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From “Outside The Ivory Tower”, by Dr. Susanne Trimbath -
I applaud the courage of German Chancellor Angela Merkel for banning naked short selling in Germany. And a “wag of the finger” goes to the rest of the Euro-Zone — plus the Securities and Exchange Commission and Congress in the US — for not doing the same. Naked short selling is the ultimate theft. It is selling what you not only don’t own but have no intention of ever delivering. [entire post]
– From “Outside The Ivory Tower”, by Dr. Susanne Trimbath –
No, British Airways (LSE: BAY) (OTC: BABWF) isn’t suing Microsoft (NASDAQ: MSFT). But they are taking on all comers in a head-to-head battle over business meetings. In an effort to “make business personal again,” British Airways (BA) commissioned a survey by the Harvard Business Review to find out if professionals think that face-to-face meetings are essential for sealing the deal. Naturally, British Airways believes this is true – after all it is their business to bring people to places where they can meet each other across the same table. The results of the Poll supported their idea – 95% of HBR readers said that face-to-face meetings are the key to developing successful business relationships.
En garde AT&T (NYSE: T) because teleconferencing just isn’t good enough for business meetings anymore! Look out Cisco Systems, Inc. (NASDAQ: CSCO) because even online meetings are not enough for most business executives!. In a promotion that started last summer, BA awarded about one thousand businesses round-trip flights to anywhere in the world that they wanted to go in order to meet with existing contacts, to visit potential investors or to introduce new clients. Three entire planes were chartered just to ferry the winners of the competition first to London for business forums and then onward to the destination of their choice. STP Advisory Services, LLC was among the small and medium-sized businesses awarded a place on the flight that originated in Chicago in mid-November. [entire post]
From “Outside The Ivory Tower”, by Dr. Susanne Trimbath
New York State Attorney General Andrew Cuomo released a new report on bonuses paid to the employees of nine recipients of the TARP bailout money. He called it “The ‘Heads I Win, Tails You Lose’ Bank Bonus Culture.” AG Cuomo concluded that even “in these challenging economics times, compensation for bank employees has become unmoored from the banks’ financial performance.” The report is only about banks, of course, since all the investment banks and brokerage firms changed their status to “bank” to become eligible for TARP bailout money.
Despite the hue and cry of the public, these bonuses have continued. In my view they will continue. Although we may think that sticking labels on the banks behavior, or asking Congress to enforce some discipline, will make a difference, it is unlikely to change anything. After the early 2009 bonuses were revealed, the banks claimed that the bonuses were required by contracts and could not be broken without violating the rule of law. They got away with this claim even as contracts with the United Auto Workers were being revised. Therefore, I offer you this modern fable, with a tip of the hat to Joel Chandler Harris. [entire post]
From “Outside The Ivory Tower”, by Dr. Susanne Trimbath
Back in March, I wrote a piece for NewGeography.com called Burnin’ Down the House (www.newgrography.com/users/susanne-trimbath) on the financial crisis. I used data on derivatives outstanding made available by the Depository Trust and Clearing Corporation for publicly traded credit default swap contracts and compared that to the market value for public companies based on recent closing stock prices. In case after case, there are more derivatives than there are underlying assets — meaning you could buy all the equity to take control of a company, drive the company into default, and profit from the derivatives payoff. [entire post]
From “Outside The Ivory Tower”, by Dr. Susanne Trimbath
The final part in a series of blogs to detail the importance of corporate governance to institutional investors; to describe the tension created by their desire to earn extra revenue from stock lending; and to outline the challenges to corporate governance presented by the subsequent lack of accounting for voting rights.
This series of blogs has described a very serious problem. Owners who are managers have day-to-day control over the productive assets of a corporation. When the business is no longer run by the owners, as is the case for modern corporations, the control of the assets (which stays with the managers) is separated from the ownership of those assets. After separating ownership from control, it can be sold off in the public capital markets in the form of stock shares. Shareholders then elect a Board of Directors to represent their interests in the way the company is managed. Boards hire senior management, approve policies, monitor audits, etc. It is through their votes that shareholders are able to influence the profitability of the company, which directly impacts the value of the shareholders’ investment. Shareholders in the U.S. are allowed to vote both for members of the Board and on some specific issues like approving mergers and acquisitions. [entire post]
From “Outside The Ivory Tower”, by Dr. Susanne Trimbath
A whopping $52.1 billion in new credit default swaps — 5,834 new contracts — were written protecting investors against credit events at JPMorgan Chase (NYSE: JPM) in the week ending May 22. Due to an undisclosed “post trade event,” that information was not widely known until the following week. We find the timing of these contracts, vis a vis the good news on JPMorgan during the week of May 22 and the bad news released the following week, to be suspicious.
Once a week since November 4, 2008, the Depository Trust and Clearing Corporation (DTCC) publishes reports based on the warehouse of information that they receive from their members on credit default swap contracts. STP Advisory Services, LLC has been tracking these reports from their inception. DTCC has been operating a “central registry” for credit default swap contracts since 2006. An estimated 90 percent of credit derivatives trades are confirmed through DTCC. [entire post]
From “Outside The Ivory Tower”, by Dr. Susanne Trimbath
The fifth part in a series of blogs to detail the importance of corporate governance to institutional investors; to describe the tension created by their desire to earn extra revenue from stock lending; and to outline the challenges to corporate governance presented by the subsequent lack of accounting for voting rights.
Evidence Of Effectiveness
We cannot over-emphasize the importance of voting rights. Beyond the simple question of fairness, there is evidence of economic consequences associated with voting initiatives. Given the nature of this approach to correcting corporate strategy, the research is naturally limited to case studies. Still it is possible to point to more cases of positive returns than negative returns for the limited voting challenges associated with Level Two active investing, aimed at changing corporate policies or securing representation on the corporate board through the exercise of corporate governance rights associated with ownership. This appears to hold true whether the investor wins or loses the voting challenge. [entire post]
From “Outside The Ivory Tower”, by Dr. Susanne Trimbath
There is a big opportunity to press for the elimination of “phantom shares” in investor accounts. The Securities and Exchange Commission is proposing to reinstate a requirement (removed in 2003) for all investment advisors to have an annual “surprise examination by an independent public accountant” to confirm client cash and securities. Here’s an excerpt that summarizes what the audits would cover:
“During a surprise examination, an independent public accountant generally must (i) confirm with the custodian all cash and securities held by the custodian, including physical examination of securities if applicable, and will reconcile all such cash and securities to the books and records of client accounts maintained by the adviser, (ii) verify the books and records of client accounts maintained by the adviser by examining the security records and transactions since the last examination and by confirming with clients all funds and securities in client accounts, and (iii) confirm with clients, on a test basis, closed accounts or securities or funds that have been returned since the last examination.” [entire post]
From “Outside The Ivory Tower”, by Dr. Susanne Trimbath
The fourth part in a series of blogs to detail the importance of corporate governance to institutional investors; to describe the tension created by their desire to earn extra revenue from stock lending; and to outline the challenges to corporate governance presented by the subsequent lack of accounting for voting rights.
Tension Between Investment and Governance
Institutional investors, like all investors, are concerned with maximizing their return on investment. The necessity for institutional investors to make use of their shareholder rights, including voting their shares, creates a tension with their investment activities. The securities market presents the opportunity to generate additional revenue by temporarily “lending” shares in exchange for a fee. However, this lending isn’t at all like lending, say, cash. Loaned securities are transferred in full with an obligation to return the same number of the same shares at a later time. From the perspective of corporate governance, the practice of securities lending creates three complications. First, the institutional investor temporarily loses his voting rights and is therefore partially unable to fulfill his corporate governance obligations. Second, there is a risk that the ultimate borrower of the shares will abuse the process by using the shares to influence a vote in a direction contrary to the best interests of the lender institution. Finally, there is a risk that the borrower, in using the shares to fulfill delivery obligations for short sales, will be driving down the value of the institutional investor’s portfolio. This last complication was the motivation for the 2008 halt to short selling in the shares of financial companies. [entire post]
From “Outside The Ivory Tower”, by Dr. Susanne Trimbath
No Accounting for Corporate Governance: The third part in a series of blogs to detail the importance of corporate governance to institutional investors; to describe the tension created by their desire to earn extra revenue from stock lending; and to outline the challenges to corporate governance presented by the subsequent lack of accounting for voting rights.
Shareholder Activism
Beginning in the early 1990s, several new investment partnerships were formed that presented “alternative emerging investment opportunities” to the major pension plans. These partnerships proposed to make a limited number of restricted investments in major public corporations, and then, to utilize the expertise of the principals to increase the value of those investment stakes. Because the partnerships proposed becoming involved with corporate policy to enhance corporate value through improved performance, they became known as “corporate governance funds.” [entire post]