Earlier this week, after wrestling with the spate of painful economic news provided by major media, I recognized that I had no immediate control over any of the massive economic concerns. The stock market zigged when I hoped it would zag. Unemployment numbers, often reported differently, moved at different paces in the undesirable direction. Our federal deficit grew, which increased our individual debt responsibility. The problems were not confined by the pages of the newspapers. When I peered through my office window I saw quality real-estate projects continuing to sit lifeless because they lacked funding. After a few moments of reflection, I recognized that I, and certainly the majority of us, am being forcibly weighed down by all of the negative. Instead of dwelling on the uncontrollable, we should be manifesting the positive by taking hold of the reins on those things in which we can have significant influence.

I decided to start anew with more refreshing thoughts. So, I turned to a medium in which I had some control over the information that was presented to me: Google. Two main pages topped the list when I searched for the words “Economy: We Are the Answer.” The first was an informal Yahoo Answer Board on which the following question was raised: “Is there hope for the American economy or should we just drastically change the way we live?” The user went on to define “drastically change” by giving up our private houses and cars. The second most-popular page that appeared was BarackObama.com, which suggests no one within Google’s reach really believes we the people have the capacity to be the answer to our economic problems. According to my Google search, the answer either rests in the hands of President Obama or we will all be forced to live in communal frat houses without automobiles.

When our economy is running smoothly, we all welcome the opportunities to be part of a do-it-yourself world. We bag our own groceries, scan our own documents, rent our own movies and print our own boarding passes. On a weekly basis, we all most likely take it upon ourselves to deposit, track, clean, swipe, dry, spray, refill, bus, organize, pour, dispense and scan in the presence of other do-it-yourselfers in the vast public. As long as the tasks are minimal and the goal is clearly in view, we are encouraged to do everything ourselves. The responsibilities we used to let others handle, we now do ourselves (I cooked my own meal at Melting Pot earlier in the month). About half of the times I visit a gas station, there is no reason for an attendant to be present—unless I am in Oregon or New Jersey, where state officials prohibit me from pumping my own gas. But, when an issue has options that are more complex than selecting diesel or regular, our individual accountability takes a vacation. Why do we turn our focus to other superpowers to take control and eliminate ourselves from the equation?

The Problem is Passivity                               

This economic downturn is nothing more than a collection of intertwined problems. Although financially painful and physically overwhelming, there is no reason for any of us to hide underneath our desks and wait for the shaking to end. Think about the steps we all take when trying to overcome a timely problem—for an example, a clogged drain. We take a short period of time to analyze the situation. We look at all the factors involved and ask ourselves crucial questions: Is the water draining at all? Is the clog causing the pipes to leak? How severe is the leak? Is it causing immediate damage? Next, inevitably, it is human instinct to search for the quickest fix. We switch on the garbage disposal and rub our lucky rabbit’s foot. When we are forced to take real action we must recognize the weapons we have to combat the problem (a plunger, a drain snake, Drain-O). After we extinguish our resources, we then consult the knowledge of an expert. 

Now consider the enormity of our current economic struggles. The formula for dealing with the problem is much more complex, but it should still follow the basic fundamentals. Why then have droves of investors been complacent to listen to long-winded “experts” before analyzing their situation and deducing what it is that they can do for themselves? The formula is flip-flopped when we let ourselves believe that any given problem is too big or too complex. Remember the old adage, “We can only eat an elephant one bite at a time”? Many of the intricacies of this recession are out of our control, but the sooner we take control over the issues we can influence, the sooner the complex problems begin to untangle.

If the severity of the problem is directly proportionate to the amount of time we take to analyze it, then we only need a brief moment to stare into a clogged drain. In that same vein, our economic crisis is much more complex and has required a longer period for analysis. I argue we have passed this stage of the process and action is required now. This summer brought about a number of signs that suggest we are now slogging around somewhere near the bottom. With home-improvement projects, summer vacations and outdoor entertainment, consumers typically spend more in the summer months. We are now entering what is destined to be a difficult autumn. Unemployment will continue to strain on families, foreclosures will mount and consumers will tighten the belts they let momentarily loosen over the summer.

On the other hand, as the leaves turn and nature gets stripped of its color, a buckled economy will continue to present opportunities for us to take action. It is time for all of us to stop viewing ourselves as helpless observers and again consider ourselves part of the equation. In some ways we already are important variables, but we rely on the inadvertent action we take to be sufficient. How many times have you heard an angry citizen blurt out something along the lines of “I do my part, I’m a taxpayer”? The somewhat-passive action of paying taxes funds many integral economic systems in which our country balances itself. Just as we hire plumbers to help unclog our drains and keep them running smoothly we elect (read “hire”) officials to help unclog our economy and keep it running smoothly. With our plumbers, we are responsible for paying the bill to enable them to do their job. The same is true for the officials; by paying our taxes, we essentially all pick up our share of the bill and expect them to do their share of the work. Without our capital, their positions would not exist; but this hardly means we have positioned ourselves as active parts of the recovery.

Investing to Make a Difference

To be an important cog in the recovery machine, we must put our money to work. Our money does not do any good stuffed in a mattress or buried underneath the deck. Private capital built this country and there are few economic problems that private capital cannot solve, if allocated effectively. During the Great Depression, a time when the economy constricted and the majority of construction projects were put on hold, the entire construction of the Empire State Building was completed. Thanks to funding from its principle backer, an automobile tycoon aiming to one-up a major competitor, the Empire State Building was constructed with staggering momentum. During the Depression, building materials were cheaper and workers were eager to earn a wage, much like today. The construction put people and money back to work in dire times; not to mention the mystique the building has given our country for nearly eight decades.

A project as grand as the Empire State Building might only come around once a century, but that does not rule out the need for quality projects in our own communities. When private capital teams with quality-managed projects, the outcomes can be extraordinary. But, you need both. Whereas quality projects cannot get off the ground without capital, poorly-managed projects get ran back into the ground even with all the capital in the world.

This recession has torn through our communities and left a stockpile of quality real-estate projects to collect dust. Without proper funding, the projects remain undeveloped, unproductive and severely underemployed. Placing our private capital into quality projects will bolster the number of available jobs in our communities and get people behind a meaningful cause. There are loads of individuals that could be taking charge and becoming part of this recovery. We will show great resilience when we, on our own, come out of this strong, super-charged and feeling part of something.

We have to put the days of excuses behind us. We should be searching for any project that someone says “can’t be done” and aim to defy. When the newspapers have stopped reporting stories that highlight economic blemishes, our unemployment numbers are approaching all-time lows and our government takes a permanent vacation from bailouts; we will only vaguely remember our current doubts. We will, however, remember the period of time when we all did our part to restore communities. We will remember the turning point when we took action to pull ourselves from the painful times and regained our spot as part of the equation.

Tags: bail-out, Bernanke, Billion, Business, Credit, deficit, do-it-yourself, economy, Finance, Geithner, media, obama, Paulson, Real estate, Retirement, Standing In The Rain, Stimulus, Thomas J. Powell, Trillion

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Reposted from “Hedge Fund Regulation: It’s Back” on the Intralinks.com Blog.

And this time it’s taking private equity and venture capital with it. First, let’s quickly rewind to 2006, when hedge funds throughout the U.S. were completing their ADV and implementing technology to retain their e-mails and documents. At the time, they were anticipating having to register with the SEC under the Investment Advisers Act of 1940. Enter Phil Goldstein of Bulldog Investors, who lives up to the company moniker by suing the SEC and to the surprise of everyone-wins.

The movement to regulate hedge funds lies dormant for several years, until the fall of 2008, when Wachovia and Merrill Lynch are listed for sale on eBay. This time around the government is smarter. They introduce an amendment to the 1940 act called the Private Fund Investment Advisers Registration Act of 2009 and, just to be safe, throw PE and VC firms under the bus along with hedge funds.

The 2009 Act eliminates the private adviser exemption that funds relied on to avoid regulation. It also takes step to ensure that the Phil Goldstein’s of the world don’t reappear by granting the SEC enhanced authority to define terms in the 2009 Act. (Note: Goldstein successfully claimed that the SEC exceeded its rule making authority in 2006.)

Recently, a lot of attention has been given to the Private Fund Investment Advisers Registration Act’s requirement that advisers report their positions, off-balance sheet borrowing and assets under management in an effort to identify systemic risk. There’s less clarity concerning the government’s proclamation that “the SEC should be given expanded authority to promote transparency in disclosures to investors.” Sounds a bit open ended, doesn’t it?

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Tags: Business, hedge fund, Investing, Investment Advisers Act of 1940, Private equity, SEC, U.S. Securities and Exchange Commission, Venture capital

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The SEC has come out with permanent rules to solve the problem caused by naked short selling.  The pivotal problem is the exploitative danger of manipulation of volatility and resulting down spiral.

The problem with regulatory approaches is a preference to add patches onto a bad system instead of re-engineering the whole system (for instance, The Federal Reserve System).  The key to a solution to the short-selling dilemma is to RECOGNIZE THAT THE CAUSE OF EXPLOITATION IS A FUNCTION OF VOLATILITY THAT IS A FUNCTION OF TRADING VOLUME.  Every dark pool operator (like SigmaX or LiquidNet) and networked crossing network (like Instinet or Posit) recognizes this and this is the essence of modeling trading algorithms to reduce execution costs.

The solution I propose (as a simple Equity Overlay Manager) is this:

TURN THE SHORT INTEREST THAT AFFECTS VOLATILITY AS A FUNCTION OF TRADING VOLUME INTO DILUTION THAT WOULD GREATLY MITIGATE THE VOLATILITY AND LESSEN EXPLOITATION.

How can we change Short Interest Short Selling into Dilution?  Easy.  Withdraw all rules regarding restraint of short selling and require that the short interest be covered periodically with the underlying company issuing stock to cover.  This would cause an accounting entry to decrease Treasury Stock and increase Assets (Cash) to the company and require brokers to cover – not from the markets – but from the companies themselves.

This would be a form of “MINI-PIPES” but instead of manipulating VOL as a function of trading volume – the VOL would be affected in the form of DILUTION that is a very mild form of VOL.  The value-added from this transformation of Short Interest to Dilution would be the price volatility caused by shorting versus the Dilution Formula for warrants (not options because we are CREATING shares in issuance) defined by the formula:

[(MV of Outstanding Shares) + (Value of Treasury Stock)] divided by (Total number of shares after Dilution).  While it may not be apparent in this script form, it should be noted that the dampening of VOL and drawdown that can cause a death spiral of stock price on illiquid securities would be tantamount to turning a tire blowout into a slow leak that essentially demotivates exploitative manipulation.

Peter J. de Marigny / DITMo Equity Hedge & Overlay Strategies / AMERICADE / DITMo Capital

Tags: Brokerages, Business, Federal Reserve System, Investing, Short, Stock, Stocks and Bonds, US the Securities Exchange Commission

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This is a re-post of the original article from Evan Rapoport’s Capital Introduction Blog

I often hear the terms Capital Introduction and Third Party Marketing used interchangeably. They actually however, represent two different services within the hedge fund asset gathering space.

Capital Introduction is a service usually provided by hedge fund prime brokers. The biggest teams coming from the largest prime brokers, firms like Goldman Sachs & Co., Morgan Stanley, Merrill Lynch, etc. These prime brokers have teams within their ‘prime services’ divisions that will help clients of the firm to find investors suitable for their funds.

How do they introduce investors you may ask? Well, investor introductions are made through occasional capital introduction conferences, road shows, one on one investor meetings, and individual investor conference calls. When done properly, this service can help to raise a fund millions of dollars at no cost to the general partner and no harm to the limited partner.

The real trick here, is finding a firm that actually follows through with what they claim. Many smaller trading firms and ‘mini-primes’ claim they offer capital introduction when in reality all they offer is a list of fund of funds or introductions to third party marketers.

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Tags: Business, Goldman Sachs, hedge fund, Investing, Merrill Lynch, Miss Universe, Morgan Stanley, Private equity

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In today’s article: “Taleb offers a universal solution to our ills” (Published July 14, 2009 at 10:46 AM “THE DEAL”) Prof. Taleb, author of “The Black Swan,” a book about the likelihood of outlier events otherwise believed to be improbable, profers a solution to the current debt and liquidity malaise.  He says to make a mandatory conversion of all public and bank debt to equity for what I infer solves an “agency” dilemma or moral hazard.

First, I perceived back in Summer 2007 in articles posted on Albourne Village that the growth of the C.O. market with its corresponding fraudalent price discovery structure and boundless creation of synthetics already doomed the banks and would result in money center bank nationalization and subsequently result in the creation of a world currency displacing the USD and the Fed.

Taleb has his own views of predicting Black Swans, but as a student of Financial Risk (GARP) I recognize two things: