Archive for July, 2011
Thursday, July 28th, 2011
Smeal’s Ed Ketz and co-blogger Anthony Catanach weigh in on their blog on the threats and rhetoric swirling in the debt ceiling debate. In particular, they question the August 2 deadline and President Obama’s assertion that Social Security payments may be delayed:
First, Geithner’s August 2 date is artificial. We see this in part because he set one date and then he switched to a later date, seemingly to give his side more heft in the debate. The problem with either date is that the U.S. government has almost $2 trillion in discretionary spending. As discretionary means “optional, not obligatory, non-compulsory,” if no agreement is achieved by August 2, the Obama administration will not have to default on its bills. Instead, it can reduce the discretionary spending, just as ordinary families with strained budgets may have to forego eating out or going to the theater. Indeed, if the Treasury Department defaults, it will be due to a political calculation and a stubborn unwillingness to reduce discretionary spending.
President Obama recently stated that Social Security checks might not be sent out in August if the debt ceiling is not raised. This Social Security scare is artificial and part of the political rhetoric. Again, there is almost $2 trillion in discretionary spending and the White House merely needs to decide which things get paid and which things are delayed. We assume he thinks Social Security is a priority.
There’s more on their blog, Grumpy Old Accountants.
Thursday, July 21st, 2011
Smeal’s John Liechty testified before the U.S. House Committee on Financial Services, Subcommittee on Oversight and Investigations, last week regarding the newly formed federal Office of Financial Research (OFR). The OFR, which was formed last year with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act, is charged with collecting data on the financial system to allow another government entity, the Financial Services Oversight Council, to effectively monitor its stability and ward off potential threats. The agency is the brainchild of Liechty, who spent 18 months gathering industry support and meeting with members of Congress to push its establishment.
According to The Hill‘s On the Money blog, the banking subcommittee wanted to learn “how the new Office of Financial Research plans to keep mounds of financial data safe from hackers. … With hackers always looming over the horizon, Republicans want to know what the office—which they charge lacks proper congressional oversight—is doing to keep that information in the right hands.”
In his prepared testimony, Liechty explained the origins of the OFR and why he believes its a necessary component to the country’s financial security. He opened with an outline of his three main points:
Financial stability requires transparency – The ability for regulators to both see through the counterparty network and the ability to see through asset backed, financial products to the underlying assets is an important fundamental component that is needed in order to be able to monitor the stability of the financial system. Transparency will require universally accepted identifiers and reporting standards—in essence it will require banks to get their back-offices in order. The investments required to improve transparency will not only result in improved macro-prudential regulation; they will result in improved risk management and substantial operational savings for the industry.
We face a significant scientific task – Not only do we not have the data in place, we have not done the science needed to understand system-wide risks to the financial system. In many ways, financial regulators are like the weather services, before the National Oceanic and Atmospheric Administration (NOAA) was established. NOAA was given the mandate to i) collect new data, ii) develop new models for identifying extreme events and improving weather forecasts, and iii) conduct the science necessary to understand the weather systems and build these next generation models. The Financial Services Oversight Council (FSOC) and the Office of Financial Research face similar challenges and have been given a similar mandate.
We cannot afford to fail – We live in a leveraged economy where the resilience and growth potential of the economy depends on having both an innovative and stable financial system. Innovation often leads to instability, unless the appropriate infrastructure is in place to provide stability. The FSOC and OFR offer a way forward to build this infrastructure. The risk that we live with, if we fail to have the proper oversight to provide a stable system, is not just the devastating economic impact that would come from another financial crisis of the magnitude of the 2008 crisis, but more importantly the political reality that will follow. If we can’t get this right and there is another crisis, then there is a very real risk that the political response may result in a response that adversly affects the finanical market’s ability to innovate.
You can view the entire hearing on the House banking committee’s website. For more on the Office of Financial Research and Liechty’s role in its creation, check out this Smeal Report feature from late last year.
Wednesday, July 13th, 2011
“Facebook, Groupon and Zynga are creating an investor frenzy around high-growth Internet companies while commanding sky-rocketing valuations. But are the valuations for these pre-IPO companies justified?” asks TheStreet.com. At least in the case of Groupon, Smeal’s Ed Ketz says, “No.”
On their blog, Grumpy Old Accountants, Ketz and Anthony H. Catanach Jr., associate professor of business at Villanova University, take a look Groupon’s S-1 filing with the Securities and Exchange Commission and conclude that they would rather buy lottery tickets than participate in its IPO:
Let’s begin with the income statement. Sales exploded from $30 (all account balances are in millions of dollars) in 2009 to $713 in 2010, an almost unheard of 23-fold growth. Unfortunately, expenses had an even greater astronomical growth, going from $37 in 2009 to $1,170 in 2010 for net losses of $(7) and $(456), respectively. The biggest expense accretion resides in acquisition-related expenses of $203; however, even if we remove this item from consideration, expenses are still $967 and they still swamp revenues. Persistent earnings are clearly negative and serve as one huge red flag.
The balance sheet also displays repugnance. Current assets are $174 while current liabilities equal $370. Any business sophomore knows that isn’t good. Total assets equal $382 and total liabilities $372, so total stockholders’ equity is a mere $10. Having only 3% equity isn’t good for banks, much less anybody else; the financial leverage risk is huge.
There’s more, too. Read on on Grumpy Old Accountants.