Inside Moves

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Did you see the 60 Minutes story on our duly-elected Congresscritters potentially profiting by using information they gleaned from their work on the Hill to inform their investment decisions?  Well, according to this Wall Street Journal story many big-time investors are profiting from information they glean directly from members of Congress and Congressional staffers.

"Hedge funds and other investors have found that Washington can be a gold mine of market-moving information, easily gathered by those who are politically connected," according to Sanford Bragg, CEO and president of Integrity Research Associates, an independent group that analyzes research providers…

Wall Street firms have for years hired lobbyists to scour Congress and the White House for news that could affect stock prices. Now, investors want to hear from decision makers firsthand.

Many turn to William Williams, president of JNK Securities, a firm that brings lawmakers and investors together "to bridge the information gap between Washington and Wall Street," according to a recent news release.

Mr. Williams used to charge clients as much as $10,000 for meetings with lawmakers. That changed last year after a reporter from the publication Inside Higher Ed asked the office of Sen. Tom Harkin (D., Iowa) about an email from JNK showing it was charging to attend a possible meeting with the senator. Mr. Harkin refused to attend.

Now, hedge funds don't pay fees to JNK Securities. If they use information gleaned at these face-to-face meetings they are expected to execute their trades through the brokerage firm, which collects commissions.

There's more, but you get the picture.  I seriously doubt this kind of inside information is restricted to the federal level – I'm willing to bet it goes on at the state and local level as well – and as the reporters point out it's not illegal activity, but I think this is exactly the kind of thing that has escalated the level of mistrust of our public and business institutions to astronomical levels.

If you were to talk to the folks involved in these meetings, both on the government side and industry side, you'd probably get an earful about this dialogue being necessary to make sure the government fully understands the issues so they don't unnecessarily burden industry with misaligned regulation or some such thing.  Sure, it makes perfect sense for government representatives to fully understand the industries they are proposing to regulate, but I'll be darned if I can understand why those discussions can't be publicly broadcast so that everyone is on the same playing field. (Truth be told I can't think of a reason why investors would need to be included in the discussion at all, but for now let's just assume they have a place at the table). Let's put it this way – why shouldn't I, as an individual investor, have access to this information at the same time as a hedge fund investor?  If Congress was a public company and members of Congress were board members of the company then this behavior would be considered insider trading.  It's ironic that because they are essentially board members of USA Inc. their behavior is perfectly legal.

The article goes on to mention some proposed legislation that would prevent this type of inside information trading, but I'm not sure how effective any legislation can be until the entire culture in the halls of power changes. If the people in power can't perceive that it's wrong to play favorites in the public sector, to create a favored class, then there's not a piece of legislation that can be passed that will fix the problem because they'll simply find a way around it to help their friends. 

Long ago some wise people realized that our entire society is constructed on a foundation made up of one element – trust.  Without trust financial markets collapse, bank runs happen (why do you think we even have an FDIC?), government collapses (usually after a bout of totalitarianism) and civil society disappears.  If our leaders don't begin to reestablish trust with the people I fear what my children will inherit.  This probably seems like an over reaction to a relatively minor financial story, but I think this story perfectly highlights what's wrong with our country right now and I very much want to see this fixed before it's too late.

Did a Bear Raid on Citigroup in 2007 Crash the Economy?

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A paper (PDF) from a group called New England Complex Systems Institute seems to make the assertion that a "bear raid" on Citigroup in 2007 may have triggered the economic meltdown that led to the Great Recession:

A paper from the New England Complex Systems Institute claims that they have found evidence that traders executed a "bear raid" on Citigroup in 2007, precipitating the financial collapse. A "bear raid" is a market manipulation technique in which short sellers conspire to dump huge quantities of borrowed shares into the market all at once, driving the price down (short selling is a stock-trading technique in which shares are borrowed for sale; the short seller makes money when the value of the borrowed shares declines).

"Bear raids" have been considered a risk to markets since the Great Depression, and a financial regulation called the "uptick rule" was instituted in 1938 to prevent the tactic. The uptick rule was repealed in in July, 2007, and the alleged bear raid took place in November, 2007.

The paper's authors offered these comments about deregulation in their conclusions:

Within the resulting deregulated environment, it is still widely believed that the crisis was caused by mortgage-related financial instruments and credit conditions, and that individual traders did not play a role [32{35]. Our analysis demonstrates that manipulation may have played a key role. Methods for detecting manipulation and its eff ects are necessary to both inform and enforce policy.

When the SEC repealed the uptick rule on July 6, 2007, one of its main claims was that the market was transparent, and that such regulations were not needed to prevent market manipulation [6]. Our results suggest that, not long after the uptick rule was repealed, a bear raid may have occurred and remained undetected and unprosecuted. Our analysis reinforces claims that lax regulation was an integral part of the financial crisis [30].

In response to requests for reinstatement of the uptick rule after the fi nancial crash,the SEC underwent extended deliberations and fi nally implemented an alternative uptick rule, which allows a stock to fall by 10% in a single day before limitations on short selling apply [36]. This weaker rule would not have a ffected trading of Citigroup on November 1, 2007, as its minimum price was just 9% lower than the close on October 31. Subsequent day declines until November 7 were also smaller than 10%.

The authors go on to recommend some policy changes (adopting preventive measures instead of current retroactive penalties, regulatory agencies investigating individual events like this one, improve access to data, etc.) but given our government's reluctance to go after these folks I'm not confident that their advice will be heeded.

Christmas and Flying Spaghetti Monsters

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Remember our little local dust-up about flying the Christian flag at the veteran's memorial in King?  Imagine how nutty folks around here would get if, like Leesburg, VA, we had the Church of the Flying Spaghetti Monster vying for space with the traditional manger scene.

For the better part of 50 years, a creche and a Christmas tree were the only holiday displays on theLoudoun County Courthouse grounds.

Then came the atheists. And the Jedis. And the Church of the Flying Spaghetti Monster – each with its own decorations. A skeleton Santa Claus was mounted on a cross, intended by its creator to portray society's obsession with consumerism. Nearby, a pine tree stood adorned with atheist testimonials.

Flying Spaghetti Monster devotees are scheduled to put up their contribution this weekend. It's a banner portraying a Nativity-style scene, but Jesus is nowhere to be found. Instead, the Virgin Mary cradles a stalk-eyed noodle-and-meatball creature, its manger surrounded by an army of pirates, a solemn gnome and barnyard animals. The message proclaims: "Touched by an Angelhair."

Given our recent debates about the Christian flag and the controversy over the right (or not) to carry concealed weapons in local parks, there's a little part of my brain that would love to see what would happen around here if we had a similar setup to Leesburg's.  In that juvenile little part of my head I picture this scene:

Bible-quoting sharpshooters taking aim at spaghetti-eating atheists and agnostics who dive for cover, sending sauce and meatballs skyward during their panic, asking Mama Celeste for help since God's out of the picture until their own contingent of pistol packers can get their firearms unholstered and de-trigger locked to return fire.  Thankfully no one's hurt since none of the participants ever served in the military and thus never received truly effective arms training, although two bullets do somehow hit something – one Christian is saved by the lucky (divine?) presence of a condensed pocket-sized King James and one innocent bystander who picked a wildly inopportune time to squat for a meditation is spared when his tattered copy of Zen and the Art of Motorcycle Maintenance takes a direct hit. Eventually cooler heads prevail when the Occupy Wall Streeters, who were minding their own business in their designated protest box, step across their chalk line to broker a truce in which the atheists and agnostics provide a spaghetti supper for everyone at the park free of charge, the Christians put on their Christmas production, collection plates are passed and everyone splits the proceeds.

I'd pay to see it.

Online Confessional

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If you follow any of the media outlets on Facebook or Twitter you've probably noticed how they use social media to find interview subjects for their stories.  One of my kids was interviewed for a story a while back because I saw a local business writer's post on Facebook asking if anyone had teenagers who were having a hard time finding work, and if they'd found a job how they'd done it.  Nothing earth shattering about reporters using social media to find story subjects, but I have to say I was somewhat surprised by this post on AP's Twitter feed:

Have you stolen from a grocery store or other retailer to get something for the holidays? If so, contact@sarahskidmoreap for an interview.

Why would anyone actually reply to this?  Even if you weren't worried that it was a setup wouldn't you be horribly embarassed to admit something like this?  Well, maybe not.  Given some of the things I've seen over these last few years on social media I'm certain there are plenty of people out there who are totally devoid of shame and crave any kind of attention they can get, so this would be right up their alley. 

Sign of the times I guess.

Crappy Numbers Getting Crappier

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It appears that the already depressing sales numbers reported by the National Association of Realtors for previously occupied homes between 2007 and 2010 were actually inflated, which means that whatever the corrected numbers are they're going to be even more depressing:

Among the reasons for the inflated figures, the Realtors group says: changes in the way the Census Bureau collects data, population shifts and some sales being counted twice. Last year's total sales figure of 4.91 million was the worst in 13 years.

The Realtors consulted with several government and private housing market experts, including the Federal Reserve, the Department of Housing and Urban Development, the Mortgage Bankers Association, the National Association of Home Builders, mortgage giants Fannie Mae and Freddie Mac and CoreLogic, the California-based data firm that first raised doubts about the annual numbers earlier this year.

CoreLogic estimated that the Realtors group overstated sales in 2010 by at least 15 percent.

NAR says they'll publish revised numbers on December 21.

Talking Trash

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Last night I attended the Lewisville Town Council meeting to see the swearing in of several new Council members, and that was fun, but what was most interesting was what I learned during a presentation by a representative of Waste Management to the new Council.  It seems that Waste Management is going to open a new single stream recycling operation in Forsyth County some time between May and July of 2012. What that means is that Waste Management's customers will be getting a new container that is the same size as their regular trash containter, but will be intended for recyclables.  In that container they'll be able to put all recycling materials (paper, plastic, metal, etc.) without sorting them and putting them in smaller containers as they do now.  It also means that recycling pickups will only happen every other week.

I didn't take good notes during the meeting, but if I remember correctly the Waste Management representative said that in other parts of the country where the single stream recycling has been introduced they've seen a significant increase in recycling and a significant reduction in solid waste going to the landfill.  All of that's good news as far as I'm concerned.

The Waste Management rep also showed a six minute video of one of their single stream recycling operations in Florida.  I couldn't find that one online, but I did find another of their videos about the process:

It will be interesting to see what kind of impact this facility has in Forsyth County. At a minimum I hope it lengthens the life span of our landfill, and really I hope it's the first step in getting us to the point where technology eliminates the need for a landfill altogether, or the need to truck our garbage somewhere else when our landfill is at capacity (Yeah, I'm a big dreamer).

Moody’s Says Winston-Salem is Stable

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Moody's Investor Services has upgraded its outlook on Winston-Salem from negative to stable.  If you want to know what that means please ask someone who knows something about municipal bonds, not your friendly neighborhood average English major (me). If I had to guess though, I'd say Camel City (and Greensboro and Guilford County) had negative ratings because of their municipal credits linked to the U.S. Government. Just goes to show that the old saying about lying in bed with dogs has some merit to it.