Archives for posts with tag: Banking

The Wall Street Journal recently had two separate articles that discussed how large, public firms regularly meet in private with security analysts who make recommendations to the public to buy or sell their stock. The articles point out how this practice may be technically at odds with the concept of fair and equal disclosure that is part of the Security and Exchange Commission (SEC) regulations.

One article was titled “Google Tries Opening Up to Analysts”. The story is that Google had always gone their own way in not meeting with or disclosing things such as financial forecasts with security analysts.  With a new CFO who came from the banker firm of Morgan Stanley, Google is now doing “briefings” with the analyst community. The objective is to make Google more transparent and help analysts build their financial models to predict its future stock price. And Google’s stock is up recently versus other tech firms.

The other WSJ article was called “Investors Price Face Time with Bosses”. It spoke about how firms such as Proctor & Gamble and GE meet regularly with security analysts. One meeting led an analyst to conclude that P&G’s current Chairman may retire, a fact that was not officially announced until months later. The article further stated that, last year, GE had 70 such analyst meetings with GE senior management present and about 400 meetings in total. Again the hope of the companies is to have the security analysts favorably recommend their stock to the public.

This all sounds great, like a win-win situation. Well, as a retired CFO myself, I can offer a few thoughts and maybe raise a few concerns.

Early in my CFO career, it was very common for public firms to travel to New York and have private meetings with the security analysts who “followed” or recommended your stock to the public. Then the Security Exchange Commission (SEC) published Regulation FD. This is called the “fair disclosure” rule that public companies must disclose material information to all investors at the same time. The idea was to prevent large bankers from trading on the basis of the information they obtained in private meetings to the disadvantage of the rest of the stock-buying public. Overnight most private meetings were gone. Even industry conferences were made available instantly on webcast or by downloading the presentations. Now doesn’t that sound logical and “fair” based on the SEC’s goal with Reg FD that everyone gets the same information at the same time?

Apparently, per these articles, many companies are back to the old private, one-on-one briefings with their favorite analysts. Now the articles were quick to point out that these meetings “tiptoe around the security laws” and that companies can avoid problems by just repeating what is already in the public domain or by just adding “new, nonmaterial information.”

Having sat in on Too many of these security analyst meetings, I can tell you what some of the issues are:

1. What is important or material new information and what is not? A very fine line.

2. Few of us can remember and repeat exactly the wording in our several hundred page quarterly SEC reports that are in the public domain. And exact words and inferences are critical at times for fair and full disclosure.

3. The worst problem is having your Chairman or CEO at these meetings. Some Chairmen/CEOs love talking and will expound at length to any security analyst’s question. Or, they will basically tell their CFO or Investor Relation person to provide whatever information the analyst is seeking. A slippery slope. And as one article points out, it is “easy to trip” and give out new information to a small, non public audience.

4. Finally, some security analysts are true professionals and treat information as confidential only to be used in working on their financial model or in their next report that becomes public information. But some analysts, like some other self-proclaimed wizards of the banking world, have no concept of confidentiality or how to manage the many conflicts of interests that can arise daily in their work. I once had a large bank security analyst who “followed” my public company and a major competitor suggest that our two firms merge and that he would be glad to organize a meeting!

Like a lot of business people, I believe we have too many government regulations in too many different aspects of our lives. Regulation FD at least made sense to me, but only if everyone is playing by the same rules as to what financial disclosures can be made, to whom and when.

We create rules to respond to each new financial crisis we encounter. But like a pendulum swings, we tend to ignore or try to avoid following them after awhile. At least until the next financial crisis!

The Wall Street Journal just had an article about how the federal regulators are trying to figure out if the Banking industry has some inherent flaws that somehow tie to a Bank’s culture. The regulators are worried that the specific crimes or security violations we read about are not just isolated examples, but relate to deeper issues in the Banks. But the regulators are having trouble figuring out how to define each Bank’s “culture”. Even the Banks themselves are hiring legions of Consultants to help them define their own culture. One well known Bank created a “happy to grumpy” ratio of their employees as one way to measure culture.

Well, if they had only asked certain retired Chief Financial Officers, like me, who had worked with Banks, they could have learned a few things in a hurry. The reason I chose “retired” CFOs is that they can be more honest now than when they worked for companies who needed the Banks to survive or grow.

Wall Street Bankers are certainly a unique breed. In my book, The Business Zoo, I have a lot of stories that relate to Bankers and their culture. A few of these are as follows:

“It’s only Business, not Personal.” This means a Banker can lie to you, but because it’s about business, he is not a bad person. Heh.

“I would sell my mother for an eight of a point!” This means that in a large deal, even a very small extra fee or interest charge, is worth doing almost any unthinkable thing to achieve. This can include breaking laws or client confidentiality or whatever. That quote is word for word from a senior U.S. banker.

“Dining with Wolves, Rats and other adversaries”.  Does this one really need more of an explanation? Let me just say I admire and respect wolves.

Bankers also have the same trait that relates to many Consultants. They believe they are smarter or better than the rest of the world. Even in my youth in public accounting, at the now defunct Arthur Andersen & Co., we were taught this. It becomes part of the ‘Culture” that these firms use to distinguish themselves from others. But it can also lead to trouble.

But the most fascinating aspect of this WSJ article was how both Bankers and their Regulators are apparently having trouble identifying Culture and are even hiring outside consultants (often with their own problems) to help!

So here are a couple of tips about Culture from my final chapter in The Business Zoo. 

Culture and Leadership are the flip side of each other. Study the Bank’s past and current leaders and you will learn about the firm’s culture as well. The good, the bad and the ugly.

Culture, as defined in the Royal British Columbia Museum, is a complex system of tools, language, arts and beliefs that help humans survive. To determine any organizations’s culture you must spent time studying their systems, procedure, policies, whether written and unwritten, or formal or, more importantly, informal. To study and define a bank’s Culture, Regulators will need to invest a lot of time and hard work.

Or you could hire a few retired CFOs who have spent decades around Banks!

One of my favorite bosses, Tony, always said that most things in the world swing back and forth like a pendulum. In society and in business, we see this all the time. This is easy to see in commodities like corn or soybeans. We go from a shortage and high prices one year to everyone planting these same crops with a market glut and low prices resulting the next year. We love the free and easy flow of information on the Internet till we want to restrict it because it can invade our privacy or use our information for someone else’s commercial gain. Prices, regulations, even emotions, often swing like a pendulum.

With the start of a New Year and our economy generally improving, I wanted to talk about the Housing Pendulum which usually swings on a decade long cycle. I know you are thinking, wait a minute, we are barely out of our worst housing, construction downturn since the Great Depression! We can’t be getting into trouble again with Housing! Let’s look at a couple things going on right now.

Housing Prices. We were just in Naples, FL. for a visit. Remember in the early 2000s when resort and second home places like Florida, Las Vegas, and Arizona had prices jump 10-20% a year. And then they fell 50% or more a couple years later. In our downtown Naples area, the same condos went from under $1 million to $1.6 million. Then they fell to under $1 million after the 2007 Housing Bubble and stayed there for a few years. Now these condos that sold two years ago for $1.1 million and last year for $1.3 million are going for $1.5 million. And there is a growing shortage of inventory to buy. The City of Naples just issued the most tear down permits in its history as the old, small, outdated cottages are being replaced with new, trendier ones twice as big that fill up every inch of the lot or of two or three lots. The pricing on the new ones begin around $2 million. Is this just true of fancy resorts and second home places, you may be thinking?

My wife and I just listed and sold our downtown Chicago condo in ONE DAY and for the FULL price! Go figure. This is still less likely outside of retirement resorts but it is happening for the first time again.

Government Assistance to Housing.  A recent Wall Street Journal article talked about how the two government agencies that buy mortgages, Freddie Mac and Fannie Mae, just issued new, relaxed mortgage standards. They will now allow as little as a 3% downpayment on a mortgage especially from low income people who have trouble coming up with a larger downpayment. These are the same two agencies that were partially blamed for the last housing crisis, for helping to bundle and sell high risk mortgages. And the same two agencies, that some in Congress and government suggested, should be disbanded. It is wonderful to want to help people struggling to buy a house and especially a first house. But the last time around, this group that struggled to buy a house with little of their own money, were the ones that defaulted or walked away from their mortgages. And it will happen again. And our government is helping.

So to some it may seem too early to worry about the Housing market tanking again. But to this old, long time building material guy, it seems like the Housing Pendulum is starting its swing. The last time it almost bankrupted Wall Street and our overall economy. Consider yourself warned!

Earlier this year I wrote about two articles in the Wall Street Journal that dealt with our world of banking and debt.

Now two more showed up and again reminded me of how our current improving financial times are just part of a never ending cycle. Things get bad, banks do not lend even when they should. Things seem better and banks want to lend and go crazy.

“Shift on NonConforming Mortgages” Wall St. Journal 12/3/13

Banks until recently were very concerned and cautious of who and how they lend money especially on the very mortgages that got them and the whole country in a mess. The article points out that now many banks, and yes, even the ones who were sued by the government and various states for their role in the mortgage crisis (like poor Bank of America), are now starting to make mortgage loans that do not conform to current lending standards. The article states that this might be the old interest-only loan again. Or a loan to someone whose income does not qualify them for the amount borrowed. Or where the bank will not fully document the borrower’s income or assets. To start, bankers claim these loans will only be made to their wealthier, high-end clients.

Well, I assure you this is where it started a decade ago, before we had our mortgage crisis. It starts small and limited. Soon banks, and the infamous mortgage brokers who feed the mortgage industry with new loan applications, will be making most of their loans that are nonconforming or do not meet standards. Last time it ended in a crisis. And we will likely have one in the future as these trends continue.

“Banks Brace for Tighter Regulation” Wall St. Journal 12/4/13

This article deals with the fact that now that the mortgage crisis is over (for this round), the government will finally force banks to limit their overall lending and investments in what we will call collectively “hedging”. In the mortgage crisis, you recall, banks managed to not only make what we called above, nonconforming loans, but they managed to bundle them and sell them multiple times and in parts and pieces to each other and make money doing it. Until they lost money doing it. So the new regulations will restrict how much of this type of trading or investing banks can do.

I have wondered for the last five or six years why these rules were not put in place already. But the banking industry has a very serious lobbying group and are a big source of fund-raising even for Congress people who claim to hate banks. So it has taken forever. It will be watered down.  Bank groups are concerned they will not be competitive with other global banks. And in the end, the new rules will accomplish, sadly, very little. And we will have banks too big to fail, failing again.

A friend in Florida just gave me further evidence to our future reoccurring  financial fate at the hands of banks, mortgages and the housing market. In the last month, he had two real estate people knock on his door and asked if he wanted to sell his condo. He is in a nice area and has an end unit which the brokers claim they have a buyer for.

Real estate agents cold calling. Banks giving out nonstandard loans. And the government unable to meaningfully limit banks and their practices. Have we seen this movie before?

It is just a sign of our financial times. But be care out there in the world of real estate, lending and banking. And in the Business Zoo!