior within the employee ranks.  Then there is the irony of their lack of a definitive policy on the distribution of material non public information.

Finally, there is this nugget from the study:

Referrals to Department of Justice for Prosecution 6. Thats 6 SEC employees being referred to the Department of Justice for consideration of criminal prosecution. For the 6 months between April 1 and Sep 30 of this year. Out of only 3500 employees.

No wonder they released it on the Friday after Thanksgiving without any press release to let people know its available…

Here is a link. Check it out for yourself

http://www.sec.gov/about/oig/audit/2008/seminov08.pdf

and

Help ensure the integrity of SEC operations by reporting to the OIG suspected fraud,  waste or abuse in SEC programs or operations, and SEC staff or contractor misconduct by contacting the OIG.
Call:
Hotline# # (877) 442-0854
Main Office# (202) 551-6061
Web-Based Hotline Complaint Form:
www.reportlineweb.com/sec_oig
Fax:# # (202) 772-9265
Write:
Office of Inspector General
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-2736
Email:
oig@sec.gov
Information received is held in confidence upon request.
While the OIG encourages complainants to provide information on how they may be
contacted for additional information, anonymous complaints are also accepted.

In the big picture this is not a major suggestion. Think of it as something that can be done with no downside and long term benefit.

I personally don’t think a stimulus package of checks or rebates to the consumer will work. I believe consumers are so beaten up and fearful of the future that they will put it in the bank.  Of course 20 years ago that would have been a good thing, These days banks don’t appear to be lending those deposits. So there is no primary or secondary stimulus impact.

Instead, having the government spend money on public works, which in turn creates jobs, will have a quick and positive economic impact. As much as it pains me to write those words, a drowning economy can’t worry about its form as it tries to get back to the surface. Sometimes you have to win ugly.

Private money is going to stay on the sidelines because we all know that there are unbelievable bargains available out there. Our money is waiting  to go to equity and debt where we think we will get outsized returns. If and when those returns happen, money will come back in as new capital investment. Until then, the only liquid investor willing to put non current assets on their balance sheet is the government.

My little idea on where the government should spend money in public works projects ?

Parks and Schools.

Maybe this is obvious to those in the coming administration, but I think we should be buying up foreclosed homes in areas that have been overwhelmed with them . Tearing them down, and replacing them with parks and schools.

Of course municipalities will have to get involved with eminent domain, but a guess is that if we buy occupied homes in communities with a large base of foreclosures, we would be rescuing many homeowners from huge declines in the market values of their homes. Something many will not be upset with.

The upside of this program of course is that not only will you be improving areas that have come across tough times with parks and schools that will act as attractions to potential new residents, but the inventory of homes will be reduced as well.

Two years ago creating parks and building schools was a local endeavor that few municipalities could afford. Today they are an investment that can bring suffering communities emotional and financial relief

On to the subject of the Inauguration. Four years ago I suggested that the Bush administration cancel the inauguration parties and instead ask corporations to donate that money to the victims of the Tsunami.

Its fair to ask where I stand on the coming inauguration and whether parties should be canceled and money sent to the victims of the tragedy in India.

When the tsunami hit, it was a devastaion of epic proportions. Raising money for the survivors and rebuilding was a responsibility we as a nation accepted. We had telethons, events and fund raisers to try to help. The unfortunate situation in India, at least as it stands today, is not one that can be helped by contributions to the survivors. Thoughts and prayers, yes. Potentially  support for anti terrorism programs, yes. But re-routing funds from anything to India, as least as far as I am aware, won’t help survivors or hostages at this time.

In addition, the 2005 inauguration was President Bush’s 2nd term. That it and of itself makes it a completely different set of circumstances.

That said, the coming inauguration is not off the hook. Some of the costs for housing, events and tickets I have seen and been offered are absurd. President Elect Obama should recognize and address the fact that in these economic times, corporations that are laying off people or getting bailout money should not be spending money sponsoring inaugural events.

Is there any doubt that the next “bailout scandal” will be banks and other bailout recipients sponsoring Inauguration events or spending boatloads of money to attend ?

Note to PE Obama, have your staff scrub the sponsors list and look for the words “bank”, GM, Ford and Chrysler and then google all sponsors for the word “layoff”

Just a brief update to try to explain what some commenters dont seem to understand.

1. the only thing that cable companies, and satellite for that matter have to sell is bandwidth and the applications they can run on that bandwith. More bandwidth means more digital everything.

2. For Basic Cable subscribers that get say, 40 analog channels, they are consuming 40 x 38.6mbs or 1.54 Gbs. Let that sink in. 1.54 Gbs of bandwidth. Compare that to how fast your internet access is. That more bandwidth than your entire neighborhood consumes online , by a lot.

Thats also the equivalent of 500 standard def digital channels.  If you convert that to revenue per bit for cable companies, or cost per bit for basic cable consumers,  the basic cable customers are getting the best deal in town. By a long shot.

Digital cable customers, not so much. Digital customers are paying multiples of analog customers for bandwidth.

In reality, analog customers are getting an amazing deal, and the cable companies have been hesitant to convert them only because of the potential FCC backlash.

I’m as cynical as the next guy when it comes to cable rates and motivations, but the reality is that the longer analog remains, the fewer opportunities to leverage the freed up bandwidth to create next generation bandwidth hog applications.

Will the cable companies charge us an a lot for that bandwidth, probably. But when we start to see applications built on top of 250mbs per second and more, it will have far more value to society than watching USA Network on your old analog TV

And Net Neutrality ? Well if everyone had that 1.54gbs available to them, net neutrality would be a non issue. We wouldnt be arguing about access or pre emption, we would be arguing about quality of service

You may not know it, but the cable industry is fighting a battle for the future of the internet. In the grand scheme of things, I think both the FCC and the Cable and Satellite industries want to see the internet thrive. In this case I believe the FCC is making a mistake.

Every now and then, things get a little confused and in this case the confusion is going to cause the internet to take a hit. It could be a potentially big hit, and the only group fighting it is the cable industry, and yours truly.

The Cable industry has been doing exactly what every internet user in search of more bandwidth wants them to do, converting analog versions of channels to digital.  Each analog channel takes up 38mbs of bandwidth. Thats right.  CSPAN takes up more bandwidth than you have available to you for internet services. Crazy isnt it ?

The standard def digital version of the same channel takes up less than 3mbs. The typical HD version takes up about 8mbs or less. So, every time a channel is converted from analog to digital a MINIMUM of 28mbs is freed up.

Of course the bandwidth that is freed up can be used for any number of digital offerings, from more internet bandwidth (accomplished via channel bonding and Docsis 3.0), to more HD channels (which obviously is good for our HDNet), more video on demand and more.

Why has the FCC made this an issue ? Because it does reduce the number of channels available to those who connect their cable to older set top boxes or directly to their analog TVs.

So which is more important, protecting analog TV connectivity, or having more bandwidth available ? Obviously I think freeing up bandwidth should be a priority. Otherwise, what is next , stopping Youtube and other video sites from increasing the bit rate of videos because those with dialup will be forced to upgrade ?

Broadband should be a priority in this country. It not only equates to faster internet service, but it will open up many new applications that can significantly impact our society. All of which are far more important than making sure that an old analog TV can receive a few more basic cable tv channels.

This past Nov 22nd Youtube had its first major live event. A concert featuring HDNet fave Joe Satriani , Katy Perry Will.I.Am and others.   Of course everyone involved in the space is chattering about whether or not the show was a success.

According to Mogulus, the live internet broadcast peaked at about 700k simultaneous users. That’s huge for an internet audience.   I think by any traditional Youtube measure , you have to call it a success, with some major gotchas.

First the reasons why it was a success:

700k would be a great audience for a small cable network. Especially for a 1 off show.

MORE IMPORTANT than the audience size was the amount of money that Youtube had to spend to generate that audience. My guess is that they only promoted it on their site  and via traditional PR.

A traditional small cable network would have had to spend several million dollars in off network promotions (radio, tv , net, mag, newspaper) in order to generate that size audience and then they would crow about how it was one of its biggest audiences ever.If Youtube can prove that it can generate this size audience on a weekly or monthly basis, it has a huge hit machine on its hands.

In particular, the audience was probably right in the 18 to 34 sweet spot that advertisers covet. More good news. They will be able to sell a ton of ads in and around their shows.

Thats on the positive side. What about the negative ?

While the cost to promote was extraordinarily low, the cost to deliver was incredibly high. The marginal cost to deliver one more viewer for even the smallest cable network is the same as the largest. Nothing. Youtube had to use the services of Akamai to deliver the event. Akamai by all accounts did a great job, but as the size of the audience grows, the total cost to deliver future Youtube live shows will increase. Cable networks do not have this problem.

Some estimates had the cost to Youtube at 25k or 10c Gb. 10c a gig works for ad hoc downloading, but when you have to have dedicated servers pushing out unicast streams, those costs go up. But even if its only 50k per hour. Extend that out for an entire day, and you are talking $1.2mm PER DAY to deliver an 800k continuous stream to only 700k average simultaneous users Slice and dice the online delivery costs any way you like. Its still incredibly expensive

Thats not going to cut it for any internet content source, even one owned by Google,  to be able to compete with even the smallest cable network.

The 2nd issue applies to the net as a whole. Akamai could devote its full resources to nicely deliver the show to 700k users. The real question is how many of these types of events could they deliver at once ? What if myspace or MTV came to them and there were 3 or more of these at the same time ? How many simultaneous users across multiple large events could Akamai and its competitors handle ?  I would be shocked if it could handle 3mm simultaneous 800k streams reliably.

There were reports of buffering and drop outs for the Youtube Live event. Thats acceptable today. It wont be acceptable as a TV alternative. It will be less acceptable if these live events are offered as alternatives to traditional TV

So there was good news and bad news. Anytime you attract and deliver 700k simultaneous users, its a success. Whether or not a content provider, even Youtube could ever make a profit doing anything more than 1 off events has yet to be determined

November 18, 2008

On behalf of

Mark Cuban

RE: SEC Civil Action in the United States District

for the Northern District of Texas, Dallas Division

The SEC knows their case centers on one telephone conversation between two individuals- 4 years ago. The SEC claims there was an agreement between these parties to the conversation to keep certain information confidential. We interviewed Guy Faure, the former CEO of Mamma.com Inc., with whom the SEC claims Mr. Cuban made an agreement. We had a court reporter transcribe the interview. There was no agreement to keep information confidential. Here is a relevant excerpt from the interview with Mr. Faure:

CHRISTOPHER CLARK :

1) Q- We spoke earlier about you were telling Mr. Cuban in words or substance : “I have confidential information for you”.

A- Right.

2) Q- Do you recall anything Mr. Cuban said in response or reply to that statement by you ?

A- No, I do not.

The SEC knows this-they have the transcript, yet they brought the case anyway. Why? Do they have a different statement from Mr. Faure ?

Why did the SEC end their multi-year investigation of Mamma.com Inc. for alleged securities laws violations days before interviewing present and former Mamma.com Inc. executives about this matter? Was the timing a coincidence? We think not.

Any inquiries respecting this release should be directed to Stephen Best at Dewey & LeBoeuf LLP (202) 346-8735.

——————————

I wish I could say more, but I will have to leave it to this, and let the judicial process do its job.
November 17, 2008
RE: SEC Civil Action in the United States District

for the Northern District of Texas, Dallas Division

Mark Cuban today responded to a civil complaint filed by the United States Securities and Exchange Commission in the United States District for the Northern District of Texas, Dallas Division. In its complaint, the Commission charges that Mr. Cuban engaged in violations of the federal securities laws in connection with transactions in the securities of Mamma.com Inc.

This matter, which has been pending before the Commission for nearly two years, has no merit and is a product of gross abuse of prosecutorial discretion. Mr. Cuban intends to contest the allegations and to demonstrate that the Commission’s claims are infected by the misconduct of the staff of its Enforcement Division.

Mr. Cuban stated, “I am disappointed that the Commission chose to bring this case based upon its Enforcement staff’s win-at-any-cost ambitions. The staff’s process was result-oriented, facts be damned. The government’s claims are false and they will be proven to be so.”
——————————

——————————

Ralph C. Ferrara, Esq.

Dewey & LeBoeuf LLP

1101 New York Avenue, N.W., Suite 1100

Washington, D.C. 20005

No question the start of the season has been a struggle for the Mavs and all of our fans.  I guess the good news is that hopefully we are getting the bad part of the season out of the way at the beginning rather than during the end of the year, as we have the last several years.

I hate to lose, and we are going to do everything we can to get everyone on the same page so we can finish games the same way we have been starting them.

Thanks to all Mavs fans for hanging in there with us. I hate to lose games as much as you do, but the season is just starting. We have gone through struggles before, and Im sure we will go through them again.  As will every team.

What seperates the Mavs from other teams is that we have great fans who have stuck with us through our entire history.  My committement as always, is that Im going to make sure we do everything we possibly can to set things in the right direction.

MFFL

As I watch and read about the Hedge Fund testimony currently going on, its obvious that the right question has not been asked.

1. Those who give money to hedge funds rarely if ever have a 1 year investment term. In fact, the contracts for investment do everything possible to lock up your money for as long as possible.

vs

Hedge Fund Managers pay themselves on an annual basis.

That is a huge disconnect and there in lies the rub. While it is true that the managers are paid on a performance basis (plus their 2pct of assets) and some even have clawback provisions, that is not enough. If a fund can get big enough, all they have to do is max out in a single year and the managers are set for life. They put hundreds of millions of dollars EACH in their pocket.

The investors on the other hand, can not max out returns in a single year. They are locked in. So there is a huge disconnect. Managers think short term, investors long term.  Managers should be paid on their performance over a much longer period.

If you made the minimum period for managers 36 months, you would see wholesale changes in how investments are made by Hedge Funds.

So, back to the Testimony today. The questions I would ask ?

How long does the average investor stay in your funds ? Why arent you paid based on the same term rather than annually ?

Got your attention didn’t I ?

You all do realize that anyone who buys a new car is UNDERWATER the minute you sign the papers and drive off the lot ? That you get further and further underwater every single day ? Maybe thats why so few are  buying new cars ?  We havent instituted a bailout for their underwater car loans.

3 Companies facing cash crunch oblivion. A bankruptcy, an desperation sale and pure desperation. What do all 3 companies have in common ? Share buybacks. Billions and Billions and Billions in share buybacks over the last 18 months.

AIG

March 2, 2007

NEW YORK, Jan 29 2008 (Reuters) - Lehman Brothers Holdings Inc, the Wall Street investment bank, on Tuesday raised its common stock dividend 13 percent and said its board of directors authorized the buyback of up to 100 million shares.

New York-based Lehman said the buyback program covers nearly 19 percent of its 530.6 million shares outstanding at year end, and supersedes a prior authorization.

The shares covered by the new program are worth about $6.25 billion, based on Lehman’s Tuesday closing price. Lehman shares rose $1.90, or 3.1 percent, on Tuesday to close at $62.53 on the New York Stock Exchange.

Can anyone say “financial engineering” ? think all 3 companies could have used that cash they spent trying to pump up their stock prices ? All that cash going to people who sold the stocks, huge losses going to those who held the stock. Thats why dividends are far better than share buybacks. At least in this case all shareholders could have gotten something back other than “the bag” remaining shareholders continue to hold.

Again, there is no risk to CEOs for playing these financial engineering games. All it does it pump up the stock. They sell into the rise and put money in the bank.

One last point, has the irony of 3 of largest companies in the country who make their money giving financial and insurance advice to companies and individuals, are facing ruin from the advice they gave themselves ? If this isnt a lesson to every individual who is taking advice from an investment firm, i dont know what is.

As much as I felt posting my “Thanks for the Advice on Josh Howard” post was the right thing to do, I have had an upset stomach all day because of it.

I thought it was important to point out the hatred and ignorance of so many who quickly judge people they have never met, based purely on soundbites and headlines. If you think you know any public figure based on what you see on TV or read on the internet or in newspapers, you are sadly mistaken.

I wanted to point out the irony of them experiencing the onslaught of attention from suddenly and unexpectedly being placed in the media spotlight from a throwaway comment.

Try being in a position of always having to be “on” and checking for cameras, because if you let down your guard, any soundbite, even one as short as 11 seconds, can turn into headline news across the country, no matter what the context. Its not always easy. Nor is it easy to just accept that its part of being a “public figure” .

I also knew that because of the email addresses being included, they would be receiving the same level of hate, ignorance and judgment that Josh and I had. They would get the same type of ignorant email threats of “I wont do business with your company again”, from people who have never done business with their company. The “I’m going to email your boss and all your sponsors” threats, because that’s the way people try to shout down other people these days.

That’s what bothered me all day. So I have removed the post.

Hopefully something good came from it being posted

Dear Sen. McCain,
I admire your desire to cut taxes, and to eliminate the pork barrel spending that costs all Americans our hard earned money.I like your Maverick spirit.

However, after the events on Wall Street this past week, my hope is that you will completely retract your economic strategy and do the prudent thing, which is to say that your strategy of tax cuts is no longer viable when the government is about to take on what could be anywhere between 500Billion and 1 Trillion dollars in debt to support retaining liquidity in our financial system and in turn keep our economy running smoothly.

Dear Sen. Obama,

I respect your desire to reduce the tax burden on the middle class, and in fact give them a tax cut, while increasing the tax burden on those earning more than 250k annually.  I understand that your goal was to have the wealthy pay for the tax cuts of the many. Speaking for exclusively for myself, I was willing to accept the tax increase and examine your candidacy based on other issues.

However, after the events on Wall Street this past week, I have to take a new look at your economic strategy.  The trillion plus  dollars of market valuation that have been lost in the stock market  has come from primarily those you would like to increase taxes for.  The reality of the market was that it  has given greatly to the wealthy over the past 8 years, in the span of a few weeks, it taketh away .

I know many people who have lost much if not all of their networth, and during my trip to NY this past week, met several who have been completely wiped out. Their entire life savings, gone because they owned stock in the several financial institutions that have gone bankrupt or sold at pennies on the dollar and their jobs were lost as a result as well.   My hope is that you will completely retract your economic strategy and do the prudent thing, which is to say that your strategy of tax cuts for the middle range of earners, and tax increases for those earning 250k  is no longer viable when the government is about to take on what could be anywhere between 500Billion and 1 Trillion dollars in debt to support retaining liquidity in our financial system and in turn keep our economy running smoothly.

Senators McCain and Obama, failure to  recognize that what the financial markets went through changed the fabric of our economic model and in turn the impact of your economic policy is completely irresponsible.

The prudent thing for each of you to do, and I know neither of you is asking me for this advice, but Im offering it anyways, is to say the following:

“Based on the series of events on Wall Street this past week, I am withdrawing my economic proposals. Once the market settles down, I will meet with Secretary Paulson, who has done a phenomenal job in handling this crisis, and gain a better understanding of where the economy is and where it can go from here. Based on that information, I will present to the American people my new economic strategy.

In the meantime, because the economic future of this country depends on the funding of the plan Secretary Paulsen has proposed, I will set aside my campaigning and work with my colleagues in the Senate and across my party to quickly get this bill passed. The future of our economy depends on it”

That is what my candidate will hopefully do.

And one last thing I have to mention. Does everyone realize how much bigger a disaster last week would have been had Social Security been privatized ?  Why ? Because the cash from the accounts would have allowed for more leverage in the system, making this delevering process even more painful. Who knows how many would have placed their money in what they thought were safe instruments, created and sold to them by companies like Lehman, only to see those funds value greatly diminished or destroyed. I believe its also safe to think that those Soc Sec funds would have jacked up the markets to even higher levels, meaning the fall the last weeks and months could have been even more dramatic.

Please, let us all remember that when the topic comes up again in the future.

Lack of transparency got us in to this mess, lets not let lack of transparency keep it messy. The government needs to immediately setup an exchange, it could be ebay.gov with more in depth description fields, for all I care. However they do it, EVERY asset  the government will buy or sell as part of this buyout needs to be shown and described with the price the government is willing to pay or sell the asset for.

Why ?

To keep government honest.

Not that anyone in our government would ever put their own personal self interest first  and over or under pay for an asset. Nor would they ever take those assets and then sell it for less than market value in exchange for “personal considerations”.

I know it could never happen, but just to make sure it doesnt, we need to post the assets involved in the bailout and the prices paid. When the assets are sold, they need to post those prices as well

In addition, by posting the assets in an ebay like auction/sales environment, it would enable independent buyers to come in and buy the assets using private money rather than government money. The benefit of course is obvious. By adding liquidity to the process, the government could be responsible for less and sellers could get more.

This is the only way I can think of to get true transparency. Without it, i promise you that it will be IMPOSSIBLE to account for how much money was spent on the assets and how much cash was generated from the sales process and what the net cost or benefit to taxpayers is.

Without transparency, we wont have any idea how this all played out. None. Which creates the real problem of allowing it to happen again, but with the government needing the bailout.

One last note on Senator Dodd’s proposal to extract shares from companies that the government buys assets from as part of the bailout, all i can say is HELL YES. As a shareholder in the USA Treasury and USA Inc, if you want to borrow money from me  or sell assets to  me that you cant sell anywhere else, then I want stock/warrants or options as my vig. You got to pay to play. In the real world, if you want mezzanine financing, you pay in kind, and provide warrants. This should be no different.

if you dont like the deal, find someone else to buy the assets.

On the subject of executive compensation, if they need government bailout money, take away 100pct of exit pay and any bonuses. Let them quit if need be.

If you think you cant find someone else to take the current CEOs place,think again.  No matter what number they pick for the CEOs compensation, its more than a lot of very smart people are getting paid elsewhere and those people would be more than happy to take a raise and replace the CEO who just took about his/her company

Let me put this a different way. The most powerful person in the world today is Sec Treasury Paulson. There is the very real possibility he will be replaced in  January. The person replacing him will be paid a government salary of I think, no more than 400k. if they can find a replacement for him, they can find a replacement for any CEO running any company for a reasonable amount

from my mobile device

According to some pundits, the simplest solution to our economic crisis is to suspend or abolish the mark to market accounting rules.

For those unfamiliar. Mark to market is where a company reprices their assets on a daily basis to the most recent market transaction price. If asset prices are falling, this means that the total value of assets on a banks or other company’s books falls. When the total value of assets fall, then those who have lent them money get worried. They are worried because the assets they lent them money against now are worth less. If the borrower cant pay them back, that leaves the lender SOL. SO, the lender demands that the borrower raise cash immediately or add assets to make their asset total higher. If the borrower does not, the lender will either take back enough assets to cover their loan, or find some other way to get their money back.

In a normal market, that wouldn’t necessarily be bad because the borrower could refinance the asset and pay off the original lender. In this market, with credit tight or not available at all, that is not possible. So the borrower ends up selling assets at far below market value to raise cash quickly.

This type of desperation sale is happening everywhere, the latest example is Goldman Sachs sale to Warren Buffet. If enough assets are being sold at firesale prices, the market for those assets collapses, as we have seen with housing prices. This creates a vicious circle. Asset prices are sold at firesale prices. That forces more mark to market writedowns, which in turn forces more firesales. etc, etc.

To some the resolution is to end or suspend mark to market accounting rules. Their logic is obvious. If there is no need to mark to market, then assets are not written down. Banks and other companies are not forced to have firesales to generate capital and prices of assets are not pushed down by the firesales. All good, right ?

Not so fast.

The other side of the coin is that because assets are not being marked to market, shareholders and potential investors have no real idea what the assets on the bank/companies balance sheet are really worth.  When prices are going up, shareholders and investors don’t care. Prices are going up.

When prices are going down, as in this market, cash is dear, and investors and shareholders do not want to take any chances that the asset values on the balance sheets have fallen dramatically. No mark to market, no trust in the balance sheet, which means shareholders run to the exits and there is no one there to buy their shares. Which means banks have to go out and find someone way to raise capital from people who dont know the real value of their assets.

Both routes get us to where we are today: A 700B bailout from you and I the friendly taxpayer

Which leads to my proposal which solves both sides of the coin.

First, let me say that its about time we take advantage of the fact that we live in a broadband enabled society. Our society is now educated to go online for information. We are digital information consumers. Its time we recognize that fact and integrate it into our decision making process.

My proposal is that we suspend mark to market rules, but require complete asset transparency for any company that chooses not to mark to market.  If a company avoids mark to market accounting,  Every asset that  company owns should be required to be listed on their website and updated in REAL TIME on their website. A full asset description, original cost or loan value, value on the books, and latest transaction for this class of asset, or an actual transaction price for the asset.

This means that investors will have the same information available as if the company had marked to market, but their actual balance sheet would not change. The best of both worlds.

I would recommend that every company be required to post this accounting information in a standardized format on a web page, AND to also post a complete comma delineated file that includes all that assets and required info.

Standardization is important as is this asset list. Why ? Because in this digital age, it wont be long till a very smart capatilist, takes all the data and creates a business out of consolidating and publishing the data and possibly even creating an exchange for the data.

If this is done, it allows for several alternatives to the current bailout plan to happen. It allows for what some call the “SwedishPlan” (from the 1992 Swedish bank bailout), but should probably now be called the Warren Buffet Plan or the 3P Plan. It  is the direct purchase of equity from the banks/organizations that need it, in the form of preferred stock and warrants in a 10 plus 10 format. (10pct Perferred, in Perpetuity, callable at 10pct Premium, ie the 3P Plan)

A combination of a 3P plan and the Virtual Mark to Market gives the government a chance to  make money back for taxpayers. It solves the banks problem of liquidity, and it stops the firesale of assets, while most importantly, increasing market transparency and in turn confidence in the market

It allows for the straight purchase of assets, by the Treasury or anyone else. I would of course recommend that any assets sold by institutions to the government then be updated with the price paid , date and who the buyer is. Transparency is king

tell me what you think about this idea.

This is what I wrote in my Presidential Endorsement Post:

In the meantime, because the economic future of this country depends on the funding of the plan Secretary Paulsen has proposed, I will set aside my campaigning and work with my colleagues in the Senate and across my party to quickly get this bill passed. The future of our economy depends on it”

The following has just been reported

SAN FRANCISCO (MarketWatch) – Republican presidential candidate John McCain said Wednesday he will suspend his campaign to return to Washington to deal with the current bailout debate. McCain also called for a delay of Friday’s debate with Barack Obama, the first of three scheduled debates, to focus on the current financial crisis.

Good for you Senator McCain. Thanks for reading my blog

Senator Obama ?

The bailout is a given. Its needed to introduce liquidity into the system. I wonder why no one is defining what happens after the 700B of mortgage and other assets are purchased by the Fed.

Has everyone forgotten that we didnt trade in last year’s bankers for a new team. The bankers that we hope will reflate the economy with loans to the people and companies who need it ARE THE SAME BANKERS THAT GOT US INTO THIS MESS. These are bankers that dont know how to bank the right way .

Not only are they the same bankers, but they now work for companies in an industry that has been completely turned upside down. WHAT MAKES ANYONE THINK THEY ARE ACTUALLY GOING TO MAKE LOANS TO MAINSTREET CONSUMERS ? What makes anyone think they are going to set standards that any normal American can meet, and then actually loan them money at terms they can afford ?

They wont. No chance, no how unless the Fed sets standards that makes them lend to Mainstreet America

You heard it here first. If the BailOut has not requirements for how the money is used, this is how its going to go down:

1. The Bailout Hits. Euphoria on Wall Street. Stock Market goes up.

2. Banking Balance Sheets improve, Banks of all types say the problem is solved. They loan money to their biggest corporate and very rich clients. They have to, they dont want to lose their business. Of course, those corporate and rich clients borrow as much as they possibly can because they dont know when and if credit will dry up.

3. Wall Street Analysts say they are optimistic that retail sales will be stable with last year, and possibly even up as consumer confidence has shown increases

4. We start to hear complaints from consumers and small businesses that loans are not available to them , or when they are, the terms are unreasonable.

5. Dec sales for retailers are below last year and below analyst expectations. Retailers say its due to lack of credit availability to consumers.

6. Mortgage default rates start to increase

7. Stocks fall hard

8. The Treasury Department says it underestimated the amount of money that needed to be pumped into the system in order to create liquidity for MainStreet. They announce they will use the ANTICIPATED profits from the 1st bailout to fund the next 500B of bailout

9. They time the 2nd 500B “investment for the taxpayers” to be on the 101st day of the new administration.

10. The Recession grinds on and on and on

Bottom line is this. If the 1st Bailout doesn’t set standards for allocation of proceeds so that corporate clients dont consume all the liquidity from the BailOut, those corporate clients will consume all the credit. They would be stupid not to try and take all the credit extended to them.

In addition, there must be credit standards set so consumers know what will allow them to qualify for loans (assuming there is any cash available for consumers) . The last thing we need is the redlining and redzoning of consumers. It may be 20pct down for a home and a given credit score. 10pct down for a car and a minimum credit score. But there needs to be some minimum standards so that consumers know if they are being taken advantage of, and banks feel the pressure to loan the money to qualified consumers. This needs to happen

I dont know why anybody thinks that the Bankers who got us into this mess are going to take 700B of taxpayer money and know how to loan us out of this mess. It makes no sense at all. We need to set standards for how the money will be used by banks

One candidate thinks he can add value to solving the greatest financial crisis since the Great Depression. The other candidate thinks he can’t add value and that its a better idea to campaign.

Here is the question I would ask the Senator: “How is it Senator Obama, that with Wall Street burning, you thought it was a better use of your time to campaign ?. You make it clear that one of your greatest skillsets is promoting consensus. Has there ever been a time when promoting consensus was more important to the financial health of the American people than today ?”

Even if all either Senator did  did was go to the meetings and shut up and listen, that would put both  in a position to offer help if needed.

Remember this. 90pct of being successful is showing up. The other 10pct is being prepared to  know what to do while you are there.

If enough people talk about it, it must be important, right ? Well the Bailout is important. It can provide needed liquidity into financial markets.

Unfortunately, it is now more important than it ever should have been because THE BAILOUT has passed from being a financial response by the Treasury, which it would have been had it been passed and played in 2 days to a completely different level. THE BAILOUT has now become THE BAILOUT: THE MYTH, THE LEGEND, THE BESTSELLER.

When The Most Powerful Man in the World Hank Paulson requested 700B to quickly reflate our banking system, it was merely a news story that Wall Street was following closely but Main Street had not begun to focus on. Way back then, Wall Street was willing to recognize that although they didn’t fully understand the scope of the problem, they could suspend belief and let the Fed do its thing. Wall Street trusted The Most Powerful Man in the World, and understood that this was the only chance that their business had to get back to normal.

Then politics happened. Regardless of why politics happened, the deal has  not gotten done. The delay gave MainStreet, now known as every taxpayer in America, the opportunity to realize that 700B was coming out of their pockets, again. That recognition caused all  of us taxpayers  to actually pay attention and read about or watch highlights of the hearings, at which point it became painfully clear that more than a few  of our esteemed politicians were fundamentally financial illiterate and had absolutely no idea what was going on.  Some of the questions were as painful for anyone with a mortgage or oustanding loan to listen to or read as it was for the Most Powerful Man in the World to respond to.

That led to the blowing up of the phones, inboxs and fax machines of every member of Congress. Instead of this being done quickly and turned over to the spindoctors, the Bailout became the number one story in the country. I have no doubt everyone in this country with a bank account asked someone whether or not their money was safe, including me. It was at this point the BailOut went from being a financial issue to being The Myth, The Legend, The BestSeller, The Bailout.

That is not good news. Forget the timing aspect of the Bailout and whatever fiscal costs may result from delays. The Bailout: The Myth, The Legend, The BestSeller has now become part of each us.

EVERY SINGLE AMERICAN with a bank account, savings account and/or retirement account has become fundamentally more conservative about their finances. We all inherently trust the entire system less today than we did last week. Our own individual Volatility Indexs have hit 51pct, and could go much higher. There is a growing amount of uncertainty among businesses and individuals and that is a very bad thing.

When uncertaintly levels get this high, businesses and individuals do the same thing: We hoard. Like the approaching bad storm, our survival instincts take over. Instead of bread and water, we hoard our savings.Our propensity to take chances declines dramatically.  We don’t spend. We save. We also try to gather as much cash as we can. That might be through selling assets. It might also be through asking for money from whatever sources of cash we can find, including banks.

None of which are good for the economy.

The BIGGEST PROBLEM is that now that the Bailout has become the Myth, The Legend, The BestSeller, even when the Bailout is passed and the money introduced into the system, it will be too little too late to get us back to “normal” anytime soon.

The people who run Banks will treat their banking assets much like they treat their personal assets. They will hoard. Yes, they will make some loans where they need to make their best customers happy and to keep their biggest customers afloat, but I doubt that much of that money will be loaned to MainStreet.

Why ? Because of uncertainty. The bankers who got us into this mess, those that still have jobs and those who used to work at Investment Banking Companies and took over or became banks, will be afraid to loan out much money for fear of running into liquidity problems again. They don’t want to go through this again anymore than you or I do.

On the flipside, once the Bailout happens, every John and Sally on MainStreet is going to run to the bank to first make sure their money is there and 2nd, to see if they can get a loan. After all, their taxmoney paid for the Bailout, they should be able fix their problems or improve their situation. From each according to their ability, to each according to their ability to ask for something. That is becoming the new American way , isnt it ?

The combination of lack of lending and an increase in asking will lead to a lot of disappointment and further uncertainty.  Which probably means that it wont be a good Christmas season for retailers and who knows what will happen in the financial markets.

Then the phones, inboxes and fax machines will blow up again as we hopefully are only in a slightly extended recession as the new President takes over and the discussion begins  about the next Bailout.

The BailOut could have worked well if it had happened quickly. Now, because its taken on mythological proportions,when it does happen, it probably won’t be big enough. And thats before we take into consideration the possibility of Oil prices running up again.

You never want to ask how hot dogs or Bailouts are made.

The good news is that we Americans are resiliant. We have an entrepreneurial spirit that has  overcome worse, and we will take on this challenge and beat it

What happens when the

and what happens re Oil, that problem has not gone away. if oil prices hit 140 again or higher ?

As you can tell by the number of the posts on this subject, I think we are in a very serious financial situation in this country. It’s bad for everyone and like many others while I think the Bailout is necessary, I would prefer any solution that doesn’t involve the government. Unfortunately, I don’t think a pure market based solution is possible.

That said, I considered what it would take for me to part with my money to provide liquidity into the banking system.

I will not just write a check to the Treasury. Thats like handing it to Ted Stevens. I’m not going to voluntarily give a year’s supply of crack to the junkies.

Here is what I will invest in:

If Treasury Secretary Paulson were to create an ETF to buy all the assets the bailout was planning to buy, along with all the warrants and shares of stocks in the bailout companies it can get, and then have any receipts generated by those assets, whether by sale, or regular income such as rent or mortgage payments or servicing them,  go into the fund, I would buy at least $50,000,000.00 of shares in The Fund.

It would not be difficult to do. Whatever funding that the Treasury Secretary says is necessary for the Bailout would first try to be raised privately from other Funds and individuals by selling them shares in The Fund.

If the amount of shares sold falls short of what the Treasury has defined as being need, the underfunded amount would be funded by the purchase of shares in The Fund by the treasury.

The ETF would initially be valued at the total amount raised and then trade based on its financial results and the trust the American people and international markets have in the job the Fund is doing to monetize the assets.  If the fund is making money, the ETF will trade up. If not, not. Either way, the share price and the transparency required of the ETF  will make it obvious to taxpayers  just how well their taxpayer dollars are performing.

If The Fund is as successful as some think it could be, it could pay dividends. Those dividends will be paid to investors, and to the US Treasury.

In addition, once the assets purchased by the ETF are aggregated and documented, and hopefully the economy has improved, it would be possible to trade out baskets of assets with institutional shareholders. This is a process that will help keep the  fund honest in how it manages the assets. If the Fund is not doing a good job of monetizing the assets, Institutional shareholders will look to exchange their shares for baskets of assets in hopes of better monetizing them.

This fund, like every other, would have investment guidelines. The same guidelines that the Treasury would use to work out the assets it would have purchased directly.  The fund, like every other, will have analysts and accountants and the same type of people that the Treasury would have hired to work out the assets, except hopefully it would be run more efficiently as a publicly traded fund.

I can’t think of any reason why this wouldn’t work, and why it wouldn’t be a better idea than the current Bailout options that I have heard discussed.

If they need someone to  help put it together and/or run it, I’m happy to help.

Tell me what you think

No question the bailout is necessary. We need the liquidity. But just like Botox, the impact of the Bailout will wear off very quickly. Its lipstick on bank balance sheets. The biggest mistake any taxpayer, shareholder or employee can make is to the think the Bailout solves the crisis. It doesn’t.

So Post Bailout what has really changed ?

1. Are there new limitations on debt leverage ratios ? No. The big investment banks are gone, but there are plenty of smaller ones ready and happy to take their place. Which is exactly where all the big brains of GS, AIG  and Morgan Stanley will go

2. Will the economy improve  ? No. The Bailout hopefully saved the economy from collapse, it didn’t improve any fundamentals. The bankers who got us into this mess got a reprieve and a few of their jobs saved. The Bailout didn’t make them any smarter. Taxpayers with good or better credit will have a chance to get loans. Same for businesses. Everyone else, the people who overspent their earnings and propelled the housing and retail economy the past several years, will not be able to refinance and will have to…….spend no more than what they can afford to pay off on their credit cards.  Which means the economy will contract to a smaller level and then start to grow again as people are able to save money and then spend those savings.

If people actually do save money, the contraction will be tough, but it will be shorter . This is still the USA and once people see money in their savings accounts (however and wherever they are held), they wont be able to resist the hole that is being burned in their pockets.

3. Are there any limits on credit or other derivatives products ?Hell No. All the fancy financial instruments that caused AIG and others  to go belly up or get bought are still unregulated. Unregulated and ready to be bought and sold by everyone who bought and sold them before. Do you really think those people are going to be willing to make less money in 2009/10 and beyond than they did last year because of what the world financial system is going through now ? Hell no.

They will invent new versions of the same instruments that supposedly avoid the pitfalls of the previous generations that got us into this mess.  They will attract huge amounts of cash and without regulation, the “Next AIG” will overleverage, the system will deleverage and we will have Deja Financial Vu all over again.

Remember this. The 1.25 Trillion Dollars plus lost in this crisis, IS MORE THAN THE HAS BEEN MADE IN THE ENTIRE HISTORY OF BANKING . Worse yet, its not the first time they have lost everything they have made in the history of banking.

4.There is a new sucker at the Table.  One of my favorite sayings is that when you sit at the table to do a business deal, you look for the sucker. If you don’t see the sucker, its you.  Well there is a new sucker at the business table, The US Government. There will be an untold number of  vulture deals put together  to leverage the anxiety of politicians who want to prove the Bailout can make a profit and quickly get taxpayer money back. Don’t be shocked to see the XY Morgan BailOut Opportunity Fund being sold in commercials on CNBC and Fox Business Network.

5. Transparency ? So how will we know how the assets purchased by the BailOut are doing ? We won’t. We will be told by our politicians how they are doing. Which means they will spin numbers they don’t understand into soundbites they hope will get them elected. Unless we move the purchased assets and the resulting transactions they create into a fully transparent fund that trades on a major exchange, we will NEVER know how well the assets have done. They will go into the general budget and be lost in the sauce.

Just try to understand the national debt and the accounting behind it and you will see how impossible it will be to track the success or failure of the Bailout.

Putting the assets into an ETF, as I suggested in my last post, will allow every taxpayer to see just how the assets are performing on a tick by tick basis, just as we follow the performance of any stock or fund we own. Because an ETF allows for the exchange of assets with Shareholders, it will also insure that the assets are managed properly. In addition, because the shares owned by the US Treasury  can be sold into a  liquid market, the money “invested” in to these assets could be returned far more quickly.

How would it work  ? The Treasury would buy the assets , apparently 250B to get started, and put those assets and the costs to manage them into the ETF. It would then issue 250B of shares, probably 2.5B shares at $100 each to themselves.

They would then immediately begin to sell shares to the market. So people like me, you , institutions, anyone who thought that this is a good deal, could buy the shares initially at $100 ea. From this initial offering, the market would take over.  If investors thought the assets were being well managed, the price would go up. If not, it would go down.

If demand was strong enough for the shares, and the price went up, the Treasury could issue more of the shares they own into the market, there by IMMEDIATELY REDUCING THE COST TO TAXPAYERS.

As a frame of reference, the marketcap of the fund, based on a 250B initial bailout, would of course be $250B dollars to start, which just happens to be the same marketcaps as MicroSoft and the same marketcap as General Electric. So this is far from being too big for the market to handle.

I promise you, this would work far better than the current plan to keep the assets behind the veil of the government, with no transparency beyond the listing of transactions and assets on government website.

6. Wall Street Will be a Barometer of the Bailout: No Longer. Far too many of our politicians think that the Stock Market, in particular, the Dow Jones is and will be a good barometer of how smart the Bailout is and how well it will do. WRONG.  There has been this big push to get the Bailout done before markets open. They lost all that sleep for nothing.

The minute the SEC suspended short selling on the 900 or so stocks they wanted to protect, they killed the value of the Dow as an index on the economy and the success of the Bailout.  We saw a big selloff last week as short sellers and hedges conformed to the new rules and adjusted their portfolios. Since that point, we no longer have an efficient market. Short Sellers keep optimism in check. The lack of short sellers mean that its hard for the market to be honest. We will hear more proclamations by companies that “there are no problems” and days or weeks later hear the same CEO comment that the failure of the company was “unforseeable and caused by dire market forces”.  It certainly will not be a true indication of financial performance.

Short Sellers serve a very valuable service to shareholders and taxpayers. Losing that has and will make the market unstable and unreliable. Always remember that it was short sellers that uncovered Enron, and all the biggest frauds on Wall Street.

With a Bailout in place, the market will go up. There will certainly be a post bailout placebo effect. How could there not be, there are no shortsellers to keep it down. But once the momentum stalls because there is no real capital left to buy stocks, then it will start to fall. Those who bought in the runup, the momentum players, will rush to cash and out of stocks to protect their portfolios.

Where will the market be in 6 months. No idea, but my guess is that it will be lower than it is today.

When the SEC allows shorts again, and it will have to, then it will fall lower. BUt thats good news. We will be able to trust stock valuations and we all can consider buying stocks with stable dividends again.

7. Main Street Hustles: If you think there were too many “buy homes at foreclosure” and “buy cars from the government” scams before, you aint seen nothing yet. It should immediately become illegal for anyone or any company to advertise the sale of individual assets sold to non qualified investors.

8. JP Morgan seems to be buying everything, are they being watched more closely now ? Of course not. They are the winners, and to the winners goes the Wizard of Oz Curtain. This is where we all pray that the assumptions that JPM is basing their acquisitions hold true. Read this to see the assumptions they are making on their purchase. If they are materially wrong, No one will be able to bailout that failure.

JP Morgan also is already in bed with taxpayer money. The Treasury will cover up to $29B in losses from Bear Stearns assets. Has any taxpayer seen any disclosure or transparency on this ? Of course not.

JPMorgan is a company trying to integrate the asset and debt base of two HUGE failed companies, Washington Mutual and Bear Stearns. It had to raise $8B just to get their equity to assets ratio in line. It needed the Treasury to backstop 29B in Bear Assets. Don’t get me wrong, I think JPMorgan is a very good company. But so was AIG. Its not so amazing any more  what execs will allow to happen on their watch to push earnings and stock prices.  Make sure you ask your representatives in Congress to keep an eye on JP Morgan.

9. Will more banks fail and what should I do ? Yes. Absolutely. If you have less than 100k dollars in the bank, do nothing. You are protected by the FDIC. If you have more, ask your bank about CDARS. CDARS is a distribution service that banks participate in that allows the bank that holds your deposits to distribute them among different banks to keep each of your accounts under 100k and as a result protected by the FDIC. This is what I did for foundation accounts I have.

In addition, there is something called the Right of Offset.  If you owe the bank money for any reason, business, mortgage, whatever , and the bank fails, then you can offset the money you lost in the failure against any money you owe the bank.  So if you have a mortgage, call the bank and confirm that you have the right of offset and move the money you have in accounts to that bank.

Remember to make sure which accounts match which debt. Your bank can confirm what matches and explain to you how the right of offset works.

For brokerage accounts, check with your broker to see what is insured, and what is not. Ask him/her what happens if the broker or institution that you bought your funds from fails. Make sure you get it in writing/email. This will be your protection to make sure that what you hear and what he/she is saying is the same thing.

Sec Paulson has asked for authority to spend what he needs to save our financial, and possibly the world’s financial system. There is only one problem. Sec Paulson may not be in charge of the Treasury for that much longer. So in essence we are giving  carte blance spending authority to some unidentified person.

If the Sen Obama wins, then the Democrats will have the Presidency and the Congress under their control. Which will give them the right to appoint just about anyone they want to run the Treasury.

Let me say that again.  A Democratic win could give them the right to appoint the King of the Financial World and let that person spend whatever they want, up to 700 Billion dollars. Have you heard anything scarier in your adult life ?

Now our politicians would reference the Oversight Boards that were appointed as part of this bill. Well let me be the first to write and say it outloud. The OVERSIGHT BOARD IS A JOKE.

Its not to say that the people that have initially been appointed aren’t smart people. They are. Thats not the problem. The first problem is that 2 of the seats, the Secretary of Treasury and the head of the SEC will probably change in the next 6 months. So we have no idea where that will go beyond them probably being Democrats. Thats not the worse of it.

The worse of it is that for Oversight of the biggest Bailout and privatization of assets in the history of this country, the appointees are not full time. They aren’t even part time. They all have other full time jobs. Important full time jobs . There is no way they can assure that the Fund is managed correctly and there is transparency and no corruption meeting 1x a month.

How in the world can you have people who only meet 1x a month overseeing the spending of 700B dollars ?

This legislation needs to be modified with a requirement that Sen Paulson is asked and agrees to stay on the job for at least 1 more year

The legislation needs to be modified so that the primary Oversight committe  is made up of full time business people who report publicly on a DAILY basis what is happening with our money and how the fund is performing.

Let me put it this way. Who in their right mind would invest money in a company where there is a darn good chance that the CEO will leave in a few months, and there is no known replacement ?

And one more importantly critical issue. The companies making all the banking acquisitions, JP Morgan and CItibank and Bank of America, they are basing the quality of these acquisitions on their ability to project failure rates and home prices.  Literally, how well they predict the future of these markets has more impact on the future of our financial systems than anything happening in the Bill.

The FDIC is  trying to use private money to minimize the public exposure to bank failures. That could be a very good thing, but they are making JP Morgan, CIti and B of A SO BIG, that after the BailOut if any of the 3 are wrong in their projections, we could create a far greater problem than the FDIC is trying to solve.

THe FDIC, as part of the brokering process, in addition to getting warrants/debt as they did in the Wachovia deal, needs to get the acquirer to agree to real time transparency standards . We have to be proactive in managing these mega banks. All surprises regarding the liquidity of these banks are bad surprises and we need to have in place dramatic means of monitoring them.

In addition, the banks need to agree to a date when  the short selling limits are lifted.  Short sellers are needed to show us any red flags in these new massive banks. We are placing a great responsibility on these mega banks. We cant just trust, we need to verify

Tax every single share of stock that is bought and sold 10 cents per transaction. One dime. If you buy a share of stock, your brokerage pays a 10c tax. If you sell a share, your brokerage pays a 10c tax. 1 share, 100 million shares. Its 10 cents per share.

Of course the  tax will be paid for by those of us who are buying and selling stocks. So what. Here is the reality. If you are a true investor. Someone who wants to own a share of stock in a company you believe in, then its an amount that is not going to impact your investment decision making process.

If you are a professional trader or an institutional trader that trades continuously, then it may impact your decision making process, but only to the point of reducing your returns by a minimal amount. Its not going to change your inclination to trade. If you make 9.9pct instead of 10pct, you aren’t going to stop trading.

Whats the economic impact ?

If the NYSE, Nasdaq, Amex and OTC are trading 2 Billion shares a day, thats $ 200 Million Dollars PER DAY. If there are 260 trading days a year. Thats about 52 Billion dollars a year.

Thats real money.

Of course there has to be some fine print. You could reduce the tax per share for stocks under $5 dollars to 5cents. But i would leave it at 5cents even for stocks priced at pennies per share or less. This tax would act as a protection for investors and traders who get pitched unregulated penny stocks and who are more often than not the victims of rip off artists.

Take this $52 Billion Dollars and ????. I will open it to the floor for suggestions and save my conclusion for a later post.

5 dollar and under stocks

What the stock market does today or any day  until short selling is restored, will tell us NOTHING.

The pundits are going on CNBC, Fox, Fox Business, Bloomberg, etc and trying to give us some historic reference and relevance of the big declines in the market yesterday.  They are comparing apples to oranges.

Without short sellers, we have no idea what shares are actually worth.

Short Sellers keep markets honest.

A market without honesty, what can that tell us ? Nothing.

Morale Hazard. Its another way of saying that Failure should have Pain attached to it. Wall Street is not stupid. While spreadsheets define financial risk, contracts define the personal pain of failure. When the financial rewards disappear or go negative, thats when the contracts get terminated or let expire. At which point any Pain associated with Failure tends to be eliminated. Here are a few steps that need to be taken in order to make sure that Pain remains associated with Failure.

1. Repricing of Options: It wont be long until we see the repricing of options in companies who’s stocks have tanked. Its another way to pump up executive compensation.  In addition to stopping Golden Parachutes, this Bill should prevent repricing of options for execs that participate.

For the rest of the public company universe, all option repricing should be required to be approved by a super majority of shareholders who actually vote .

2.  Closing of Hedge Funds: Everyone is a genius in a bull market. Hedge funds take their 20pct of profits when things are good. When things are underwater, not only do they not get 20pct, they often can’t start charging 20pct on profits until they recapture all losses. Rather than working their asses off to get investors back into the black, its not unusual for funds to close up shop.  Why work hard to get your investors their money back, when you can close the fund, start another hedge fund and start collecting your 20pct ?

Its particularly enticing after a bear market because the odds of making huge  money in the new fund improve dramatically.

The amazing part is often they will take the same investors they lost money for in the old fund, to the new fund. Why would investors follow a hedge fund manager who lost them money ? In the Hedge Fund world in a down market,  success is defined by outperforming their peers rather than actually making money. The fund manager may have lost you 20pct, but the market lost 24pct, so this is a good manager and you want to follow him/her.  So they take what money they got back in the 1st fund and put it in the new fund.

Hedge Fund Hopping is not necessarily a bad thing, however, it does encourage leverage and greater risk taking. Why wouldn’t a hedge fund manager leverage to the hilt and take bigger risks ? If it works, they make great money. If it doesn’t , you close up shop, move down the hall and do it all over again.

If we want to keep Risk and Reward, and Pain and Failure attached to inhibit future bubbles and melt downs, there should be a connection between closing a fund that has negative returns to its investors and your obligations to those investors when you start or go to manage a new fund.

If you start a new hedge fund after leaving one where the investors are in the hole within 2 years, some percentage of your profits from the new fund should go to investors of the old.

I will close with a question. Would you give 700 Billion dollars to a company whose CEO is going to leave the job in 4 months and you have no idea who the replacement will be ? Neither would I. The Presidential Candidates have to publicly committ to keeping Sec Paulson on the job (with his agreement of course), or publicly announce who will be running the 700 Billion Dollar fund, so we votes and taxpayers can vett him or her prior to their taking the job

I’m just saying..

Thats what so many want. Right ? I’m certainly not going to lie and say it is not a whole lot better having lots of money. I had a whole lot of fun and loved my life when I was eating mustard and ketchup sandwiches and sleeping on the floor of a 3 bedroom apartment that housed me and 5 buddies.

I have a whole lot more fun now. It doesn’t suck to be rich.

The question everyone wants answered, is how to get there. There are ways to get there. But there is not a template that works every time for everyone. It works sometimes. Getting there requires being ready when opportunity presents itself.

IMHO, change and uncertainty create opportunity. Times like we are facing now, with complete financial uncertainty are perfect times to start on the road to getting ahead financially.

First, here is WHAT NOT TO DO:

There are no shortcuts. NONE. With all of this craziness in the stock and financial markets, there will be scams popping up left and right. The less money you have, the more likely someone will come at you with some scheme . The schemes will guarantee returns, use multi level marketing, or be something crazy that is now “backed by the US Government”. Please ignore them. Always remember this. If a deal is a great deal, they aren’t going to share it with you.

I dont broadcast my great deals. I keep them all to myself. The 2nd thing to remember is that if the person selling the deal was so smart, they would be rich beyond rich rather than trolling the streets looking to turn you into a sucker. There are no shortcuts.

So what should you do to get rich ?

Save your money. Save as much money as you possibly can. Every penny you can. Instead of coffee, drink water. Instead of going to McDonalds, eat Mac and Cheese. Cut up your credit cards. If you use a credit card, you dont want to be rich. The first step to getting rich, requires discipline. If you really want to be rich, you need to find the discipline, can you ?

If you can, you will quickly find that the greatest rate of return you will earn is on your own personal spending. Being a smart shopper is the first step to getting rich. Yeah you have to give things up and that doesn’t work for everyone, particularly if you have a family. That is reality. But whatever you can save, save it. As much as you possibly can. Then put it in 6 month CDs in the bank.

The first step to getting rich is having cash available. You arent saving for retirement. You are saving for the moment you need cash. Buy and hold is a suckers game for you. This market is a perfect example. Right at the very moment when cash creates unbelievable opportunity, those who followed the buy and hold strategy have no cash. they cant or wont sell into markets this low, that kills the entire point of buy and hold. Those who have put their money in CDs sleep well at night and definitely have more money today than they did yesterday. And because they are smart, disciplined shoppers, their personal rate of inflation is within their means. Cash is king for those wanting to get rich

The 2nd rule for getting rich is getting smart. Investing your time in yourself and becoming knowledgeable about the business of something you really love to do

It doesn’t matter what it is. Whatever your hobbies, interests, passions are. Find the one you love the best and GET A JOB in the business that supports it.

It could be as a clerk, a salesperson, whatever you can find. You have to start learning the business somewhere.  Instead of paying to go to school somewhere, you are getting paid to learn.  It may not be the perfect job, but there is no perfect path to getting rich.

Before or after work and on weekends, every single day, read everything there is to read about the business. Go to trade shows, read the trade magazines, spend a lot of time talking to the people you do business with about their business and the people they buy from.

This is not a short term project. We aren’t talking days. We aren’t talking months. We are talking years. Lots of years and maybe decades. I didn’t say this was a get rich quick scheme. This is a get rich path

Now you wait for times of uncertainty and change in your business. The time will come. It may  come quickly, it may take years and years. But it will come. The nature of our country’s business infrastructure  is that it is destined to be boom and bust. Booms are when the smart people sell. Busts are when rich people started on their path to wealth.

You will know when that time is here for you because you will know your business inside and out. You will be ready because you will have been saving up for this moment in time

With all the change and uncertainty in the financial markets, there are people right now making more money than they ever dreamed of. They are the ones who have been living the real estate market and the financing behind it and understanding what actually what was going on. They re the one who understood the complexities of the credit markets. When everyone was following the crowd, they kept on saving their money and avoiding the temptation of groupthink.

Boom and busts happen to every industry. The question is whether you have the discipline to be ready when it happens for you ?

If you do, you will find out what it feels like to get lucky.

For more on how to get lucky, here is some additional reading for you

Our financial system is quickly become a Rube Goldberg contraption of quick fixes. We have yet to see any fundamental changes to how the business of business is done. There has been one theme to the financial engineering of Wall Street: Print money and give it away

Like any Rube Goldberg contraption, it seems great when you are desperate for a solution. The problem is that in hindsight its always a mess.

If the Fed is going to give money to corporations unsecured, what happens if they cant pay it back ? Yep, I dont know either. Does the Fed ?

How much are they going to loan ? Yep, I dont know either. Does the Fed ?

Which companies will get the money  ? I don’t know, but I own a bunch of corporations, can I borrow some ?

Does the Fed remember that it was leverage and the ensuing deleverage that got Investment Banks into trouble. Will there be leverage limits on corporations that can borrow money ? Just because the loans are just 3 months doesnt mean they wont be a problem./ How many times will  they let a company roll over the debt ?

How will the Fed’s Special Purpose Entity (which will actually lend the money) pick which companies to lend to ? Will they be Obama or McCain supported companies ? Defense contractors who need money to supply bullets for our troops ?

If the loans are unsecured, what will the Vig be ?  Cash ? Stock ? Preferred ?

Where is the transparency behind all of this ?

Call me a cynic, but I dont trust anything that doesnt offer me a realtime data stream

You would think that in 2008 that markets should be efficient.  One market that certainly is not is the corporate bond market.

Any individual who has ever tried to buy a corporate bond knows how difficult it can be. There is no exchange for corporate bonds.  They don’t trade like stocks, indexes, ETFs, or anything for that matter. Each purchase is  more like buying a car than buying a stock. There is little liquidity for 99pct of the corporate bonds issued.

That is a huge problem on many levels. It makes it harder for corporations to issue bonds. It makes it hard for individuals and institutions to buy bonds. It makes it harder for buyers to sell bonds. There is no question that our money markets would be safer if there was a liquid market for the bonds money market and other funds hold.  Trying to sell bonds in even small volumes can be an adventure, and thats not a good thing

The very worst part of all of this is that it makes it so difficult to buy and sell  bonds,  stocks dont have to compete with bonds for buyers. Think about it.Thats a disaster.

If stocks and bonds truly competed for buyers, buyers would benefit. You would see more stocks paying dividends. Consumers would realize that bonds are less risky than stocks.  It wouldnt take losing all your stock in Wachovia to realize that Wachovia bonds were safer than Wachovia shares.

More competition between bonds and stocks would mean that consumers money would be safer. More money would flow into bonds and less into stocks, which means we wouldn’t see such dramatic moves in the stock market. Stocks wouldnt go up nearly as much, and they wouldnt come down nearly as hard.

One of the shocking problems of our financial system is that there is no exchange on which bonds trade.  Want to know the current pricing for a bond ? You have to call someone to get the latest price. That person has to go out there and figure out what is for sale and to buy and at what pricing. And pricing is not efficient.  Normally there is a HUGE spread between the buy and sell pricing. Want to buy or sell a big amount of bonds, someone literally has to go out and find buyers or sellers of the bonds. Its such a pain in the ass, and it is so incredibly inefficient, that for 99pct of consumers out there, its not worth the effort.

Which takes us to mark to market. With out an exchange, and with the barker system of buying and selling bonds, sellers in distress, like homebuyers in distress,  can and will sell to any willing buyer. Which means that prices are often below where they would be if there was an exchange. For example, if I knew that I was a buyer of ABC Company bonds if they fell to X price, there is no exchange to send me an alert that the price has fallen to that price, its time to buy. Nor is there an alert for the seller to know that I am a willing buyer. The seller has to hope that the desks they use to sell knows to call the desks I use to buy. Thats ridiculous

We need a market of bonds, just as we have a market of stocks, that is just as liquid as our stock market. Then maybe rather than the Fed being the lender that provides cash, it would be just as easy for GM to issue bonds into a liquid market as it was for Bank of America to issue 10 Billion dollars worth of stock into the market.

Now maybe Im missing something or don’t see something. All I know is my experiences trying to buy bonds as a somewhat intelligent and size buyer.  I have no problem saying that its a clusterfuck and it should change

Is our Dallas Mavericks.  The Preseason starts tonight. Not only can I not wait to get things rolling, but I can not wait for the election to be over.  Watching Tina Fey on SNL is hysterical, but its time to return the Maverick name where it truly belongs.  On our jerseys.

Any one know of any decent players named McCain and Obama that I can sign for the preseason  ?

Should I just put McCain on the back of a Mavericks jersey and have someone selling them at Republican rallies and on their website ?? Now thats an idea !

Think Tina Fey of SNL might have some fun with that ?

Go Mavs !

I  could be an idiot. But I think now is the time. I put 8 pct of my net worth in DIAmond puts at 11000, as a hedge, and just sold them at a very nice gain. Very nice. Now Im short puts that I sold in not near as big a position, but nice.

Im going long.

Im not going to give you some historical perspective. The SEC killed any historical relevance when they stopped shorts on 900 stocks. Im buying because the only real uncertainty I see remaining is from the economy. So when you hear the talking heads giving you historical facts, stand up, yell at the screen “You are full of BS”

One thing I know is that starting tomorrow the shorts can get back in the market. I love shorts. Short create a foundation of demand for their positions. If a good company gets shorted, whether as a hedge, or because someone thinks the company will underperform, that short will need to be covered at some point. If the company outperforms, or the demand for the stock exceeds the supply, the price of the stock, like any baseball card, iwll go up. Which will provide incentive for the shorts to cover sooner than later. When that happens, the stocks go up. Shorts are good for the market. They make good companies go up in price.

When I look at the credit markets. The Fed and  Treasury and even international agencies are signalling that they will be the lender of the first and last resort. We see short term treasuries trading as if traders are starting to get comfortable with credit and liquidity. I think that although banks dont fully trust lending to each other yet, they are working to put together the scenarios under which they will trade. They are gearing up.

I have no idea what the economy will do other than the fact that it wont be good. How bad it will get, I dont know. But I can look at a company, discount what the projections are, then discount them some more, and come up with what I think is a fair price.

What is a fair price to me  ? Well I start with the Dividend first. No dividend, no buy. Wasn’t that a song ? No Dividend, no buy…oooh Or was it No Woman No Cry.. Any way I digress.

My first stomping grounds are MLPs. They have been getting killed. KILLED. They build pipelines, ships, whatever, and they do contracts to provide service via those assets.  The assets are very long term, and the cash flows are very consistent. I am putting together a big porfolio that will pay me more than 10pct yield. The nice thing about 10pct yield, is that its 10pct yield. As long as I watch them and make sure nothin