• House agriculture hearing (which I’m listening in on right now) on credit default swaps. This is a follow-up to last month’s hearing. Among those testifying is the SEC’s Eric Sirri, whose prepared testimony is here. Apparently, members of the Ag Committee are heading to Europe next week to talk to officials in London and Germany about regulating the CDS market. Members of Congress seem to be poking (over and over) at the jurisdictional issues that seem to be complicating who should regulate this huge market. The live feed is here.
• UPDATE: Chairman Colin Petersen (D-Minnesota) just asked what would happen if CDS were made illegal. Pretty interesting.
• ABC News has a follow-up to its story on the Big Three automakers CEOs flying private jets to and from Washington to ask for $25 billion in taxpayer money. No matter what you think about that request, the company’s PR people should all be fired for allowing this to happen. Fairly or not, images count and the ones of these guys emerging from their GV’s was a very bad decision. I’ve done a quick skim of past proxies for Ford (F) and GM (GM) and the corporate jet travel definitely seems pretty generous.
• ProPublica, a non-profit news organization run by former Wall Street Journal managing editor Paul Steiger has an interesting story today about how the former CEO of The South Financial Group managed to collect on $18 million in severance while the bank is poised to collect $347 million under TARP just by adjusting his retirement date.

UPDATE 12:55 pm: Chairman Petersen just read a statement from former SEC Chief Accountant Lynn Turner from this Bloomberg story (scroll down to the end) that was highly critical of the Fed’s role. The Fed’s Patrick Parkinson practically bristled essentially saying it was easy to throw stones from outside. The hearing just ended.

The folks at Fortress Investment Group (FIG) weren’t on that panel, but that same day they reported its first quarterly loss since going public in February 2007 and announced that redemptions were running around 25%. But it was some of the new disclosures in the 10Q they filed that piqued my interest.

While the warning about the potential change in the tax code in terms of carried interest has been in previous filings, the last line was new:

If legislation were to be enacted by the U.S. Congress to treat carried interest as ordinary income rather than as capital gain for U.S. federal income tax purposes, such legislation would materially increase the amount of taxes that we and possibly our equityholders are required to pay, thereby reducing the value of our common units and adversely affecting our ability to recruit, retain and motivate our current and future professionals. Senator Barack Obama, the President-Elect, has publicly stated that he supports similar changes to the tax code.

Also new was a warning of the increased attention on hedge funds by members of Congress and the additional regulation that this could bring. Among the concerns singled out was the SEC’s rule on short-selling, which expired last month, though companies are still required to file the Form SH until next August: “Compliance with any new laws or regulations could make compliance more difficult and expensive and affect the manner in which we conduct business.”

Of course, given Fortress’ performance — the stock has declined a whopping 93% since February 2007 — new regulations seem like the least of their problems.

Image source: NYSE

So you can imagine my surprise when I took a look at the 10Q that Capital Corp. of the West (CCOW) filed late yesterday. As the bank, which has seen its stock decline 91 percent so far this year, announced back in July, it replaced longtime CEO Thomas Hawker (pictured here during happier times) with Richard Cupp, a veteran banker from the Los Angeles area.

But it wasn’t until yesterday’s filing that the bank included the details of Cupp’s agreement. Under the agreement, Cupp will get paid $500K a year — a 22% increase over Hawker’s salary of $410K. But it’s the car — specifically the stipulation that the “Company shall purchase or lease an automobile of the Executive’s choice for his use as Chief Executive Officer at an “out the door” cost not to exceed $55,000.” that really made me pay attention, especially in light of the fact that the bank is asking the feds (read: taxpayers) for a $46 million helping hand. Given that, couldn’t Cupp settle for a Nissan Versa?

Image source: Nasdaq

Cuban, who I interviewed for this story in Worth magazine two years ago, is clearly a controversial figure. In addition to owning the Dallas Mavericks (and blogging here) about basketball and other things, he also owns HD Net, which managed to attract former CBS anchor Dan Rather. Cuban also funds two other sites: Sharesleuth and the newer, Bailoutsleuth.com. So far, I haven’t seen any response to the SEC complaint on his sites, but I’m guessing that’s only a matter of time. Stay tuned….

UPDATE: I’ve just reread the complaint and the first question that comes to mind is why now, given that the events as outlined in the complaint took place 4 1/2 years ago. According to the complaint, Cuban acquired the 600,000 shares in March 2004 and sold them on June 28 and 29, 2004 after learning from a call with the CEO that Mamma.com planned to do a private placement. The complaint says that Cuban was pretty angry about that, saying to the CEO at the end of the call, “Well, now I’m screwed. I can’t sell.” But then he proceeded to sell the shares. The complaint notes that by getting out in front of the news, Cuban managed to avoid “losses in excess of $750K”.

By odd coincidence, Cuban gave an interview to NPR’s Planet Money last month, during which the reporter asked Cuban a question about how much was too much. Here’s what Cuban said: “You can’t get greedy. You can’t want more, more more…There’s just no reason to risk everything to get more.”

So here’s my questions: why would a billionaire take this kind of risk for $750K? And why would the SEC wait 4 1/2 years to go after him?

UPDATE 3:00: Cuban’s response to the SEC complaint is here.

UPDATE 11/18: Mark Cuban has posted another response to the SEC’s complaint here that basically says the SEC’s key evidence — that Cuban knew he was receiving non-public information and agreed to that beforehand — is not accurate.

Another update: And just in case you still can’t get enough of Cuban, be sure to check out the SECLaw blog which has some interesting legal perspectives on the case.

Be sure to read Dealbook’s take, which includes an email from an SEC employee. Something is definitely not adding up here.

Image source: Ronald Martinez / Getty

The 10-Q filed last Friday noted that the stock is trading at a historic low (it’s at $0.96 a share at the moment) and said that if the price per share doesn’t increase soon, the company may have to recognize a non-cash impairment charge.

Blockbuster is trying to re-invent itself on several fronts. It’s got its own movies-by-mail program (to try and keep Netflix (NFLX) from getting all the business from those of us who think that driving to a store is so 20th century). And since the summer, it has been testing the “Blockbuster store of tomorrow” in the Dallas-Ft. Worth area to see how consumers respond to features like a children’s media zone where kids can play while their parents browse for movies. There’s also a lounge with flat screen TVs, free Wi-Fi, and a gaming center where customers can test games and gaming systems on a 62-inch television.

But it takes money to make those extensive renovations, and that’s the problem. The credit freeze is still on, and – in Blockbuster’s words - “The recent extraordinary and unexpected limitations in domestic and international capital and credit markets have significantly limited the availability and raised the cost of debt and equity financing.”

Blockbuster said that it’s too early to tell whether it will be able to obtain credit on acceptable terms when the credit market finally thaws a bit. In the meantime, it is taking “prudent actions” to conserve the cash on hand and monitor expenses. It is also considering whether it should sell and/or license some of its international operations.

The scariest part, though, may come from what happens if the credit thaw doesn’t happen within a reasonable time frame.  The Q says:

“Our ability to obtain future financing or to sell assets to provide additional funding could be adversely affected because a very large majority of our assets have been secured as collateral under the credit agreement…. If we are required to fund our business and operations without outside capital, we will have to significantly reduce our spending and limit certain operational and strategic initiatives. These scenarios could materially adversely impact our liquidity and results of operations.”

Hopefully this is one drama that will be over soon and leave us with a happy ending.

Image source:  Blockbuster

But here at footnoted, we’re much more fascinated in the steady trickle of filings from banks that have chosen not to participate in the program. That’s right — they’re turning down the money! In our routine trawl of the filings, we’ve come across a dozen banks that have issued 8Ks in the past few days that essentially say “Thanks, but no thanks” to that taxpayer money. According to Keefe, Bruyette & Woods research, 29 banks had announced as of yesterday that they won’t be participating in the program.

Among the ones we’ve noticed are Bancfirst Corp. (BANF), which filed this press release in an 8K yesterday. In the release, Bancfirst notes that it would like to buy additional banks and that accepting the money would make that harder to do because “Congress has expressed concern about financial institutions accepting funding from the U.S. Treasury to fund the acquisitions of banks.”

New Jersey-based Investors Bancorp (ISBC) is also turning the Treasury down, saying that it has the ability to raise its own capital. California-based TriCo Bancshares (TCBK) also cited potential merger opportunities in the 8K it filed yesterday, with CEO Richard Smith adding that “those funds can be made available for others.” And, in its’ press release Defiance,Oh-based Rurban Financial (RBNF) sounded pretty defiant: “Our view is that some of the restrictions within the announced provisions of the Capital Purchase Program appear to limit our options. In our view, there also remain too many unknowns within the program for us to prudently enter the program.”

So while there’s likely to be more banks scurrying to make today’s deadline, there’s also some who, in the words of Nancy Reagan, are just saying no.

Henry Waxman just opened the hearing, noting that each of the five hedge fund managers made over $1 billion a year and that current tax rules allow them to be taxed at just 15% — “a lower tax rate than school teachers, firefighters and even plumbers.”

Stay tuned for more….we’ll be live blogging today’s hearing.

2:02 pm: Waxman wraps it up by saying he believes there’s been a consensus that hedge funds cause systemic risk and that the current tax system isn’t fair. Also thanked the witnesses for their thoughts on TARP. Time for lunch!

1:56 pm: Rep. Issa asks a question about calculating leverage.

1:50 pm: Rep. Van Hollen asks a question about regulators and asks whether the SEC or some other group should be able to go in and fix things. Soros, Paulson and Falcone agree. Griffin says rules need to be clear so that he knows how to run his business. Adds that there needs to be a solution to meet all financial markets.

1:44 pm: Rep. Cooper jokingly describes this hearing as Paulson v. Paulson and asks about differences between hedge funds that hedge and other types of funds and suggests that some, such as pension funds, may not know exactly what they’re investing in.

1:38 pm: Rep. Yarmuth asks whether the hedge fund managers have a concern about corporate governance and excessive compensation at public companies. Soros says he hasn’t thought about this a lot. The rest talk about the need for profit-sharing. (Ed comment: Nice save! Imagine the headline “Uber-rich hedge fund managers say corporate executives make too much!).

1:26 pm: After thanking Soros for his funding of needles, Rep. Cummings mentions the $1 billion that each of these managers made last year and asks whether the 15% tax rate is fair and asks Paulson in particular whether it is fair since he reportedly made over $3 billion last year. Falcone says that hedge funds should not be treated any differently than any other investor. Says that 98% of his income was taxed as regular income last year. Cummings asks whether the managers would agree to a repeal of the carried interest portion. Soros and Simons agreee. Paulson says it’s “not a loophole”. Griffin makes a distinction between long-term gains and short-term gains.

1:20 pm: Rep. Shays is up again and asks whether income should be taxed as capital gains or earned income. Then he drills into Griffin about costs and asks whether funds that Griffin has his money in have done better than those that he doesn’t have his money in. Griffin quickly shoots him down. Shays seems pretty testy and quickly cuts the witnesses off.

1:13 pm: Griffin says “thousands of high-paying jobs” have been pushed overseas due to too much regulation.

1:06 pm: Rep. Souder scolds Soros for his support of certain drug policies, such as needle exchange programs. (And you thought this was a hearing about hedge funds).

12:44 pm: Rep. Davis asks if there a danger of too much transparency in the hedge fund industry. Griffin says disclosing to regulators is fine, but disclosing to the public would be akin to disclosing the secret formula of Coke to the public. The other managers essentially agree. Davis also asks for the fund managers’ opinions on TARP. Griffin says buying stakes is a good thing, but says where “do we draw the line” outside of the non-banking sector. Falcone says TARP “is a safety net” but that it shouldn’t be used for virtually anyone. Paulson says “list of recipients needs to be expanded to other types of financial firms” including auto finance firms, insurers and others. Says that any company that gets government money under TARP should eliminate cash dividends and that compensation and bonuses should be subject to restrictions. Simons says something has to be done with the assets. “It’s a problem and it’s a big problem.”

12:34 pm: The Q&A part starts and Waxman kicks it off by asking whether the collapse of large hedge funds poses systemic risk and whether that means there should be greater regulation. Soros, Simons and Falcone essentially say yes to both. Paulson says problem is due to too much leverage and that there needs to be more stringent leverage requirements on banks and financial institutions. Notes that not one dollar of the $700 billion in bailout money has “gone to support hedge funds” and cites money given to AIG and GE. Griffin says that private market solutions are the best way to fix crises. Adds that hedge funds are already heavily regulated.

12:29 pm: Ken Griffin of Citadel talks about Citadel’s size (enormous!). “In this crisis the concept of too interconnected to fail has replaced the concept of too-big-to-fail.” Talks about $55 trillion in CDS and says the number is “four times the GDP” of the nation. Suggests a central clearinghouse to correct this problem and says Citadel has begun to build one. “Our markets work best when they are competitive, fair and transparent.” Says Congress, regulators and industry needs to work together.

12:21 pm: Philip Falcone makes four points: Compensation in the hedge fund industry is performance based. Hedge funds use a variety of strategies. Short-selling is a valuable long-standing feature of our markets. And he supports greater transparency and better reporting in the industry. Gives some personal background to say he “wasn’t born on Fifth Avenue” and that good luck and hard work got him where he is today. Says hedge funds need to be looked at as part of the solution for the current turmoil.

12:15 pm: John Paulson of Paulson & Co. says that his fund is good for the economy — growing the number of high-paying jobs 10 times over the past 10 years. Says that in 2005 his fund became very concerned about economic climate and that he purchased CDS leading to substantial (a minor understatement) gains.

12:08 pm: Jim Simons of Renaissance Technologies says rating agencies are “the most culpable” because they allowed “sow’s ears to be sold as silk purses.” Says Renaissance models “tend to be contrarian” and that he stays away from the “alphabet soup” — CDS and CDOs — that Soros just mentioned. Simons goes on to answer the questions that were posed to him prior to the start of the hearing. Adds that he has no problem with changing the tax rules on carried interest, but that it should apply to all such partnerships, not just hedge funds. Says most important thing right now is to keep people in their homes. And he says that there needs to be a new rating agency — “a new non-profit rating agency” that rates derivatives.

Noon: After a brief break, George Soros is up and he’s sticking pretty closely to his prepared comments. “Financial markets are proven to produce bubbles.” Says that regulators have to accept responsibility for controlling bubbles and they also have to control credit. Talks about an “alphabet soup” of new products that are impossible to currently measure and says regulations need to be global in scope. “The entire regulatory framework needs to be reconsidered. But we have to be careful of going overboard. There’s a real danger that the pendulum will swing the other way.” Says regulators aren’t just human, but also bureaucratic and susceptible to political influences. Says amount of money under management will shrink by 50 to 75% and that ill-considered regulations will only worsen the impact.

11:50 am: Rep. Shays (who recently lost his re-election bid) and who notes that he probably represents the largest concentration of hedge fund managers probably in the country (Greenwich) asks whether there was evidence that an implosion was imminent. Also asks whether a centralized exchange would have prevented the problem.

11:44 am: Rep. Van Hollen asks about what additional powers be given the SEC. Ruder says information on risks and leverage should go to the Federal Reserve. Ruder responds saying, “I think it would be wrong for some government agency to tell investors what their leverage should be. Van Hollen also asks about disclosing short positions. Lo responds that he could see a 13-F filing for short positions, but not necessarily one that would be made public.

11:37 am: Rep. Sarbanes asks about exemption for so-called sophisticated investors and asks whether this concept needs to be reassessed.

11:32 am: Rep. Cooper asks whether speculative hedge funds should really be called speculative funds and says pension fund managers don’t really know what they’re getting.

11:15 am: Rep. Lynch asks whether there should be something like a National Safety Transportation Board for hedge fund blow-ups. Lo says that this is a sensible approach.

11:10 am: Rep. Souder says “some of this has to be blamed on incompetency of management and nobody is willing to take the blame. Nobody in the private sector and nobody in government.”

11:01 am: Rep. Tierney asks what happens to the hedge funds that “go under”. Lo says that’s the purpose of greater transparency to see whether this might be a significant market event. Tierney also asks how imploding hedge funds will impact “Main Street”.

10:56 am: Rep. Issa says doctors have the same opportunity as hedge fund managers to get preferential tax treatment due to capital gains. Now asking Ruder about regulations for hedge funds and wants to know what size would exclude them from potential additional SEC regulation.

10:50 am: Rep. Cummings asks about tax rates for hedge fund managers and asks Prof. Bankman to compare that 15% to some other occupations, including teachers, firefighters and plumbers and notes that these people are paying around 25%. Asks whether Joe the Plumber is being taxed at a higher rate than Joe the fund manager. Ah — the return of Joe the Plumber. It took a little over a week!

10:44 am: Rep. Tom Davis asks witnesses whether hedge funds are properly regulated. Rudin says no and that there’s a need for greater transparency. Lo agrees with him that there’s a need for more information. Shadab says that hedge funds tend to take care of their own messes and notes that new funds are being created today, which shows the vitality of the market.

10:33 am: Houman Shadab, a Senior Research Fellow at the Mercatus Center, George Mason University says that “Hedge funds did not cause the financial crisis. They have made markets more stable.” Says that changing how hedge funds are regulated could lead to more financial instability. “When hedge funds get companies to more properly manage their businesses it helps companies run more efficiently.” Lawmakers should make it easier for hedge funds to invest in banks. Suggests also making it easier for ordinary investors to invest in hedge funds.

10:30 am: Joseph Bankman of Stanford University’s Law School is addressing tax issues related to hedge funds and debunks arguments that the capital gains tax rates are fair due to the amount of risk that is being taken.

10:23 am: Andrew Lo of MIT’s Laboratory for Financial Engineering notes declining assets and leverage of hedge funds over the past year and says several thousand will be going out of business. Lo compares hedge funds to banks. “Hedge funds now provide many of the same services as banks, but unlike banks are outside the Federal Reserve System. When hedge funds were a cottage industry, this wasn’t a problem.” But over the past few years, locked in heated competition with one another seeking that extra bit of yield. Lo also notes that banks have also become more like hedge funds. “The economic free-for-all is one of the reasons for the magnitude of the current problem.”

10:20 am: David Ruder calls for some new regulations including reporting the “size and nature of hedge fund risk positions and the nature of their counter-parties” to the SEC, but that the information wouldn’t necessarily be made public. Ruder says to deal with this, the SEC’s budget would need to be expanded dramatically. He adds that this information should be shared with the Federal Reserve.

Some companies — Google (GOOG) is just one that comes to mind here — are playing coy and saying they have no idea how much this will impact them because the legislation, which was signed on Oct. 3, happened after the close of the quarter. Here’s how Google put it in its 10Q filed on Friday:

On October 3, 2008, the United States enacted a law, the “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008″. Under this act, the federal research and development credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. The effects of these changes in the tax law will be determined and recognized in the fourth quarter, which is the quarter in which the laws were enacted.

But other companies have been able to predict the likely impact, including DRS Technnologies (DRS), which estimated a $1.6 million benefit, Lam Research (LRCX), which estimated a $14 million to $18 million benefit, Verisign (VRSN), which estimated a benefit of $4.5 million to $6 million.

We’ll continue to keep an eye out for these benefits. Given the retroactive nature of the credit, we’re guessing that there’s some heavy duty number-crunching going on as we type.

We have had significant losses from 2005 through the nine months ended September 30, 2008, attributable to operations and to restructurings and other charges such as support for Delphi and future cost cutting measures. We have managed our liquidity during this time through a series of cost reduction initiatives, capital markets transactions and sales of assets. However, the global credit market crisis has had a dramatic effect on our industry. In the three months ended September 30, 2008, the turmoil in the mortgage and overall credit markets, continued reductions in U.S. housing values, historically high prices for energy, the high likelihood that the United States and Western Europe have entered into a recession and the slowdown of economic growth in the rest of the world, created a substantially more difficult business environment.

And, just in case it’s not exactly clear what GM thinks needs to be done, the 10Q goes on to say that, “We do not believe it is likely that these adverse economic conditions, and their effect on the automotive industry, will improve significantly in the near term, notwithstanding the unprecedented intervention by the U.S. and other governments in the global banking and financial systems.”

And, just in case there’s still some doubt over exactly how troubled GM is — cue the club over the head here –  the company mentions the words “going concern” — an accounting-speak term that scares the daylights out of most investors — no fewer than 15 times in the filing.

The filing also mentions the discussions with various members of Congress as well as the discussions last month with Chrysler, though neither Nancy Pelosi nor Chrysler is actually named in the filing.

Meanwhile, Bill Ackman has somewhat different advice for GM: file a pre-planned bankruptcy.

So grab another cup of coffee and tuck into GM’s filing. At 337 pages, you should be done in time for lunch, assuming that you skim.

Image source: Associated Press

While there were a few things that caught our attention back then, such as the generous handouts given the state of the company including a $250K signing bonus to cover travel and other expenses between Marcum’s home in New Hampshire and the company’s headquarters in Richmond, Va., it was the language in Marcum’s contract — specifically the language that spelled out a liquidation scenario — as one of the change in control provisions that really made us pay attention. I’ll leave it up to the lawyers to figure out whether the language in Marcum’s contract means he’ll collect due to today’s filing. But to me, it seems like the “consummation of a reorganization” seems to apply here.

There was one other thing that didn’t catch our attention at the time: this 8K that Circuit City filed when it announced Schoonover’s departure as well as better-than-expected results for the second quarter. Though the filing didn’t include a separation agreement, it did note that Schoonover would get a year’s salary and another $900K for his targeted bonus as well as two years of continued health benefits. No word on whether he gets to keep the equipment that we’ve footnoted about before.

Over at FootnotedPro we have a new post up about the impact of margin calls that includes a spreadsheet of October margin calls that is only available to FootnotedPro subscribers.