Overheard at a Branch Opening

"We're financially lacking in fodder,
As bankers, to earn as we oughter,
When deposits accrue
At zero-point-two
And we lend out at three and a quarter."

Dr. Goose was among the guests at the opening of the Glen Ridge, New Jersey branch of Boiling Springs Savings Bank. As an invited community leader (not as a limericker laureate), I chatted with Boiling Springs' President & CEO Bob Stillwell, who proudly told me of the bank's adherence to the time-honored business of taking deposits and making mortgages. This basic approach has served the bank well from the 1959 founding of its original branch in Lyndhurst NJ, to the opening of its 18th branch today. Not only has the bank stuck to the basics, it has also stuck with Mr. Stillwell, who joined over 40 years ago as a recent college graduate.

One of the ways in which Boiling Springs, a mutual holding company, puts down roots in the four New Jersey counties in which it operates is by supporting local charitable causes. This was evident in the reception's guest list, which included trustees of the Glen Ridge Educational Foundation and the Glen Ridge Community Fund. The bank had actively supported both organizations before even setting up shop in Glen Ridge.

Boiling Springs' head of lending, Frank Weber, asked my opinion on the current interest rate environment, which we agreed was not easy for savers or community bankers. "Margin compression" is a serious concern for an institution whose funding cannot get any cheaper; at 0.15%, its checking accounts now pay three times the national average rate. Every incremental reduction in mortgage rates reduces the bank's interest margin, for which a higher level of refinancing volume is only a partial compensation. Still, a savings bank that has grown slowly and stuck to its knitting through five decades of financial cycles is not likely to let a little margin compression impede its progress.

Remembering Lincoln on Thanksgiving

In celebration of Thanksgiving Day 2012, I offer once again my limerick verse based on the 1863 proclamation that established our national holiday:

"The Almighty, with merciful gaze
Looking past our iniquitous ways,
Has bountif'ly blessed,
As we all may attest
In a day of Thanksgiving and praise."

In 1863, with the nation ablaze in civil war, President Abraham Lincoln spoke movingly of

"these bounties, which are so constantly enjoyed that we are prone to forget the source from which they come, [to which] others have been added, which are of so extraordinary a nature, that they cannot fail to penetrate and soften even the heart which is habitually insensible to the ever watchful providence of Almighty God... They are the gracious gifts of the Most High God, who, while dealing with us in anger for our sins, hath nevertheless remembered mercy.
It has seemed to me fit and proper that they should be solemnly, reverently and gratefully acknowledged as with one heart and one voice by the whole American People."

It is worthwhile to read the entire proclamation as we come together to give thanks in a time of troubles, and remember the greater trials of our history. Happy Thanksgiving to all!

Caveat Emptor

A buyer who looks to an audit
Of a target before having bought it,
May leave itself open
In spite of all hopin',
To sellers' attempts to defraud it.

Years ago, an accounting professor visited a class of credit risk analysis trainees, of which I was one, and told us that "a financial statement is like a bikini: what it reveals is interesting, but what it conceals is vital." Every so often, I have cause once again to ponder the professor's sage insight. Today, for example, comes news of an $8.8 billion accounting fraud allegedly perpetrated on HP by management of the software company Autonomy, which $HPQ acquired last year for $11.1 billion. Autonomy's key product is IDOL, a software package that allows big users to crunch big data and find patterns and meaning in it. HP alleges that, notwithstanding clean audits by Deloitte, Autonomy's pre-acquisition financial statements contained -

The mischaracterization of revenue from negative-margin, low-end hardware sales with little or no associated software content as “IDOL product,” and the improper inclusion of such revenue as “license revenue” for purposes of the organic and IDOL growth calculations.The use of licensing transactions with value-added resellers to inappropriately accelerate revenue recognition, or worse, create revenue where no end-user customer existed at the time of sale. This negative-margin, low-end hardware is estimated to have comprised 10-15% of Autonomy’s revenue.

Somewhere, my old accounting professor is smiling ruefully.

No Cliffhanger

A pundit, politically touting,
The conventional wisdom was flouting,
When he roundly dismissed
The Fiscal Abyss
As "Over, except for the shouting."

The Business Insider's Joe Weisenthal declares that today's stock market is in the throes of a "Morning Money Ben rally." That's because Politico's Ben White has made the gutsy call that the fiscal cliff is already over. Swimming against the current of mainstream media coverage of this supposed January 1 cliffhanger, Mr. White points out the essential difference between the political situation today and that which prevailed during the Debt Ceiling debacle:

Nearly every signal from Republicans suggests they understand they have lost the war over taxes going up on the wealthiest Americans and are just trying to figure out how to get the least objectionable deal that includes real spending cuts and a trigger for tax and entitlement reform. It’s clear from polling that the GOP will get the blame if taxes go up on everyone on Jan. 1 and any subsequent damage to the economy and markets will fall squarely at the party’s feet. Republicans are no longer ignoring such polls.

In a somber counterpoint to Mr. White's analysis, Mr. Weisenthal reminds us that the greater political difficulty for President Obama this time may lie on his own Democratic side, in getting Senate Majority Leader Harry Reid and House Minority Leader Nancy Pelosi to play ball in the field of Social Security and Medicare cutbacks.

No Security in Book Value

Said a banker: "The Crisis revealed,
In investments we carried for yield,
How extreme fluctuations
Affect valuations,
So better to keep them concealed."

Said investors: "It's better to trust
In the price you could fetch if you must,
And the equity value
Which, hopefully, now you'll,
Accordingly, have to adjust."

Bankers, regulators, lobbyists and the US Congress have all turned their attention to the US implementation of the Basel III regulatory framework, which appears to have very few friends in high places. One always-controversial element of Basel III is the requirement to mark to market those securities that a bank has as "available for sale." Bankers hate this idea because it increases the reported volatility of earnings and capital. At a Senate Banking Committee last week, Michael S. Gibson, director of the Division of Banking Supervision and Regulation at the Fed, appeared prepared to give a little in the face of industry pushback, saying that regulators are "considering changes to the treatment" of such securities.

However, if bankers hate mark-to-market, investors should love and defend it. As the Journal's Heard on the Street columnist David Reilly writes: "the only thing worse than a loss at a big bank is pretending it doesn't exist." Reilly points out that available-for-sale securities comprised $2.6 trillion, or 19% of bank assets, on June 30, up from 14% in 2008. Like it or not, such investments do fluctuate in value, and pretending that they could be disposed of at cost only leads to investor distrust during financially difficult times. Unlike bank loans, liquid securities are not reserved against, so marking them to market is the only way to assure that, at least in this one respect, investors can place some credibility in the reported book value of financial institutions.

WSJ: No Security in Book Value

Here is my latest post for the Journal's Total Return blog, on the fight over banks' having to mark to market their securities held for sale. Please enjoy, and leave a comment!

RIP Hostess

Hostess will finally cease
Mixing flour and sugar & grease,
And many are sad,
But is it so bad
After making the nation obese?

For me, the bankruptcy and liquidation of Hostess was a bit like reading of the death of a former celebrity that you had thought was long deceased. I have not seen, much less eaten, a Twinkie in twenty years. The company's demise has been met with an outpouring of grief fit the passing of a national icon, which in a way it was. But was it a good way? This was a maker of products whose nutritional emptiness and questionable chemical content were so widely known that their consumption once comprised part of the psychological testimony for the defendant in a murder trial. While I do mourn for the 18,000 jobs lost, the death of Hostess leaves me feeling... curiously empty.

Conditions Are Tight

Said Bernanke: "By now it is evident
That tight mortgage standards are prevalent,
Which is really too bad,
As it's time that we had
An impetus, not an impediment."

Federal Reserve Chairman Ben Bernanke gave a speech at a housing conference yesterday in which he noted the tight lending conditions currently prevailing in the mortgage market. Although loose lending standards contributed to the 2008 economic collapse, and tightening standards in response was appropriate, Bernanke said it appears that “the pendulum has swung too far the other way,” denying some creditworthy borrowers. This may slow the housing revival and impede the economic recovery, warned the Chairman.

That mortgage lenders remain reluctant to lend puts a spotlight on the limitations of Fed action, inasmuch as the central bank has recently begun a program to buy $40 billion a month of mortgage-backed securities as a way of freeing up the market's credit capacity. Chairman Bernanke spoke in Atlanta at the Operation HOPE Global Financial Dignity Summit. His remarks did not address the question of whether "financial dignity" is an oxymoron.

A Perfect Scandal

In DC, it's a welcome distraction
From each warring political faction:
Invoking, in speeches,
Security breaches
From man-on-biographer action.

It appears that the affair of CIA director David Petraeus and his biographer, Paula Broadwell, is the perfect Washington scandal, giving the mainstream media just enough connection to supposed "national security issues" to justify around-the-clock coverage of a tabloid story. This was made abundantly clear today during President Barack Obama's midday press conference.  The President spoke on progress in negotiating a long-term budget deficit solution that would avoid the fiscal cliff (or "austerity bomb," as I like to call it), with special attention to his insistence on letting the Bush tax cuts expire for the top 2% of income earners.  The first question went to the AP's Ben Feller, who asked:"Can you assure the American people that there have been no breaches of national security or classified information in the scandal involving Generals Petraeus and [John] Allen?"

Now, this is a non-question, since it is already evident that there was no breach of national security, and we already know that Ms. Broadwell had classified information on her computer.  Of course, Mr. Feller's question gives him an opening to write a lede containing the keywords "sex scandal", which is much juicier than leading with "tax cuts" or the "fiscal cliff". However, this is a time when the nation needs to focus on its long-term sustainability, and the Ben Fellers of this world should be helping us to do so - as should the Dr. Geese.