Hey, we still have 6 business days left in November –
but funders know that there are only 20 in December (including
Christmas Eve and New Year’s Eve, which I guess count from the
government’s perspective). Today we are privileged to see
riots in the streets and stores, full of excited mobs of
people with too much debt and little fiscal responsibility
trying to obtain more possessions. This scene, however,
could be here in the United States OR in Athens or Lisbon. But
we'll stick with the United States, where Black Friday is the
annual celebration of American consumerism. Yesterday we all
sat with our families, gained 5 pounds, and watched some
meaningless football match involving the Detroit Lions. But
whether it is here, or in Europe, both groups want the same
thing: to have their creditors give them more goods in
exchange for debt that will ultimately be inflated or
defaulted away. And now instead of the election we’ll have
the press yammering about a) consumer’s shopping trends, and
b) the fiscal cliff.
One
person who won’t be doing much shopping is a former
executive of Lender Processing Services, Inc. (LPS) who pled
guilty last week to mail and wire fraud charges,
admitting her participation in a six-year scheme to prepare
and file more than 1 million improper mortgage documents as
part of the so-called robo-signing scandal. Lorraine Brown,
former CEO of DocX LLC, a subsidiary of LPS, faces a maximum
penalty of five years in prison and a $250,000 fine, or twice
the gross gain or loss from the crime. Assistant U.S.
Attorney General Lanny A. Breuer said, "Lorraine Brown
participated in a scheme to fabricate mortgage-related
documents at the height of the financial crisis. She was responsible
for more than a million fraudulent documents entering
the system, and directing company employees to forge and
falsify documents relied on by property recorders, title
insurers & others.
Andrew Liput, with Secure Settlements, sent out, "The
robo signing scandal that has infected the foreclosure process
in judicial states has caused millions in losses to banks as
litigation has been prolonged or placed on indefinite hold so
courts can sort out the mess. These fraudulent activities
highlight the lack of transparency and accountability of those
few who fail to take their roles as fiduciaries of banks
seriously. The days are long gone unfortunately when banks, or
the public, can assume that a licensed attorney or any
licensed professional is exempt from bad acts. This is
precisely why Secure Settlements favors individual vetting and
ongoing monitoring on top of licensing and insurance. When
those entrusted with bank funds and documents know that they
are being checked out, monitored and rated, and that banks and
consumers will be expecting independent verification of their
credentials and identity, I am certain it will be a
significant deterrence to cutting corners and outright fraud.
Criminals don't like to work in the sunlight."
Wednesday
the commentary discussed some auditing
information/suggestions. Audits and exams are a way of
life for banks, mortgage companies, and so forth – most
believe it is only a matter of time until other “handlers”
of money, such as Realtors, title companies, attorneys, and
so on are subject to the same scrutiny. One of the
offshoots of the work of internal auditors, and their process,
is to make sure that the integrity of the audit process is
maintained, remove undue management influence and while it can
sometimes put management and staff on edge, it is designed to
serve and protect the bank. Such processes are common in
banking. As audits unfold, teams will commonly seek answers to
questions that surface from their discussions with staff or
management. To ensure accuracy, anything of note that surfaces
should be double-checked again to make sure nothing is
misunderstood. This is the time when management or staff has
an opportunity to respond or clarify things. All of this back
and forth process is then incorporated and final results are
provided to the audit committee of the board.
Auditing
is important and to make sure the process is thorough, fair
and effective; it is also critical to make certain the
function is independent of the audited activities. That
sounds like common sense, but when expertise resides in one
area and a community bank doesn’t have extra people to throw
around, it can be more complex than it seems at first blush.
Community banks just don’t have teams of experts lying around
that are unused, so care must be taken to ensure the audit
process is followed. In a community bank stretched for
resources, it seems to make sense that the internal audit
function should be able to design and implement processes to
correct findings, but this should be avoided. There are simply
too many potential conflicts that can arise, so the audit
function must remain independent of operational management.
Questions and discussion are common and helpful, but the
audit team should not be directly involved in the
development or implementation of internal controls.
Finally, it is important for companies to train their audit
staff to keep them at the top of their game. Understanding
where risks are coming from is important, but equally
important is making sure the auditor has the understanding and
training to handle the bank’s situation. Here the report
indicates auditors should have the ability to collect and
understand information, to examine and evaluate audit evidence
and to communicate with stakeholders of the internal audit
function. Pacific Coast Banker’s Bank notes, “It makes
sense to not only boost training for audit teams, but to share
knowledge gained throughout the bank that is obtained as a
result of the audit process. Doing so will help your bank
maintain best practices, as risk management is further
enhanced.”
For economic commentary, David Zervos with Jefferies did a
great write up a while back on Europe, and an analogy, that
I wanted to share. "Imagine that the state of California
could not fund itself in the private capital markets. And as
the state unemployment rate pushed north of 25 percent, basic
government services ceased, pensions were slashed, house
values plummeted and there was growing social unrest on the
streets. California needed a massive fiscal adjustment to wean
itself off decades of mismanagement, abuse and unsustainable
debt accumulation. Default was imminent and it was going to be
an ugly end to the great California bubble! Of course, if that
were to happen, California would appeal to Washington for
help. And given our pork filled federal government structure,
there would be immediate relief via fiscal transfers. But
imagine a US constitutional set-up like that of the Eurozone -
one with no federal transfers for states. As California sank
deeper into the abyss, there would be no fiscal lifeline - and
the negative externalities from a statewide depression would
start to feed into the other states, contaminating the entire
financial system, and threatening the longer term growth
prospects for all of the United States.”
He
continued, “In this ‘European’ version of a US downturn, there
would only be one institution that could act - the Fed. But
even as the Fed lowered rates to 0, and expanded its balance
sheet to counteract the systemic effects from this localized
depression, a funny thing happened - none of the stimulus got
to California. There were "Draghian blockages" in place! The
lower rates went to North Dakota and Texas instead. In fact,
the states with sound finances were even able to fund at
negative nominal yields. And corporates in those states could
fund at record low rates. But those low rates did not actually
entice much municipal or corporate investment since folks were
simply too worried about the negative Californian
externalities. Further, everyone saw what too much leverage
did to California and they were rightly nervous. To be sure,
there were windfall gains from refinancing existing debts at
lower rates in the healthy states, and consequently businesses
in those states saw their equity valuations rise sharply, but
there was little new investment or job growth. In this
hypothetical world, easy monetary policy blanketed the entire
US, but the elixir did not make it to the source of the
problem. Further, the negative sentiment associated with a
California depression kept overall US sentiment depressed -
even with record low rates. So what would the Fed's answer be
- just do more QE. And as the dosage of monetary policy
accommodation increased ad nauseum, the temptations would
become too great in the uncontaminated areas - bubbles in
Texas and North Dakota would develop. Deja vu all over again!”
Lastly,
“Meanwhile, after decades with California living beyond its
means, many ordinary US folks would push for them to leave the
US. Their profligate ways would be seen as a stain on the rest
of the country. And of course many in California would begin
to push for an exit from the United States. Their solution
would be to redenominate the existing debts into a new
currency that featured pictures of their heroes from the old
days. The currency would be called ‘the bubble’ - Kim
Kardashian would be on the one bubble bill, Paris Hilton on
the five, Lindsay Lohan on the ten, Brittany Spears on the
twenty, David Hasselhoff on the fifty and of course Charlie
Sheen on the C-note. And a hundred bubbles would basically
buy a big gulp a 7 eleven!" Very well done, Mr. Zervos.
(For
anyone
who cares about where rates are today, they’re about
unchanged from Wednesday’s levels with the 10-yr at 1.67%.)
New Federal Golf Rules
Major rule changes in the game of golf became effective in
November, 2012.
This is only a preview as the complete rule book (expect 2,716
pages) is being rewritten as we speak.
Here are a few of the changes:
Golfers with handicaps:
- Below 10 will have their green fees increased by 35%.
- Between 11 and 18 will see no increase in green fees.
- Above 18 will get a $20 check each time they play.
The term "gimmie" will be changed to "entitlement" and will be
used as follows:
- Handicaps below 10, no entitlements.
- Handicaps from 11 to 17, entitlements for putter length
putts.
- Handicaps above 18, if your ball is on the green, no need to
putt, just pick it up.
These entitlements are intended to bring about fairness and,
most importantly, equality in scoring.
In addition, a Player will be limited to a maximum of one
birdie or six pars in any given 18-hole round.
Any excess must be given to those fellow players who have not
yet scored a birdie or par.
Only after all players have received a birdie or par from the
player actually making the birdie or par, can that player
begin to count his pars and birdies again.
The current USGA handicap system will be used for the above
purposes, but the term "net score" will be available only for
scoring those players with handicaps of 18 and above.
This is intended to "re-distribute" the success of winning by
making sure that in all competitions every Player above an 18
handicap will post only "net score" against every other
player's "gross score".
These new Rules are intended to CHANGE the game of golf.
Golf must be about Fairness. It should have nothing to do with
ability, hard work, practice, and responsibility.
This is the "Right thing to do."
So, please remember; if you shot a round of golf under par,
you didn't shoot it yourself. Someone else built that course,
and someone else cut the grass so that you could play on it.
Someone else built the clubs and the cart.
You need to share with everyone and anyone who made you a
successful golfer.
If
you're interested, visit my twice-a-month blog at the STRATMOR
Group web site located at www.stratmorgroup.com.
The current blog discusses some of the considerations facing
the FHFA regarding Fannie and Freddie. If you have both the
time and inclination, make a comment on what I have written,
or on other comments so that folks can learn what's going on
out there from the other readers.
