Michael Erlanger referenced in September Issue of Rough Notes

In his latest column in the September issue of Rough Notes, “AIG and the Meth Labs of Finance: How the GLBA came to replace Glass-Steagall and led us astray”, Kevin P. Hennosy references a letter to the editor written by Michael Erlanger in response to one of his earlier columns.

“I was pleased to receive and interested to read Mr. Michael Erlanger’s letter to the editor, (page 10 of the August issue) concerning my column in the June 2011 edition of Rough Notes.

Mr. Erlanger offers an insightful and well-reasoned response on the commentary that I offered with regard to the failure of American International Group (AIG). In general terms, I agree with his assessment, although he is correct that I place more blame on American insurance regulators than I believe he does.”

Mr. Hennosy goes on to explain the history of Glass-Steagall and its replacement, the GLBA, and to claim that the repeal of Glass-Steagall was a mistake, and that the GLBA should be repealed instead.

Both articles and Michael Erlanger’s response make interesting reading, and we highly recommend taking a look.

You can read the entire column here.

You can also click here to read the original column in the June 2011 Issue of Rough Notes, “Supervision & Regulation Aren’t The Same: NAIC chief rejects McCarran-Ferguson Act, again and again.”

And finally, you can read Michael Erlanger’s response here.

Posted in 2 Press, Financial Crisis | Tagged , , , , , , , ,

Marketcore Receives Patent for ‘Informational Netback’ System

Marketcore Receives Patent for 'Informational Netback' System, Securities Technology Monitor, by Tom Steinert-Threlkeld, 9/28/11

Click on thumbnail to read "Marketcore Receives Patent for 'Informational Netback' System", Securities Technology Monitor, by Tom Steinert-Threlkeld, 9/28/11

From Securities Technology Monitor, September 28, 2011 by Tom Steinert-Threlkeld:

Marketcore said it received a patent for an “informational netback,’’ where financial market participants are compensated for revealing risks in contracts they undertake.

The patent, styled as Efficient Markets for Financial Products (US Patent 8,027,909), is the third that Marketcore has received. Marketcore is a Connecticut developer of systems for mitigating risks, primarily in fixed-income markets.

This patent covers a system where market participants provide details on the risks involving in financial products and transactions they are involved in. Typically, in the Marketcore approach, contributors of information the market needs to understand risk are compensated for providing such information.

The credits they receive can be applied to acquiring similar information from the marketplace, when pursuing other transactions.

In this case, the “netback” facilitates and compensates market participants for revealing risks in financial contracts.

Marketcore is run by Michael and Constance Erlanger, who founded IPEX, LLC, an institutional whole loan brokerage, which handled orders as large as $5 billion across 60 different types of financial instruments.

To date, Marketcore’s work has been licensed multiple times for applications in the origination of insurance. The company has been pushing for its risk-mitigating technology to be used in fixed-income and other securities markets.

Previously, it received a patent for a data processing system that measures risks in bond markets and acts as a “ticker tape” for prices and values of loans, lines of credit, insurance and reinsurance…

Read the rest of the article in Securities Technology Monitor.

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Informational Netbacking Patent Issued to Marketcore

WESTPORT, CT – Marketcore.com, Inc. has been granted a third patent, Efficient Markets for Financial Products (US Patent 8,027,909). This patent relates to collecting financial product application and transaction information, providing the risk-detailing information to participants in financial and derivative markets, using an enabling mechanism, a netback, that facilitates and compensates market participants for revealing risks in financial contracts. Marketcore develops solutions to those problems underlying financial markets, which negatively impact efficiency and profitability. The Company’s solutions have application in all markets for all financial products. Marketcore works with its partners in the development of these solutions and their deployment in credit markets, and in the insurance/reinsurance markets. Marketcore’s work has been licensed multiple times for applications in the origination of insurance.

About Marketcore®

Founded in 2000, Marketcore (www.marketcore.com) is a privately held company based in Westport, CT. The Company focuses on creating tools that improve operating efficiencies, liquidity, value enhancement and risk assessment for the financial services industry. Marketcore’s work has been uniquely recognized by the Congressional Research Service (CRS) in their November 2008 “CRS Report for Congress”. The Congressional Research Service is a legislative branch agency within the Library of Congress, providing bi-partisan policy and legal analysis to the House and Senate

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AIG’s downfall and the transparency of derivatives

The following letter to the editor by Michael Erlanger appeared in the August issue of Rough Notes in response to Kevin Hennosy’s article in the June 2011 issue of Rough Notes, “Supervision & Regulation Aren’t the Same” :

I read with interest Kevin Hennosy’s article, “Supervision & Regulation Aren’t the Same,” in the June 2011 issue of Rough Notes.

I understand that many of Mr. Hennosy’s articles focus on the McCarran-Ferguson Act, as this one does. However, the Gramm-Leach-Bliley Act, like the McCarran-Ferguson Act, is the law of the land. Unless and until Congress repeals it, its provisions are the guidance regulators must use.

My perspective is different from Mr. Hennosy’s. He assumes that AIG is an insurance company rather than a conglomerate. At its peak, AIG was involved in more non-insurance activities than it was in U.S.-based insurance. To suggest that U.S. insurance regulators ought to be regulating airplane leasing operations, aircraft sales, advice on airline route planning, or the AIG insurers domiciled in other countries—or the AIG Financial Products Corporation based in the United Kingdom—would be granting U.S. insurance regulators a lot more power than Congress (or anyone else) has or should provide to them.

In AIG’s case, Dr. Vaughan was correct: Regulatory arbitrage was evident. The AIG leaders picked the Office of Thrift Supervision as its de facto U.S. regulator. However, the AIG Financial Products Corporation was located in the U.K. Thus, it is the U.K.’s Financial Services Authority that should have been charged with watching over the AIG Financial Products Corporation. Neither regulator did. As a result, we have all suffered from the fallout.

What really occurred was that the deals consummated with AIG Financial Products Corporation were completed in a regulatory vacuum. Ordinarily, free markets operate quite well without much oversight as long as everybody knows the rules and plays by them. In this case, there were no rules and the supposedly sophisticated parties to the transactions took advantage of each other at every turn. The arrogance of managers at AIG Financial Products allowed the corporation to be duped by a relatively small number of broker-dealers. Joseph Cassano was convinced that AIG would never lose a dime on these exotic transactions. All this noted, I agree with Mr. Hennosy’s point: It was AIG’s greed that led to its downfall.

Mr. Hennosy wants to blame the insurance regulators for AIG’s failure. While there is plenty of blame to go around, we would all be better served by carefully identifying the problem and addressing it. The problem was not lack of supervision or regulation; it was lack of transparency in the type of derivatives that AIG Financial Products Corporation and others were issuing—and the fact that AIG sought the protection of a failure in oversight that results from regulatory arbitrage. One cannot effectively supervise or regulate risks kept opaque and valued by proprietary models. To manage systemic risk, one must be able to see the dots in order to connect them so that all systemic risks can be known and quantified. Systemic risk regulators cannot connect the dots if no one regulator can see them.

There are two fixes that address this problem. One would involve a lot of potentially heavy-handed and expensive government regulation with as massive a data collection effort as the financial world has ever known. (This is the model under development to serve the needs of the Financial Stability Oversight Council.) The other solution is a cost-effective free market alternative. It is a private sector solution that, in its simplest form, matches buyers and sellers in a reasonably transparent, neutral environment so that all parties know what assets and risks are actually assembled in the resulting derivative product—and what these instruments are worth.

This solution has been adopted in the insurance sector by the LexisNexis Insurance Exchange. It is a model that is market neutral and “friendly” to all market participants: carriers, agents and brokers, and the consumer. In fact, this is so much the case that the participants refer to their model’s neutrality as “Switzerland.” I encourage your readers to visit our Web site to see an “Overview Demo” and other details of our proposal at http://www.marketcore.com and to learn more about our company’s role at http://www.lexisnexis.com/risk/insuranceexchange/marketcore.aspx.

(EDITOR’S NOTE: The previous link has been changed. The new link location is http://blogs.lexisnexis.com/insuranceexchange/about/partners/)

No one can attempt to fix the problem until they know the problem. Addressing the lack of transparency in capital market transactions and the job of supervising or regulating the insurance industry also gets easier. A significant benefit then occurs: confidence in market function is restored. Then we can all look forward (and with reasonable speed) to a much more prosperous future with greater financial market product differentiation for risk transfers of every sort with an accompanying and very significant increase in business volumes.

—Michael Erlanger
Managing Principal
Marketcore, Inc.

Posted in 3 Opinion, Financial Crisis | Tagged , , , , , , , , ,

Marketcore again featured in “Compliance Matters,” a publication of the Regulatory and Legislative Interest Group of the CPCU Society

Marketcore is once again featured prominently in Compliance Matters, a publication of the Regulatory and Legislative Interest Group of the CPCU Society.

The current issue, July 2011, includes an article written by Hugh Carter Donahue, Ph.D., entitled, “One Solution for Three Hundred Rules.”

According to the “Message from the Chair” of the CPCU Society Regulatory & Legislative Interest Group by Joseph F. Bieniek, CPCU, AIE, CCP, CIC, ARC, MCM, AIS, AU, AINS,

The article “One Solution for 300 Rules,” by Hugh Carter Donahue, Ph.D., is a follow-up to “It’s a Brave New World,” which we published in the June 2010 Regulatory & Legislative Interest Group newsletter. It provides some insightful commentary on how the actions of the financial sector impact insurers through the assets they hold. It is an interesting commentary on the civil war between Federal Reserve Chairman Ben S. Bernanke, Ph.D., and financial heavyweight Jamie Dimon, chairman and CEO of JPMorgan Chase, over whether the financial sector needs oversight or freedom to do what it did in the past.

(If you would like to see Marketcore’s coverage from that June, 2010 issue of Compliance Matters, click here.)

To read “One Solution for 300 Rules,” click on the thumbnails below. You can also click here to download the entire July edition of Compliance Matters.

One Solution for 300 Rules, Page 10, Hugh Carter Donahue, Compliance Matters, July 2011

Part 1

One Solution for 300 Rules, Page 11, Hugh Carter Donahue, Ph.D., Compliance Matters, July 2011

Part 2

Posted in 2 Press

Transaction Credits and Marketcore Patent discussed in July Issue of Risk Magazine

In response to the SEC’s solicitation of comments on various proposals to reform the institutional framework of credit ratings, David M. Rowe writes in the July, 2011 Issue of Risk Magazine that:

Trying to reform market structure in search of a non-existent objective measure of credit quality and associated risk amounts to a mission impossible.

He suggests instead that they should seek  “a framework that will make all the relevant data underlying such securities readily available in a standard format to a broad community of analysts.” He describes how Transaction Credits™ can be used to promote that structure, and then goes on to point out that the outline of such a system already exists, in the U.S. Patent granted to Marketcore and titled, Efficient Market for Financial Products. He concludes:

In the end, the SEC would do well to spend more time considering how to foster this type of institutional structure that encourages and rewards disclosure than in tilting at windmills in the belief that reshaping the credit rating market can produce uniquely reliable risk estimates of new, complex and historically untested financial instruments.

You can read the entire article by downloading the PDF here or read it below. (Please click on the image to see a larger version.)

Mission Impossible for Ratings, David M. Rowe, Page 60, Risk Magazine, July 2011

Posted in 2 Press, Financial Crisis, SEC | Tagged , , , , ,

Marketcore featured in March Issue of Risk Magazine

In his article in the March, 2011 issue of Risk Magazine, David M. Rowe describes a solution to the financial crisis that would “force greater disclosure and increase transparency for both market participants and regulators.” He concludes that such a system is in fact already operating: The LexisNexis Insurance Exchange, created in collaboration by Lexis Nexis, the Council of Insurance Agents and Brokers, and Marketcore.

You can download the PDF here, or read it below. (Please click on the image to see a larger version.)

Market-Driven Transparency, David M. Rowe, Pg. 85, Risk Magazine, March 2011

Posted in 2 Press, Financial Crisis

First mention of Marketcore’s technology and intellectual property in international press

Efficient Market Solution to the Economic Crisis

– Hugh Carter Donahue explains the Marketcore technology enables efficient markets to address and correct the asset crisis. The Elevator published Donahue’s article in its fall issue. You can read the article below. If you’d like to download a pdf of the article (immediately below) that includes the independently-chosen-by-the-editor views of the international financial trade, click here. (For more on The Elevator, see http://www.the-elevator.com.)

The Elevator, Issue XVII, Fall 2010

Efficient Market Solution to the Economic Crisis, Hugh Carter Donahue, Ph.D., excerpt from The Elevator, Issue XVII, Fall 2010 (Please click on image to see larger version.)

Efficient Market Solution to the Economic Crisis

Hugh Carter Donahue, Ph.D. investigates a way out of the current financial climate.

Two innovative information solutions are now in hand to reconstruct efficient markets: 1. a data repository, enabling disclosure and reporting to aggregate and clarify financial instruments, loans, mortgages, lines of credit, insurance, reinsurance and securitized risks and structured products, and 2. a transaction platform providing economic and strategic incentives rewarding disclosure.

Their consequential and transformative clarity will enable institutions, investors and citizens to recreate efficient markets. No matter how many times a risk, like a mortgage for example, has been sold and resold in secondary markets, the data repository and transaction platform enable efficient risk transfers which will support economic recovery.

Extensive broadband networks, robust, real-time data processing, falling storage costs, Internet ubiquity reaching to portable hand held devices and the potential efficiencies and cost savings of secure lockers in Internet clouds, constitute the information keys enabling institutions, investors and citizens to access and use the data repository and transaction platform.

The insurance industry is ahead of Wall Street, employing the data repository and transaction platform to stimulate efficient markets. This fall, building on innovations pioneered by intellectual property firm Marketcore, property agents and brokers will use a web based exchange enabling agents to submit applications and to evaluate availability, price and coverage of competing insurance products. The system will cut administrative costs for agents and enable brokers to reach multiple carriers with single data submissions. Insurance carriers will find it easier and cheaper to differentiate products. Customers will net cost savings thanks to more competitive comparisons. These are all attributes of efficient markets.

Systemic data repository and transaction platform adoption is crucial to prosperity. The 2008 Asset Bubble implosion, a $55 trillion “unrestrained book making paradise” in the words of one analyst, still hobbles. One in four hundred homes is in foreclosure according to RealtyTrac. Other experts caution of as many as 25 million home foreclosures by 2011. At the point in time when the U.S. concludes Iraq combat, Iraq tallies $5-12B/month; Afghanistan $5.5B/month, approximately $960,000,000,000 to more than $1,000,000,000,000 with goodly portions awarded to preferred vendors as no bid contracts. Boomers are switching to bonds from mutual funds at an historically high rate, $33B so far this year, placing wealth in debt instruments rather than stocks. Bush tax cuts have backfired. The wealthiest one percent of the population, those with incomes over $340,000/year received 40% of the Bush tax cut benefits. These wealthy Americans are not investing or, to the extent that they are, their investments are not stimulating aggregate demand. The US economy’s gasping for investment and employment.

Unfortunately, presidential and central bank initiatives are not yet nor seem robust enough to stimulate aggregate demand and spur national income. President Barack Obama’s stimulus is accomplishing all it was designed to do but is now pilloried for not spring boarding the economy to prosperity and is getting another iteration. The Federal Reserve Bank has kept short term interest rates close to zero for two years and it may buy additional government debt. The Fed has already purchased and holds $1 trillion plus home mortgages. Economist Alan Blinder recommends that the Fed cut interest rates on bank reserves to free up $1 trillion for investment. For all the promise of corrective regulation, Financial Reform Act loopholes diluting Volcker Plan stipulations still enable large banks to behave pretty much as they did during the Asset Bubble, say by executing client oriented trades pretty much as proprietary bets, among other ambits, and intermediary disclosure responsibilities remain maddeningly vague.

Given the powers of the financial services and military industrial sectors, a legitimate question arises as to what institutions, investors and citizens can reasonably do to reclaim their rightful places in the American economy. Innovations like the data repository and transaction platform remain the time tried solution.

Observing the transforming impacts of railroads and telegraphy on commerce and society in the 1840s, Ralph Waldo Emerson wrote “invention breeds invention. No sooner is the electric telegraph devised than gutta-percha, the very material it requires, is found. The aeronaut is provided with gun-cotton, the very fuel he wants for his balloon. When commerce is vastly enlarged, California and Australia expose the gold it needs. When Europe is over-populated, America and Australia crave to be peopled; and so throughout, every chance is timed, as if Nature, who made the lock, knew where to find the key.”

Too many people and too much wealth are being held hostage to remedial solutions, which still insulate a self-interested handful, who prosper by perpetuating inefficient markets premised on information asymmetry. Efficient markets, enabled by innovative information keys like the data repository and transaction platform providing granular, real time monitoring, data analysis and risk metrics, constitute the most viable pathways to stimulate sustainable investment, reanimate aggregate demand and reinvigorate national income.

© Hugh Carter Donahue
Hugh Carter Donahue publishes widely on communications markets, policies and innovations and consults on communications policy and commerce. Donahue earned a Ph.D. in Communications and Policy Analysis from MIT.

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Patent Awarded for “Ticker Tape” Identifying Risks in Bond Markets

From Securities Technology Monitor, August 18, 2010, by Tom Steinert-Threlkeld:

“A Connecticut intellectual property development firm said it had received a patent for a data processing system that measures risks in bond markets and acts as a “ticker tape” for prices and values of loans, lines of credit, insurance and reinsurance.

Marketcore said it received patent 7,742,966 from the United States Patent and Trademark Office on June 22 for its creation of an “Efficient Market for Financial Products.”

In its system, the Westport, CT, company maps out a process whereby…”

Read the rest of the article in Securities Technology Monitor

Posted in 2 Press

Comments on Proposed Rule on Consolidated Audit Trail, August 10, 2010

The following public comment was provided to the SEC on their proposed rule that would “require national securities exchanges and national securities associations (“self-regulatory organizations” or “SROs”) to act jointly in developing a national market system (“NMS”) plan to develop, implement, and maintain a consolidated order tracking system, or consolidated audit trail, with respect to the trading of NMS securities.”

Subject: File No. S7-11-10
From: Michael Erlanger
Affiliation: Managing Principal, Marketcore, Inc.

August 10, 2010

Sirs —

We suggest that this file be expanded to look at the creation of the instruments that underly the securities that make up MBS and ABS — and their actual performance across their full life cycle, inclusive of information captured at every intermediation.

If you think of it, only such a process could have predetermined that this current crisis would have started through excesses occurring in product creation and their aggregation for loans and lines of credit.

We have previously discussed this matter with the SEC’s Jonathan Sokobin and a wider range of individuals at Treasury Department and other senior regulators. As we consider the implications of data capture for protection against systemic risk, it should be a requisite.

Our work in this area has captured the interest of a large group of regulators, legislators and was a part of a CRS Report for Congress.

Sincerely Yours,

Michael Erlanger
Managing Principal
Marketcore, Inc

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