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Archive for the ‘Politics’ Category

    Senator McConnell’s Dilemma:   To Serve Patients or Investors?

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When evaluating health care investments it is important to analyze the structure of leading drug and medical equipment companies.  A close look indeed reveals a derivative driven system in which private equity and hedge funds increase demand for drug payments by purchasing the rights to the cash flows from key drugs.  Patients are indeed unaware that many of the drugs they consume are now owned in part by private equity investors.

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Trump Mercer Simons Koskinen Bharara

President Trump’s most significant backer, Robert Mercer (CEO of the giant hedge fund Renaissance Technologies), is Deutsche Bank’s largest customer.   Deutsche Bank is indeed also President Trump’s and Jared Kushner’s largest lender.  One phone call from Mercer and either should be able to refinance or gain a new loan, as both did in 2016.

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President Obama’s best chance for turning around the economy is to make sure that Paul Volcker, Federal Reserve Chairman prior to Greenspan, is in charge of needed economic reforms.   Although Tim Geitner showed promise when nominated Treasury Secretary, he looked more like Michael (Katrina) Brown than a competent leader in his first press conference.   He may indeed be nothing more than a figure head for unregulated hedge and private equity funds.  After all, the Chairman of the New York Federal Reserve Bank– where Geitner came from– was formerly with Goldman Sachs, and now works for a leading private equity fund.

Geitner actually proposed that these unregulated hedge and private equity funds could be a key part of the solution to the current financial mess, a mess they created.   While Volcker is calling for immediate registration of hedge and private equity funds with the SEC, Geitner and Summers, both of whom have strong ties to these funds, are silent on the issue.

One has to ask how long the markets, in particular the equity markets, will wait for transparency and integrity to be restored before sending a strong message to President Obama.  Below is an excerpt from a Bloomberg article summarizing Volcker’s concerns with respect to Summers and Geitner’s inaction.

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This week TD Ameritrade held its annual institutional advisor conference at Cesar’s Palace in Las Vegas.  CEO Fred Tomczyk, pictured on left below, summarized TD’s strong financial position in addition to his belief that money market accounts should be about safety and stability. For this reason, TD has chosen to minimize both duration and credit risk in these accounts. Tomczyk is clearly the right person to be leading TD Ameritrade.

Tom Bradley, pictured on right below, leads the institutional area and was instrumental in successfully advocating against the Merrill Lynch brokerage exemption rule, a rule which allowed investment professionals to avoid registration with either the state or SEC.  It is now up to the SEC to take action regarding this rule which has led to such widespread abuse.

I asked the first question of Tom after his presentation.  The question was, will TD Ameritrade now aggressively advocate that private equity and hedge funds be required to register with the SEC.   This same question was asked of both Karl Rove and General Wesley Clark, in addition to whether or not they are personally invested in private equity or hedge funds.  I will mention their responses below.

My sense is that requiring hedge funds and private equity to be registered with the SEC is essential to restore transparency and investor confidence. Bradley  responded that he is optimistic and sees the new SEC chair as a reasonable person but stopped short of committing to lead this much needed effort.  Bradley also noted that the SEC has had difficulty regarding effective enforcement, as indicated by the $50 billion Madoff scandal that broke in December.

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In response to my question directly to Rove and Clark, Karl Rove said “I am too poor to invest in private equity and hedge funds,” but added that he thought that as long as these investors are large sophisticated investors, perhaps there is no need for registration.  He added that if he were not speaking at the conference he would be hunting with T. Boone Pickens, one of the nations largest private equity investors.

Pickens spoke the previous day and noted he had lunch with President Bush that week, a lunch Bush requested.   Pickens added that Bush asked him straight out, “Boone do you understand all this stuff Wall Street has created.”  Pickens replied, I am a geologist and have no idea what they were doing.

What neither Rove or Bush seem to realize is that the biggest investors in these hedge and private equity funds are now tax exempt public pensions, endowments and foundations.  What this means is that teachers, janitors and college students financial futures are directly tied to these investment vehicles, making registration with the SEC imperative.  Not to mention their interlocks to banks and their government insured deposits.

Clark was articulate in his response, noting that elimination of the “uptick rule” had fueled short selling by hedge funds, perhaps adding to market volatility.   He did not however answer the question regarding whether he was personally invested in such funds.  Clark also cited the Bush administration as being lax in its regulatory responsibilities.  Although perhaps true, Rove repeated several times that it was the Democrats who blocked the Bush administrations efforts to regulate Fannie Mae, a key catalyst to the current financial crisis.

My overall take on the Rove Clark debate is that Rove overlays his economic philosophy with too much politics and not enough basic math, although he was certainly right on the Fannie Mae issue.  Clark is a brilliant articulate leader, perhaps able to contribute to solving this mess, yet he is simply naive with respect to the impact of hedge and private equity funds.  One thing is for sure and that is the increasing importance of Paul Volcker to the Obama administration.  Volcker appears to be the only visible leader who truly “gets” what is needed to stabilize the system.   Pictured below is a photo of Rove and Clark responding to my question.

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William Poole, pictured below, was also keynote speaker.  His presentation was superb, yet like many distinguished economists he is handicapped by not understanding accounting and taxation.  His perspective seemed to be that free market solutions are always best and did not seem to understand the importance of adequate disclosure to generate transparency and related investor confidence.  I asked Poole after his presentation if he supported hedge and private equity funds being required to register with the SEC and he replied no because they might just move to London.  He clearly has no grasp regarding the significance of this vast shadow banking system and how it has destabilized our economic system.  Such funds are now receiving most of their funding from US based public pensions and endowments and therefore the SEC or another government regulator clearly has the leverage to generate this needed oversight.   It is not likely that these funds will abandon their funding sources.

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On January 31st I posted a brief video on youtube summarizing a program in which the Oregon Investment Council is lending its securities portfolios, using State Street as an intermediary, to hedge funds and private equity firms so that they may meet the ownership standards required to conduct short selling– betting on the declines of stocks.   The video can be seen by searching for Bill Parish Public at youtube.com or by following this link: Public Pensions Fuel Short Selling.

Below is the Agenda, note this was for January 2009, it mistakenly lists Jan 2008, highlighting the review of this program in addition to a photo of Tom Motley, the representative from State Street in charge of Security Lending.

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It is somewhat astonishing that these hedge and private equity firms are therefore profiting on the decline of the very same securities owned by the Oregon Investment Council.  Clearly, the lending of securities owned by public pensions should be banned immediately by the Obama administration.  While short selling may be an important part of the overall market, the notion that right of ownership can be lent for the purpose of such investments is simply ridiculous, no matter how long it has gone on.

A link to this video was also sent to several leading journalists and today the Wall Street Journal printed a story today regarding AIG’s security lending portfolio.   Although AIG’s program is different in detail, the same overall concept is used.  That is, AIG was lending its right of ownership to others so they could engage in transactions which regulators would otherwise prohibit.

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On Sunday December 21, 2008  Oregonian columnist Steve Duin wrote a column  titled  “A fool and his trust are soon parted.”  Clearly, Oregon State Treasurer Randall Edwards, in his management of the plan, has breached his responsibility to Oregon’s parents savings for college, saddling those making conservative bond choices with losses of almost 40 percent.   President elect Obama’s home state, Illinois, also uses Oppenheimer.

In 15 years as an investment manager, perhaps the most disappointing experience for me was when Edwards, pictured below far left, and Richard Solomon, far right, who later went from the College Savings board to chair Oregon’s $70 billion PERS fund, chose Oppenheimer to be the key vendor to Oregon’s College Savings plan over Vanguard.

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Most startling about the choice was that they had full information regarding why Vanguard was a better choice, including documentation from me outlining the unique risk involving the Tremont Group, a wholly owned Oppenheimer subsidiary, that lost $3 billion on the Madoff Scandal.   Even today, after numerous scandals, few are openly recommending that hedge and private equity funds register with the SEC, something I have aggressively pushed for since 2003.

The deciding factor in Edwards and Solomon’s choice was $350K in advertising Oppenheimer agreed to contribute in order to promote the plan.  Those would be the television ads Edwards appeared in, ads that, well, greatly simplified his re-election campaign.  Also particularly disappointing was the fact that Edwards wife had recently been Chair of the Portland Public Schools board, a role in which the importance of a quality college savings plan would seem most apparent.

Hopefully the new incoming State Treasurer Ben Westlund will replace Oppenheimer as the key vendor with Vanguard and make it possible for advisors like myself, who are residents of Oregon, to recommend the Oregon plan.   Thus far I have recommended the TD Ameritrade plan, based upon Nebraska’s plan, which is mostly Vanguard funds.  Unlike Oppenheimer, Vanguard does not pay kick backs to advisors and public officials or what are often referred to as “fees” and “administrative reimbursements,” by recipients.

In many states, parents mistakently choose their home state plan, i.e.  Oregon, in order to receive a deduction for state income tax purposes.   Simply changing this policy, as Pennsylvania did, is another easy way to fix the problem.  That way parents can choose the best plan for their children and escape the plans that were structured to benefit advisors.  The following summarizes the change in Pennsylvania:

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Pulitzer Prize winning reporter Nigel Jaquiss of Willamette Week also wrote a story this week about the Oregon 529 Plan which includes pdf files of correspondence from myself to former State Treasurer Randall Edwards regarding why Vanguard should have been chosen rather than Oppenheimer.  Jaquiss story  Titled “Bill Cassandra Parish” provides a good detailed summary of what happened in 2004.

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On November 18, 2008 I gave a presentation to the local chapter of the American Association of Individual Investors (AAII) at the Multnomah Athletic Club here in Portland, Oregon regarding the overall state of the financial markets.  The talk focused on how we arrived where we are and what to look for going forward.  Also included were what I believe to be the six most important regulatory reforms– all of which could be implemented immediately– that would collectively turn around the economy.

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VIEW EXCERPTS FROM AAII PRESENTATION

These could all be passed and implemented in one week, the only missing ingredient being desire.  It is somewhat astonishing how the current solution is focused on providing trillions of taxpayer dollars to various failed institutions when, if the objective is increased market confidence, these measures can be implemented with little or no cost.  They are:

1)  Requirement that hedge and private equity firms register with the SEC and disclose their top 25 holdings, top 25 sources of funding  and key accounting policies on a quarterly basis.

2)  Expanded oversight of bond rating agencies and requirement that Warren Buffett and other investors who do significant business with these rating agencies divest themselves of equity positions in the same rating agencies.  Buffett is currently Moody’s largest shareholder.

3)  Provide the SEC with oversight of public pensions, now the nation’s largest investment pools.  They currently have no jurisdiction or oversight over such funds, which is simply astonishing given their growth and related impact on the market.

4)  Expanded oversight of proxy firms and development of new competitors in this crucial area.  Currently one firm, Institutional Shareholder Services (ISS), has a monopoly over the market.  ISS is owned by Risk Metrics, a company that recently went public, whose primary owners are unregulated hedge funds.  It is unthinkable that unregulated hedge funds would hold the levers over the most important entity with respect to corporate governance, the entity that votes key corporate resolutions for many leading fund managers regarding mergers, executive compensation, etc.

5) Stock option accounting must be standardized and based upon values captured when such options are exercised rather than using arcane math formulas and related assumptions.  This is simple but has been bitterly fought against by the technology industry, most notably John Chambers of Cisco Systems.  Microsoft has provided the leadership when it terminated its stock option program in 2003, it now provides restricted stock that vests 20 percent each year and whose cost is fully accounted for.

6)  Reform the tax code to prohibit net operating losses (nol’s) from being aggregated and used to purchase profitable companies and avoid taxation.  Such losses should be amortized over 15 years, as is the case when profitable companies purchase other companies with operating losses.  Such amortization was created when a loophole was closed in the 1980’s due to a public outcry, the closure was led by then Republican Senate Finance Chairman Bob Packwood of Oregon.  Packwood and others never conceived that the loophole would be worked in reverse to escape the reform, that is someone aggregating losses and rolling in profitable companies.  Closing this loophole will slow down mergers that make no economic sense and preserve millions of jobs that would otherwise be lost for no sound economic reason other than a few managers leveraging growth in their stock options for short term gain.

Summary:  These are all administrative rules that can be changed next week.  Again, the only missing ingredient is desire.  Please pass this along to any policy makers who might be interested. A VIDEO with excerpts from the talk to the AAII can also be accessed on YouTube by selecting the picture link above, or by searching for “Parish Speaking.”

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