The Securities and Exchange Commission (SEC) is getting tough on credit rating agencies. A series of measures announced on Wednesday, December 3, would impose additional requirements on the credit reporting agencies in an effort to increase transparency and accountability. Consumers, investors and lenders may even end up getting more meaningful ratings.

These comprehensive rules touch every aspect of the credit rating process - from conflicts of interest, to publication of ratings methodologies to disclosure of ratings track records,” explains SEC Chariman Christopher Cox.

The proposed rules are the result of an extensive examination of the three major credit ratings agencies recently concluded by the SEC. The examination, which lasted 10 months, revealed significant weaknesses in ratings practices.

“One of the significant weaknesses in the credit rating process has been that while the credit rating agencies often relied on other to verify the quality of assets underlying structured products - and thus their ratings were vulnerable to reliance on incorrect information - there was frequently inadequate explanation of the limitations of the ratings of these products,” Chairman Cox said. “Just as significantly, conflicts of interest ingrained into the business models of credit rating agencies were amplified as structured products were specifically designed to achieve high ratings for certain tranches and as credit rating agencies sought to gain business and market share by assisting in this process.”

This is the second set of reforms proposed by the SEC since June 2007 when Congress granted the Commision the authority to Register and oversee credit rating agencies. The Credit Rating Reform Act ended nearly a century of self-policing by the credit rating agencies who act as financial gatekeepers determining who can borrow funds and at what cost (interest rate). Some would also say that credit ratings have become a means of assessing a person’s or an organization’s trustworthiness and moral character.

Credit scoring cannot help but provide a moral context for making credit decisions. To be creditworthy is to be trusworthy,” says credit evaluation and financial identity researcher Josh Lauer, assistant professor of communication at the University of New Hampshire. “At a fundamental level, credit evaluation is an effort to determine whether a given person can be trusted.”

According to Chairman Cox, ten credit rating agencies have registered with the SEC since the Act passed in 2007. This represents an increase of 43 percent in the number of nationally recognized statistical rating organizations. Despite the increase in competition, three firms - Fitch Ratings, Standard & Poor’s and Moody’s - continue to dominate the 45 billion-a-year credit rating industry, according to the Associated Press (AP).

The public has 45 days from the date the proposed amendments are published in the Federal Register to submit comments to the SEC. The AP reports that some critics are already sayign the proposed rules do not go far enough while spokespersons for the three major credit rating agencies have already expressed their support for the measures.

A Fact Sheet containing additional details on the proposed rules can be found on the SEC website at www.sec.gov.

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Filed under: Consumer experience, Competitive strategy, Recession

This post is part of AOL Money & Finance’s Best & Worst in Money 2008 feature.

As the economy slides into recession and struggling retailers and restaurants begin to lose the good fight, its inevitable that some favorites will disappear. Among those leaving us in 2008 are retailers Linens ‘n Things, Mervyns, Sharper Image, and Steve & Barry’s.

I always liked Linens ‘n Things for its reasonably priced, reasonably stylish offerings of such functional things as kitchenware and linens, not to mention the occasional useless but chuckleworthy items such as dancing Santas and big plastic barrels of pretzels. But I admit that I didn’t shop at the New Jersey-based big-box retailer very often. After Linens ‘n Things went private in 2006, the chain’s expansion was offset by declining same-store sales, and the company operated at a loss. It filed for Chapter 11 bankruptcy in May 2008, but in October said it would liquidate all remaining stores.

Being from the midwest, I’ve never shopped at a Mervyn’s. It appears to have been a store with a bit of an identity crisis. It was acquired by Dayton Hudson in 1978. Beginning in the ’80s, Mervyn’s tried unsuccessfully to expand into Georgia and Florida. From 1996 to 2001, the name was changed to Mervyn’s California to identify with its West Coast roots. Then in 2004 , Mervyn’s was sold to private investors. Store closings became a regular occurence. In July 2008, the company filed for Chapter 11 bankruptcy. More store closings followed, and in October the company filed for Chapter 7 bankruptcy and began to liquidate its stores.

Continue reading Best & Worst in Money 2008: Retail store we’ll miss the most

Best & Worst in Money 2008: Retail store we’ll miss the most originally appeared on BloggingStocks on Sun, 07 Dec 2008 14:40:00 EST. Please see our terms for use of feeds.

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We can now enter a new acronym into our lexicon: TALF. And what is TALF? The Federal Reserve and the Treasury announced on November 25^th that a Term Asset-backed securities Loan Facility will be created to provide liquidity for purchasers of ABS’s (Asset-Backed Securities, which include mortgage-backed securities). Asset-backed securities also include student loans and car loans, which under normal conditions are packaged and sold to investors willing to take a risk that has been evaluated by another institution.

The trouble is, no one can be certain how thorough those institutions (specifically banks) were in their risk assessment process. Banks need to package and sell these securities in order to remove potential liabilities from their balance sheets, but when it becomes virtually impossible to slog through the tranches of loans within those securities, investors can easily become gun shy. To witness the headaches that these loans are causing banks, take a look at the chart below.

So as our trusted officials continue their efforts to restore confidence in the markets, and as the demand-led recession deepens, this task seems increasingly Herculean. Paulson & Company have resorted to some extremely desperate measures to pull this one off. To fund the TALF, approximately $600-800 billion will have to be committed, which nearly equals the amount of the original bailout plan. $20 billion of that money is, in fact, coming from the bailout plan. The other remaining billions are being leveraged, a fairly astonishing fact whose implications remain unclear. One thing is for certain: if the Fed wishes to avoid an inflationary spiral, destruction of money will become a necessity once this crisis begins to abate.

It would appear that the Fed’s announcement caused a positive reaction in the mortgage markets, however, Mortgage prime rates dropped from 6.3% to 5.5%, a relatively massive decline, and a huge wave of refinancing ensued…in a matter of hours, essentially. Could that be a forward indicator? Credit Suisse Group mortgage strategist Mahesh Swaminathan thinks so, saying that he expects to see rates drop below 5% in the near term. While there are some strict requirements for homeowners hoping to refinance, this is obviously a positive for the consumer. And while these measures do little to halt the rising tide of foreclosures, it does help the demand side of the issue. And in a demand-led recession, such as the one we are in, has the Fed finally stumbled upon the right combination to stimulate the markets?

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The selling pressure on Fannie Mae and Freddie Mac has been heavy this week after a Barron’s article published on the weekend made the case that both government sponsored entities would require a full fledged bailout.  This was made clear even prior to the Housing and Economic Recovery Act of 2008 being signed into law.  […]
Related Posts:
■Real Homes of Genius: Two For One in Compton. Southern California Housing Bubble Hangover.
■Real Homes of Genius: Today we Salute you Paramount. 768 Square Feet for $324,900. Buy, Withdraw, Sell, Foreclose. The Cycle of Life.
■World Premier! Real Homes of Genius Video.
■Real Homes of Genius: Today we Salute you Compton. $90,000 in Los Angeles County?
■How Many People Overpaid for Their Home in Los Angeles County? Trying to get a Raw Number of Households Underwater.

The selling pressure on Fannie Mae and Freddie Mac has been heavy this week after a Barron’s article published on the weekend made the case that both government sponsored entities would require a full fledged bailout.  This was made clear even prior to the Housing and Economic Recovery Act of 2008 being signed into law.  The challenge now becomes if they do go out and sell more stock that current shares will be diluted to a point where the shares become worthless.  Both Fannie Mae and Freddie Mac are testing multi-decade lows.

Sometimes people forget what these two companies stand for.  Part of their mission is of creating liquidity on the secondary mortgage market.  Yet with a struggling housing market these large institutions have to contend with a faltering portfolio that is seeing more and more losses.  Now it is very likely that current shareholders would be wiped out in the event of a bailout.  The question becomes why would foreign investors purchase bonds or preferred shares in the company if the likelihood of failure is around the corner.  Certainly they will be made whole but not at premium rates.  The well is drying up quickly.

There are a few emerging trends in the housing market.  It is rather clear that housing still remains in a precarious situation.  We are nearing the end of the summer selling season and the boost that was expected unfortunately did not materialize.  Record inventory is still on the market and questionable mortgages such as pay option ARMs still loom on the balance sheets of many lenders.  One of the trends that is emerging is people engaging in housing swaps.  That is, people exchanging homes normally without a broker or agent.  In many cases, it is a barter trade.  Another trend is towards frugality.  Now some would argue that this isn’t a trend more than the economic situation forcing the hand of many to face the grim reality.  Yet there should be little doubt that prudence is making a comeback.  Also, we will examine the hidden housing numbers embedded in the Southern California housing market.  Are we really approaching some sort of market bottom?

Housing Swaps

I happened to stumble upon housing swaps on Craigslist.  For those two of you who haven’t heard of Craigslist, this is one of the most visited sites on the internet with some 20,000,000 visits per month in the United States alone.  You can consider this a dynamic classified section where you can find pets, look for employment, trade cars, get rid of unwanted furniture, and now swap your home with someone else.  Now I’ve used housing swaps when traveling for a temporary living arrangement.  For example, you need a place to stay and you find someone in your desired location who is looking to travel as well, and you come to an agreed upon trade.  Now this I used during college and was amazed at how many people are out there and the ability of technology to shrink the world.

That isn’t the new trend.  But what I am noticing is postings from people looking to permanently swap their place with others.  That is something that is new.  There were the unique postings in the past but now everyday you can find a person looking to trade their home with your home.  Here is an example:

The person above is looking to exchange their Chicago home with a home out here in Burbank either temporarily or permanently.  Now why would someone do a housing swap as opposed to selling their home?  There are actually many good reasons.  First, you may be an area with depressed sales and can’t sell your home.  For many corporate careers, if you are in a junior position you may need to go where the company sends you.  This may translate into you relocating but if you own your home and cannot sell, then you are stuck.  What if you absolutely love your career?  Then most would do anything they can to find a way to move to their new location.

Another reason people would do a housing swap instead of selling is they may be in a negative equity position.  Say you bought a home for $350,000 and the home is now “worth” $250,000.  A large number of people do not (or don’t want to) come to the table with $100,000 simply to sell their home.  There is a large portion of the population that can manage the housing payment but is simply stuck in this position of limbo.  They would like to sell their home but cannot.  There only other option is to ruthlessly default and some are going down this path as well.

Finally, this may workout for people who are on the margins.  If you have say a 4 or 5 percent equity position in your home, it may cost you $10,000 or $30,000 simply to sell your place.  Why not contact someone and save yourself that amount?  You can hire a real estate attorney for a few hours, get the paperwork drawn up and finish the deal.  This may work for cases like the person that needs to relocate and doesn’t really care if they get a profit on their home.  They are simply looking to sell the home.

It’ll be interesting to see if more and more of these cases pop up on Craigslist.

Frugality

There is a definitive emerging trend in frugality.  There is a fountain of wealth with Google.  You can use Google Maps and have access to technology that only a few years ago was accessible by the highest level government officials.  You also have the luxury of searching for information from a variety of sources.  One of the features I enjoy from Google is their Google Trends search feature.  In this, you can see the amount of search queries for any phrase or word.  Since Google dominates the search world, this is an excellent view of what people are searching for at any given time.  Take a look at this search phrase:

As you can see from the above chart, not many people are searching for “real estate investing” anymore which shouldn’t come as a surprise.  Ironically, in times where people should be more financially educated they tend to steer away from this.  They ramp up their investments at the worst time, near a peak, and face rapid problems.  Is it any wonder that California has now seen a drop of 38 percent in one-year for a median priced home?

This trend can also be seen perfectly by comparing two stocks for the year.  That of Family Dollar Stores and Best Buy:

For the year Family Dollar Stores are up 24 percent while Best Buy is down 15 percent.  So what does this mean?  What it means is that people are focusing on things they “need” and avoiding things they “want.”  It is interesting to note that consumer and producer inflation is running at decade highs.  Now why is this?  Clearly housing prices collapsing and credit tightening is wealth destruction so you would think that we would be seeing possibly deflation.  The problem however is items that people need such as food, fuel, and healthcare are not growing exponentially.  These remain fixed while the U.S. Dollar declines and purchases less and less of these items.  In addition, many Wal-Mart goods are produced in China which is facing its own inflation.  The workforce is slowly getting more educated and is demanding slightly higher wages which find their way into the price of the goods that people consume.

With budgets getting tight “want” stores like Best Buy are facing the brunt of the economic contraction.  We saw this with Mervyn’s filing for Chapter 11 bankruptcy in July.  Another clear example is looking at a low cost food source such as McDonald’s and comparing it to P.F. Chang’s China Bistro:

Over the past year McDonald’s is up 29 percent while P.F. Chang’s is down 27 percent.  Frugality is becoming a way of life because money is tight and this is being reflected in the spending behavior of Americans.

Census Selling

Much to the chagrin of many the housing market won’t see a bottom at least in California until 2011.  There is some positive aspects to this including more affordable housing for many.  It will also lighten the debt load for households in the future.  It may also give people the incentive to purchase homes in areas they plan on staying in and investing their time in creating a better community.

Foreclosures are still at historical highs.  Given the recent housing report for Southern California and the modest jump in sales, I think it is important to look at the actual sales and how they played out in various regions.  Let us first get a population count for the 6 major counties:

Population Count For County:

Los Angeles:               9,948,081

Orange:                       3,002,048

Riverside:                    2,026,803

San Bernardino:          1,999,332

Ventura:                      799,720

San Diego:                  2,941,454

Total Southern California:   20,717,438

So that gives us the entire population count for Southern California.  The total population of California is 36,457,549 so Southern California makes up 56 percent of this amount.  Now let us look at last months sales data:

Now I made the case in a previous article that the minor bump in sales was in large part by the fire sale of homes in the Inland Empire.  Let us now break down the numbers to get an actual proportion:

Riverside + San Bernardino Total July Sales =  6,637 / (20,329 total SoCal Sold)

So these two counties made up 32.6 percent of all sales for Southern California.  Now we should look at what percent these counties make up for the Southern California population:

Riverside + San Bernardino Population = 4,026,135 / (SoCal total 20,717,438)

Total population percentage for these two counties is 19.4 percent.  So essentially these two counties are selling at twice the percent of their population representation.  I was listening on the radio to someone explain the median price drop and cautioning that sales are getting skewed because “expensive” homes aren’t selling and only foreclosures and lower priced homes are selling.  This in fact is true.  The only thing I would caution these folks about is that distress sales are now the bulk of the market even though miraculously in some of the data, foreclosures don’t pop up in multiple listing services.

These new trends are simply a way people are coping with the economic conditions.  It is very unlikely we will be seeing a second half recovery especially for housing.

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Emerging Economic Trends: Housing Swaps, Frugality, and Selling Homes in Lower Priced Areas.

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Related Posts:
■Real Homes of Genius: Two For One in Compton. Southern California Housing Bubble Hangover.
■Real Homes of Genius: Today we Salute you Paramount. 768 Square Feet for $324,900. Buy, Withdraw, Sell, Foreclose. The Cycle of Life.
■World Premier! Real Homes of Genius Video.
■Real Homes of Genius: Today we Salute you Compton. $90,000 in Los Angeles County?
■How Many People Overpaid for Their Home in Los Angeles County? Trying to get a Raw Number of Households Underwater.

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Filed under: Analyst reports, MasterCard Inc’A’ (MA), Morgan Stanley (MS)

Credit-card concerns Visa, Inc. (NYSE: V) and MasterCard, Inc. (NYSE: MA) will be shelling out up to $2.75 billion to settle an antitrust suit with Discover Financial Services (NYSE: DFS). Specifically, MasterCard will pay Discover $862.5 million in the fourth quarter, while Visa will fork over $1.89 billion over the course of 2009. Following the release of the settlement’s details, an analyst at Keefe, Bruyette & Woods is weighing in favorably on all three firms.

Sanjay Sakhrani called the news “a big win for Discover, as it provides an additional cushion to contend with the implications of a weaker U.S. economy.” He expects the payments will add about $1.75 to Discover’s earnings per share. However, he also cited the report as an upside catalyst for MasterCard and Visa, as it eliminates an overhang on shares of both companies — an assertion supported by analyst Julio C. Quinteros, Jr., of Goldman Sachs.

Unfortunately, though, it’s not all sunshine and rainbows in the credit-card group today. Morgan Stanley (NYSE: MS) has filed its own suit against Discover in New York State Supreme Court, alleging that it’s entitled to a chunk of the $2.75-billion settlement. DFS was spun off from Morgan Stanley last year, and the latter company claims that it should receive a portion of the award under the terms of a special dividend agreement.

Not so fast, says Discover, which alleges that its parent company is in violation of their spinoff agreement, and “the amount of Morgan Stanley’s special dividend is a matter of dispute.” Morgan fired back that “there is absolutely no basis for Discover’s claim that the agreement was breached.” Stay tuned to see how this credit-card drama plays out — in early trading, shares of all three credit card companies were higher.

Elizabeth Harrow is an analyst and financial writer in the research department at Schaeffer’s Investment Research. She is featured in the video series Schaeffer’s Daily Q&A on SchaeffersResearch.com.

Visa, MasterCard settle with Discover, but what about Morgan Stanley? originally appeared on BloggingStocks on Tue, 28 Oct 2008 11:11:00 EST. Please see our terms for use of feeds.

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Filed under: Commodities, Oil, Recession

This post was written by Minyanville contributor Adam Warner:

Smarter minds than yours truly have noted that the oil ETF United States Oil Fund (AMEX: USO) is not the best bullish play on crude here. My understanding of the product is that USO owns futures, and must roll each cycle. And right now oil is in deep contango, which always sounds pornographic but actually just refers to the fact that there’s a particularly steep and upward sloped curve in the futures as you go out in time.

I’ll take their word for the contango part, but I’m not entirely sure why that necessarily will knock down USO. They’ll roll when they roll, and even if the spread is wide, won’t it then just depend on what happens in the next month AFTER the roll? I’m thinking out loud here, so if anyone has something enlightening to add on this topic, I am all ears.

I sold and am selling more Nov. puts anyway, so it should not matter a great deal from my standpoint. And I’m not sure I really have a great alternative if I want to do something bullish in oil options.

I don’t trade futures or futures options, and as far as pure oil there’s Super Double Ultra Octane Special (AMEX: DBO), which does not have liquid options.

There’s also Ultra Oil & Gas ProShares (AMEX: DIG) and UltraShort Oil & Gas ProShares (AMEX: DUG), but those track energy stocks.

Playing oil with the United States Oil Fund (USO) ETF originally appeared on BloggingStocks on Tue, 28 Oct 2008 14:42:00 EST. Please see our terms for use of feeds.

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Filed under: Scandals, Books

The best business books are almost always the ones about scandal.

Success is great, but it’s much more interesting to read about a convoluted web of lies designed to bilk investors out of $500 million over 20 years in what is possibly the largest Ponzi scheme in U.S. history (with the exception of Social Security).

In The Hit Charade: Lou Pearlman, Boy Bands, and the Biggest Ponzi Scheme in U.S. History, Radar reporter Tyler Gray examines boy band mogul Lou Perlman’s illustrious career that involved deception from the beginning. It started with an airline that didn’t own any planes but was able to raise hundreds of millions to fund a lavish lifestyle and later provide the start-up capital to form hit boy bands including N’SYNC, The Backstreet Boys, and O-Town.

Gray writes well, with an eye for what’s interesting and relevant — I read the entire book in an afternoon, and The Hit Charade isn’t bogged down with the minutiae of the scam the way that so many of these books are. Instead it paints an interesting portrait of a complex charlatan — Gray was the only reporter to interview Pearlman while he was behind bars.

What sets Pearlman apart from so many other frauds is that his impact is so enduring: He created the soundtrack for a generation of teenage girls, and paved the way for Justin Timberlake to become one of the biggest pop stars ever. Without Lou Pearlman, there never would have been this.

Book Review: The Hit Charade: Lou Pearlman, Boy Bands, and the Biggest Ponzi Scheme in U.S. History originally appeared on BloggingStocks on Sat, 06 Dec 2008 15:40:00 EST. Please see our terms for use of feeds.

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