Simple Math Stumps US Corporations - SEC Rides to the Rescue

Our Corporations Isn't Learning

As you'll recall, Section 953b of the Dodd Frank Act requires corporations listed in the USA to publish a ratio of the total compensation of the CEO to the median compensation of all other employees (excluding the CEO).

Self-proclaimed "captains of industry" objected to the onerous requirement of providing this ratio, but their pleas were ignored --though implementation was delayed till 2017.

Now with a kindler gentler administration in the White House and control of both the House and Senate in the hands of the GOP, they are getting a second hearing.

February 6 Acting SEC Commissioner Michael Piwowar:

The Commission adopted the pay ratio disclosure rule in August 2015 to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule requires a public company to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.

Based on comments received during the rulemaking process, the Commission delayed compliance for companies until their first fiscal year beginning on or after January 1, 2017. Issuers are now actively engaged in the implementation and testing of systems and controls designed to collect and process the information necessary for compliance. However, it is my understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.

I encourage commenters and the staff to expedite their review in light of these unique circumstances.

Boldface above courtesy of AA.

Yes, this is indeed an almost insurmountable task. 

1. One has to figure out the total compensation of the CEO.  Oh, wait.  That's already done for the annual Proxy Statement. 
2. Then one has to figure out the median salary.  That's even more tricky because it involves two really "hard" steps.  
3. Big corporations have operations all over the world and pay their employees in a myriad of currencies.  How possibly could they figure out the US equivalent of Paris-based Jacques' salary or Frankfurt-based Heinrich's?  Oh, wait.  Corporations routinely convert local currency transactions into US dollars for their annual financial reports, including salaries paid to foreign workers.  Corporations also routinely keep detailed employee by employee payroll records for tax, pension, and other purposes so no new records have to be created.  What probably would be required is to add a column to figure out the US dollar equivalent salary for each employee.  
4. But, as no doubt many a beleaguered corporation will point out, then they have to figure out the median salary.  What's a median? An extremely challenging task.  One lists all salaries and then picks out the one that is smack in the middle.  This is the sort of things that computers were made to do.  Microsoft's Excel has a preprogrammed "median" function so this is definitely not rocket science.
5. So the corporation would have to consolidate US dollar-equivalent lists of salaries prepared by various operating units (foreign and domestic) and then sort them by amount and pick out the median.  Another automated process.

On its face, it sure looks like this objection is motivated by a desire to avoid providing this information because it's likely to raise uncomfortable questions about CEO compensation.

But, let's accept the manifest absurdity of this argument and assume for a moment the objection is true.  After all, we have a new Treasury Secretary who swears he can't fill out government ethics forms and other members of the Administration see things that never happened (3.5 million people at the Mall for the Inauguration, 3.5 million illegal voters, etc). 

On that score Mr. Piwowar "understands" that some corporations are having a problem.  It's not clear if there have been many complaints from companies, whether he is seeing things, heard about it from KellyAnne, or read about it on Breitbart.

Rule 953b was finalized 5 August 2015. 

That means that some US listed corporations have been unable to establish a system to calculate this ratio in the 17 months since then and believe that they will be unable to complete it in the additional 11 months remaining during this year (assuming most corporations have a December fiscal year end).

If this is the case, then 3 troubling questions.

1. In an era where complex calculations are at the base of product development and production, should a consumer purchase a product from a company that acknowledges its inability to do simple maths?
2. In an era where proper pricing of products, operations and risk management depend on the ability to perform complex calculations, should an investor buy the stock or bonds of a company that admits that simple mathematical procedures exceed its competence?
3. Should the average citizen and our government be worried that our self-proclaimed math-challenged corporations are clearly not equipped to compete with foreign corporations?

The SEC is taking comments on implementation of this rule.  Let your voice be heard.

The Bowling Green Massacre - Never Forget & Contribute Now

Regular readers of this blog know that our primary focus is financial, but there are times when other issues assume such paramount importance that silence is impossible.   Such is the case with the Bowling Green Massacre.

The Cowardly Bomb Attack

It wasn't that long ago that the idyllic atmosphere of Bowling Green, Kentucky was shattered (quite literally) by a cowardly bombing by terrorists.

But the damage wasn't only to property.  

An Anguished Cry.  Why?  

And yet in this time of anguish, a simple but powerful memorial to the untold number of victims.  And I'd note one conducted by the residents of blue state New York City for the fallen in red state Kentucky--a typical American response to threats.

Citizens across the nation express their solidarity. 

AA is Bowling Green and sincerely hopes you are too.

Americans are known for their charitable instincts.  And it didn't take long before a fund was established.  Below is a link to their website.

We all still carry the vivid memories of what horrors occurred at Bowling Green, but some still relive those moments everyday as they work to rebuild a community torn apart.

ذكرى فاطمة ابراهيم البلطجي -- لست أنساكي

رجعوني صوتك لأيامي اللي راحوا
علموني أندم على الماضي وجراحه
اللي سمعته قبل ما تسمعك اذنيه 
عمر ضايع يحسبوه إزاي عليّ
انت عمري اللي ابتدي بنورك صباحه
قد ايه من عمري قبلك راح وعدّى
يا حبيبي قد ايه من عمري راح
ولا شاف القلب قبلك فرحة واحدة

Wall Street Titan "Trips Up Again" or Did He?

Abu Arqala Reports, But You Decide

According to The Columbus Dispatch:

President Donald Trump's nominee for U.S. treasury secretary was untruthful with the Senate during the confirmation process, documents uncovered by The Dispatch show.  Steve Mnuchin, former chairman and chief executive officer of OneWest Bank, known for its aggressive foreclosure practices, flatly denied in testimony before the Senate Finance Committee that OneWest used "robo-signing" on mortgage documents.  But records show the bank utilized the questionable practice in Ohio.

"Untruthful" presumes that Secretary Mnuchin deliberately misled the Senate.   

That's a rather damning indictment of Mr. Mnuchin who the "World's Greatest Deliberative Body"--at least according to their own assessment--recently confirmed as Secretary of Treasury after what was no-doubt grueling examination of his qualifications, behavior, and ethics.

But are there other explanations? 

Of course there are! 

1. Mr. Mnuchin was not familiar with the term "robo signing" and believe it referred to robots. So he answered sincerely that not a single robot signed a document.  An admirable stance for a member of an Administration that has pledged to create jobs for Americans. 
2. "Robo-signing" by humans did occur, but even though he was Chairman and CEO, Mr. Mnuchin was so out of touch that he really didn't know what was going on at One West.  Luckily, a firm grasp of reality is not a prerequisite for a cabinet post in the current Administration.  
3. According to The Columbus Dispatch's "facts" robo-signing did take place, but according to Mr. Mnuchin's "facts", it did not.  In such a case, the simple answer is teach our children both sets of "facts" and let them make up their own minds.  

India: Moody’s and ICRA See “Subdued” Prospects for India’s Banks

Sometimes Even When You See Something Clearly, You Think It Wise to be Indirect

Just when I was recovering from The National Bank of Ukraine’s festival of euphemisms about PrivatBank, along come Moody’s and its Indian affiliate ICRA to once again remind AA that his attempts are easily upstaged. 

In a report released on 9 January, Moody’s and ICRA summarize their conclusions about the country’s banking sector with the phrase “see subdued prospects for India's banks“.

Why is AA “skeptical” and inclined to a stronger term than “subdued”?  Perhaps “dismal”?

Three factors.

First, Indian banks—particularly public sector banks or PSBs—have a reputation for under-reporting NPAs.    Favorite techniques were refusal to recognize NPAs, disguising bad loans via restructuring and/or making new loans to pay interest on past due loans.   Former RBI Governor Raghuram Rajan launched a “crackdown” in 2015 to curb under-reporting of NPAs. 

Performance suffered.  The decline was chiefly due to increased provisioning in 2016 and the related impact on net interest margin.   According to RBI’s Report on Trends and Progress of Banking in India,  Operations and Performance of Scheduled Commercial Banks Table 2.1, banking sector return on assets for 2015/2016  was 31 bp and ROE 3.59% compared to 2014/2015’s ROA of 81 bp and ROE of 10.42%.   Public Sector Banks—some 70% of banking assets--fared even worse with negative ROA and ROE in 2015/2016.  

Second, Indian banks have also traditionally under-reserved their declared NPAs with provisions averaging roughly 40% of total NPAs.   According to RBI Handbook of Statistics of the Indian Economy Table 65, 2015 reserving levels were at 46%.   Unreserved NPAs were some 20% of 2015 capital (Table 64). 

It’s hard to tell what happened in 2016.  Much higher provisions were taken, but more loans were recognized as NPAs and restructured loans are now to be included in that figure.  What’s the net effect?   

Sadly, RBI data on NPAs is available with a roughly 12 month lag.   See Table 65 in the RBI’s “Handbook of Statistics”.  Latest figures are from September 2016.  Other RBI reporting has detailed bank-by-bank analysis but the latest data appears to be March 2016. 

Without RBI statistics on both NPAs and provisions, it’s not possible to determine if the provision coverage has increased because both NPAs and provisions have increased.  

Third, low provisioning levels are particularly important because NPA recovery is traditionally very low in India.  According to RBI’s Report on Trends and Progress of Banking in India,  Operations and Performance of Scheduled Commercial Banks, Table 2.2,  in 2016 Indian banks recovered roughly 10% of NPAs versus 12% for the previous year.  

What this means is that recoveries are unlikely to make up provisioning shortfalls to any meaningful extent.   Provisions then are more critical than in jurisdictions where average recoveries are in the 40 to 50% range. 

It’s hard for AA to imagine that during 2016 Indian banks cured decades of bad practice and bad underwriting.  Trump Tower like Rome wasn’t built in a day, though it is by some Twitter accounts better.  And banking sector cleanups generally take more than a single year. 

Moody’s/ ICRA seem to agree. In their press release, they project single digit ROE for 2017 and 2018 and note large capital needs particularly among PSBs. 

A case of JPMorgan “Jakarta” fever?  Or euphemism?  

And finally a tip of AA’s enormous tarbush to ICRA SVP Karthik Srinivasan for combining “dent” with “profitability matrices”.  See link to Moody’s / ICRA press release. Shabash!

Golden Curtains

New Administration, New Curtains in the Oval Office

Contrary to some media reports, these do not appear to be shower curtains.