Risk Rap

Rapping About a World at Risk

Big Data for a Small World: SMEIoT

smeiotIoT

The world is a great big database and algorithmic wizards and mad data scientists are burning the midnight oil to mine the perplexing infinities of ubiquitous data points.  Their goal is to put data to use to facilitate better governance, initiate pinpoint marketing campaigns, pursue revelatory academic research and improve the quality of service public agencies deliver to protect and serve communities. The convergence of Big Data, Cloud Computing and the Internet of Things (IoT) make this possible.

The earth is the mother of all relational databases.  It’s six billion inhabitants track many billions of real time digital footprints across the face of the globe each and every day.  Some footprints are readily apparent and easy to see.  Facebook likes, credit card transactions, name and address lists, urgent Tweets and public records sparkle like alluvial diamonds; all easily plucked by data aggregators and sold to product marketers at astonishing profit margins.  Other data points are less apparent, hidden or derived in the incessant hum of the ever listening, ever recording global cybersphere.   These are the digital touch points we knowingly and unknowingly create with our interactions with the world wide web and the machines that live there.

It is estimated that there is over 20 billion smart machines that are fully integrated into our lives.  These machines stay busy creating digital footprints; adding quantitative context to the quality of the human condition.  EZ Passes, RFID tags, cell phone records, location tracking, energy meters, odometers, auto dashboard idiot lights, self diagnostic fault tolerant machines, industrial process controls, seismographic, air and water quality apparatuses and the streaming CBOT digital blips flash the milliseconds of a day in the life of John Q. Public.  Most sentient beings pay little notice, failing to consider that someone somewhere is planting the imprints of our daily lives in mammoth disk farms.  The webmasters, data engineers and information scientists are collecting, collating, aggregating, scoring and analyzing these rich gardens of data to harvest an accurate psychographic portrait of modernity.

The IoT is the term coined to describe the new digital landscape we inhabit.  The ubiquitous nature of the internet, the continued rationalization of the digital economy into the fabric of society and the absolute dependency of daily life upon it, require deep consideration how it impacts civil liberties, governance, cultural vibrancy and economic well being.

The IoT is the next step in the development of the digital economy. By 2025 it is estimated that IoT will drive $6 Trillion in global economic activity.  This anoints data and information as the loam of the modern global economy; no less significant than the arrival of discrete manufacturing at the dawn of industrial capitalism.

The time may come when a case may be made that user generated data is a commodity and should be considered a public domain natural resource; but today it is the province of digirati  shamans entrusted to interpret the Rosetta Stones, gleaning deep understanding of the current reality while deriving high probability predictive futures.  IoT is one of the prevailing drivers of global social development.


SME

There is another critical economic and socio-political driver of the global economy.  Small Mid-Sized Enterprises (SME) are the cornerstone of job creation in developed economies.  They form the bedrock of subsistence and economic activity in lesser developed countries (LDC).  They are the dynamic element of capitalism.  SME led by courageous risk takers are the spearhead of capital formation initiatives.  Politicians, bureaucrats and business pundits extol their entrepreneurial zeal and hope to channel their youthful energy in service to local and national political aspirations.  The establishment of SME is a critical macroeconomic indicator of a country’s economic health and the wellspring of social wealth creation.

The World Bank/ IFC estimates that over 130 million registered SME inhabit the global economy. The definition of an SME varies by country. Generally an SME and MSME (Micro Small Mid Sized Enterprises)  are defined by two measures, number of employees or annual sales.  Micro enterprises are defined as employing less than 9 employees, small up to 100 employees and medium sized enterprises anywhere from 200 to 500 employees.  Defining SMEs by sales scale in a similar fashion.

Every year millions of startup businesses replace the millions that have closed.  The world’s largest economy United States boasts over 30 million SME and every year over one million  small businesses close.  The EU and OECD countries report similar statistics of the preponderance of SME and numbers of business closures.

The SME is a dynamic non homogeneous business segment.  It is highly diverse in character, culture and business model heavily colored by local influence and custom. SME is overly sensitive to macroeconomic risk factors and market cyclicality.  Risk is magnified in the SME franchise due to high concentration of risk factors.  Over reliance on a limited set of key clients or suppliers, product obsolescence, competitive pressures, force majeure events, key employee risk, change management and credit channel dependencies are glaring risk factors magnified by business scale and market geographics.

In the United States, during the banking crisis the Federal Reserve was criticized for pursuing policies that favored large banking and capital market participants while largely ignoring SME. To mitigate contagion risk, The Federal Reserve  quickly acted to pump liquidity into the banking sector to buttress the capital structure of SIFI (Systemically Important Financial Institutions). It was thought that a collateral benefit would be the stimulation of SME lending.  This never occurred as SBA backed loans nosedived. Former Treasury Secretary Timothy Geithner implemented the TARP and TALF programs to further strengthen the capital base of distressed banks as former Fed Chairman  Ben Bernanke pursued Quantitative Easing to transfer troubled mortgage backed securities onto Uncle Sams balance sheet to relieve financial institutions  of these troubled assets. Some may argue that President Obama’s The American Recovery and Reinvestment Act of 2009 (ARRA)  helped the SME sector.  The $800 billion stimulus was one third tax cuts, one third cash infusion to local governments and one third capital expenditures aimed at shovel ready infrastructure improvement projects.  The scale of the ARRA was miniscule as compared to support rendered to banks and did little to halt the deteriorating macroeconomic conditions of the collapsing housing market, ballooning unemployment and rising energy prices severely stressing SME.

The EU offered no better.  As the PIGS (Portugal, Ireland, Greece, Spain) economies collapsed the European Central Bank forced draconian austerity measures on national government expenditures undermining key SME market sensitivities.  On both sides of the Atlantic, the perception of a bifurcated central banking policy that favored TBTF Wall Street over the needs of  an atomized SME segment flourished.  The wedge between the speculative economy of Wall Street and the real economy on Main Street remains a festering wound.

In contrast to the approach of western central bankers, Asian Tigers, particularly Singapore have created a highly  supportive environment for the incubation and development of SME. Banks offer comprehensive portfolios of financial products and SME advisory services. Government legislative programs highlight incubation initiatives linked to specific industry sectors. Developed economies have much to learn from these SME friendly market leaders.

The pressing issues concerning net neutrality, ecommerce tax policies, climate change and the recognition of Bitcoin as a valid commercial specie are critical developments that goes to the heart of a healthy global SME community.  These emerging market events are benevolent business drivers for SME and concern grows that legislative initiatives are being drafted to codify advantages for politically connected larger enterprises.

Many view this as a manifestation of a broken political system, rife with protections of large well financed politically connected institutions. Undermining these entrenched corporate interests is the ascending digital paradigm promising to dramatically alter business as usual politics. Witness the role of social media in the Arab Spring, Barack Obama’s 2008 election or the decapitalization of the print media industry as clear signals of the the passing away of the old order of things.  Social networking technologies and the democratization of information breaks down the ossified monopolies of knowledge access. These archaic ramparts are being gleefully overthrown by open collaborative initiatives levelling the playing field for all market participants.

SMEIoT

This is where SMEIoT neatly converges.  To effectively serve an efficient market, transparency and a contextual understanding of its innate dynamics are critical preconditions to market participation.  The incubation of SME and the underwriting of capital formation initiatives from a myriad of providers will occur as information standards provide a level of transparency that optimally aligns risk and investment capital. SMEIoT will provide the insights to the sector for SME to grow and prosper while industry service providers engage SME within the context of a cooperative economic non-exploitative relationship.

This series will examine SME and how IoT will serve to transform and incubate the sector.  We’ll examine the typology of the SME ecosystem, its risk characteristics and features.  We’ll propose a metadata framework to model SME descriptors, attributes, risk factors and a scoring methodology.  We’ll propose an SME portal, review the mission of Big Data and its indispensable role to create cooperative economic frameworks within the SME ecosystem. Lastly we’ll review groundbreaking work social scientists, legal scholars and digital frontier activists are proposing to address best governance practices and ethical considerations of Big Data collection, the protection of privacy rights,  informed consent, proprietary content and standards of accountability.

SMEIoT coalesces at the intersection of social science, commerce and technology.  History has aligned SMEIot building blocks to create the conditions for this exciting convergence.  Wide participation of government agencies, academicians, business leaders, scientists and ethicists will be required to make pursuit of  this science serve the greatest good.

 

This is the first in a series of articles on Big Data and SMEIoT . It originally appeared in Daftblogger eJournal. Next piece in series is scheduled to appear on Daftblogger eJournal within the next two weeks.

#smeiot #metasme #sum2llc #sme #office365 #mobileoffice #TARP #capitalformation #IoT #internetofthings #OECD #TBTF #Bitcoin #psychographics #smeportals #bigdata #informedconsent

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July 9, 2014 Posted by | banking, Bernanke, commerce, commercial, credit crisis, economics, ethics, Internet of Things, IoT, politics, risk management, SME, SMEIOT, Sum2, sustainability, TALF, TARP, Treasury | , , , , , , , , , , , , , , , , | Leave a comment

We Deserve Better (2): The Damnation of the Democrats

A few days after President Obama took office I remember him emerging from a meeting at the Pentagon.  The summit was arranged to brief the Commander In Chief on the progress of the wars and to assure the nation that the new president was in-sync with his generals and admirals charged with running the war.  Emerging from the highly publicized meeting America’s new war time president stated “as long as the generals take care of what they have to do, we’ll take care of what we have to do.”  I found the statement to be unsettling.  It implied that  the new administration would not alter the course set by the previous administration insuring that the inertia of Bush’s policies and strategies would continue unabated.  On another level Obama’s statement also seemed to suggest an abdication.  I get nervous to think that the Commander in Chief  has ceded civilian control of the greatest military force the world has ever known.  The decision to pursue war or enjoy peace is too delicate a matter to be left to the decisions of an entrenched military-industrial bureaucracy.  The abdication of assertive control, weather its born from the desire to get along, build consensus or a deep seated need for acceptance has been a disturbing custom of Obama’s presidency and the prevailing characteristic of the Democratic Party.

Obama’s easy surrender to established protocols, processes, precedents has been a hallmark of his presidency.  It exemplifies the failure of the Democratic Party’s oppositional legacy to Republican rule during the two previous Bush Administrations.  At every turn, the Democrats gave in to the Republican conservative legislative agenda with little or no dissent.  The Patriot Act, the blind march to  two unnecessary wars, the dismantling of government oversight and regulatory controls on business, the slavish submission to Republican led expenditures or tax cuts in service to corporate welfare and the tepid lip service to the struggle for social justice made the democrats complicit accomplices in America’s dramatic conservative swing.

The democrats failure as an oppositional force to counter the reactionary juggernaut of neo-conservatism has emboldened the reactionary impulses of the ruthless power elites.  Threatened by economic distress and disintegration of our political institutions, Americas ruling  plutocracy has spawned a malevolent Tea Party movement to crush any progressive populism that may arise to counteract their social position, economic power and political sovereignty. The democrats adamant refusal to stand firmly against the destructive impulses of xenophobia and virulent nationalism has allowed an ugly chorus of fear to become our new national anthem.  The resentful voices of suspicion, intolerance and  exclusion grows ever louder each day as emboldened Falangists and neo-fascists take center stage on a surreal  commercial production of American political theater.

In defense of President Obama his presidential campaign and his administration have expressed a deep desire to pursue a political consensus.  This sentiment is admirable and the ability to form a consensus is an absolute and critical virtue to the health of a democratic society.  The freedom to express differing opinions, voice dissent, air grievances, petition, ability to listen, interest to hear, converse, change opinions and assimilate these competing impulses to form a consensus to express the common will are what makes democracies imperfect yet the fairest expression of governance.  Mr. Obama has sought to pursue and build consensus with an opposition Republican Party that has been nothing short of obstructionist since the democrats assumed control of the Executive office.  Rush “Country Firster” Limbaugh said it best “I hope he fails” set the tone and sealed the intractability of Republicans and any possibility of bipartisan cooperation to deal with the critical issues confronting the nation.

Last summers spectacle of town meetings designed to initiate a national conversation on Health Care Reform devolved into a partisan shouting match and an opportunity for the formation of the Tea Party galvanized by propaganda about a socialist takeover of the economy, death panels, and the idea that President Obama was a fascist dictator.  At this point President Obama still took the opportunity to sit down with the leadership of the GOP in a televised discussion to initiate a dialog.  The Consensus Builder in Chief was rebuffed again.  The democrats responded by killing single-payer and backing down on universal health coverage.  The watered down health care reform bill accomplished an extension of coverage for more, but not all Americans and eliminated preexisting conditions as a disqualification for coverage while also extending the power of insurance companies by making it mandatory that all tax payers purchase health insurance.

This reform is not a significant ground breaking legislative event.  President Obama and the democrats should have recognized early on the inability to work a compromise with the obstructionists in the Republican Party.  As is the case with Cap and Trade legislation, rescinding  Don’t Ask Don’t Tell, ending the Iraq and Afghanistan war, financial services reform, TARP and the economic stimulus bill;  the GOP, “Party of No” has done everything in its power to derail the efforts of the democratic party to address the deep problems confronting America.  The Democratic Party should have leveraged its control of the legislative and executive branch of the Federal Government to push through a program for a new America.  The pressing circumstances of history required decisive leadership and bold ideas to address the complex problems confronting America.  FDR’s “New Deal” or Johnson’s “Great Society” were ideas accompanied by innovative legislation to solve systemic problems.  The democrats tepid response acquiesced to the conservative demands of the GOP.   The Blue Dog Democrats yelped and barked louder then any rabid GOP hound subverting a robust game changing legislative response to the problems confronting America.

The democrats would again demonstrate their timidity in how they responded to the Gulf Oil Spill.  If the free falling economy was the equivalent of economic Armageddon the Horizon Deep Water catastrophic oil spill was its environmental equivalent.  In each case President Obama fashioned piece meal responses designed not to offend “free market evangelists” for fear of being accused of over reaching.  Both instances provided opportunities to mobilize the nation and its significant resources in these titanic tests of national resolve.  In both instances the cojones challenged donkeys failed to seize the reins of state to wield its power.  I am still shocked by images of Jamie Dimon and Lloyd Blankfein pulling the strings on Timothy Geithner like a marionette to exact concessions during the banking crisis.  Or consider the high profile of BP CEO,  Tony “I want my life back” Hayward mounting a $50 million PR campaign to quell any concerns that the benevolence of corporate capitalism will eventually “set things right.”    The Republicans turned this into President Obama’s Katrina with Bobby “don’t spend no stim in Louisiana” Jindal taking the EPA to court for declaring a moratorium on deep water drilling.  And the fattest of fat cats Republican Mississippi Governor Haley “rebuild the casinos first” Barbour shaming Obama to spend a portion of his non- Martha Vineyard family vacation swimming in the pristine waters of the Gulf of Mexico.  It was a PR disaster for President Obama because he failed to act with the resolve or manner of a strong decisive leader.

But now as the midterms approach the democrats must answer to a crumbling alliance of constituencies that they have taken for granted and failed to help.  They are unable to see  constituents as anything other then a demographic voting block devoid of a face, personality or soul.  The democrats see stereotypes not people.  Labor unions are blue collar voters that now approximate 7% of registered voters.  This year the democratic controlled legislature failed to act on Card Check legislation that would protect the right of labor unions to vote and organize non-union companies.  Another important constituency of the Democratic Party is the LGBT community.  The military said it would comply with the decision of a California District Court  that overturned Don’t Ask, Don’t Tell.  Incredibly, President Obama’s Attorney General appealed the decision and asked the court to reinstate Don’t Ask, Don’t Tell.  Teacher unions are also big supporters of the Democratic Party, but many democrats support school vouchers and Charter Schools and seem unconcerned that financial and institutional support of public schools continues to erode.  Working class families and woman  are under severe distress as unemployment rates approach 10%, home foreclosures rise , spiraling cost of living increases spike, the cost of sending kids to college slip out of reach and a marked erosion in quality of life and expectations for a secure future and comfortable retirement evaporate.    The democrats did little to solve these pressing problems save the offer of cheap lip service that they understand their pain.  Charlie Rangel secure in the refuge of his four rent controlled apartments will not feel the cold experienced by a homeless mother and her children this winter;  nor will Hillary Clinton lose any sleep worrying about  deploying Chelsea to fight an incomprehensible war in Afghanistan.

This mid term election democratic candidates are running away from their unpopular president.  They will run on a platform of tax cuts and appear as local election district manifestations of gun toting patriotic Christophanies.  The poverty of a party with no conviction of principle is made plain.  Having no principles, Democrats have not offered a true alternative to reactionary Republicanism.  Nearsightedness has robbed them of a vision for a new republic.  They offer no demarcation with the broken policies that preceded their rule.  The hallmark of their governance has been the complete compromise with an recalcitrant opposition; content to administer a broken and corrupt apparatus rather then chart a new path.  The democrats remain shining examples of self serving politicians retuning to office  on mythical inertia to secure rent controlled apartments while public housing remains an endangered and dear want for many.  They believe themselves to be righteously led by the presiding shame of a president made possible by an epic civil rights struggle who cannot muster the fortitude or conviction to extend the equal right of marriage for one of his liberal constituencies.

We deserve better.

You tube Music Video: Les McCann, Eddie Harris, Compared to What

Risk: democracy, two party political system, liberalism

 

October 28, 2010 Posted by | Bush, conservatism, culture, democracy, democrats, environment, labor, LGBT, Obama, politics, recession, republicans, social justice, TARP, taxation, Tea Party, unemployment | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | 1 Comment

The Profitability of Patriotism: SME Lending

What a  difference a year makes.  A year ago the banks came crawling to Washington begging for a massive capital infusion to avoid an Armageddon of the global financial system.  They sent out an urgent SOS for a $750 billion life preserver of tax payers money to keep the banking system liquid.  Our country’s chief bursar Hank Paulson, designed a craft that would help the banks remain afloat.  Into the market maelstrom Mr. Paulson launched the USS TARP as the vehicle to save our  distressed ship of state.  The TARP would prove itself to be our arc of national economic salvation.  The success of the TARP has allowed the banks to generate profits in one of the most prolific turnarounds since Rocky Balboa’s heartbreaking split decision loss to Apollo Creed.  Some of the banks have repaid the TARP loans to the Fed.  Now as Christmas approaches and this incredible year closes bankers have visions of sugar plum fairies dancing in their heads as they dream about how they will spend this years bonus payments based on record breaking profitability.   President Obama wants the banks to show some love and return the favor by sharing more of their balance sheets by lending money to small and mid-size enterprises (SME).

Yesterday President Obama held a banking summit in Washington DC.  Mr. Obama wanted to use the occasion to shame the “fat cat bankers” to expand their lending activities to SMEs.  A few of the bigger cats were no shows.  They got fogged in at Kennedy Airport.  They called in to attend the summit by phone.    Clearly shame was not the correct motivational devise to encourage the bankers to begin lending to  SMEs.    Perhaps the President should have appealed to the bankers sense of patriotism; because now is the time that all good bankers must come to the aid of their country.  Failing that, perhaps Mr. Obama should make a business case that SME lending  is good for profits.   A vibrant SME sector is a powerful driver for wealth creation and economic recovery.    A beneficial and perhaps unintended consequence of this endeavor is  the economic security and political stability of the nation.  These  are the  worthy concerns of all true patriots and form a common ground where bankers and government can engage the issues that undermine our national security.

The President had a full agenda to cover with the bank executives.  Executive compensation, residential mortgage defaults, TARP repayment plans, bank capitalization and small business lending were some of the key topics.  Mr. Obama was intent on chastising the reprobate bankers about their penny pinching credit policies toward small businesses.  Mr. Obama conveyed to bankers that the country was still confronted with major economic problems.  Now that the banks capital  base has been stabilized with Treasury supplied funding they must get some skin into the game and belly up to the bar by making more loans to SMEs.

According to the FDIC, lending by U.S. banks fell by 2.8 percent in the third quarter.  This is the largest drop since 1984 and the fifth consecutive quarter in which banks have reduced lending.   The decline in lending is a serious  barrier to economic recovery.  Banks reduced the amount of money extended to their customers by $210.4 billion between July and September, cutting back in almost every category, from mortgage lending to funding for corporations.  The TARP was intended to spur new lending and the FDIC observed that the largest recipients of aid  were responsible for a disproportionate share of the decline in lending. FDIC Chairman Sheila C. Bair stated,   “We need to see banks making more loans to their business customers.”

The withdrawal of $210 billion in credit from the market is a major impediment for economic growth.  The trend to delever credit exposures is a consequence of the credit bubble and is a sign of prudent management of credit risk.  But the reduction of lending activity impedes economic activity and poses barriers to SME capital formation. If the third quarter reduction in credit withdrawal were annualized the amount of capital removed from the credit markets is about 7% of GDP.  This coupled with the declining business revenues due to recession creates a huge headwind for SMEs.  It is believed that 14% of SMEs are in distress and without expanded access to credit, defaults and  bankruptcies will continue to rise.  Massive business failures by SMEs shrinks market opportunities for banks and threatens their financial health  and long term sustainability.

The number one reason why financial institutions turn down a SME for business loans is due to risk assessment. A bank will look at a number of factors to determine how likely a business will or will not be able to return the money it has borrowed.

SME business managers must conduct a thorough risk assessment if it wishes to attract loan capital from banks.  Uncovering the risks and opportunities associated with products and markets, business functions, macroeconomic risks and understanding the critical success factors and measurements that create competitive advantage are cornerstones of effective risk management.  Bankers need assurances that managers understand the market dynamics and risk factors present in their business and how they will be managed to repay credit providers. Bankers need confidence that managers have identified the key initiatives that maintain profitability.  Bankers will gladly extend credit to SMEs that can validate that credit capital is being deployed effectively by astute managers.  Bankers will approve loans when they are confident that SME managers are making prudent capital allocation decisions that are based on a diligent risk/reward assessment.

Sum2 offers products that combine qualitative risk assessment applications with Z-Score quantitative metrics to assess the risk profile and financial health of SMEs.   The Profit|Optimizer calibrates qualitative and quantitative risk scoring  tools; placing a powerful business management tool into the hands of SME  managers.   SME managers  can  demonstrate  to bankers that their requests for credit capital is based on a thorough risk assessment and opportunity discovery exercise and will be effective stewards of loan capital.

On a macro level SME managers must vastly improve their risk management and corporate governance cultures to attract the credit capital of banks.  Using programs like the Profit|Optimizer,  SME’s can position themselves to participate in credit markets with the full faith of friendly bankers.  SME lending is a critical pillar to a sustained economic recovery and stability of our banking system.  Now is the time for all bankers  to come to the aid of their country by opening up credit channels to SMEs to restore  economic growth and the wealth of our  nation.

You Tube Music Video: Bruce Springsteen, Seeger Sessions, Pay Me My Money Down

Risk: banking, credit, SME

December 16, 2009 Posted by | banking, credit, government, Paulson, Profit|Optimizer, recession, risk management, Sum2, sustainability, TARP, Treasury | , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

The Cost of Banking Goes Up

screamThe severity of the banking crisis is evident in the 95 banks the FDIC has closed during 2009. The inordinate amount of bank failures has placed a significant strain on the FDIC insurance fund. The FDIC insurance fund protects bank customers from losing their deposits when the FDIC closes an insolvent bank.

The depletion of the FDIC Insurance fund is accelerating at an alarming rate. At the close of the first quarter, the FDIC bank rescue fund had a balance of $13 billion. Since that time three major bank failures, BankUnited Financial Corp, Colonial BancGroup and Guaranty Financial Group depleted the fund by almost $11 billion. In addition to these three large failures over 50 banks have been closed during the past six months. Total assets in the fund are at its lowest level since the close of the S&L Crisis in 1992. Bank analysts research suggests that FDIC may require $100 billion from the insurance fund to cover the expense of an additional 150 to 200 bank failures they estimate will occur through 2013. This will require massive capital infusions into the FDIC insurance fund. The FDIC’s goal of maintaining confidence in functioning credit markets and a sound banking system may yet face its sternest test.

FDIC Chairwoman Sheila Bair is considering a number of options to recapitalize the fund. The US Treasury has a $100 billion line of credit available to the fund. Ms. Bair is also considering a special assessment on bank capital and may ask banks to prepay FDIC premiums through 2012. The prepay option would raise about $45 billion. The FDIC is also exploring capital infusions from foreign banking institutions, Sovereign Wealth Funds and traditional private equity channels.

Requiring banks to prepay its FDIC insurance premiums will drain economic capital from the industry. The removal of $45 billion dollars may not seem like a large amount but it is a considerable amount of capital that banks will need to withdraw from the credit markets with the prepay option. Think of the impact a targeted lending program of $45 billion to SME’s could achieve to incubate and restore economic growth. Sum2 advocates the establishment of an SME Development Bank to encourage capital formation for SMEs to achieve economic growth.

Adding stress to the industry, banks remain obligated to repay TARP funds they received when the program was enacted last year. To date only a fraction of TARP funds have been repaid. Banks also remain under enormous pressure to curtail overdraft, late payment fees and reduce usurious credit card interest rates. All these factors will place added pressures on banks financial performance. Though historic low interest rates and cost of capital will help to buttress bank profitability, high write offs for bad debt, lower fee income and decreased loan origination will test the patience of bank shareholders. Management will surely respond with a new pallet of transaction and penalty fees to maintain a positive P&L statement. Its like a double taxation for citizens. Consumers saddled with additional tax liabilities to maintain a solvent banking system will also face higher fees  charged y their banks so they can repay the loans extended by the US Treasury to assure a well functioning financial system for the benefit of the republic’s citizenry.

You Tube Music Video: The 5th Dimension, Up Up and Away

Risk: bank failures, regulatory, profitability, political, recession, economic recovery, SME

September 30, 2009 Posted by | banking, business, commerce, economics, government, Hamilton Plan, private equity, regulatory, SME, sovereign wealth funds, TARP, Treasury | , , , , , , , , , , , , , , , , , , , | 2 Comments

A Taxing Situation

irs-and-capitol2President Obama announced his intention to curb the use of offshore tax havens for multinational corporations.  The Treasury Department is looking to raise tax revenues and believes that by closing the use of offshore tax shelters it will be able to raise over $200 bn over the next ten years.  According to the New York Times,  firms like Citibank, Morgan Stanley, GE and Proctor and Gamble utilize hundreds of these type structures to shelter revenue from being taxed by the IRS.  It has effectively driven down the tax rates these companies pay and has been a key driver in maintaining corporate profitability.

This move should come as a surprise to no one.  The Treasury Department needs to find sources of tax revenues to cover the massive spending programs necessitated by the credit crisis and the global economic meltdown.  The TARP program designed to revitalize banks has  expenditures that amounted to $700 bn.  Amounts pledged for economic recovery through EESA, PPIP and ARRA will push Treasury Department expenditures targeting economic stimulus projects and programs to approximately $2 tn.  These amounts are over and above routine federal budget expenditures that is running significant deficits as well.

The planned move by the Treasury Department to rewrite the tax code may be an intentional effort to close budget deficits but it also represents a significant rise in tax audit risk.   For the past two years the IRS has been developing a practice strategy and organizational assets to more effectively enforce existing tax laws.  Private sector expertise, practices and resource has significantly out gunned the IRS’s ability to detect and develop a regulatory comprehension of the tax implications of the sophisticated multidomiciled structured transactions flowing through highly stratified and dispersed corporate structures.  The IRS is looking to level the playing field by adding to its arsenal of resources required to engage the high powered legal and accounting expertise that corporate entities employ.

The IRS has hired hundreds of new agents  and has developed risk based audit assessment guidelines for field agents when examining corporations with sophisticated structures and business models.  As such investment partnerships, global multinational corporations and companies utilizing offshore structures can expect to receive more attention from IRS examiners.

The IRS had developed Industry Focus Issues (IFI) to be used as an examination framework to guide audit engagements for sophisticated investment partnerships and  Large and Mid-size Businesses (LSMB).  The IFI for LSMB has developed three tiers of examination risk.  Each tier has comprises about 12 examination issues that will help examiners focus attention of audit resource on areas the agency considers as high probability for non-compliance.  Clearly the audit risk factors risk

To respond to this challenge, Sum2 developed an audit risk assessment program to assist CFO’s, tax managers, accountants and attorneys conduct a through IFI risk assessment.  The IRS Audit Risk Program (IARP) is a mitigation and management tool designed to temper the threat of tax audit risk.   A recent survey commissioned by Sum2 to measure industry awareness of IFI risk awareness indicated extremely low awareness of tax audit risk factors.

Sum2’s IARP helps corporate management and tax planners score exposure to each IFI risk factor.  It allows risk managers to score the severity of each exposure, mitigation capabilities, mitigation initiatives required to address risk factor, responsible parties and mitigation expenses. The IARP allows corporate boards and company management to make informed decisions on tax exposure risk, audit remediation strategies, arbitration preparation and tax controversy defense preparation.

The IARP links to all pertinent IRS documentation and information on each tax statute and IFI audit tier.  The IARP links to pertinent forms and allows for easy information retrieval and search capabilities of the vast IRS document libraries.  The IARP also has links to FASB to have instant access to latest information on accounting and valuation treatments for structured instruments.

The IARP is the newest risk application in the Profit|Optimizer product series.  The Profit|Optimizer is a enterprise risk management tool used by SME’s and industry service providers.

The IARP is available in two versions.

The IRS Audit Risk Program for investment partnerships (IARP)

Buy it on Amazon here: IARP

The Corporate Audit Risk Program (CARP)

Buy it on Amazon here: CARP

Sum2’s Audit Risk Survey results are here: IFI Audit Risk Survey

You Tube Video: Chairman of the Board, Pay to the Piper

May 7, 2009 Posted by | business, commerce, economics, EESA, FASB, government, hedge funds, IRS, off shore, Profit|Optimizer, regulatory, SME, TARP, Tax, taxation, Treasury | , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , | Leave a comment

IRS Has Hedge Funds in its Crosshairs

irs_logo-bwThe earths axis seemed to have tilted way off course last year. The global capital and credit markets crashed. Venerated banking institutions moved dangerously close to insolvency forcing mergers with better capitalized banks. The bulge bracket investment banking institutions disappeared. Some were acquired by traditional banks, others converted to a bank holding company structure; while others declared bankruptcy. In response the Federal Reserve, Treasury Department and SEC initiated unprecedented concerted interventionist actions. The passage of EESA legislation and the implementation of the $750bn TARP program are the first in many expected moves by the government to maintain the solvency of the banking system as a national economic security issue. In addition to these initiatives the government has also passed a massive $750bn economic stimulus bill to kick start the economy. All told over $1.5 trillion dollars has recently been appropriated by the federal government to address the economic crisis. This massive capital infusion has ratcheted up the federal budget deficit. It will be incumbent on the Treasury Department and the IRS to make a concerted effort to uncover new sources of revenue to finance these massive spending programs.

Hedge funds, private equity firms, CTA’s and other corporations that utilize elaborate corporate structures, engage in sophisticated transactions and recognize uncommon forms of revenue, losses and tax credits will increasingly fall under the considered focus of the IRS. Times have changed and so has the posture and practice of the IRS. The agency is transitioning its organizational posture by moving away from a benign customer service resource and assuming the form of an activist body that is intent on assuring compliance and enforcement of US tax laws. In particular it is building up its expertise and resource to more effectively address the audit challenges the complexity and sophistication hedge funds present.

The IRS has developed its industry issue competencies. It has developed a focused organizational structure that assigns issue ownership to specific executives and issue management teams. This vertical expertise is further enhanced with issue specialists to deepen the agencies competency capital and industry issue coordinators that lends administrative and agency management efficiency by ranking and coordinating responses to specific industry issues. Clearly the IRS is building up its portfolio of skills and industry expertise to address the sophisticated agility of hedge fund industry tax professionals.

To better focus the resources of the agency the IRS has developed a Three Tiered Industry Issue Focus. Tier I issues are deemed most worthy of in depth examinations and any fund management company with exposure in these areas need to exercise more diligence in its preparation and response. Tier I issues are ranked by the IRS as being of high strategic importance when opening an examination of hedge funds and other sophisticated corporate structures. This is followed by Tier II and Tier III focus areas that include significant examination issues but are ranked according to the agencies strategic significance of the market vertical. Clearly the IRS is investing significant organizational and human capital to address an industry that will no longer fly beneath the agencies radar. This institutional investment will be called upon to generate a considerable return on the investment in the hopes that the discovery of lucrative tax revenue streams will help to pay down the massive spending deficits of the federal government.

This development has clearly raised the tax compliance and regulatory risk factors for hedge funds and other fund managers. Significant tax liabilities, penalties and expenses can be incurred if this risk factor is not met with well a well considered risk management program. In response to this industry threat, Sum2 has developed an IRS Audit Risk program that allows a hedge fund CFO to quickly ascertain its IRS risk exposures within the Three Industry Focus Tiers.

The IRS Audit Risk program provides a threat scoring methodology to ascertain level of risk within each Tier item and aggregates overall Tier exposures. The product also uses a scoring methodology to determine your level of preparedness to meet the audit risk, mitigation actions required and potential exposures of the risk. The IRS Audit Risk calculates expenses associated with mitigation initiatives and assigns mitigation responsibility to staff members or service providers. The IRS Audit Risk links to issue specific IRS resources and documentation that will help you determine if the issue is a audit risk factor for your firm and the resources you will need to addresses it.

The IRS Audit Risk for Hedge Funds product is a vertical application of Sum2’s Profit|Optimizer product series. The Profit|Optimizer is a C Level risk management tool that assists managers to uncover and mitigate business threats and spot opportunities to maintain profitability and sustainable growth.

The IRS Audit risk for Hedge Funds product is available for down load on Amazon.com.

The product can be purchased here: Sum2 e-commerce

You Tube Music Video: Beatles, Taxman

Risk: tax liability, penalties, reputation

March 3, 2009 Posted by | compliance, EESA, hedge funds, IRS, legal, off shore, private equity, regulatory, reputational risk, risk management, SEC, TARP | , , , , | Leave a comment

Good Bank Bad Bank Could Get Ugly

Bank Panic

Bank Panic

President Obama’s announcement that he intends to limit compensation for CEO’s of banks that accept TARP funds is only the tip of the iceberg. This one gives real meaning to the concept of Good Bank/Bad Bank and it could get ugly. As the government led economic recovery plan is implemented the banking system will still require massive capital infusions to maintain solvency. This will usher in far reaching structural and systemic changes in the banking system and capital market industries. Executive compensation is but a minor issue.

These structural changes risk creating a bifurcated banking system. The Bad Bank, so designated because it was placed into a timeout with a capital infusion by a benevolent state agency will be forced to change the banks demeanor and the manner in which it conducts business. These Bad Banks will become wards of a state intent on controlling behaviors by minimizing the risk posture these types of institutions can assume. Good Banks, so named because they remain above the need to accept the federal largess of TARP funds, will be free to conduct business without the additional cumbersome oversight of regulatory agencies.

What will the topology of a bifurcated banking system look like? A model that one may consider could be found in the People’s Republic of China where state controlled banking enterprises conduct business alongside emerging private sector banks that are mostly agencies of large global investment banks. In the US the history may be reversed; but the full or partial nationalization of weak banks will create a new institutional hybrid that will need to function under different ground rules then those imposed on fully privatized domestic banks.

The Bad Banks will become quasi-state run enterprises. Their business model and charter will be highly risk adverse forcing them to focus on mortgage related and low margin retail transactional type business. These banks will be required to maintain expensive brick and mortar branch networks to make sure that all sectors of society have access to the financial system. This might actually provide a growth opportunity for these types of banks because the “unbanked sector” of the economy remains large. A large and vibrant money services business (MSB) industry has flourished and thrived to serve the unbanked sector. The unbanked sector purchases banking services and it represents a significant expense burden on the underclasses and working poor who don’t have checking or savings accounts. Bringing this sector into the state banking system would also help to combat money laundering and the loss of tax revenues of cash based businesses. The sale of money orders, money transfer services and the sale of savings bonds and other fungible certificates will become a source of revenue dedicated to paying down the TARP debt.

The Bad Banks will not just become glorified MSBs. Bad Banks will need to focus on the stressed mortgage and credit card debt markets. These customer facing retail lines of business will offer a full line of workout resources to stave off the rate of home foreclosures and credit card delinquencies.

The Bad Banks will be capitalized with the Level III toxic assets that Hank Paulson so shrewdly purchased from the large investment banking institutions. The Treasury Department can dispense with FASB valuation rules and use these assets to value the collateral to maintain sufficient levels of capitalization in line with Basel II recommendations. Smoke and mirrors perhaps; but backed by the full faith and credit worthiness of the US government who can argue?

Equity shareholders in the Bad Banks can expect to see their shares underperform the market and its Good Bank peers. A balance sheet loaded with questionable asset quality, high debt to equity ratios, low margin businesses and high overhead due to excessive fixed costs all conspire against the Bad Banks shareholders potential of realizing a handsome return on their investment.

The Good Banks, liberated from the tyranny of balance sheets polluted with toxic assets and freed from the need of additional rounds of TARP funding will be energized with new entrepreneurial zeal. They will be free to ply their trade as evangelists of free market laissez faire capitalism. The Good Banks will be unencumbered by any new regulations federal agencies impose on the TARP dependent Bad Banks.

Unfettered from bureaucratic control, the Good Banks will be able to fulfill their mission of maximizing value for their shareholders. The risk profile of the Good Banks will be considerably different from that of the Bad Banks. The focus of their business will be on marketing higher margin and more risky financial products. They will offer investment banking and other transactional services and will command fees on scales radically different from the Bad Banks collecting two bits for each money order sold. The Good Banks will offer a full array of investment products and transactional services. Hedge funds, brokerage transactions and a full range wealth management services will be part of the product portfolios of Good Banks.

The Good Banks blessed with healthy balance sheets and strong cash flows from steady product sales into high net worth market segments will embark on aggressive acquisition programs of financial service providers. Healthy regional and community banks will be purchased on the cheap with the blessing of the acquired company’s shareholders who want to be freed from the tyranny of state control and TARP dependency. Good Banks will be the preferred bank for a vibrant and growing small business market and will command healthy fee income and sit on generous account balances this type of business provides. If a small business or retail customer account underperforms or becomes delinquent the account will be banished to the workout professionals eagerly waiting in the Bad Bank.

The Good Banks will be more like a giant private equity firm holding a vast portfolio of public financial companies and services providers. Good Banks will be nimble and voracious practitioners of free market capitalism. The accouterments of affluence like generous stock options, corporate jets, exotic junkets, splashy corporate parties will be in full swing. Larry Kudlow should have nothing to worry about. Free market capitalism as the only sure road to wealth and freedom will remain open to anyone as long as they have the means to pay the modest toll.

You Tube Video: Ennio Morricone, The Good the Bad and the Ugly

Risk: systemic, banking, market

February 5, 2009 Posted by | banking, Basel II, credit crisis, FASB, government, hedge funds, private equity, recession, TARP | , , , , , , , , | Leave a comment

Do You Know Where Your TARP Money Is?

Obama wants Congress to authorize the release of the second $350 Bn in TARP money authorized under EESA. Apparently he has called his good buddy Bush and asked if he would be kind enough to pull the trigger and release the funds. Perhaps Obama is concerned about the ability of Citicorp to make good on its separation agreement for his key adviser Robert Rubin?

When Paulson envisioned the TARP, I guess they figured that if they just threw a TARP (Troubled Asset Relief Program) of money over the banking problem everybody would forget that our banking system is broken. I believe this a a kind of ostrich strategy. Just suggest to all American taxpayers that all they have to do is stick their heads in the sand and pretend that the TARP money is saving our crashing banking system. All should be oakie dokie.

During the holidays I welcomed a little respite from the real time news feeds of the capital market carnage that the credit crisis has wrought. The daily bulletins that our investment portfolios and 401K’s are worthless and that our home equity nest egg is gone with the wind seemed to have abated. But now that the holidays are over the sad news concerning our nations economic health is starting to trickle in again. Today two little news items came across our desk arousing our curiosity about the $350 Bn Paulson, Kashkari and the rest of the crew at the Treasury Department has been throwing at US banks and bank wannabe’s.

The first item elevated my comfort level a couple of notches. The FDIC is requesting that banks receiving TARP program monies need to improve reporting on how the provision of credit products and lending is being enhanced through the participation in the program. WOW what a thought. The Treasury Department dolls out $350 Bn and as an after thought is now setting reporting requirements as to how the taxpayers capital is being used for lending to restore the economic vibrancy of the stalled economy.

If taxpayers and politicians remain unsure as to how the TARP monies are being put to good use by the banks one doesn’t have to look further then the news items concerning Morgan Stanley’s interest in purchasing Citibank’s investment banking arm. Citibank owner of the remaining vestiges of Salomon Brothers and Smith Barney have been under investor pressure for years to divest its brokerage divisions. The transformation of the banking industry as a result of the credit crisis will accomplish this feat. Citibank continues to require major capital infusions. So far, Citibank has received almost $45 Bn in TARP and federal assistance monies. It still requires substantial capital to remain solvent, Mr. Rubin’s separation package notwithstanding. Morgan Stanley flush with at least $10 Bn in TARP money will put it to good use by acquiring Citi’s brokerage unit on the cheap. This asset for cash swap exchange is a telling example as to how TARP funds are being deployed by its recipients.

I can’t believe that many American taxpayers are feeling too good about their money being used to enrich the shareholders of Morgan Stanley and to protect the threatened equity capital of our countries once largest banking institution. In a capitalist economy you need institutions that are allowed to fail. If capitalists are protected from the possibility of failure they can’t be rightfully called a capitalist. Given all that the capitalists have been through with the credit crisis, recession and bank failures; we cannot allow our financiers to experience an identity crisis as well. That would be cruel.

You Tube Video: Grateful Dead, US Blues

Risk: banks, market, credit

January 13, 2009 Posted by | banking, Bush, credit crisis, EESA, Obama, Paulson, TARP | , , , , , | Leave a comment

Whats Good for GM

I always thought the quote “Whats good for General Motors is good for America.” was a vile admission that the rights and interests of individual citizens was subservient to the vested interests of corporations. I always thought this was uttered by Calvin Coolidge or Herbert Hoover, the historical poster boys of an out of touch presidency intellectually immune and emotionally removed from the pain and troubles of the working class. Happily ignorant or seemingly unconcerned of a country slipping into a paralyzing depression while they whistled past the grave yard.

More recently the voices of average citizens have again been raised to decry the power and privilege of special corporate interests. They buy access and favor through the deft abilities of well compensated lobbyists and generous financial contributions by the monied interests to encourage politicians to adopt their world view. America’s economic and political history is a sometimes sordid, sometimes splendid tale of the restive relationship of labor and capital and how their respective political interests are made manifest in our laws, policies and programs that emanate from Capitol Hill.

Since at least the beginning of this year we have been barraged with prognostications of a catastrophic economic collapse. The Federal Reserve and Treasury Department have moved with dispatch to bolster bank capital to assure that liquidity and confidence in the banking system is protected. The EESA and TARP responded to the capital formation needs of banks. Most legislators supported EESA even though it only had tepid support by taxpayers. But the deal went through because we were told that if we failed to pass the bailout legislation for banks our nation would be swallowed by an economic black hole. Paulson’s defense of the TARP and its strategic transformation will be covered in subsequent posts but this authors skepticism of the TARP and Paulson’s intention is on record. The TARP and EESA are temporary short term liquidity fixes to frozen credit and capital markets. Supporting and protecting manufacturing is how the US will transition its bankrupt merchant capitalism to an economy based on the manufacture of value capable of long term sustainable growth.

So today we go on record in support of a Federally mandated capital infusion and formation initiative for the automotive industry. As we have previously stated the dismantling of our countries manufacturing infrastructure lies at the root of our current economic dilemma. We advocate acceptance of The Hamilton Plan to address economic recovery and long term sustainability of the US economy. Manufacturing is the bedrock of recovery and the Federal Government needs to encourage the formation of capital clusters of all stakeholders to incubate support structures that will accelerate the recovery of manufactures. The support program is not about writing a blank check to an industry that is badly managed. The automotive recovery plan needs to recognize, aggregate and focus all forms of capital to address this rapid deterioration of our ability to create value through manufactures.

The Hamilton Plan advocates that the Treasury Department form an SME Development Bank to encourage manage and administer the capital formation required to address a GM turnaround. The recovery proscription will need capital, cooperation and political will from all parties. Those include, government, business, labor, social service and academic institutions. The need to support manufacturing is paramount if we hope to recover from structural economic malaise. The failure of GM would have a profound impact on the fiscal, physical and psychological health of the US economy and its citizens. In this instance what is good for GM is not only good for America but it is vital for its survival.

We will offer a more detailed outline in future posts.

You Tube Music Video: James Cotton, Rocket 88

Risk: manufacturing, recession, unemployment, sustainability

November 13, 2008 Posted by | blues, Bush, manufacturing, recession, TARP, unions | , , , , , , , , | Leave a comment

Viceroy for Life

The Colossus
Francisco Goya

I like Mike. Michael Bloomberg has been a wonderful mayor for the City of New York. I am in awe of his accomplishments as a businessman and as a political leader. As a person, from what I have been able to observe through the lenses of the media I like his temperament, sensibility and believe him to be a good man. I feel a strange kinship with the man. He seems honest, direct is beholden to no one and seems to be a man of his word in whom I can trust. I also believe Mr. Bloomberg to be a man of integrity and his dedication to public service is borne from a desire to serve and to give back to society some of the bounty that society has richly conferred on him. Yes, he is a billionaire and I guess it is at this point that my kinship with the man takes diverging paths. Yet I believe Mr. Bloomberg is one of the best and most capable persons ever to sit in the NYC mayoral office. So it is with regret that I cannot support Mr. Bloomberg’s desire to change the election laws so he can run for a third term in office.

Democracy in the United States is imperiled. The United States once seen by the world as the great laboratory of participatory democracy with the constitution and a citizens Bill of Rights as its guarantor is quickly losing that honored designation. The passage of FISA by our legislative branch of government is a clear and present danger to The Bill of Rights. And during the eight years of the Imperial Presidency of George W. Bush, at times he and his lieutenants seemingly treated the Constitution as an occupational nuisance and an unfortunate cost of doing business for America Incorporated.

The ascending power of the US Treasury threaten unfettered markets operating free from government control. Unilateral interventionist actions into the capital markets and the tremendous power that EESA confers on Cabinet officials to throw a TARP on toxic assets, is a transformational event in how our economy functions and is controlled by the influence of appointed government officials.

The continued war posture of our country and the seeming abrogation of the executive branch’s responsibility to decide strategy, direction and manner of how to prosecute the Iraq war to General David Petraeus’s discretion is a dangerous surrender of civilian control of the military branches.

The judicial branch of our government is also complicit in the dismantling of the great experiment of American democracy. Their autocratic decision to sanction the Florida election that gave Mr. Bush the presidency was based on no precedence nor will it carry the weight of precedent for future cases heard before the court. Bush may have won the election but the protection of voter rights and a respect for the electoral process was the clear loser.

I believe that these represent serious challenges to a free and democratic society and the institutions that support it. That is why I cannot sanction Mr. Bloomberg’s desire to change the law so that he can run for election.

If I recall correctly Bloomberg’s first mayoral primary election was scheduled for 9/12/01. That is a day after that transformative event that continues to inform and direct Americans political consciousness. Though we didn’t vote on the 12th, New Yorkers eventually went to the polls and brought this great mayor into office. I am glad that New Yorkers had the wisdom and foresight to elect Mr. Bloomberg.

But the election process and protocol was respected and continued. Mr. Giuliani wanted to run for a third term but thankfully he did not run. This opened the door for Mr. Bloomberg. I remember at the time thinking that whoever takes office under these conditions will be severely tested by the adverse economic and political conditions of the time. Mr. Bloomberg has conquered and mastered the adversity and his constituents are the better for it. Thank you Mr. Bloomberg.

But you can do one more great service to New York and to our country Mr. Bloomberg by stepping down in deference to democracy. During the next four years you can work to get the law changed so you may assume the office you so richly deserve.

Honor the existing term limits law that were enacted to protect against the abuse of power. Honor a crumbling remnant of our rapidly evaporating democratic culture. Your honor is at stake.

Thank you for your service Mr. Bloomberg.

You Tube Video: Johnny Cash, I Am The Nation

You Tube Video: Be Like Mike

Risk: term limits, representative democracy, elections, laws

October 22, 2008 Posted by | Bush, EESA, elections, folk, politics, TARP | , , , , , , , , , , | Leave a comment