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My Trip To DC

Thursday, May 13th, 2010

In June 2009, I went to DC to meet with Senator Corker, the SEC, the Senate Banking Committee, the FDIC, the Congressional Oversight Panel and the Public Company Accounting And Oversight Board. I provided a report on corporate disclosure transgressions (request access to this report via research@newconstructs.com) that detailed over twenty problem areas in the corporate financial system. The report references specific cases, with excerpts from the original 10Ks, of companies violating or stretching disclosure rules. None of the issues I highlighted were caught by the SEC.

My pitch was simple:

  • Regulators do not make markets more transparent – proper disclosure does.
  • The problem with transparency is not the lack of data but the overwhelming load of it created daily.
  • The public sector is several steps behind the financial wizards that Wall Street and Corporate America employ to manipulate accounting data.
  • Regulators need better expertise and tools for gathering and analyzing data. New Constructs has been delivering that expertise and the tools to apply it since 2003.

Click here for a copy of the presentation used in all my meetings.

My presentation focused how to improve the integrity of the capital markets most efficiently. As detailed in my letters (#1 and #2) to Senator Corker, my purpose was to provide our political decision-makers with a powerful tool to combat stock market manipulation and Wall Street propaganda.

I pointed out that not only were companies able to manipulate the accounting system, but also that violation of accounting was rampant and undetected. For example, as detailed in our Corporate Financial Disclosure Transgressions, over the last 5 years we found 10 companies whose income statements do not add up correctly and 20 companies in the last 11 years whose balance sheets do not balance. I’d say that is proof that when the cat is away the mice will play.

Having worked on Wall Street for several years, I know how the “sausage is made”. I explained to everyone I met in Washington that New Constructs can immediately provide the public with additional information on the true profitability and valuation of companies that would empower investors to make more informed decisions. Just suggesting they provide an alternative to the home-spun Wall Street research.

I do not believe that most investors make bad investment decisions because they are stupid. They make them because they are misled about the true profitability and valuation of companies.

Guess what the reaction was:

  1. Great ideas, great stuff. You should hire a lobbyist.
  2. The reaction of the lobbyist who could best meet my needs: sorry, we cannot represent you b/c we are conflicted. You could not possibly pay us enough to cover the loss of the financial sector clients who would not like what you are doing.

Take away:

Wall Street’s money machine buys influence and drowns out the dissenting voices.

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3 Comments

  1. varadha says:

    Terrific, yet simple analysis. I’ve always been a fan of ROIC as a measure of capital efficiency and believe that no size/growth outperformance can replace the quest for efficiency.

    Sort of like a big gas guzzling v8 that needs ever increasing gallons of fuel to keep its engine running

  2. David says:

    But Angie’s $90 per user acquisition cost is going to go away. That’s what their approach probably is. How would their outlook be if that $90 cost dropped down to a total cost of $3 per user?

  3. David:

    That would be great, but cost per user acquisition is not something that’s very easy for a company to fix. ANGI can slash their marketing budget to the bone, but then they would stop acquiring new members. They would probably lose members in fact, as their membership renewal rate is at ~75% and declining. If they cut marketing expense by ~95% as you seem to be suggesting, ANGI might be able to eke out 1 year of slight profits, but they would start shedding members and losing money very quickly. ANGI’s only hope is to keep its marketing budget high and hope it can reach the scale and brand awareness to be able to sustain its business while scaling back marketing costs enough to turn a profit. The fact that ANGI’s revenue growth is slowing down even as its marketing costs keep increasing makes it very unlikely it will achieve that goal.

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