Using Veritas to Construct the "Per…

29-04-2017 Hits:84626 BoomBustBlog Reggie Middleton

Using Veritas to Construct the "Perfect" Digital Investment Portfolio" & How to Value "Hard to Value" tokens, Pt 1

The golden grail of investing is to find that investable asset that provides the greatest reward with the least risk. Alas, despite how commonsensical that precept seems to be, many...

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The Veritas 2017 Token Offering Summary …

15-04-2017 Hits:79093 BoomBustBlog Reggie Middleton

The Veritas 2017 Token Offering Summary Available For Download and Sharing

The Veritas Offering Summary is now available for download, which packs all the information about Veritas in a single page. A step by step guide to purchasing Veritas can be downloaded here.

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What Happens When the Fund Fee Fight Hit…

10-04-2017 Hits:78938 BoomBustBlog Reggie Middleton

What Happens When the Fund Fee Fight Hits the Blockchain

A hedge fund recently made news by securitizing its LP units as Ethereum-based tokens and selling them as tradeable (thereby liquid) assets. This brings technology to the VC industry that...

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Veritaseum: The ICO That's Ushering in t…

07-04-2017 Hits:83426 BoomBustBlog Reggie Middleton

Veritaseum: The ICO That's Ushering in the Era of P2P Capital Markets

Veritaseum is in the process of building peer-to-peer capital markets that enable financial and value market participants to deal directly with each other on a counterparty risk-free basis in lieu...

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This Is Ground Zero for the 2017 Veritas…

03-04-2017 Hits:79991 BoomBustBlog Reggie Middleton

This Is Ground Zero for the 2017 Veritas Offering. Are You Ready to Get Your Key to the P2P Capital Markets?

This is the link to the Veritas Crowdsale landing page. Here is where you will be able to buy the Veritas ICO when it is launched in mid-April. Below, please...

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What is the Value Proposition For Verita…

01-04-2017 Hits:82298 BoomBustBlog Reggie Middleton

What is the Value Proposition For Veritas, Veritaseum's Software Token?

 A YouTube commenter asked a very good question that we will like to take some time to answer. The question was, verbatim: I've watched your video and gone through the slides. The exchange...

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This Real Estate Bubble, Like Some Relat…

28-03-2017 Hits:53272 BoomBustBlog Reggie Middleton

This Real Estate Bubble, Like Some Relationships, Is Complicated...

CNBC reports US home prices rise 5.9 percent to 31-month high in January according to S&P CoreLogic Case-Shiller. This puts the 20 city index close to an all time high, including...

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Bloomberg Chimes In With My Warnings As …

28-03-2017 Hits:81302 BoomBustBlog Reggie Middleton

Bloomberg Chimes In With My Warnings As Landlords Offer First Time Ever Concessions to Retail Renters

Over the last quarter I've been warning about the significant weakness in retailers and the retail real estate that most occupy (links supplied below). Now, Bloomberg reports: Manhattan Landlords Are Offering...

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Our Apple Analysis This Week - This Comp…

27-03-2017 Hits:81303 BoomBustBlog Reggie Middleton

Our Apple Analysis This Week - This Company Is Not What Most Think It IS

We will releasing our Apple forensic analysis and valuation this week for subscribers (click here to subscribe - lowest tier is the same as a Netflix subscription). As can be...

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The Country's First Newly Elected Lame D…

27-03-2017 Hits:81110 BoomBustBlog Reggie Middleton

The Country's First Newly Elected Lame Duck President Will Cause Massive Reversal Of Speculative Gains

Note: Subscribers should reference  the paywall material here for stocks that should give a good risk/reward scenario for bearish trades. The Trump administration's legislative outlook is effectively a political desert, with...

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Sears Finally Throws In The Towel Exactl…

22-03-2017 Hits:86965 BoomBustBlog Reggie Middleton

Sears Finally Throws In The Towel Exactly When I Predicted "has ‘substantial doubt’ about its future"

My prediction of Sears collapsing once interest rates started ticking upwards was absolutely on point.

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The Transformation of Television in Amer…

21-03-2017 Hits:84982 BoomBustBlog Reggie Middleton

The Transformation of Television in America and Worldwide

TV has changed more in the past 10 years than it has since it's inception nearly 100 years ago This change is profound, and the primary benefactors look and act...

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WARNING! - the Emergency Economic Stabilization Act of 2008 may significantly DESTABILIZE the US and global economy for the balance of 2008 and 2009

 

I am not trying to be alarmist, but we are at a precipice here that we do not have to fall off of - although it appears that some are insistent that we take the plunge.

 

Summary of the Proposed Act

 

The draft legislation tilted "Emergency Economic Stabilization Act of 2008" authorizes the Treasury Secretary $250 bn immediately to purchase troubled assets and to provide insurance to companies for distressed assets. This limit could be raised to $350 bn through presidential certification and further to $700 bn through a joint resolution. The draft also provides limits on excessive compensation for executives, provides for judicial review and greater objectivity and transparency to the entire process.

 

However despite greater transparency, the draft is still silent on many fundamental aspects including mechanisms for asset purchase and sale (which is to be released within 45 days from date of enactment), the pricing of distressed securities, and determination of premium for insurance.

In addition although the draft imposes some limits on executive compensation it does not make attempts to curb current compensation structure. Also the law gives SEC the powers to suspend mark-to-market losses under SFAS 157 which would lead these institutions financial statements to be artificially inflated and will not be reflective of their true market values. This, in addition to the off balance sheet shenanigans of the shadow banking system, is exactly how we got into this mess in the first place.

 

Purpose

 

To provide authority to the Federal Government to purchase and insure certain types of troubled assets to providing stability and to prevent disruption in the economy and financial system.

  • Protecting the interests of taxpayers by maximizing overall returns and minimizing the impact on the national debt
  • Providing stability and preventing disruption to financial markets
  • The keep families in their homes

 

Authority

 

Limits:

  • The authority shall initially be limited to $250 bn outstanding at any one time.
  • The limit could be raised to $350 bn outstanding at any one time if at any time the President submits to the Congress a written certification.
  • Afterwards, this authority could be raised to $700 bn outstanding at any one time by a joint resolution

·        Pursuant to the act the statutory limit on public debt would be raised to $11.315 trillion.

 

Although the draft has divided the amount into 3 tranches there are no time lines for raising limits.

Timeframe:

  • The authority held by the Secretary to purchase or insure the troubled assets shall terminate on December 31, 2009. However if the need persists, it can be extended for a maximum of two years from the date of enactment of the act upon submission of certificate of justification to the Congress.

 

Judicial review and related matters:

  • Any action of the Secretary pursuant to the authority of this Act found to unlawful shall be subject to judicial proceedings.

 

Funding:

  • For the purpose of the authorities granted and for the costs of administering, the Secretary may use the proceeds of the sale of any securities issued under chapter 31 of title 31, United States Code.

 

The huge cost of bailout at the expense of taxpayers' money would lead to inflationary pressures and further weakening of US dollar. Also if the bailout helps semi-solvent of insolvent investment banks and other financial institutions avoid bankruptcy, it would not solve the liquidity and credit crisis facing the economy. The issue of the dearth of capital in these institutions has not been addressed by this bill. As a matter of fact, if the securities were purchased at a realistic value from the financial institutions, those who have been laggard in making realistic marks would be faced with significant write-down's that would drastically increase their need for capital. In other words, "The economic truth hurts!" It appears as if there was an attempt to address this by relaxing the mark to market rules. This is the economic equivalent of cutting off your head to cure a headache. By easing the mark to market rules in order to ease the accounting requirements that would force the institutions to raise capital, you will create a short term reprieve, but you will now have officially sanctioned significantly economically weaker companies. In addition, this economic weakness will be hidden from all but the most astute of insider investors due to the hide the sausage game of Level 2 to 3 to 2 (at a profit) "I betch' ya can't guess where these hidden profits came from" charade. This will either placate our economy and lull them into a stupor that will be awaken from when the markets drastically crash from institutions that collapsed from their own economic foibles, or engender even further mistrust amongst lending institutions, for they will trust each other even less - due to the even greater lack of transparency than that which brought this crisis upon us. My best guess would be that a combination of both scenarios would most likely occur if this plan goes through as is.

 


 

Purchase of troubled assets

 

Mechanics

To establish the troubled asset relief program (TARP) to purchase, hold, and sell troubled asset and issue obligations.

  • Market mechanisms: Auctions and reverse auctions.
  • Direct Purchases:  If the use of a market mechanism is not feasible, the Secretary can indulge in direct purchase ensuring that the prices paid for these assets are reasonable and reflect the underlying value of the asset. This needs to be explicitly defined. I smell the word abuse already, and this isn't even signed into law yet.

 

Pricing

  • Before the end of the 2nd business day from the date of first purchase or 45th day from the date of enactment of this act, which ever is earlier, the Secretary shall publish guidelines for mechanisms for purchasing troubled assets and methods for pricing and valuing troubled assets.
  • To prevent unjust enrichment of financial institutions, the price of troubled assets should not be more than what the seller paid to purchase the asset.
  • To minimize the long-term costs the purchase price should be at the lowest price consistent with the Act

The act is still silent on the pricing and mechanism to purchase securities which is to be decided later.

The current mechanism could lead to recording some accounting gains (which could still very well be economic losses) in the books of financial institutions if assets written below par value are purchased at higher prices. Also since most of these securities are divided into tranches it adds significant complexity to the problems. The legislation is also silent to address these issues. To sign this into law with this much ambiguity simply adds to the lack clarity and transparency from the market's perspective and may very well lead to significantly lower market valuations. This draft came out late Sunday night, and all major global credit and equity markets moved and opened SHARPLY lower, despite the concerted efforts of the major central banks across the globe. ‘Nuff said!

 

Troubled Assets

  • Residential or commercial mortgages and any securities related to such mortgages originated or issued on or before March 14, 2008
  • Any other financial instrument that the Secretary, after consultation with the Chairman of the Board of Governors of the Federal Reserve, determines necessary to promote financial market stability after giving in writing of such intentions to the appropriate Congress committees.

 

Insurance of troubled assets

 

The Secretary shall also establish a program to guarantee troubled assets of the financial institutions by collecting the associated premiums from financial institutions for such guaranty. The fees collected would be transferred to "Troubled Assets Insurance Financing Fund." Have actuaries been consulted on the feasibility of such a plan? Have any financial market professionals, successful investment professionals or accomplished economists been consulted with the other parts of the plan. I am concerned that law makers, lawyers and politicians (whose core competencies are not finance and economics) attempted to cobble together a plan that would challenge even the most astute and accomplished financial professionals and economist.

 

Adjustment to purchase authority

As a result of insurance of troubled assets the purchase authority limit under the program would be reduced by

  • Total outstanding guaranteed obligations less balance in the Troubled Assets Insurance Fund

 

Premium

To be determined by secretary in accordance with the credit risk of the product and shall be set at a level necessary to create reserves sufficient to meet anticipated claims, based on an actuarial analysis, and to ensure that taxpayers are fully protected.

 

If the premium for insurance is low, it would risk the tax payers' money. Also low premium would severely affect the monolines business as financials institutions would find it cheaper and more reliable to underwrite their existing mortgage with Federal Reserve. This will cause a reflexive feedback loop that would further stress the system, since the monolines (and multi-line businesses such as AIG and XL Capital who ventured into the CDS markets) are one of the primary writers of credit default swaps. Since this market is on the verge of its own misery, we could be skirting with even larger, unforeseen problems since a collapse of the CDS markets will affect the markets in a fashion similar to that of the collapse of Lehman Brothers, whose failure will probably take years to absorb. On the contrary if the premium set is too high financial institutions would be reluctant to insure their assets with Fed and instead sell their assets directly.

 

Relaxation of mark to market requirements

 

The bill proposes to identify any possible drawbacks in the existing accounting standards particularly the mark to market statutory requirements that led may have led to the collapse of banks in the recent times. Consequently, following measures have been propounded in this regard

  • The SEC shall hold the power to judge the validity of mark to market adjustments under SFAS no. 157 and has the right to suspend it if found necessary in public interest and investor protection. This is illogical, and bordering on utter nonsense. How can the public having less information about the value of their investments be in their best interest???!!!
  • Further, the bill proposes SEC to review the impact of such accounting standards on the financial institutions in light of the recent collapse and to come up with some modifications or an alternative accounting standard in a report to Congress within 90 days of enactment of the Act.

 

However, the proposed amendments which signal relaxation in terms of reporting of the true value of the investments will bring opaqueness in the financial reporting of the financial institutions and will jeopardize corporate governance in these companies. This can have far reaching implication when the books do not reflect the true financial health and lead to accounting frauds. If such a thing were to come to pass, it will enrich investors such as myself who have the resources to ferret out such non-sense, at the expense of 99% of the populace!

 

Executive compensation and corporate governance

 

Direct purchase (where no bidding process or market prices are available):

In cases of "direct purchases" and the Secretary receiving a "meaningful" equity or debt position in the financial institution, the institution should meet appropriate standards for executive compensation and corporate governance that would -

  • Place a prohibition on the financial institution to make golden parachute payment to its senior executive officer
  • Place limits on compensation that exclude incentives for executive officers of a financial institution to take unnecessary and excessive risks
  • Provision for the recovery by the financial institution of any bonus or incentive compensation paid to a senior executive officer based on statements of earnings, gains, or other criteria that are later proven to be materially inaccurate

 

Auction purchases:

Where the auction purchases of troubled assets in the aggregate exceed $300 mn (including direct purchases) there is a prohibition of "new" employment contract with a senior executive officer that provides a golden parachute in the event of an involuntary termination, bankruptcy filing, insolvency, or receivership.

 

The proposed restrictions seem ineffective as it regulates or prohibits only the selective forms of remuneration including golden parachute payment and the bonus or incentive compensation while the executives' current remuneration structure escapes scrutiny or revision. It also seems to be aimed only at executives, while the bulk of compensation may go to non-executive employees, ex. Investment bankers, traders, analyst, brokers/salespersons, etc.

 

Recovery of deficit from financial institutions

 

To observe fiscal discipline and ensure that the cost burden does not exceed the stipulated amount, the bill proposes that after five years of the enactment a report will be submitted about the net amount and in case of a deficit; shortfall shall be recovered from the financial institutions.

Foreclosure mitigation efforts and assistance to homeowners

 

  • Secretary shall implement a plan to maximize assistance for homeowners and use the authority to encourage the servicers of the underlying mortgages, considering net present value to the taxpayer, to take advantage of the HOPE.
  • The Secretary may also use loan guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures. The Secretary shall also attempt to improve the loan modification and restructuring process and to permit bona fide tenants who are current on their rent to remain in their homes under the terms of the lease. Federal property manager shall implement a plan to maximize assistance for homeowners including reduction in interest rates and loan principals.

 

Minimization of long-term costs and maximization of benefits for taxpayers

 

  • To minimize long-term negative impact on the taxpayers' the Secretary shall hold the assets to maturity or for resale until the market is optimal for selling such assets.

 

  • The Secretary may not purchase any troubled asset unless the Secretary receives warrant (listed firms) or senior debt instrument (unlisted firms) from financial institution to receive non-voting common stock or preferred stock.

 

Market transparency

 

To facilitate market transparency description and pricing of assets acquired shall be made publically available within 2 business days of the transaction.

 

Study to determine impact of excessive leverage

 

  • The Comptroller General of the United States shall undertake a study to determine the extent to which leverage and sudden deleveraging of financial institutions was a factor behind the current financial crisis and to review the effectiveness of the existing regulatory framework governing leverage levels in the financial institutions. Excessive leverage was not the problem insomuch as the ability of the firms to hide assets, liabilities and risks off balance sheet. A stated leverage ratio of 30:1 could really be 45:1 if 50% of gross assets are off balance sheet. Investors should be left to choose how much risk they should take. The government should facilitate the investor in achieving transparency in discovering said risks. The investment banks would not have received nearly as much capital as they did if prudent investors had any idea of what they were up to. Let the capitalistic markets work as they should!
  • The study shall give its recommendations before June 1, 2009 to the Congress committees.

 

 

Review

The implementation of the program will be closely monitored and reviewed by various bodies with periodic reporting -

  • Financial Stability Oversight Board would be responsible for reviewing the exercise of authority including the policies implemented by the Secretary and effect on bailout in assisting homeowners, stabilizing financial markets, and protecting taxpayers.

­   The board would be comprised of the Chairman of the Federal Reserve, Secretary, Director of the Federal Home Finance Agency, Chairman of the SEC and Secretary of Housing and Urban Development.

  • A congressional oversight panel consisting of five people will be appointed to review and report the functioning of troubled assets relief program and its impact on the financial system to the Congress every 30 days.
  • The Comptroller General of the United States will oversee the functioning and the performance of the troubled assets relief program in terms of achievement of the preset objectives and submit a report every 60 days to Congress committees.
  • A Special Inspector General shall be appointed by the President with the consent of the Senate, to conduct, supervise, and coordinate audits and investigations of the purchase, management, and sale of assets by the Secretary of the Treasury. Within 60 days of his appointment and then for every calendar quarter thereafter, he shall report to the Congress committees.