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Everybody’s got a secret…  

- Bruce Springsteen, “Darkness on the Edge of Town”

COMPLIANCE: Odd Lots - Screen shot 2010 08 24 at 7.09.57 AM

How Much Worse Could It Be?
“States Will Be Hedge-Fund Police” says the Wall Street Journal (19 August), describing the change under Dodd-Frankenstein which will raise the assets under management threshold for SEC oversight to $100 million from a current $25 million.  The SEC estimates that about 4,000 registered hedge funds will switch from SEC to state jurisdiction.  One of the knotty bits to work though: each state has a different regime, so funds will have to learn different practices state by state.  Another knotty bit: state budgets have been slashed, with some state regulators on unpaid furlough.  Here’s another knotty part: the SEC doesn’t believe the states have the resources to take up the slack – but out of 11,300 registered advisers under SEC oversight, more than 3,000 have never been examined.  Let’s face it, how much worse could the states do?
Guess we’ll find out…
You Mean Now?!
SEC Chairman Schapiro has cautioned Congress that they should not expect anyone at the Commission to actually do any work.  Speaking before the House Financial Services Subcommittee on Capital Markets, SEC Chair Mary Schapiro said the SEC may not be able to deliver all that is asked of it under the schedule for implementing Dodd-Frankenstein.
The SEC is required to issue a large number of new rules, create five new offices, and to conduct a number of studies, much of this on an accelerated timetable, with final results due in a year.  Some items must be completed in as little as 90 days.
“The importance and complexity of the rules, coupled both with their timing and high volume, and the rule writing agenda currently pending, will make the upcoming rule writing process both logistically challenging and extremely labor intensive,” Schapiro testified, which means the Commission will set aside the balance of its agenda for 2010.
President Obama has allocated $24 million to help the Commission with the implementation, which Schapiro says will enable the SEC to create 800 new positions.  That comes out to $30,000 per new employee, leading us to conclude the government has finally created an employment program for those laid-off New Coke deliverymen.  And heads up: many of the projects on a short time frame are hot-button issues like the proposed fiduciary standard for brokers.  You think the SEC couldn’t get anything accomplished before?  Just watch!
Darkness on the Edge of Town
So these guys from Washington come inna office down in Trenton, and they say we “created the false impression” that we were funding these pension funds, you know?  Even though everybody knows the teachers and the public employees, all these mokes depending on the State for their retirement are gonna end up pounding salt, so they better hope they die before they hit sixty-five – which I got a guy says he can arrange it.
So these guys from the SEC, they say we, like, out of the blue decided to change the value of the stuff in our portfolio, and then we wouldn’t have to write a check – which you gotta admit, it’s pretty ingenious.  So in June of 2001 we re-marked our whole portfolio back to the bull market prices of June 1999, which made a whole lot of liability disappear and didn’t cost a dime.  And which is a lot smarter than when New York had to pay money into their pension funds, and they borrowed $6 billion from the same funds, and then paid it back to them – which is totally stupid, because now they owe the same money twice.  Whereas we didn’t do anything except just tell the truth about our holdings, just, you know, it was the truth from a different point of view, which it so well for Lenny Dykstra that even Jim Cramer said he was “great.”  Maybe we should tell Ben Bernanke about this?
So then they say that since we created this alleged false impression, that when we sold $26 billion worth of munis we were supposed to tell people that the extra money wasn’t really money.  Like, these guys are from Washington, and they’re telling us we’re lying to people about how much money there actually is?  So we tell ‘em, look, we make-um deal.  You get to tell everyone that you told us not to be bad guys, and we’ll tell everyone that that’s what you told us.  And then you don’t show your face around Drumthwacket ever again.
Which is how it came to pass that, one day after agreeing to no monetary fine and no finding of wrongdoing on allegations of misleading muni bond investors by consistently misrepresenting the value of state pension funds, the State of New Jersey issued $2.25 billion in notes at a near-record low borrowing cost of 0.332438%.   (Full disclosure: your humble scrivener is a long-time New Jersey resident.)  Because we may be New Jersey, and you can say what you like, but we’ve never defaulted on our bonds, and the markets know that.  Because like Tony Soprano says, you’re only as good as your last envelope.
You Can Take That To The Bank
In a move certain to unleash general hilarity, Fannie Mae and Freddie Mac are trying to force major banks to take back mortgages.  The Dumb and Dumber of America’s social-fiscal policy just woke up to the fact that some of the mortgages they guaranteed, and which are now in default, may have been issued based on false information.  There are big bucks at stake here – Bank of America, for example, is haggling over $11.1 billion in buyback demands.  We have to wonder at the timing, as Dumb and Dumber have lost their only friend.  Barney Frank, of all people, stated publicly this week that the two GSE’s “should be abolished.”  A decade late and a trillion short, but hey, some guys are a little slow on the uptake.
With their only friend out of the picture, the desperate Pair Extraordinaire have hit on the notion that running their business responsibly is their only hope of salvation.  Time will tell.  After all, it’s never been tried before.
While all this is going on, the man credited with creating asset-backed securities, Lewis Ranieri, has resurfaced at the helm of a fund whose sole purpose is to buy out under-performing mortgages.  The Wall Street Journal reports (18 August, “Vultures Save Troubled Homeowners”) that Ranieri’s vehicle, Selene Residential Mortgage Opportunity Fund, has been cherry-picking residential mortgages, buying them at a deep discount from face value, then renegotiating the payment terms.
This is a natural business – indeed, it was what the TARP and the Public-Private Partnership were supposed to accomplish, except those darned banks wouldn’t cooperate, so we had to just give them the money instead.  We wonder whether this development indicates that some part of the banking / housing complex may be coming unstuck.  We are not sure how the banks will account for sales to Ranieri’s fund, but the willingness of any bank to countenance a write-down in these assets may signal the leading edge of a sea-change.  As with all massive shifts, this could explode.  Keith, our CEO, is fond of the image of a rubber ball being held underwater.  When you can no longer hold it – POW!
We bet dozens of new vultures will swarm the banks in the coming months.  And we haven’t forgotten that private equity firms raised millions in a frenzy the last time they saw “vulture” opportunities, only to be abruptly shut out of what turned out to be an extremely narrow market window.  The money is still there – and so are the bankers who raised it, being yelled at by their investors and by their partners. Watch for the next wave of scams as banks rush to clean up their mortgage portfolios.
For instance, a banker closes a file without including certain key financial information about the homeowners, and the bank sells a $100,000 balance mortgage to a vulture fund for $40,000.  The family pays off not $40,000, but $75,000, and the portfolio manager at the vulture fund hands the banker an envelope containing ten thousand dollars in cash.
Not in America, right?  Well, maybe in New Jersey.
I Speak, You Speak, We All Speak For Newspeak
Said President Obama this week: “We have a choice between the policies that got us into this mess and the policies that are getting us out of this mess.”  We question the Presidential use of the present continuous tense, properly used to describe an action already commenced and that proceeds uninterrupted.  It is not clear to us that Washington has put policies in place that have made progress towards getting America out of anything other than our hard-won place as Leader of the Free World.
We freely admit that we might be following the wrong line of reasoning.  The issue might not be what we understand by the words “getting out of this mess”, but rather what President Obama meant by the word “us.”
Just checking, Mr. President.
Moshe Silver
Chief Compliance Officer