Like a seething insect infestation that grows exponentially if left unattended, the recent proliferation of positive propaganda courtesy of the talking-heads over at CNBC is at best misleading and at worse dangerously irresponsible in its presentation. Many would have you believe that the recession is over, in fact many have purported that not only is the worst behind us but indeed we’re in a new bull market (say what?) and that a prosperous recovery interlaced with growth and renewed consumer confidence is right around the corner.
Quick, pour your money back into equities, and go buy a car, or a house (or both), and take out some new credit cards because you don’t want to get left behind! While I may subscribe to the theory that the worst of this recession has past I do not agree that we’re out of the woods. In point of fact, just because things are getting ‘less bad’ doesn’t mean they’re getting better…
Let’s look at this in several contexts: firstly, credit is still scarce both for consumers and businesses; banks have tightened their lending standards drastically and have raised their risk tolerance levels significantly. Until mainstream credit markets become more liquid one cannot call this a recovery.
Secondly; Q2 corporate earnings were touted as “strong”, and “beating expectations”. Let’s agree that the expectations were set artificially low in the first place, and let’s also acknowledge that profits earned as a result of cost savings are not the same as profits earned from an increase in revenue. You can’t save your way to profitability. At best these “earnings” which are a result of savings from massive layoffs, reductions in capacity and clever accounting entries are one-time events and cannot be repeated every quarter. Until demand for goods and services returns to the market place and corporate earnings are the result of incremental increases in revenues then one cannot call this a recovery.
Thirdly, and perhaps most important, is employment (or lack thereof). The equity markets rejoiced in the “reduction” of June unemployment from 9.5% to 9.4%. Are you kidding me? A tenth of a percent drop in unemployment is by no means a cause for celebration; similarly, the fact that only 250K people lost their jobs last month is equally no reason to call this a recovery. While the unemployment number was less than expected, it only suggests that the pace of job loss is slowing (which is good) but does not show job creation which is a critical component to any recovery.
Unemployment might be bottoming but lets not forget that this economy has shed nearly 7 million jobs and the Obama administration planned their recovery and fiscal budgets on 8.5% unemployment (which they said we wouldn’t surpass) which we’ve blown through like a runaway train. Unemployment is supposed to top 10.5% next year and while, yes, this is a “lagging indicator” in a technical sense it’s still a very real component in a physical sense when you picture the 7 million people sitting at home every day not working.
What I’m trying to say here is don’t believe the hype. The equity markets have come too far too quickly with no reasonable fundamental explanation. Don’t rely on the news anchors alone to tell you this recession is over, and certainly take everything CNBC says with several grains of salt. Until we start to see credit flowing again, incremental increases in corporate revenues based on real demand, and job creation (and not just Government jobs) it is not fair for anyone to call this a recovery.
Sound Off: Do you think the economy is actually getting better, or just less-bad?
Thomas Jefferson was arguably one of the greatest men in our country’s founding history, and was a brilliant thinker – a true renaissance man. It has been said the greatest volume of sheer brainpower in one place occurred when Jefferson dined alone…
Below are some quotes from Thomas Jefferson, which are as relevant today as they were when he stated them. They pertain not only to the issues which were prevalent during the first few decades of our country, but they are important now as conceptually our country may be on the verge of either making significant mistakes with serious implications or potentially changing the future for the better (for once!) [Especially read the last quote from 1802.]
“When we get piled upon one another in large cities, as in Europe,
we shall become as corrupt as Europe.”
Thomas Jefferson
“The democracy will cease to exist when you take away from those
who are willing to work and give to those who would not.”
Thomas Jefferson
“It is incumbent on every generation to pay its own debts as it goes.
A principle which if acted on would save one-half the wars of the world.”
Thomas Jefferson
“I predict future happiness for Americans if they can prevent the
Government from wasting the labors of the people under the pretense of taking care of them.”
Thomas Jefferson
“My reading of history convinces me that most bad government results from too much Government.”
Thomas Jefferson
“No free man shall ever be debarred the use of arms.”
Thomas Jefferson
“The strongest reason for the people to retain the right to keep and bear arms is, as a last resort, to protect themselves against tyranny in government.”
Thomas Jefferson
“The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants.”
Thomas Jefferson
“To compel a man to subsidize with his taxes the propagation of ideas which he disbelieves and abhors is sinful and tyrannical.”
Thomas Jefferson
Thomas Jefferson said in 1802:
“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered..”
IS THERE ANOTHER “THOMAS JEFFERSON” OUT THERE? WE SHOULD HOPE AND PRAY THERE IS ONE!
Sound Off:Do you feel that these quotes rendered over 200 years ago are relevant in today’s context given our current economic and political environment?
It’s up – it’s down – it’s flat… Oil supply is building, wait, it’s decreasing. The weak dollar is effecting prices, no, wait – it’s the speculators, or maybe demand…
The foregoing jibber-jabber is a small sample of the back-and-forth opinions being presented recently over the relative spike in oil prices from the lows over the winter through the current period. It has been difficult for oil to pick a solid direction recently, though; it is decidedly up over 100% in the last six months.
The uncertainty in the price of oil and, therefore the tremendous differentiation of opinion by pseudo-economic experts alike is predicated on a series of significant discrepancies in the underlying fundamentals, or lack thereof.
Last summer we saw the price of oil reach an all-time high near $147 a barrel. This was attributed after the fact to speculators as opposed to a genuine increase in prices based on increase in demand. Now, the price per barrel is more than half that price but has increased drastically of recent, perhaps in a similar speculative fashion.
The problem at large is that the supportive fundamentals in the marketplace are not there. There has been a drastic reduction in capacity coupled with a complete retreat in spending by the consumer. Unemployed people tend not to drive too much…
Furthermore, though OPEC has reduced production in an effort to maintain price stability they have been unable to match the pace with which demand has paired off. We have seen a significant build in oil supplies and a relatively little increase and, in fact, a general decrease in demand which has attributed to the price reduction per barrel.
However, one cannot ignore the recent spike in prices. Of course, the bulls insist that higher oil prices are supportive of an overall recovery due to the return in demand. I don’t buy it. We cannot rely on Joe Consumer anymore to lift us out of the economic hole. This is evidenced by the recent run in oil to the mid $70’s followed by a retreat to $60.
As far as long term projections there is some agreement that prices will likely go up. Many are calling for a return to oil north of $100 by 2011/2012. If this is accurate, then I would suggest you buy some Exxon/Mobile (ticker: XOM), or United States Oil Fund (ticker: USO) as long term investments – meaning, buy them now and don’t watch them day to day but have it in your mind that in three years they’ll yield a significant return.
If you’re looking for more short term exposure (arbitrage) in the volatility of oil prices I would stick to the ETF’s; namely UCO (long oil) and SCO (short oil). However, be weary of the news and learn to read between the lines. If you choose to play short term then keep watchful eyes on inventories including crude, distillates, and gasoline. Do your homework and know when the inventory data gets reported and be prepared to be nimble and execute trade orders promptly.
Adhering to the later strategy helped me add a 20% return in one month using the same ETF’s I stated above.
Happy Investing.
Sound Off:Do you believe that oil prices are going up in the short term? Long term? Do you believe that it’s mostly speculation, or genuine influence from supply/demand?
As we saw just a week ago, Bernard L. Madoff was sentenced to 150 years in Federal prison. While him going to jail with effectively a life sentence closes one chapter in the Madoff drama it leaves other chapters without closure.
However, I ask the question, “What has really changed”? Are we to believe that because Madoff went to jail, or, Alan Stanford is about to go to trial (and likely to jail) that we as a general investing public are any better off than we were before? Is our money somehow less at risk because these men were caught? I’m sure that the stories of Bernard Madoff and Alan Stanford will be taught in business schools as famous examples of fraud; likely topping the former king fraudsters of Kenneth Lay (Enron) and Jordan Belfort (Stratton Oakmont). However, no one can guarantee that other people will not perpetrate another fraud similar to these aforementioned characters.
In point of fact, there has been a party to all of these frauds past and present which has gone largely unpunished: the Securities and Exchange Commission (SEC). The SEC received warnings about Bernard Madoff in the late 90’s, and as recent as 2004/2005, yet they did nothing. The SEC received notices and began “probing” R. Alan Stanford’s bank and associated businesses as far back as 2000. Yet, nothing was pursued vigilantly and nothing came to light until arguably too late and too many people got hurt.
So what has changed? Is the Securities and Exchange Commission better prepared to spot fraudulent investment schemes in the future? I doubt it. Unfortunately the SEC is a mish-mosh of red tape and political cock-fighting which, in my opinion, does nothing but get n the way of effective regulation and thus ultimately harms the individual investor in the process. The victims of these frauds need to be made whole or, to the extent possible be compensated for their losses (though by no means do I support the Government bailing out fraud victims). BUT… the SEC needs to take some blame beyond their quiet admission that they ‘may have dropped the ball’.
In my opinion the Securities and Exchange Commission has not properly leveraged in assets in terms of its ability to properly regulate, investigate, and protect the investing public. I’m happy that Bernard Madoff went to jail and Stanford will get his too, but I’d like to see someone over at the SEC catch more heat than being “reassigned” to an alternative sub-department and actually accept some responsibility.
Sound Off: Should people who had knowledge of, or, ignored the signs of Madoff and other fraudsters be sent to jail also?
Today was judgment day for Mr. Bernard L. Madoff, the poster child of ponzi scheme’s. Arguably the largest investment fraud, ever, Bernie Madoff – who operated Bernard L. Madoff Investment Securities duped investors out of purportedly $65 Billion.
After all is said and done, the judge threw the book at Madoff today handing down a ridiculous sentence of 150-years. Let’s be clear: We here at theymadoffwithyourmoney.com applaud his arrest, guilty plea, and subsequent sentencing. While we agree that Bernard Madoff deserves to spend the rest of his life in jail the actual number of years handed out doesn’t really mean anything (the guy is 71 years old – even a 30 year sentence is a life sentence).
Though largely symbolic, the sentence does not offer the victims of Bernie Madoff any restitution or closure other than the obvious knowledge that Madoff will die in prison. Many investors will never see their money returned, especially those who invested through feeder-funds or funds-of-funds; the Securities Investors Protection Corp. (SiPC) is not recognizing losses related to Madoff that were incurred through investment with third parties (like feeder funds).
So what does this all mean? Sadly, essentially nothing. While Madoff will rot in a dank jail cell for the rest of his years, his wife and kids will continue to live free (for now) and the victims will largely never be made whole. The trustee overseeing the liquidation of Bernard L. Madoff Investment Securities, Irving Picard, has only recovered slightly more than $2 Billion which is nowhere near the amount purportedly absconded with.
This is a horrible case, and has caused tremendous heartache, stress, and has destroyed peoples families. We’re glad he will spend the rest of his days in jail, but this is just the closure of one chapter. The real recovery for the victims has yet to begin.
Sound Off:
Do you feel 150 years means anything other than the symbolic meaning? Do you think Madoff deserved more/less?
Have you ever heard of Lou Pritchett? He is the former Vice President of Procter & Gamble (retired in 1989); he also wrote a very well recognized business book in 1995 entitled, “Stop Paddling & Start Rocking the Boat”.
Lou Pritchett recently wrote an open letter to President Obama. He sent this letter to the New York Times who ignored the letter. It was only through exposure on the internet that Lou Pritchett’s letter received any acknowledgments.
In my opinion his letter is right on. It emphasizes concerns and fears that I believe many Americans are starting to develop about our current President and, more specifically, the agenda he seems to be pushing and what the long term implications of that agenda are.
What troubles me about how Lou Pritchett’s letter was treated by the New York Times, for all intensive purposes an extremely left wing publication, is that as our country made this supposed leap of “Hope” it has become apparent that anyone who doesn’t “Believe in Change” or at least, the kind of change being promoted by the current Administration, is wrong. In point of fact, as I watch the mainstream media go through the motions of the current events and topics, it is apparent that any discussions opposing the ideology of the current President and his Administration is quickly suppressed or worse, dismissed as irrelevant.
Being conservative, or event moderately conservative in our current political environment is viewed as a faux pas. People like Shaun Hannity, Glenn Beck, and Rush Limbaugh get castrated for giving their opposing points of view. Worse, the only defense that the Probama liberal lunatics seem to be able to muster up is, “Hey, we won”, or, “We’re still cleaning up after the last eight years”. Poor excuses and explanations without any sustentative merit.
I fear that if this mentality continues that we’ll be in jeopardy of destroying our core values as Americans and adopting a socialistic, suppressive environment which will be not result in prosperity for all but rather a few who know how to play politics (more on this concept in posts to come). The following are the words of Lou Pritchett in his open letter to President Obama:
Dear President Obama:
You are the thirteenth President under whom I have lived and unlike any of the others, you truly scare me.
You scare me because after months of exposure, I know nothing about you.
You scare me because I do not know how you paid for your expensive Ivy League education and your upscale lifestyle and housing with no visible signs of support.
You scare me because you did not spend the formative years of youth growing up in America and culturally you are not an American.
You scare me because you have never run a company or met a payroll.
You scare me because you have never had military experience, thus don’t understand it at its core.
You scare me because you lack humility and ‘class’, always blaming others.
You scare me because for over half your life you have aligned yourself with radical extremists who hate America and you refuse to publicly denounce these radicals who wish to see America fail.
You scare me because you are a cheerleader for the ‘blame America’ crowd and deliver this message abroad.
You scare me because you want to change America to a European style country where the government sector dominates instead of the private sector.
You scare me because you want to replace our health care system with a government controlled one.
You scare me because you prefer ‘wind mills’ to responsibly capitalizing on our own vast oil, coal and shale reserves.
You scare me because you want to kill the American capitalist goose that lays the golden egg which provides the highest standard of living in the world.
You scare me because you have begun to use ‘extortion’ tactics against certain banks and corporations.
You scare me because your own political party shrinks from challenging you on your wild and irresponsible spending proposals.
You scare me because you will not openly listen to or even consider opposing points of view from intelligent people.
You scare me because you falsely believe that you are both omnipotent and omniscient.
You scare me because the media gives you a free pass on everything you do.
You scare me because you demonize and want to silence the Limbaugh’s, Hannitys, O’Relllys and Becks who offer opposing, conservative points of view.
You scare me because you prefer controlling over governing.
Finally, you scare me because if you serve a second term I will probably not feel safe in writing a similar letter in 8 years.
Lou Pritchett
Note: Lou Pritchett is a former vice president of Procter & Gamble whose career at that company spanned 36 years before his retirement in 1989, and he is the author of the 1995 business book, Stop Paddling & Start Rocking the Boat.
Mr. Pritchett confirmed that he was indeed the author of the much-circulated “open letter.” “I did write the ‘you scare me’ letter. I sent it to the NY Times but they never acknowledged or published it. However, it hit the internet and according to the ‘experts’ has had over 500,000 hits.
Sound Off: Do you think that the liberals in our political environment are suppressing opposing points of view? Are you scared by, or at least in certain respects agree with Lou Pritchett’s point of view?
…it’s funny how things tend to repeat themselves throughout history. We often find the words of wisdom from years past serving us well at points in the future.
Currently our Country is in the midst of a very serious economic recession. Irrespective of what the media pundits, prObama supporters, and Government officials may say this is not over yet. Will it get better eventually; yes – soon, maybe…but maybe not.
There has been a lot of focus and attention on how our Country is going to pay for all the debt we’re creating. Simply put, the plan is basically to tax the shit out the rich and punish large corporations with extra taxes for revenues earned overseas – all while giving the “average joe” a “better shot” (a.k.a. a handout).
I believe that we’re on the path to create a huge gap in our society within this country. I believe the middle class is being destroyed; I believe we’re going to have a disparity in the classes analogous to the way we had disparity and inequality in the races during the first half of the last century. I believe that people will be punished through taxes for being successful. I worry hat we’re rapidly devaluing our currency and creating an impossible burden of inflation and debt that even our children’s children will be paying off long after we’re gone.
…I’m truly concerned about the state of our economy and country.
The following words are from Abraham Lincoln, and in the context of my first paragraph I ask, where has the wisdom gone?
You cannot help the poor by destroying the rich.
You cannot strengthen the weak by weakening the strong.
You cannot bring about prosperity by discouraging thrift.
You cannot lift the wage earner up by pulling the wage payer down.
You cannot further the brotherhood of man by inciting class hatred.
You cannot build character and courage by taking away people’s initiative and independence.
You cannot help people permanently by doing for them, what they could and should do for themselves.
…..Abraham Lincoln
Sound Off: Do you think that we’re on the right track towards prosperity, or, are we creating larger problems down the road?
During the Great Depression the ice cream flavor “Rocky Road” was introduced. As everyone’s favorite recession treat grew in popularity, that flavor is still around and popular today.
In honor of the 44th President of the United States,TheyMadoffWithYourMoney.com has introduced a new flavor of ice cream to compliment our modern day struggles: “Barocky Road”.
Barocky Road is a blend of half vanilla, half chocolate, and surrounded by nuts and flakes. The vanilla portion of the blend is not openly advertised and usually denied as an ingredient. The nuts and flakes are all very bitter and hard to swallow.
Unfortunately; due to rising costs, we’ll be charging $100.00 per scoop.
When purchased it will be presented in a large beautiful cone, but then the ice cream is taken away and given to the person in line behind you.
You are left with an empty wallet and no change, holding an empty cone with no hope of getting any ice cream.
When it comes to recent fraudsters Nicholas Cosmo is up there with the best of them. He may not be Bernie Madoff, but running a Ponzi scheme worth over $380 million that has affected many Long Island families is something we should be cautious of moving ahead. Chris Hansen of Dateline NBC does an excellent job exposing this story and showing the emotion that people go through after finding out their life savings had been rolled into a scam.
I was approached by a well-educated upstanding citizen with a great job at Keyspan to get in with Agape World in January of 2008. The minimum investment was $10,000 offering returns of 14% via 90-day bridge loans funding commercial construction in the NY metro area. I saw the paper work, I looked at the website, I did my due diligence, and I had funny feelings. Why was the rate at a flat 14%? What if I’m not an accredited investor? I politely decline investing as I thought it was too good to be true.
Best regards,
Nicky Papers
Sound off: What would you tell a friend who is advising you to roll your money into something “that’s too good to be true?”
Try, try as the Government may but they cannot keep a lid on long term interest rates. This week the long term mortgage bond yield climbed for a fourth straight day. The yields on Fannie Mae and Freddie Mac 30-year mortgage bonds rose to 4.3 percent from 3.94 percent (an increase of 36 basis points) as the Federal Government continues to shovel cash into the system like coal feeding the fire of the runaway locomotive in an attempt to drive down loan rates in order to ‘stimulate’ consumers and stem housing declines.
What seems to be escaping everyone’s eye, except until recently, is that as the Fed has “come to the rescue” in their purchasing of treasury’s and notes the long term yields have increased and thereby driven down bond prices. So what does this mean? Well, basically, it means that long term interest rates are going up. In very basic terms, it will cost more to finance money for a longer period of time.
As this has been occurring, ETF’s like TBT have been increasing (TBT is an inverse ETF to long term bond prices). This is indicative of a fatal flaw in the Fed’s management of this recession – they’re pumping the patient full of drugs today in order to “stop the bleeding” but they’re not thinking about the long term impact on the patient’s health.
What I’m saying is that short term fixes will not yield long term results; not if long term yields keep increasing thereby setting the stage for inflation. With so much money entering the system the Government thinks that it’s “stimulus” is working. Why wouldn’t they think that? The DOW, along with other major averages are up on a percentage basis (DOW up 11.9% since the stimulus bill was signed) and have provided support behind all the bulls calling an end to the recession.
Premature celebration typically leads to inevitable disappointment. This is a basic supply/demand problem – too much money supply chasing too few goods (remember as the recession deepened and capacity declined there has been less supply of goods and services) will lead to higher prices (welcome back inflation!).
What some economists have suggested is that with long term yields on bonds rising, and the increase in the money supply courtesy of Timmy & the Boy’s we have no where to go but an inflationary economic environment. There are several outcomes to this scenario which may result in anything from a forced secondary recession to curb the inflation (which would be like taking two steps back) to an insane increase in interest rates.
Higher interest rates are likely, which, coupled with a decline in income due to unemployment will lead to a situation whereby consumer financing will be nearly impossible to obtain and in the alternative be so expensive, who would want to finance anything? Cash will be king as many lending institutions will be unable to finance consumers both from a credit standpoint due to stricter lending criteria and a resistance by borrowers to higher interest rates.
If you believe my aforementioned opinion then short long term bond prices and while the rates are low borrow as much money as your income level can tolerate!
Sound Off: Do you think the Federal Government’s spending program will flood the markets with too much cash? Do you think long term interest rates will increase as a result?
Who saw this guy coming? Wow. Without being overly repetitious given how much press this guy and his ridiculous Ponzi scheme have received already, it’s obvious that Bernard L. Madoff will go down in history as the biggest scam artist of the modern century. He puts others before him to shame; including the likes of Michael Milken, Jordan Belfort, Kenneth Lay (remember Enron), and Bernard Ebbers (former CEO of Worldcom).
He outshines even those among his current peer group including R. Allen Stanford, Nicholas Cozmo (Agape World), and the like. Madoff has become the consummate poster-child for greed, corruption, and dishonesty. He’ll likely have his last name (if not already) coined into an expression for when you get screwed out of money – “You got Madoff’d” comes to mind.
However, we must remember that the current recession (or depression depending on how bearish you are) is not Madoff’s fault, nor is it the cumulative fault of the other fraudsters who similarly squandered their client’s money in poor/fake investments. Rather, it was the collective mentality of Wall Street greed, perpetuated by the pressure amongst traders, bankers, underwriters, CEO’s and Boards of Directors to outperform each other and the competition, fueled by a lack of adequate regulation, ignored by an absentee Securities and Exchange Commission.
Much like a devastating engineering failure, the catalyst of a single event is rarely traced back to a singular cause. Typically many factors need to come into play, in a specific order, to render an outcome. As such, the culmination of all the people, places, and things involved in the economy came together like a perfect storm a la recession 2008/2009.
And now, the Cheese stands alone…apparently. With his allocution in open court last Thursday (Check it out here!), Bernard Madoff asserted that he and he alone carried out his Ponzi scheme. That no one else assisted him in this elaborate ongoing plot of siphoning client money through his investment advisory business is preposterous. His attempt to segregate himself and his brother and two sons from scrutiny is admirable, but ultimately I believe will be in vein since I’m sure the rest of the ‘Justice-Mob’ will come for his wife, brother, and kids after their done running Bernie through the mixer.
It undoubtedly took an “army” of staff, as described by one Madoff victim being interviewed outside court last week, to prepare and send all the client statements, issue the [fake] trade tickets, and keep track of where all the funds were going. It’s logistically impossible for Bernard Madoff to have pulled this off by himself, let alone for the past 20-years, almost. Yet Madoff asserts that the proprietary trading and market making side of his business were, “legitimate and profitable”. Are we really supposed to believe that?
Nevertheless, there is no incentive for Madoff to give anyone else up. There’s no way given the magnitude of his crimes that he would likely get any significant reduction in his sentence for any cooperation. Though I would personally like to drag him into Central Park and beat him repeatedly with a pillowcase filled with doorknobs to elicit his cooperation, his decision to stand alone was the right choice. Despite the fact that his brother and sons were likely directly involved or in the least had knowledge of his actions Madoff chose to protect them, and I respect that (though I respect little else about the man). It’s up to the Government now to figure out the rest of the puzzle.
Sound Off!:
How long do you think Madoff acted alone? Do you think Madoff’s brother, wife, and/or children should be punished even if they weren’t involved, but had knowledge of his fraud?
It is absolutely astounding to me that AIG executives received in excess of $165 Million in bonus payments, after being bailed-out by the U.S. Government to the tune of over $80 Billion (with a ‘B’) and counting…
There is no excuse, and no explanation as to why at least seventy-three (73) executives at AIG received over $1 Million in bonus payments including at least eleven (11) executives who no longer work there! AIG, I deem thee, “Corporate-Madoff”.
The New York attorney general, Andrew Cuomo, is right to look to AIG to disclose the nature of these bonus payments under the terms and conditions of AIG’s Government loans. However, I do not agree with House Financial Services Committee Chairman Barney Frank to allow the Government to sue AIG over the bonuses as an 80% shareholder. This issue unfortunately draws a very fine line in the sand.
On one hand, I do not want the Government to step in and arbitrarily claw-back the funds, but on the other I agree that something has to be done. At issue is that essentially any company that has received Government funds is subject to much scrutiny (as they should be). Nevertheless, its not that bonuses should not be paid within company’s that have received Government funds, but they should be paid subject to strict conditions and under very clear guidelines.
This ties into my opinions regarding the outrageous bonus structure on Wall Street; while I agree performance bonuses (key word, performance) should be paid, the colossal figures attained for even the most mediocre of work product is disproportionately ridiculous. I think that all bonuses should be tied directly to the performance of the individuals direct work product for the firm. Bonuses should not be given nor expected but earned and appreciated. If in a given year an employee doesn’t perform as well they should not receive a bonus. I do think it wise that certain CEO’s of bailed-out company’s take “voluntary” pay cuts, but I also feel that if they and their management team turn around the company and return funds they should do whatever they want subject to shareholder approval.
However, I do not think that simply because a company receives a bailout that under all circumstances no employees should receive bonus payments. I believe that it is perfectly fine for an employee to receive a bonus within a company who has received Government funds if it can be demonstrated that said employees work product and contribution has specifically resulted in something positive for the company. Especially if said employees efforts assist the company in being able to recover and return any Government funds. I do not think you can expect any employee; clerical, administrative, managerial, executive or otherwise to work without any incentive structure – even in this current economy.
I want to be very clear here. The difference is that bonus payments and salaries (FYI Citigroup, increasing salaries in lieu of bonus payments is not acceptable either) should be properly calculated and dispersed in direct proportion to the scope of an employees specific job and subsequent performance. However, the bonus situation at AIG is downright reckless, irresponsible, and offensive given the context of how much they’ve received.
So what should the Government do, if anything? I agree with the general consensus that these bonus payments should be taxed. I do not think the Government should make demand for the repayment of the bonuses directly. Furthermore, the bonuses should be taxed as normal income in the appropriate tax bracket for the individual who received it and not as capital gains irrespective of whether or not the bonus payment included stock or options or otherwise.
Sound Off:
Do you think that the Government should demand the bonuses back from AIG executive? Do you feel that company’s who have received bail-out money should not pay bonuses?
It’s really had to pinpoint the catalyst that caused markets to plummet, the exposure of unethical practices in the financial world, and the credit crisis that we are in today. Is it because working in financial services (in many instances) had become so goddamn profitable or is it because Americans (as consumers) are weak and gravitate toward exotic equities trades (from a hotshot broker in New York!) and complicated mortgages structured by now defunct banks. Asking a question like that is like asking what came first, the chicken or the egg?
One of my favorite movies of all-time is Boiler Room, as it shows an accurate representation of chop-shop culture and the attitudes/behavior of many brokers on a trading floor. For me, Boiler Room glamorized the business and influenced me toward working within the financial services industry.
At the age of 21, I responded to a Craigslist ad for an opportunity to become sponsored by a “retail equities brokerage” where I would learn the business through cold calling and studying for my Series 7 and Series 63 licensing exams. As a college student, the opportunity seemed like it would pay dividends down the road so I kindly accepted the offer.
In just a few months working at this firm I observed the following:
1. I was becoming an animal on the phone. Being trained by sharks caused me to be relentless and not take “no” for an answer. By aggressive cold calling, I was able to pass along leads to my team leader who then opened the account up with a $1000 trade with a $1.00 commission fee.
2. There was no dress coded or sense of office etiquette. Most of us, (myself included) rocked the classic head-to-toe Puma jumpsuit. (Typical guinea shit.) We had dice games (Left, Right, Center) in the conference room after the markets closed. One game for everyone (piker’s!) at a $15 buy-in, followed by $300 game for the big dog’s who eat their lunch with a side of volatility.
3. There were no analysts at the firm. Brokers pitched what they liked or stocks with preexisting “call scripts”. There was one speculative stock (Telconet) that was pitched harder than anything else. It’s ticker symbol (TKO) opened up more accounts on a first trade basis than more commonly known stocks, because it’s ticker sounded “cool”.
4. Everything I did was fake. I used a fake name. I pretended I was a senior broker. I held conversations in topics I knew nothing about. (Fishing and hunting?) I told prospects I would call them back “later on down the road”, in-turn I passing them off to a British guy (heavy accent) where he’d read my notes and open the account. The client was none-the-wiser.
5. The number of Series 7 brokers under 24 years of age outweighed the number of “older” brokers in the firm. One of the top “money raisers” in the firm was 19 who last worked at a pizzeria on Long Island. This wasn’t a juvenile environment by any means. It was a serious business with one goal: “RAISE NEW MONEY”.
I never ended up passing my Series 7 exam. The firm tried selling me on reasons I should keep studying and “dialing for dollars”. Frankly, I was sick of being an actor on the telephone getting leads for someone else. I ended up parting ways with the firm on good terms. As a former “chop shopper”, where would I go next? For me that was an easy decision, I became a mortgage broker.
Sound-Off!
Do you think “chop shop” fundamentals (in some instances legal) were used by Madoff as a means to raise money? While some may think “hard selling” is unethical, do you think that the SEC should regulate a firm’s “marketing methods”?
Is this story ever going to end? It feels like it keeps getting deeper and uglier by the day. Apparently, according to the Connecticut State Attorney General, AIG may have paid as much as $218 Million in bonus payments! This is an additional $53 Million beyond what they apparently were already accused of paying out.
This is just getting more preposterous as the sums keep inflating. As I wrote in my previous post addressing the AIG bonus issue, I continue to stand by the notion that bonus and incentive payments in the financial industry are important. However, AIG is not helping that notion. It’s almost like AIG is holding the American taxpayers hostage: on one hand, they claim that if forced to fail their downfall would have catastrophic economic consequences, on the other they readily accepted over $170 Billion (with a “B”) dollars effectively giving the taxpayers an 80% stake in their company and have been entirely ungrateful for it.
Enough is enough. While I agree with certain comments made by other bank CEO’s this past week, including Bank of America’s CEO Kenneth Lewis who stated that the special bonus tax is “unfair”, I propose that the Government (who represents the American taxpayers) as the majority shareholder of AIG go in an break up the company. Divide the good from the bad and allow the profitable business units to survive and move forward and take the unprofitable units out behind the woodshed and smash their brains in with a shovel.
I want to be clear, I’m very against Government intervention in the private sector; however, I do not see much of a choice on this one.
One of the big questions, among many, that have been swirling around the Madoff case is what will become of his wife (Ruth) and two sons (Andrew and Mark)?
This topic presents another very hazy gray area in this case. On one hand, you have the wife, Ruth, who has enjoyed a very lavish lifestyle thanks to Bernie yet asserts that she has nearly $70 million in personal assets. On the other, you have the Madoff sons who ran part of their fathers business and have undoubtedly enjoyed a similar lifestyle.
I believe it to be virtually impossible for either his sons or his wife not to have known what was going on. Yet, in his open court allocution Madoff insists that the business his sons ran was “profitable and legitimate”. Excuse me, Bernard, if I don’t take your word for it. Especially considering the loans made to his sons Andrew and Mark for $9.5 million and $22 million, respectively. Then there is the matter of his wife, Ruth’s, assertions that the house in Palm Beach (worth approx. $10 million) and other assets (including $2.6 million in jewelry) are hers. The last time I checked I don’t believe Ruth Madoff had a job?
The Government certainly has the right to liquidate any assets belonging to Madoff and, any assts belonging to his family if said assets were purchased with the proceeds of the fraud. Again, there is a very gray area about; namely, that if any assets or income of the wife and sons are not the result of monies obtained through the fraud, then I do not believe the Government has a right to attack it.
If you can demonstrate to me that the business the sons were operating was indeed legitimate and, that any assets specifically in the name of Ruth Madoff are not derived from the proceeds of the fraud; I say leave them be. Though I do not see my aforementioned opinion as plausible given the fact that everything affiliated with Barnard Madoff ties into his fraud in at least some way or another, I cannot agree to the argument that family should be killed for the sins of the father. This becomes a question of how punitive do we need to be in the pursuance of justice in this matter?
Sound Off:
Do you think that Madoff’s wife and sons should be prosecuted, even if they were not directly involved in the fraud but had knowledge of it? Do you think that Madoff’s wife and sons should be held responsible monetarily, even if their own assets are not tied to the fraud?
Apparently, (as I suspected) the cheese does not stand alone. David Friehling was arrested this week by authorities and charged with securities fraud for being alleged “independent auditor” of Bernard L. Madoff Investment Securities. Friehling is the first person to be charged as an alleged co-conspirator in what has become the largest investment fraud in history.
Friehling & Horowitz, CPA’s, P.C. was the firm of which David Friehling was the sole proprietor (Horowitz was his father-in-law). The SEC alleges that between 1991 (approximately about the time that Madoff admits his fraud began) through 2008 that Friehling was the auditor who certified Madoff’s statements.
The firm occupied a 550 sq/ft. office in small shopping plaza in New City, New York (look for a future post from me in which I’ll get into the dangers of working with ‘shopping-plaza’ accountants and attorneys).
It’s not that Friehling was necessarily directly involved in the fraud, but he falsely certified statements and failed to actually audit anything that Madoff had going on. According to available information, ““Friehling failed to conduct audits that complied with GAAS and GAAP,” Acting U.S. Attorney Lev Dassin said in a statement, referring to generally accepted accounting principles and standards. “He did little or no testing, no verification of the ‘facts’ he certified. His job was not merely to rubber-stamp statements he didn’t verify.”
In basic terms, the dude was paid to shut his mouth and sign some papers. He was apparently paid somewhere in the range of $186,000 per year for his “services”. Not bad work if you can get it. His family also had an account with Madoff which had stated balances totaling about $14 million as of November 2008, and apparently withdrew somewhere in the neighborhood of about $5.5 million between the year 2000 and 2008 (source: Bloomberg.com)
I don’t think Friehling actually knew the specifics about what Madoff was doing, but he had to know something was up. Did he think Madoff was utilizing his “services” because he’s a charming guy? I don’t think Friehling’s a fraudster, I think he’s lazy. I think that his arrangement with Madoff was a matter of convenience for him and strategic alliance for Madoff.
Madoff needed someone who wouldn’t ask questions or get in his way. Friehling likely didn’t care, or didn’t want to know, and was perfectly happy collecting a monthly retainer for doing nothing. The larger issue at hand is, how many more affiliates of Madoff will go down for simply enabling him to carry out his fraud? For instance, if and when we discover what internal staff at Bernard L. Madoff Investment Securities assisted Madoff through compiling and sending out the fake statements, or falsifying trading tickets; what should become of them?
Friehling may face as much as 105 years in prison for his role with Madoff. Is that appropriate? Certainly some type of penalty and punishment is in order since he did violate very specific SEC laws; however, is it right to throw him in hail for 105 years? What about the secretary’s and office staff that may have helped Madoff, either directly or indirectly? Should they go to prison for the rest of their lives?
After all, it was Madoff who was apparently at the helm of this scheme, was he not? If his staff or other outside affiliates had direct knowledge of the fraud, that’s one case. If they simply suspected something, but did not have any direct knowledge and were just ignorant, that’s another case. Where do we draw the line? Enough people’s lives have been ruined by loosing their entire life savings with Madoff. Do we need to ruin the lives of every single person who worked in his office as well?
Mahatma Ghandi once said, “An eye for an eye will make the whole word blind”…
Interesting Fact: Jerome Horowitz (Friehling’s father-in-law) was at one time an outside account to Madoff before retiring in the 1990’s – Jerome Horowitz dies on March 12th, the same day Madoff pleaded guilty to eleven counts of securities fraud (Madoff’s Plea Allocution).
Peter Madoff, the brother of confessed and convicted fraudster Bernard Madoff, had his assets frozen by a New York State Supreme Court Judge in connection with a lawsuit filed by an investor who lost $470,000 in the Madoff mayhem.
The investor, 22-year old Andrew Samuels placed $470,000 of an inheritance he received with Peter Madoff, who acted as trustee for the funds.
First off, nice inheritance Andy, big thanks to the relative who dropped that one on your lap. Though in hindsight you probably wish you didn’t tie your money up with anything related to Madoff. However, as we’ve seen over and over again recently the Madoff virus has infected yet another victim.
Now, in order to pursue the recovery of his funds Andrew will have to wait in line just like everyone else that lost money and may or may not be able to recovery what he lost. According to court documents Samuels is seeking $470,000 in compensatory damages and $1.5 million in punitive damages.
In the interim, Peter Madoff’s assets are frozen which require him to disclose all his assets as well as prevents him from transferring or deferring his assets in an attempt to shield them from the lawsuit.
It’s unclear what specific involvement Peter Madoff may or may not have had in his brothers epic pyramid scheme. Apparently he personally lost a tremendous amount of money in the collapse of Bernard L. Madoff Investment Securities and, his daughter Shana Madoff allegedly working in compliance at Madoff Securities.
I’m of the opinion that in this specific case regarding the issue of Peter Madoff being trustee of Samuel’s funds, that the court made the right decision. However, without knowing the scope of Peter Madoff’s assets (which I have to assume are far more than what the kid is suing for both compensatory and punitively), what the court should have done is mandate Peter Madoff to place in escrow assets equivalent to the total damages sought in the suit.
If it can be established that indeed Peter Madoff did not have a part in the overall scheme which was perpetrated by brother Bernie, then subject to other situations in which Peter Madoff was a trustee on someone else’s behalf the remainder of his assets should be left alone. Though I agree that if accurate, the allegations by Samuels would constitute a breach of fiduciary duty by P. Madoff and he should be responsible to pay back the kids money and some punitive damage amount.
Sound Off: Do you think that Peter Madoff was involved in the ponzi scheme with Bernie? Do you think that all of Peter Madoff’s assets should be frozen pending the outcome of this case and/or the entire case against Madoff Securities?
Who would have thought dialing for dollars could be so much fun? It’s a hell of a lot easier when working with bulk leads from Dunn and Bradstreet. For pennies on the dollar you could buy thousands of leads in select states and set parameters of your choosing.
To make money “chop shop” style you will need the following:
1. A telephone blocking the number on outbound calls.
2. Thick Skin
3. Male Leads (We don’t pitch the bitch.)
4. Puma Jumpsuit.
Welcome to Cold Calling 101. The sample lead above, (rendered the image to protect identity) is a fair representation as to how a boiler room works and the mentality of the brokers behind the high-energy phone calls. Everyday thousands of Americans are harassed at work by money hungry brokers hopped-up on a mix of high testosterone, Red Bull, and Ritalin. For Nicky Papers, (yours truly!) it was a combination of all of the above on typical office afternoon.
So what are the “sharks” looking for exactly?
Currently working with Brokers: A prospect who works with multiple brokers shows that he’s not completely committed to anybody and will cut a check if he likes an idea. (He’s done this before…) Be wary of guys who use online brokerages as they don’t see the need in being told what to do. For prospects that have brokers out of state, (especially in NY) this is a clear indicator that they are receptive to doing business completely over the phone. In our case with the sample lead he has all of the above and even told us who he works with. Good stuff!
Owns Stocks: Prospects that trade common stock are our type of guys! We really could care less about how many houses they have or commercial properties. We are looking for liquidity and a gamblers mentality. At this time, if they made some money on a stock they’ll share the ticker with you. On the sample lead the prospect was kind enough to tell us that (NASDAQ: SLAB) Silicon Laboratories took the prize as he doubled his money on it. At this time, you’d compliment him and make a note of that ticker and the sector that stock is in. Reference something similar on the next call to open the account.
Ballpark Portfolio Size: So, how much are you playing with in the market? We were looking for guys with over 100k in the market. In pursuit of gaining a piece of that portfolio, anything over 100k is a safe number to weed out the piker’s from the players. In this case, our prospect is playing with 900k. “A fucking whale baby!”
Personal Info: After capturing the aforementioned “meat and potatoes”, now it’s time to bullshit a little. So are you still making six-figures? (Of course.) What do you like to do in your spare time? Still chasing the ladies? At this time the victim will lighten up and tell you some tales of adventure and romance. This is their time to do a little bragging. Our prospect (above) enjoys fishing for trout. (How exciting!) It’s not much, but valuable enough to pull out your ass on the next phone call.
This prospect turned into a slippery eel and got away on the follow-up call. The more leads that look just like this, the better chances you have to close. Now don’t think I was the Michael Jordan of cold-calling, but for being 21 years old I was pretty ferocious. With a solid 5% in / 5% out game plan in place, the broker is always on top. And if the stock that was picthed went up, more power to the broker!
Sound off: Can you blame the unsuspecting clients for not doing their due diligence before opening accounts over the phone from a cold call? Was it a combination of greed for all parties (broker/client) that spawned Madoff-esque schemes to acquire new money and accounts?
Due Diligence: Wikipedia Definition - Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person, or the performance of an act with a certain standard of care. Probably one of the biggest issues now facing the financial industry and, more specifically with respect to Hedge Funds, Money Managers, and Private Equity Investment Firms is the need to perform Due Diligence so as to avoid the likes of Madoff, Stanford, Nadel, and company.
Typically an investor should use the assistance of his/her own attorney and accountant to investigate a given Fund or Money Managers claims regarding past performance, likely returns, risks, fees, expenses, etc. One of the things that everyone should keep in mind is that one of the core goals of any Fund or Money Manager is to solicit new capital. Don’t get sucked up in overly hypes sales presentations. If it sounds to far fetched, or too easy, it probably is. One alternative that many investors are now choosing to utilize is the services of a private investigator. Sounds a little over-the-top? I recently read an article on Bloomberg.com which highlighted a private investigator who three years ago investigated Paul Greenwood and Stephen Walsh who were recently arrested in connection with allegedly misappropriating over $500 Million in client funds.
The article highlighted the fact that three years prior to Greenwood and Walsh being arrested this investigator found public documents that a brokerage run by both Greenwood and Walsh had agreed to settle regulators’ claims that their firm improperly used customer assets as loan collateral and had been fined at least eleven times for violating rules at several U.S. exchanges. Greenwood and Walsh neither admitted nor denied the allegations, which covered actions from August 1985 to January 1986. With the likes of Bernard Madoff, Arthur Nadel, and R. Allen Stanford being “outed” recently, many investors of their respective Funds probably wished they had used a private investigator. Though, hindsight is always 20/20.
The investigators are actually looking into the people who run these operations which are just as important as the performance of the underlying Fund, since a Funds performance and Manager are inextricably intertwined. A good investigator will research through court filings and public databases such as LexisNexis and interview former employees to get information on managers that may raise concerns. They dig up records of violations of trading rules, faked resumes, drunk- driving offenses and drawn-out divorce cases. Essentially anything which may show inconsistencies in a Managers representation to clients and prospective clients. The cost of a background search by an investigator should cost about $1,000. As an example; Public records show that Arthur Nadel, founder of Scoop Management Inc. in Sarasota, Florida, was disbarred as a lawyer in New York in March 1982. Nadel now faces federal charges of defrauding investors of more than $300 million.
If you have suspicions about a particular investment manager, firm, or otherwise it certainly pays to perform proper Due Diligence with an attorney, accountant, and a private investigator. Better safe then sorry…
Secretary of the Treasury Timothy Geithner is perhaps the most timid, inarticulate, dull, sorry excuse for an administrative official I’ve ever seen – and I’m being gentle. Is it me, or does every time this guy get up to testify in front of the House Financial Services Committee he looks like he’s going to pee his pants? You would expect more from a man with a Bachelors degree from Dartmouth and a Masters from Johns Hopkins.
Lets not get carried away; Timmy (as I will refer to him from now on) has a tough job right now. Our country (and the rest of the globe) are in the midst of perhaps the most severe economic depression (there, I said it) that we’ve seen in nearly seventy years. Geithner is tasked with leading the way, and let’s face it; he doesn’t exactly have a group of rocket scientists behind him helping him sort through the mess. But he does not get a pass for the blundering he’s displayed to date.
The proposals he’s put forth regarding reform and oversight and regulation within the financial markets are dangerous and reek of Orwellian 1984-ish type control. Specifically Geithner’s proposals would affect large hedge funds, private-equity firms and derivatives markets by placing them under federal supervision. A new systemic risk regulator (hello Bank Czar?) would have powers to force companies to boost their capital or curtail borrowing, and officials would get the authority to seize them if they run into trouble.
This is utterly frightening. Obama has stated openly that we should not, “Govern out of Fear”; however, this is precisely what the proposals from Geithner are based on. The administration is betting on the fact that the American tax payer is angry over all the bailout mess (and believe me, they are, we are, everyone is!), but regulation and policy derived from anger and fear coupled with an excuse to expand Government into the private financial sector is not the answer.
Timmy’s proposals also call for intense scrutiny of executive compensation at financial firms, and look to analyze the risk certain institutions are taking and, if that risk is deemed to great then regulators could step in and stop it. All of these moves will stifle economic growth will lead to nothing but exaggerated risk aversion with everyone from the traders on the floor to the executives upstairs looking over their shoulder wondering if Timmy is there and if he’s going to ruin their party.
I’m deeply worried that Timmy Geithner is under qualified, over zealous, and inebriated off of the high he’s getting from being the chief money man these days and it will result in terrible fiscal policy, socialistic-like intervention and control, and trillions in debt that our grandchildren will being paying back long after we leave this earth. Someone needs to rein his leash in…
Sound Off: Do you think Tim Geithner is doing a good job? Do you think Government intervention into the financial markets in the right thing to do?
Does it seem like the case of R. Allen Stanford is absent from news coverage? It seems that way to me. I mean, he’s no Bernard Madoff – he only ripped off investors for $8 Billion (with a ‘B’) dollars. Chump-change I suppose in the grand scheme of things.
Nonetheless R. Allen Stanford (don’t you hate people who use an initial as the prefix to their name?) is no less a fraudster than Madoff or anyone else. Though his particular ponzi pilfered funds through bogus certificate of deposit instruments as opposed to fictitious securities trades, Stanford was quite masterful for a time in eluding suspicion about his investment activities.
The typical modus operandi of most fraudsters is to project an image of greatness which is promulgated by their “pillar of the community” image visa vie involvement in non profit activities, significant donations to charity, and the perpetuation of the “good” their doing in their community and the world. Truth is, most of these guys are narcissists.
In 2007 Stanford was listed as the #239 richest American. He’s allegedly a distant relative of the founder of Stanford University. The guy has been knighted and carry’s a “Sir” title in front of his ‘R.” – does anyone else’s douche bag alarm go off on this guy? He’s good, maybe better than Madoff…nah.
The website which purports all of Sir R. Allen Stanford accomplishments and accolades also bears his [former] company’s slogan, “Hard Work. Clear Vision. Value for the Client”. Wow. This guy really get’s an A+ on the bullshit-o-meter.
Seriously though, his fraud was real. It was costly, and it hurt a lot of unsuspecting investors. Specifically his fraud circled around certificate of deposits which offered significant returns, far above most conventional CD instruments, and were not insured by the FDIC. He channeled these fraudulent CD’s through his banking operations in Antigua. The bill for is damage tops $8 Billion.
In addition to his fraudulent certificates of deposit, there have been allegations that Stanford’s bank and capital management business laundered money for less-than-legal “export” company’s largely based in South America. If that is indeed accurate then Stanford has way more than the SEC to worry about.
My question is, how did no one get to this guy, or Madoff, or anyone of these other fraudsters sooner? As in the case with Madoff there were allegations made previously about Stanford dubious activities. There were lawsuits filed which alleged that his operations were indeed a “ponzi” scheme, way before the term became a regular part of our vernacular when talking about the economy. As far back as 2003 Stanford was accused of bribing to Antiguan Ministry officials with over $400,000.
I suppose that when everyone is getting a check and the money is flowing no one asks questions, at least not until the well goes dry. I plan to follow the case of R. Allen Stanford and provide updates and analysis going forward, keep checking back for regular updates about this topic.
Sound Off:Do you believe you could be fooled by an investment scheme like Stanford’s? Do you think his case is not receiving the proper coverage in the mainstream media?
At least this is what accused fraudster R. Allen Stanford is doing – well, not directly, but through his attorney Dick DeGuerin. Stanford’s lawyer insists, “He’s no a swindler…”, and, “This is not a ponzi scheme…”
So then I ask: why when the news broke about this ‘alleged’ fraud did Stanford first attempt to board a private jet out of the country? Why is it that upon being accused of bilking his investors to the tune of $8 Billion did he disappear for two days, only to be found in Virginia at his girlfriends house? Why did he invoke his 5th amendment right against self incrimination in court papers filed on March 9th? This doesn’t sound like the actions of a man who has nothing to hide. This sounds like what happens when you get caught up in your own bullshit and try to bounce, can’t, then try to cover your ass.
And when all else fails, blame the SEC. That’s right; Stanford’s attorney has all but accused a gunman on the grassy knoll of plotting a conspiracy to bring down Stanford. He (DeGeurin) alleges that the SEC caused a panic, which in turn caused a run on Stanford’s bank, which then led to the events which have unfolded of recent. DeGuerin claims that Stanford can back up every dollar behind his investments.
Furthermore, DeGeurin claims that the only reason the SEC is going after Stanford is because they screwed up on Madoff and are seeking a scape-goat. For one thing, I’ll give Stanford credit – he hired an attorney with balls. The ensuing trial should be a glorious spectacle of plausible deniability and, “I didn’t do it” syndrome.
Truth is, if what Stanford’s attorney is saying hold merit and, they can back up Stanford’s investments and show that everything was legitimate then I’ll be the first one to apologize. Though I can’t see how that could be the case given Stanford’s own actions.
What will be interesting is the game of good-cop, bad-cop that I’m sure the Fed’s will play with the two associates they’ve arrested who worked for Stanford. James Davis, who was Stanford’s CFO, and Laura Pendergest-Holt who was his CIO. According to what I’ve understood David and Stanford go back to being roommates at college. Subject to the Fed’s really having something on him I bet he hangs tough. He probably has enough money squirreled away that if he cops a plea and does some basic time he can get out in seven-to-ten with a healthy retirement.
This Laura chick, on the other hand, is apparently 35 years old (young for the business world) and has only been on Stanford’s team for about 12 years. She has no significant experience in the financial world at all from what anyone can tell, yet within 10 years of joining Stanford’s company’s she’s the Chief Investment Officer? I call office affair on this one…
Based her relative youth, and from what I can see no real history with Stanford, she’s his biggest liability. If the Fed’s are going to sweat anyone it will be her, all they have to do is convince her that if she doesn’t cooperate she’s going to spend the majority of her life in prison and she’ll fold like a poor poker hand.
It will be interesting to see how this plays out.
Sound Off: Do you think Stanford is innocent? Do you think that either of his chief managers will give him up to the Fed’s?
Millions, on top of Billions, on top of Trillions… Seems like the total figure for the “stimulus” keeps increasing daily, doesn’t it? It’s nearly incomprehensible to fully fathom the magnitude of the dollar amounts that are being thrown around.
The Troubled Asset Relief Program (TARP), the $700 Billion bill passed last October was implemented to support the apparent multitude of failing institutions abound in our seemingly bottomless depression. As of April 3rd, 2009 approximately $333.28 Billion or about 48% of the total allotted funds in TARP have been distributed to approximately 532 financial institutions.
Question: Where’s the other $366.7 Billion?
Of the $333 Billion in play about $303 Billion has actually been “invested” while about $32.5 Billion has been set aside for “other purposes” – what other purposes?
This is all our money. The Governments money is our money. While I agree that certain institutions needed support since the alternative of failure for some (though I believe many of them should have been allowed to fail) would have had more disastrous consequences for the economy as a whole than any of us bargained for. Nevertheless, what seems to be irking everyone is the recklessness of the “investments” made.
The issuance of TARP funds with such carefree distribution is analogous to throwing a bottle of Poland Spring on a smoldering fire. Where does it end, and how effective are the efforts being implemented? Did all 532 financial institutions need the money? Surely some could have gotten by with less, or, in the alternative some should have been denied funds and allowed (forced) to fail.
What seems to be pissing everyone (taxpayers) off is the idea that these company’s who are in receipt of our money carried on their usual business of remitting bonuses and booking corporate parties, etc. While I’ve previously stated that the bonus system on Wall Street and at major corporations is necessary in order to promote productivity in many respects I will state that it’s inappropriate to be so reckless as to remit $218 Million in bonuses after receiving $70 Billion of Government aid (Hi, AIG).
Don’t come crying to the Treasury with your hands out, or, essentially threatening the Treasury by saying, “If we don’t get this money the economy is doomed” and the turn around throw the taxpayers gratitude in their faces.
In positive news there have been several institutions that have openly stated they plan to pay back their TARP funds as soon as possible. This would be good news on several fronts, but highly conditional in my opinion. First, if the return of TARP funds is prompted by the institution actually being in control of their balance sheet and can really make due without Government support, then this is not only good for the particular institution by the economy in general. However, if a firm seeks to return funds simply to get the Government’s eye off it’s back and, the return of said funds would otherwise leave the given institution in continued questionable form then swallow some pride, hold on to the money, and get your crap together before making another poor decision.
BUT… I do not think that the Government should bully the TARP recipients either (i.e. ousting CEO’s) just because an institution has TARP money. Remember, Uncle Sam, you are simply our representative – an agent in control of our tax dollars. Your responsibility is to the American taxpayer. I think that it’s wrong for the Government to muscle around these institutions the same way it’s wrong for the institutions to be giving out huge bonuses or spending ridiculous money on office renovations, or what have you. The Government should be supportive, not punitive, and should “advise” institutions and not castrate them. TARP recipients should be humble and acknowledge that they have an obligation to disclose fully their use of TARP funds work together with the Government to improve their respective situations.
Note: Watch for a follow up post with a complete chart of all TARP recipients.
Sound Off: Do you think that the Government should have the ability to control institutions in receipt of TARP money? Do you think that certain institutions should have failed instead of receiving money?
The old saying, “What Goes Up, must Come Down”, is certainly a good description of the financial markets within the last year. Though I’m stating the obvious what many people are failing to understand is that we’ve only just begun to see the turmoil.
While all the Ra-Ra-Cheerleaders at CNBC (as I’ll refer to them from now on) and other networks which cover the financial markets have all but called an end to the current recession based on the recent upswing in the market over the last three weeks; what they’re missing is that nothing has fundamentally changed in the grand scheme of things.
Jobless rates are still at all time highs and continue to mount. Housing is far from any reasonable recovery when you consider that the full breadth of foreclosures have not been absorbed into the market yet (nor reported/recorded on the official books in many cases) and, commercial real estate (the other shoe that needs to drop) has not come through to ruin the day yet.
Let me be clear – I am no market expert, nor do I claim to be. I am invested in the markets and have had successes and failures just like anyone else and anyone who claims they “never loose” in the market are either full of it or running a ponzi scheme. Though I have limited my downside within the last year because I was so extremely bearish the major difference in how I approach the markets is that I don’t get swept up in other people over exaggeration of circumstance or conjecture.
When everyone else is running into something, it’s usually time to get out! Take the recent activity in the last two weeks in the market: we’ve had nearly 25 trading sessions of upside momentum and if you follow the general parameters at best we typically get 25-30 sessions out of any sustained upswing before we get a retraction, and that’s in relatively stable markets. If you believe nothing but the latter than at least now is the time to take some profits if you’ve been trading recently. Again, though, many people who got burned in October/November 2008 and have been sitting on the sidelines with their cash are all running into their brokers clamoring for buy advice.
My advice? Be short…be very short. In the alternative look for some inverse ETF instruments, especially ones related to specific indexes (like financials, materials, etc.). The reason why is very simple: we still have too much capacity and we have not shed all the excess yet.
Are we at a bottom? No way. The DOW was above 14K at its peek and we’re only hovering near 8K right now – that’s still 42% off the highs! It’s irresponsible to call a bottom here because it will do nothing but encourage a reckless stampede into the markets by novice investors who just want “in”. The worst thing we can do is force this situation.
I suspect we’ll see a retraction through the first month of the 2nd quarter followed by some sideways movement through summer. September and October are typically low points for the markets anyway and if we follow that trend then look for a lower DOW (closer to 5.5K) near that time.
All this stated, it doesn’t mean one cannot make money. Volatility can be exploited by traders to create huge profits; both going up and coming down. Be careful and watch out for broker B.S.
Happy Investing,
Blake Winston
Sound Off: Have you been burned in the ups and down of the stock market recently? What are your strategies for exploiting the current markets and/or protecting your portfolio?
Unruly Heir, a NYC based clothing company has released their Spring 2009 line with the satirical “Bailout Collection”. The t-shirts are available for purchase at the Official Unruly Heir web-store. If you are one of the first thirty customers to order, they are offering “a bailout of your own” with 20% off your order. Use coupon code, ‘mybailout’.
Why not stay up on style and recent financial tragedies at the same time? Unruly Heir really takes their clothing line to “the street” serving up some humor with their “Fear and Loathing on Wall Street” tee and the “Freddy Mac F*@CKED Fannie May” shirt that’s loaded with ticker symbols. For guys like us, Unruly Heir really nailed it with their Spring 2009 collection while making light of recent economic events.
If you’ve been following the markets you’re well aware of the turmoil going on. More so, you’re probably aware of the political pressure coming from Washington to implement a whole host of new rules, regulations, laws and more in an effort to curb what most politicians have dubbed the “recklessness of Wall Street”.
Let’s get one thing straight – the recession was not exclusively caused by Wall Street. Much like an engineering disaster there is no one singular event or person who can be held responsible; its always a multitude of factors that have to come together just right in order for the outcome to be produced. This is the case when talking about the current recession. Now, market regulators (influenced by politicians) are attempting to implement changes in certain regulations, particularly in short selling, which could dramatically change the way traders play the markets. On top of that, the SEC may implement these potential changes in less that six months which really puts a tremendous amount of pressure on firms and traders to change their systems (which will also be expensive) which apparently is of no concern to the SEC.
Just to make sure everyone is on the same page lets fully define short selling: When a trader places a short sale they ask a broker to lend them stock and then sell it right away. The trader hopes to make a profit by buying back the shares at a lower price and returning the borrowed shares and keeping the difference.
What’s being proposed now, among other regulations, is the reinstatement of a 70-year old provision which prohibits short selling a stock until its price rises (a.k.a. the Up-tick rule). This particular rule was lifted in July 2007. Many people believe that frenzied short selling contributed to certain stocks getting pounded and loosing significant value. If the Up-tick rule is reinstated it would not allow a trader to sell a particular stock short until there was an incremental move upward in the stocks price. In theory this is supposed to slow down the momentum of a downward trending stock and keep traders from piling into a stock on the short side like a wolf pack on a deer carcass.
Other proposed rules as alternatives that SEC commissioners are considering would allow short-sales only at prices exceeding the best bid on a particular stock. This rule is similar to a proposal made last month by the NYSE and three other exchanges. Some believe this is more prohibitive than the original up-tick rule and it also allows for fairly simple implementation.
The question I’m asking is; are these new measures punitive rather that supportive? Are we implementing change out of fear, or worse, out of spite? I don’t think it’s far to blame short-seller for this recession anymore than you can singularly blame the previous administration, or the banks, or any other factor. All of these moving parts contributed to the circumstances of recent.
This recession was several years in the making. The notion that we can fix this by reversing some rules and throwing a few trillion around is preposterous. But that’s our culture – a quick fix – a quick buck – instant coffee – I needed it yesterday. The fact is we paved a long road into this mess and we have a huge field of weeds to chop through before we can reach a clearing.
We’re not going to spend and regulate our way out of this…the fundamentals still need to improve.
Sound Off: Do you think the SEC should prohibit short-selling and bring back the up-tick rule? Do you think short-selling should be banned all together?
A Connecticut judge has frozen the assets of Madoff’s wife, Ruth, his brother and two sons, and has also frozen the assets of Sandra Manzke the founder of Maxam Capital and Walter Noel Jr. a partner at Fairfield Greenwich Group (FGG is also being sued separately in the case) both feeder funds to Madoff’s former operation.
Apart from, “normal living and business expenses”, everything is on pause for the entire family and even some of Madoff’s top business associates. Fairfield Greenwich Group was a “feeder-fund” which funneled approximately $7 Billion to Madoff. The court order was brought about after the Fairfield Pension Fund (which currently has 1,500 members) requested it – the pension fund had as much as $42 Million with Madoff placed through the aforementioned Maxam Capital. The lawsuits are alleging that both FGG and Maxam Capital were negligent in placing funds with Madoff and while they may not have specifically know that Madoff’s operation was a ponzi scheme they were certainly involved in the criminal actions as a related party.
I can see the courts freezing the family’s assets, but is it too much to freeze these firms’ assets as well? I think so. I think it’s a reach and, unless you can prove to me that these feeder funds actually knew what Madoff was up to then its not proper to throw them in his realm, as they are victims as well.
Madoff has proved to be a cunning liar and creative schemer who fooled the SEC, his investors, and others for decades. Is it a stretch to think that these other feeder funds were also lied to? Madoff’s key defense to questions about his operations was to either dodge the questions or just lie – that’s it! Let’s remember this guy was not a criminal mastermind, he was just a good liar who covered his tracks well and was able to get away with something for a long time. Also remember that for the last thirteen years he never actually invested a single dollar in any stock at all!
My fear hear is that the tar and feather routine will get out of hand. While its necessary and appropriate to punish those involved and who assisted Madoff in perpetrating his perpetual ponzi scheme it is not right, nor practical to blast the flame-thrower at everyone who was in Madoff’s vicinity. These feeder funds were lied to as well. They received fake information, or none in some cases, but chose to invest anyway because Madoff was supposed to be this “genius”. How many times have you bought stock on a friends tip and it backfired? The only reason you bought the stock is because you thought it was a “hot tip”
What I’m driving to hear is that the greed perpetuated the frenzy. The feeder funds wanted to make their fees for “managing” money and the clients wanted to get “in” to the markets and as long as they were being told they were making money no one really checked.
Everyone was negligent. It was negligence through greed. Should everyone be sued? Should you sue your own accountant who looked through the Madoff prospectus and didn’t ask a lot of questions? How about your friend’s cousin who turned you on to the hedge fund who, through another third party channeled money to Madoff? You see where I’m going, right?
Let’s hold the parties who are directly involved and truly responsible accountable and let’s not whip the revenge buzz-saw around because we’re all upset.
Sound Off: Do you think its right to hold multiple parties accountable in the Madoff fraud, like feeder funds and money managers, who were not directly involved and were simply fooled as well?
I suppose one of the biggest questions surrounding the Madoff scandal is, “where did all the money go?” Good question. Even looking at this guys lifestyle (and Madoff had quite a lifestyle) it’s hard to imagine that out of all those billions there’s only a few hundred-million left.
In case you don’t know who Irving Picard is, he’s the trustee appointed to oversee the liquidation of Bernard L. Madoff Investment Securities. To date, he’s collected approximately $1 Billion in funds from various accounts held by Maddof’s company. In Addition the Securities Investors Protection Corp. (SIPC), has about $1.6 Billion is a fund designed to compensate victims of an investment fraud like this.
Is anyone following the math here? Allegedly $65 Billion was stolen, misappropriated, embezzled, whatever you want to call it. Between the trustee, Picard, and the SIPC, they’re prepared to shell out about $2.6 Billion to reimburse to the over 5,000 investors that got royally screwed up in Madoff’s little world. My math skills aren’t fantastic, but that sounds like a $62.4 Billion shortfall to me, right?
The Fed’s are seeking about $170 Billion in forfeiture from Madoff (which he does not have by any stretch of the imagination) – and they (the Fed’s) have identified to date about $100 Million (miniscule in comparison to the aforementioned dollar figures) of houses, cars, jewelry, etc. which they will likely seize from Madoff.
This doesn’t even make a dent in the losses that Madoff ran up in what has become likely the longest running most expensive investment fraud in history. As such, many investors are up in arms over the fact that after investing millions upon millions of dollars with Madoff that the only recovery they’re going to see is probably the $500,000 maximum allowed by the SIPC. That’s like getting a swift kick in the balls after you’ve just found out that your wife has been cheating on you for 20 years. If I were a Madoff investor who lost millions and got a measly check for $500,000 – I’d ask if I can return the money and instead could get 10 minutes in a locked room with Madoff and pair of pliers.
I’m note sure any of the investors of Madoff’s former fraud factory will ever be made whole, even if they receive most of their money back. There is a certain mental and emotional quotient which goes beyond the actual physical loss of capital. Though I cannot opine based on any first hand experience but I imagine it’s like being raped; the physical scars and bruises heal but the mental pain stays for a long time…maybe forever.
On the other hand I’m not sure what else the thousands of screwed investors of Madoff’s bogus firm can expect. At the end of the day, even if they recover most of what was lost and strip Madoff and his whole family of every cent they have, it probably still won’t begin to cover all the Billions that this guy so maliciously and tactically absconded with. You can’t get blood from a stone…
Sound Off: Do you think all Madoff victims should be entitled to all their principal money back? Do you think that the Government should make up the difference?
We keep hearing the term, “Too Big to Fail” these days. Is this a real and accurate statement? Are the institutions and company’s which are at the center of the bailout debates really too vital to the stability of the economy that they cannot be allowed to fail? Why is it then that within the last few days’ talks of allowing GM and Chrysler to pursue restructuring visa via an organized bankruptcy been more prevalent? Filing chapter 11 doesn’t necessarily mean a company totally dissolves but it is certainly arguable that filing for bankruptcy via chapter 11 is still a form of failure, is it not?
For clarification purposes lets quickly define the two most common types of bankruptcy. In business Bankruptcy occurs when a firms liabilities exceeds its assets and the business does not have enough capital to maintain credit payments. When a business is in this situation it has two choices, chapter 11 or chapter 7 bankruptcy.
Chapter 11 usually happens when a firm seeks protection from its creditors while it attempts to restructure and create a plan to remain in business. The creditors are only being held off temporarily by the courts for a period of time that will allow the firm to put the revised business plan and payment schedules into effect. The majority of the creditors (including bond holders, banks, and vendors who are owed money) must then approve the plan before it is put into place. While in Chapter 11, the majority of the Creditors and any new vendors will place the firm on a C.O.D. (payment up front) payment terms.
Chapter 7 is the least popular choice of the bankruptcy options. Chapter 7 requires a complete liquidation of all of the assets for repayment to the creditors. In most cases the assets do not equal the amount owed to creditors, forcing the creditors to accept pennies on the dollar. Company’s who file Chapter 11 and cannot reorganize or restructure, or in the alternative obtain new capital typically slip in to Chapter 7. This later example is what happened to Circuit City.
In the case of talking about GM and Chrysler the conversations have been in reference to Chapter 11, not Chapter 7. Though the Obama Administration has stated that if GM and Chrysler cannot get their acts together within 60 and 30 days, respectively, they should consider going through a “strategic” reorganization.
Let’s be clear… There is nothing “strategic” about going Chapter 11. Especially in the case of GM or Chrysler the process will likely be messy and go on longer than we all reasonably expect. The question is whether or not GM and Chrysler are too big to fail? Apparently not since Chapter 11 is on the table for both. What happens if neither GM nor Chrysler can reorganize successfully?
Where I’m driving to is this opinion within our economy that we cannot allow these company’s to fail. This is a ridiculous concept. There is nowhere in the constitution that states that the taxpayers have an obligation to keep major company’s going for the sake of everyone else. In normal business, if your company is unsuccessful, you go out of business, period. If your pizza shop on main street doesn’t sell enough pizza slices you close your doors, you don’t get a bailout from the Government.
I believe that certain company’s that can’t cut it right now should do what other business’ do when they can’t meet their obligations – break apart certain divisions, sell some assets, attempt to pay back the most senior debt first, etc. If this can be accomplished in a Chapter 11 or 7 preceding then I say do it. We cannot continue to prop up these company’s by throwing more taxpayer money at them.
There are no absolutes in business, and sometime things don’t work out. This is the nature of being in business and it’s a concept that the directors of these company’s need to learn. Yes, if allowed to completely fail the job losses and impact on the economy of a GM or Chrysler going out of business would be significant. However, it is equally significant and will probably have more of a negative impact for the long term is we continue to throw Trillions (with a ‘T’) dollars at these company’s. Remember, these Trillions of dollars will have to be paid back somehow and trust me the payback of all these bailouts, economic stimuli, and all the money in between will take far longer and cost much more than any short term impact of GM going out of business.
Sound Off: Do you think GM, Chrysler, or any other company involved in the bailout should be allowed to fail?
With the arrival of spring comes the proverbial ‘spring cleaning’, and it’s no different in the case of cleaning out the assets of convicted fraudster Bernard L. Madoff. The trustee, Irving Picard, who is in charge of the orderly collection and liquidation of assets from the now closed firm Bernard L. Madoff Investment Securities, is currently attempting to auction off season tickets for the New York Mets.
According to reports, Picard is hoping to sell the opening day tickets and tickets for individual games in April. The remaining season tickets will be sold as a package and Picard plans to utilize the services of a ticket broker to govern the highest bid for the package. The season tickets are valued at a little over $60K, and are apparently in the Delta Club Gold section of the brand spanking new Citi Field. Normal tickets in this section can be as much as $500 per seat per game!
Picard is also apparently working with the New York Mets organization to ensure that other perks of the tickets transfer to the new happy owners like the parking and renewal options. All in all a pretty sweet deal for whomever end up with the tickets. I can just imagine the conversation now between the box owner and his/her guests, “Hey,…you know whose seats these used to be?” Thanks Bernie!
My question is when is the rest of the Madoff yard sale going to commence? We know his boat (excuse me, yacht) deceivingly named “Bull” was already seized by the feds – and we know he’s probably got a slew of fancy cars, and we know he’s got a ridiculous house in Palm Beach, Florida and one in the Hampton’s on the east end of Long Island, New York.
I can only imagine the elaborate furniture, art, and miscellaneous paraphernalia collecting dust in his $7 million New York City Penthouse. What treasures may exist in the vast walk-in closets and jewelry boxes of the Madoff’s – well tailored suits, fine watches, etc.
I think that all the screwed-over investors should have first crack at a Bernie Madoff yard sale! How much fun would it be, if you’re a victim of Madoff, to have access to his entire wardrobe of fine suits and expensive clothing and to set them on fire right in front of the jail he’s locked up in?! Oh the joy one could have with access to one of Bernie’s sports cars, where one could rip through gears without properly shifting ensuring the clutch is burned up, or, spinning endlessly in doughnuts while the expensive tires that come on his expensive car(s) disappear into milky white smoke!
As a matter of fact, being a fan of nice watches I wouldn’t mind having some of Bernie’s collection as I’m sure he probably had a few nice ones!
So, Mr. Picard, if you’re reading this please let me know the date and time of the auction sale and I’ll be there with my checkbook and a smile!
Sound Off: Do you think Madoff’s assets should be sold to help repay damaged investors? Should his family get to keep certain personal items, like gifts, even in Madoff bought them with fraudulent money?
Quantitative Easing has been a recent favorite buzz word of the pro-bama, stimulus-maximus, please Uncle Sam can you save me from myself, rah-rah cheerleading crowd who keep pushing this notion that dumping Federal money on top of this economy is going to solve everything.
Let’s be upfront and specifically define ‘Quantitative Easing’: Quantitative Easing refers to the creation of a significant amount of new money. This money is created to stimulate the economy, specifically to promote lending by banks. The Central Bank adds to the money supply by buying up large quantities of securities from banks, giving them new money to lend. This usually means government bonds, commercial loans, asset backed securities (our favorite), etc. Quantitative Easing is usually used when lowering official interest rates is no longer effective because already effectively at or at zero.
‘Quantitative’ refers to a specific quantity of money being created; ‘easing’ refers to reducing the pressure on banks. A central bank can do this by using the new money to buy government bonds (treasuries), or by lending the new money to deposit-taking institutions, or by buying assets from banks in exchange for currency; etc., etc. These have the effects of reducing interest yields on government bonds and reducing inter-bank overnight interest rates, and thereby (should) encourage banks to loan money.
The aforementioned actions are essentially the core application being leveraged by the Government in the recent months in order to get our economy back on track. There’s just one problem: banks are not really lending! They may say they are, but find me one person with an average profile of income, credit, debt (not a degenerate but an average person) who has recently obtained credit and I’ll find you twenty people who’ve been rejected for the most basic of credit terms.
Credit risk to a bank these days is as dangerous as sleeping with a prostitute without a condom. The short term pleasure might be enjoyable, but the long term pain will constantly remind you of your mistake! Such is the case with how badly a lot of banks got burned in the infamous blow out of the mortgage market.
The problem with ‘Quantitative Easing’ is that as the Fed leverages its balance sheet more and more (remember, they’ve exhausted their interest rate reduction options), they’re simply creating another massive bubble which will need to pop, eventually. What bubble, you may ask? The bubble of having too much money supply and not enough demand to facilitate it. This is why many economists have forecasted that upon the recovery of the current recession we can expect ‘hyper’ inflation – I’m talking 15%-20%…maybe more…
The problem with what the Fed is attempting to do right now is that they’re ignoring the fundamental cause of all this, which is, demand destruction; more directly, a reduction in capacity. Too many high priced goods/services being chased by too low wages, exacerbated by extremely easy credit for unqualified consumers.
The title of this post is, “Quantitative Beasting”; because what I feel the Government is doing is laying the foundation for a fire-breathing beast a la hyper inflation which will blast off into the next universe and create a situation whereby we’ll have to force another recession to ease it.
Sound Off: Do you think that the Federal Reserve is doing the right thing by increasing the money supply? Do you think that the Fed’s actions will help or hurt the economic recovery?
“So now you know what’s possible, let me tell you what’s required. You are required to work your fucking ass off at this firm. We want winners here, not pikers. A piker walks at the bell. A piker asks how much vacation time you get in the first year. Vacation time? People come to work at this firm for one reason: to become filthy rich; that’s it. We’re not here to make friends; we’re not saving the fucking manatees here, guys. You want vacation time, go teach third grade at a public school.
First off, I’d like to thank Ben Affleck for playing his role so well in Boiler Room and influencing the actions and attitudes of young brokers, and “brokers to be”. Though Boiler Room is only a movie, it’s a fair representation of firms that utilize aggressive marketing (mostly phone) tactics with the intentions raising new capital. The unsettling part about this is that aggressive marketing tactics are real, used by firms across the US, and could have a substantial financial impact on middle to upper-class Americans who take the bait. (Accredited investors my ass!)
Please review the video above narrated by Jon Landau, Spyker Consulting’s Executive Vice President. Mr. Landau entices young brokers of what’s to come if they are interested in joining the team at Spyker. He’s no Ben Affleck, but gets an “A” for effort when inspiring his office to stay well-groomed and take advantage of 20%-off sales at SIMS. (Vin Diesel stunt double at 00:14)
Exhibit A: Jon Landau
As Spyker’s public relations figurehead, (where’s the CEO?) Jon Landau makes it known what exactly the firm is looking for: “go getter’s who are a little bit arrogant and have that New York attitude”. Is this guy for real? I’m not sure what’s more embarrassing for Spyker, having a spokesperson that looks like “Sonic The Hedgehog” or showing the world that your firm is a complete CHOP SHOP on corporate recruitment video? Jon, it’s time to go back Seaside Heights, NJ where you got that disgusting haircut, drive your leased 3-series BMW to the gym, and fist pump at the club with your boys on the weekends. Your bullion days are over brother. : (
Exhibit B: Aggressive Cold Calling
With so much action going on in Spyker’s office it’s hard to remember what clients have been called/dialed, or in this instance, harassed repeatedly? Maybe it’s the coke? Perhaps it’s the steroids? Or possibly it’s the radiation coming from their tanning beds that’s causing Spyker’s brokers to forget about a little something called COMPLIANCE. Spyker’s video showed everything but their DO NOT CALL box. What gives fella’s?
Exhibit C: Business Information
The Principal of the firm is Edina A. Ferreira according to Manta.com. Who is this person and why is there no information about them anywhere on their website or anywhere else on Google? Additionally, it notes that the firm started in 2008 (what happened to the previous 17 years, as per Jon Landau?) and consists of (2) employees. Also note that they are doing approximately $130,000 in annual sales. Hoovers also confirms this information.
Exhibit D: Top Line Revenue
Being that this company is privately held, it’s not my place to point my finger at their top line revenue unless it was so blatantly obvious that “something funny is going on here”. In the picture above it seems like “Dan” is having a killer month with over 180k in sales. What about the rest of those knuckle heads? I’m sure their doing well too. This firm is most likely doing annual sales in the low 7 figures, a far cry from 130k. Perhaps the $130,000 figure is what Edina Ferrerira tells Uncle Sam she personally makes.
Now why would I take the time to break this firm down? It’s not because Spyker employee haircuts (firm appropriately named!) and Karako suits make me sick, it’s because aggressive and reckless marketing tactics (demonstrated above) have ruined people’s financial lives in many recent instances.
I can’t bash the firm on performance; they may actually make their clients money. I can assure you, Nicky Papers (yours truly!) isn’t affiliated with the SEC or NASD. I’m simply a concerned citizen who’s looking out for your money. If you’ve stumbled upon this article while toying with the idea of sending these clowns a check in the mail (use Google to your advantage!) consider this article the due diligence you may have needed to make a better educated decision.
Sound off: Have you ever been bombarded with phone calls from brokers who just can’t take “NO” for an answer? At what point does the SEC or NASD regulate how a firm goes about seeking new investors?
With the news of recent days that the Government is seriously recommend that General Motors (GM) be prepared for a real bankruptcy has been met with mixed reaction. Some think it’s a good idea, some think it’s a bad idea. Certainly, a GM bankruptcy would materially impact many aspects of the overall economy and, probably hinder the recovery (though of course most talking-heads in the media believe its all “priced in”).
At issue is the most recent news whereby the U.S. Government is considering swapping about $13 Billion in bailout money that was lent to GM for a majority stake is a stripped-down version of the company (a.k.a. the ‘good’ GM). If this were to come to fruition, then the bondholders of GM, who currently lay claim to about $27 Billion in GM debt, would be effectively blown out. Previously bondholders were offered a 90% stake in the new, ‘good’, GM though the Government’s stake would significantly reduce that as their [Government’s] idea is to reduce the debt structure of the company by the June 1st deadline imposed on GM to come up with a viable plan.
The proposals on the table also include splitting up GM into two entities; essentially a ‘good’ GM consisting of the less crappy assets (likely Cadillac and Chevy), and another ‘bad’ GM consisting of the poor quality assets. The Government believes that GM can accomplish this via a “surgical” bankruptcy in as little as two weeks.
The idea that the Government would come in and take such a large stake in the ‘good’ GM and effectively wipe out the bondholders is preposterous, and should not be allowed. This would effectively nationalize GM, and we would have Government Motors, at least until the Government would sell of its stake (as it claims it will once the new ‘good’ GM starts operating profitably). The problem with the latter is it would not happen for a long time.
What will likely come as a huge surprise to the Government is that their idea of a “drive-through-bankruptcy” will be derailed once the matter hits the judiciary circuit. The Government will not be able to directly control the process and, the existing bondholders will certainly put up a fight in representing their interests.
My problem here is that the Government’s role, while important due to the fact that taxpayer money is at stake, is not being supportive (though they appear they are), rather they’re being forceful and effectively putting the company and the bondholders between a rock and a hard place. First it was forcing out the CEO; now they’re [Government] is putting the pressure on the bondholders to roll over, and next, when (not if) the bankruptcy ensues they will place a tremendous amount of political pressure on the courts involved to expedite this issue in favor of the Government’s interest.
I believe the best idea for GM is to perform some “self-surgery”. Though it would continue to impact the economy, GM should cut down one step at a time all of their “toxic” components. This should be accomplished in a formal bankruptcy proceeding with the assistance of a qualified trustee who can work out the issues one by one. This idea that we can get GM through this “express” bankruptcy is ridiculous and will only result in more layers of complexity and prolong the overall process of bringing this company back. That of course, assumes it should be brought back. Remember when Pan Am and TWA were the largest airlines in the world?
Sound Off: What do you think is the best option to restructure GM? Do you think the Government is right in the action(s) it is proposing to take?
Rick Santelli is probably the only person over at CNBC who has their head on straight. He continually is the voice of reason amidst an otherwise wolf pack of rah-rah cheerleaders. His infamous, “Rant Heard ‘Round the World”, during a live CNBC program was the proverbial explosion of the underlying opinion that I believe many Americans feel.
Since that time, some of the loony-left have taken shots at him, but Rick has thick skin. He continue to be the voice of reason in a sea of mindless talking-heads who are either too scarred to really speak up or really are drinking the Kool-Aid.
In any case, I applaud Rick Santelli’s ability to offer genuine opinion which is derived not of the force-fed pro-bailout/Government control nonsense flying around but rather on core underlying opinion which is likely shared with most common Americans.
…I really don’t enjoy being the perpetual pessimist. In fact, I would love to be positive about the economy, the markets, the government’s efforts; yet I find it increasingly hard to do so given the gravity of what’s going on.
That said I want to specifically opine on the topics of credit card defaults as it relates to the current rate of unemployment.
Ben Bernanke, the Fed Chairman, this week said that the collapse of the U.S. lending markets will have “long lasting” implications on home prices, personal wealth, and consumer credit. He specifically stated, “…The damage from this turn in the credit cycle — in terms of lost wealth, lost homes, and blemished credit histories — is likely to be long-lasting.” In other words, things are going to be messed up for a while.
BUT… if you listen to the liberal media, specifically my favorite group of rah-rah cheerleaders over at CNBC (I’m talking to you Bob Pisani), we’re bottoming! YEA! …please, spare me the hype.
Fact is, we may be decelerating the decline but we’re not at the bottom. This was noted this week in the Fed’s beige book: “…the Federal Reserve’s Beige Book reported overall economic activity either contracted or remained weak. However, “five of the twelve Districts noted a moderation in the pace of decline, and several saw signs that activity in some sectors was stabilizing at a low level.” The overall takeaway is that the economy is getting worse, but more slowly.” – Translation: things are still going down but not as fast. I agree that the pace of the decline is slower but this is simply a period of sideways movement and all it shows is that we’ve taken the first wall of the hurricane without our house being totally ripped from its foundation. As with most hurricane’s, it’s the second wall after the calm of the eye passes that you have to worry about. Meaning: we’ve been beat up already for while and though there is some breathing room right now we’ve got more storm clouds brewing.
So where specifically am I looking? I’ll tell you. Commercial Real Estate, the proverbial “other shoe” which is due to drop. Specifically this week General Growth Properties (ticker: GGP), a huge owner of Mall property filed for bankruptcy this week (one of the largest real estate failures in U.S. history) and though they’ll likely emerge from chapter 11 a smaller company less some assets. Don’t let this fool you, though, their failure is a function of a heavy debt load and the rapid decline in property values exacerbated by a lack of consumer buying at retail (i.e. their tenants can’t pay rent if they’re not selling anything).
Another sector I’m looking at as the next ‘hurricane wall’ is consumer credit cards. This brings me back around to my aforementioned purpose of this post which is to discuss the relationship between unemployment and the rate of credit card defaults. If you look at a chart of unemployment (nationally) versus credit card default, you’ll see that when unemployment was in the mid 4% range that credit card defaults were roughly the same. As unemployment has increased in the last several months to 8.5%, you’ll see credit card defaults surpassing the trend line and increasing to nearly 10.5%. This however, is no “big-whoop” since it makes sense that as people loose their jobs their likely not paying their credit cards. However, the key concept I want to convey is that the credit card default component is surpassing the unemployment trend line, and increasing exponentially.
This will have a negative impact on the earnings of credit card company’s like Capital One and Amex, and banks like Citigroup, all of whom have large exposure to consumer credit.
What I’m saying here is don’t believe the hype. Big deal Citi posted a “profit” in Q1. It’s a ‘paper-profit’ due to a change in accounting rules. They still lost $.18 per share… and as credit card defaults continue to increase with unemployment (and unemployment is still very much increasing, just look at states like California which now has 11.2% unemployment, and states like Indiana and Virginia, and others who are at or north of 10%), company’s like Citi will have tremendous downward pressure on their earning as they either absorb the losses or write them down.
I’m a big believer that everything lags with impact. A job lost today doesn’t impact the person who lost that job until next month, or the month after, or more. A person defaulting on their credit card today doesn’t effect the credit card company’s earnings for months, and a mall loosing retail tenants doesn’t feel the impact until theirs more vacancy then the properties income model requires to break even. See where I’m going?
…mark my words, Commercial Real Estate and Credit Cards are the economy’s next storm surge – and if you believe that all the potential downside is already “priced in” then ignore my comments, but just to be on the safe side I’d hedge any long positions on the financials or real estate with some inverse ETF’s…
Invest Cautiously,
Blake Winston
Sound Off: Do you think the economy is at the bottom? Do you think we’ll experience another impact from Commercial Real Estate or Credit Cards?
So what the F*ck is a feeder-fund? We kept hearing this term used over and over as issues related to the recent investment fraud of Bernard Madoff became more prevalent. So, what is it? Well: A Feeder-Fund is essentially a pool of capital (a ‘fund’) whereby nearly all of the funds are invested through another fund called a “master” fund. Furthermore, this structure is similar to a fund-of-funds arrangement, except that the master fund manager is responsible for managing the underlying investments (source: Investopedia).
So what’s the deal with why Funds-of-Funds and Feeder-Funds have been under scrutiny? Well, simply put; many investors we’re blasted back once they learned that their money which they turned over to a money manager was cycled through several large pools of funds (and funds-of-funds, and funds-of-funds-of-funds, etc.) only to be told, “Sorry, you’ve lost everything”. To add insult to injury all along the way their capital was ‘pinched’ by each handler along the way through an assortment of different types of fees.
Fees, fees, fees – what’s up with all these fees? It appeared after further investigation of the Madoff fraud, specifically, that all these different channels and pools of money and managers, and funds-of-funds and feeder-funds, etc. we’re all charging “management” fees along the way.
So here’s my question: if you don’t actually “manage” the money why are you charging a management fee? Aren’t you just a broker if you’re simply channeling one person’s money to another to manage? In fact, isn’t the underlying end point where the money ends up the actual manager? I’m beating up the point here a little, but what I’m essentially trying to get to (and almost where the entire philosophy of this site is going to) is the concept of Due Diligence and Transparency.
The aforementioned terms, though overly abused in application in recent months, are still very much important in the grand scheme of investing and money management. I, the investor, have a right to know where my capital is being invested, and I need to know all the costs, fees, expenses, etc. – and, perhaps more importantly, I deserve to know if you’re handing my money over to someone else to manage!
The biggest example of feeder-funds gone wrong is Fairfield Greenwich Group, the CT based fund which channeled Billions to Madoff and in the process made more than $500 Million in fees. Fees that were disingenuous in nature given the fallacy that was Bernard L. Madoff Investment Securities. While lawsuits filed by Fairfield Greenwich clients will likely claw back a substantial portion of those fees and, the two principals of the firm are under federal indictment, I still feel the situation could have been avoided or in the alternative come as less of a blow had their fee structure been less aggressive.
This leads me to another point; which is what are the right types of fees and how much is appropriate to charge clients for the management of their money? No doubt it’s proper to compensate their firm for their research, work, and execution of managing your money. Though, I question at which point the fees start becoming excessive?
I’d like to turn this over to you, the reader. Please share with us here at TMYM what you think about the fees and charges imposed by investment firms, hedge funds, feeder-funds, and funds-of-funds. We want to hear opinions, direct experienced, and everything in between.
The best written responses will be included in a follow up article later next month.
With so many conflicting points of view about the market it’s been very difficult for your casual (amateur) investors to get a handle on how to manage their portfolio’s recently. With the surge of cash into the marketplace recently, coupled with inconsistent trading volume and, of course, good‘ol Uncle Sam in there mixing things up it can be a gauntlet for many would-be investors and one can be burned very easily.
I want to specifically stress that I am not a professional investment advisor, nor do I hold myself out to be any kind of a market expert, but here are a few tips I’ve been using over the last three months which have resulted in a near 200% increase in my account (no, that is not a typo):
1) ETF’s – I’m a HUGE fan of ETF’s, specifically the ProShares series of ETF product. ETF’s, which are Exchange Traded Funds, and which in the last several years have become an extremely hot item, are great because they trade like stock (meaning you can buy and sell them with the same ease of any normal stock) and typically give you some leverage whereby you can achieve a multiple based on the performance of underlying securities in a given index.
As an example, the ProShares ETF UltraShort Financials which trades under the ticker ‘SKF’ renders daily performance before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the Dow Jones U.S. Financials Index; translation: when the banks go down this goes up! The ETF which ProShares offers which is correlated (moves with) the same Financial Index is ‘UYG’ – right now with the banks flip-flopping back and forth with the pending stress test results and with the earnings, etc., these can be useful tools to play with. Remember, ETF’s are great for intraday trading or at best a small position trade over a short period of time are not long term instruments. Some recent ETF’s which I’ve recently had a lot of success with include: UYG, SKF, UYM, SMN, TBT, UCO, SCO, and SSO.
2) Beware of low volume or big block movements! On any given day when you see the average daily trading volume very low it’s an indication that most traders are on the sideline waiting for something. Don’t be foolish and jump into something just to “put on a trade”, you could get caught in the buzz-saw once everyone comes off the fence and starts to get into the action. Also be weary of big block movements in any particular stock – if you’re trading during the day and tracking a specific stock and, you’re using any of the conventional trading platforms (TD Ameritrade, E-Trade, ScottTrade, etc.) your system should be able to bring up a ‘last-sale’ chart which should give you real time last-sales including price and share size as it comes across the floor. What you need to look for are multiple big blocks of stock being shot off, on the sell side this could be a big position trader unloading and taking profits, conversely it could be short covering which doesn’t necessarily help your situation if your long.
3) READ! Very basic, but very important. Do your homework! You should be doing no less than two-to-three hours per day of reading and research. This should include news from generally available mediums like Bloomberg, The Wall Street Journal, etc. as well as some alternative sites like Seeking Alpha (be careful, though, because Seeking Alpha is racked with more opinion than fact sometimes and not everyone who posts there knows what they’re talking about). You should also be reviewing charts and specific news about any of your direct holdings (obviously). You should never invest with a “set-it and forget-it” mentality; many investors who didn’t start paying attention to the news about 18 months ago and had banks and real estate stocks in their portfolios are kicking themselves for not reading more. I suggest a few core methods for “doing your homework”
a. Spend at least 45mins to one-hour in the morning reading news briefs of the day; this are best usable and obtainable through daily e-mails with news captions
b. Learn to read charts in a very basic sense and understand where certain trends occur in specific stocks you like.
c. Be careful in choosing an economist or author to follow, research their background and performance, if any, and always interpret opinion based on your individual circumstance.
4) Always leave yourself some breathing room. Just because TD Ameritrade or ScottTrade, or whichever online broker you choose (which I highly recommend since online brokers come at substantially less cost) and, they give you a bunch of margin (credit) to play with doesn’t mean you should leverage out your whole account. Always be conscious of your order sizes in terms of shares, cost, and availability of capital. Always leave yourself some buying power in case a position goes against you; this way you avoid the potential of having a margin call (which sucks!) and if need be you can hedge your downside risk with an ETF or another opposing trade which evens you out – but even then use discipline and don’t deplete your availability.
5) Watch out for the third Friday of each month. Options expiration day (more on options in a later post coming soon). Options expire on the third Friday of every month and, as such, that week of trading leading up to expiration is typically weird – weird volume, unexplainable peaks and valley’s in select stocks for no apparent reason. Best advice is that when this week is upon you be very careful and consider exiting your positions and staying in cash until it passes.
These strategies are just some basic (very basic) tips that I use in my course of trading. These are not necessarily right for long term investing, and my not be right for you all together. My recommendation is that if you’re serious about learning to trade for extra income (or as primary income) you seek the advice of a professional investment advisor.
BUT, remember, do your due diligence lest you become the next victim of an aspiring Madoff!
In the video above Timothy Sykes does an excellent job describing how to spot a stock scam from a legitimate investment opportunity. As Timothy explains, there approximately 8500 of these “scam stocks” trading on the OTC Bulletin Board that utilize “pump and dump” strategies to drive the share price of their stock up.
Please note that the marketing tactics of these companies may be overly aggressive, but for the well-informed investor, trading these types of stocks can be lucrative if you know what to look for. As Tim further describes, he has no qualms investing in what he considers horrible companies, but plays the odds when noticing a penny stock jump from 100-200%.
One must always take into consideration that the hot penny stock that was just recommended was most likely aimed at individuals who are susceptible to impulsive buying tendencies based on reading “jazzed up” marketing materials. Those individuals have not done their due diligence and read the fine print contained in the marketing materials. Other times, a chop shop will pump a promoted stock to prospective clients to raise the share price on sparsely traded penny stocks over the telephone.
Always remember that a stock being promoted (by e-mail, message boards, cold calling) is not putting money back into the company, research and development, staff augmentation, mergers and acquisitions, etc. The independent marketing firms pumping these stocks are making out like bandits! Always do your research before moving forward with a “marketed” investment.
In a previous post on March, 30th entitled, “David Friehling: The Fraudsters Friend”, I made reference to being weary of “Shopping Plaza” accountants. I want to be clear: I’m not trying to imply that all accountants or attorney’s who have offices in shopping plaza’s are fraudsters or, for that matter any less qualified than a professional in a big fancy office. In fact, just because an accountant or lawyer has a fancy office, or a nice suit, doesn’t mean they’re any better either. Rather, my comment was intended to provide an underlying description of the ‘style’ a professional exhibits in their practice. Typically, in my experience, low-brow accountants and attorney’s who have shady office locations are usually suspect.
This all rolls into my theory on due diligence on one’s behalf being more a function of analysis and perception than simply a surface review of a prospectus or a less than forthcoming reference list.
So, let’s explore more on this topic of ‘Shopping Plaza Professionals’. First, these types of professionals are usually if not always sole practitioners, as it is far too complex for these shade-balls to operate with a big staff or a group of partners. That’s not to say that there are not truly good professionals out there who operate solo; however, your typical sole practitioner who is an accountant or attorney usually has at least a secretary and likely an under-study type assistant (like a paralegal or a bookkeeper). Any professional who is totally solo with absolutely no support staff is something to be weary of – and don’t believe the story that they employ ‘part-time’ staff because if it’s 10 AM and no one’s in the office I have news for you: no one else works there.
Moving on; if the office is located in a “weird” part of town not typically near where other professionals keep their offices, you should raise an eyebrow. Remember, we’re not talking about professionals in major cities, in New York City, whether a professional’s office is in mid-town, down-town, or in between is not necessarily any special indicator. However, we are talking about professionals located in suburbs and rural areas. Typically there is the preverbal “Main St.” in a town where many small business including attorneys and accountants congregate. Alternatively in slightly larger towns there may even be specific neighborhoods where professionals keep their offices; for instance, near court complex’s (many attorney’s locate near these complexes for obvious reasons of convenience). If an attorney’s office is located way out of the way there should either be a good reason, or something is off.
Next, check out the neighbors. Most of the time professionals tend to be in the same neighborhoods (as I mentioned just before). If the accountants neighbor on one side is “Bobbies Chicken & Ribs”, and on the other side, “Kim Lee Express Nails” take that into consideration. Most professionals, even sole practitioners that maintain a decent client base can afford to have a more presentable office in a less-than-ghetto location.
Then we get into the actual appearance of the practitioner and his space; contrary to what your mommy told you growing up, you can judge a book by its cover sometimes. Though aesthetic professionalism isn’t necessarily indicative of ability, if your accountant or attorney looks like a used car salesman, or he appears shabby and discombobulated then he probably is that way in practice. However, with that in mind be similarly weary of “sharks” that look like they’re trying way too hard to “look the part”. Someone who is generally cleaned up and presentable is usually organized in their personal/professional matters as well.
Let’s talk about office space. An obvious “run” signal is if there are no degrees on the wall…at all. Most professionals who’ve attended law school or graduated with advanced accounting degrees are usually very proud of their academic accomplishments and display them accordingly. Also, most competent attorney’s and accountants belong to some type of professional organizations at least regionally and in most cases nationally, like the American Institute of Certified Public Accountants (AICPA), no affiliations or memberships in these types of organizations should arouse at least some skepticism.
Beyond surface perception and observation of attire and surroundings, one should of course ask for references. Ask for at least five, or more; most people can drum up at least two or three people who will ‘vouch’ for them, beyond that it gets difficult. Also ask for a full disclosure of their certifications to make sure they’re truly registered and currently allowed to practice. Their certifications can also usually be back-searched to find any officially registered complaints about the practitioner, but these days Google can do that just as easily.
Lastly, ask for a complete and thorough disclosure of their fees upfront, especially with attorneys. Lawyers are notoriously guilt of “padding” their bills with extra charges for basic administrative functions, and bloated hours. In my experience most attorneys spend more time managing their billing then they do actually putting in the work. This can also be true for accountants. Be weary of charges on any statement which appear vague or overly exaggerated. What I like to do is discuss in advance the scope of services I require and ask the professional for a good faith quote of the services; then I deposit a retainer in that amount exactly with the instructions that any overage charges should be presented and cleared with me first before simply being thrown onto a bill.
I will share with you that I am a “Las Vegas Veteran”. I travel there quite often, though, not for the reasons you’d expect! In the last five years I’ve graced the desert oasis with my presence no less than twenty-two times. I’ve seen the city of Las Vegas go through many changes in that period of time.
Most notably in the last year has been the steady rise of concrete and steal associated with the gloriously disastrous City Center project which is the regrettable brain-child of MGM Mirage and Dubai World, the state-owned investment fund of the country of Dubai.
Billions over budget, problems upon problems with the construction schedule among other issues have turned the City Center project into the laughing-stock of the Strip. I’ve literally watched this monster develop over the course of the last year through a cacophony of cranes, buzz-saws, blow torches, endless trucks bringing in trailer loads of materials, and the cat-calls of construction workers hollering at any remotely good looking female who passes by.
City Center is the would-be icing on the now stale cake which had been served generously to many multi-billion dollar developers, especially in Las Vegas; which is, “You can build anything”. In fact, as we’ve learned in the credit collapse and subsequent retraction in residential real-estate (look for commercial real-estate to blow up in 3,… 2…) you cannot just build anything.
Just look at any number of the failed and/or defunct development projects within the last two years including Lake Las Vegas, Tamarack in Idaho, and countless high-rise condo’s in Miami. All of these projects we’re funded on the, “Build-now, pay later” model which essentially gave developers the equivalent of “seed money” to start building but never enough funds to actually finish the whole project. The idea was that as the project moves along your ‘sales office’ would sell units/lots/whatever as “pre-construction” in order to pay for the remaining development of the site. This was a stupidly over-zealous mentality that many developers utilized and now their developments are either owned by the banks that backed them or close to it.
Coming full circle; about one month ago there was a lot of rumor that MGM Mirage may have had to declare the City Center project bankrupt. In fact, MGM had bankruptcy counsel on standby just in case – with the tension literally coming down to the wire and in order to avoid total devastation MGM ended up making a construction loan payment (which was supposed to be split equally between MGM and Dubai World) totally by itself to the tune of nearly $300 Million (ouch) covering Dubai World’s half. Oh, and lest we forget at the time Dubai World was suing MGM for “mismanagement” of the project and refused to pay their portion (remember, when the going gets tough in business loyalty quickly defers to lawyers).
Now, it appears things are all-good on the home front with MGM, Dubai World, and City Center. This is because MGM, Dubai World, and their funding sources reached an agreement which allows the developers to complete the project through the establishment of a $1.8 Billion loan facility – and Dubai World has dropped their lawsuit.
Though to accomplish this MGM is paying a hefty price; mind you, MGM already sold its Treasure Island property to help continue funding this money pit. Now, MGM signed over the Circus-Circus property and the adjacent land as a guarantee to the loan, which it now bears alone. Additionally, MGM has restructured some of its previously unsecured debt facilities by giving lenders security interests in its Mississippi and Detroit Casino properties, as well as some undeveloped land in Las Vegas. MGM also plans to sell other assets and perform debt buybacks as a means to avoid default. I hear they may consider selling those cute little tigers they keep in the lobby if the going really gets tough… Seems like MGM is really getting the wrong end of this stick, doesn’t it?
All this for a doomed project (which is aesthetically ugly) and will likely never deliver the over-bloated ROI that I’m sure MGM thought the property could produce. This leaves me with one question for the head-honcho, 91-year old MGM founder Kirk Kerkorian: was all this worth it?
Sound Off: What are your thoughts on the City Center project situation? Do you think commercial real estate is the next “bubble”?
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In many recent posts both here on theymadoffwithyourmoney.com, and on other sites like seekingalpha.com I’ve commented on the pending bubble of commercial real estate as the next wave to wash over our economy. Many people agree with this assessment, while others have ignored it either knowingly or naively.
Fact is, if you look at year-over-year statistics the level of commercial mortgages at risk have quintupled (that means increased by five times!). In dollar terms we’re roughly talking about $24 Billion of distressed mortgages from the commercial sector. This translates into millions of square feet at risk for foreclosure.
This should not come, however, as any surprise. I’ve long stressed the concept that things tend to lag and therefore aren’t realized as an impact until much later. Hence, as the economy down-turned and residential mortgages became distressed, and joblessness soared, and consumer spending decreased, and less people shopped, and big-box retailers like Circuit City and Linens N’ Things went out of business, many commercial properties which cater to retail lease space began seeing defaults. Similarly as many smaller financial firms and other companies got wiped out from the severity of the market cliff-dive last Oct./Nov. many class-A office buildings began noticing higher rates of rent defaults as well. This in turn affected the balance sheets and cash flow of the management company’s and, in instances such as Global Growth Properties (the U.S.’s second largest retail space and mall owner) caused said management company’s to file bankruptcy.
But it’s always easy to see the path to destruction once it’s been paved, isn’t it?
The concern now is that the impact of commercial-backed mortgages that were used as investment tools just like residential-backed mortgage pools will be far greater than anyone has anticipated. What’s worse is that irrespective of Government stimuli abound I’m sure we can all see the result of the doom brewing in the preverbal “space available” signs which seem to be populating vacant store fronts and office parks from Wall Street to Main Street.
Make no mistake; this too shall pass, though not without its share of pain (or pleasure depending on what side you’re on). In fact, many experts believe that the impact of defaults on commercial-backed mortgages will be 50% greater than was the impact of defaults in residential-backed mortgages.
So, what should/could we do? Well, sadly not much in practical terms… Though I’m sure that The National Bank of Obama & Co. will figure out a way to pile more cash atop this heaping pile of decaying paper.
BUT…
Out of disaster comes opportunity. Opportunity for investors, both seasoned and amateur alike, to make strategic investments in commercial properties and business’. As defaults increase you will see an increasing number of foreclosures on the local shopping strip as well as many local business’ filing for bankruptcy and holding auctions for their assets and accounts. One man’s falter is another mans gain…
Always wanted to invest in commercial real estate? The next two years may be your opportunity. Thought that the cost to start your own bakery, dry cleaning business, or limo company could never happen – think again as many over-leveraged business’ with high-cost fixed overhead structures hold fire sales to pay off creditors. For the savvy and tenacious among you be ready, beware, and bring your checkbook.
Sound Off: Are you an investor waiting for the right opportunity to pick up a property or business from default?
There’s something about Ben Bernanke’s beard that show’s he’s distinguished, wise, and has the power to shell out billions to those companies in need. If he wasn’t the chairman of the federal reserve he’d be perfect for a “Just for Men” ad campaign. (Comb away the gray that hides your energy, keep a little gray to show your experience!) It’s no mystery why Tim Geither and Ben Bernanke have become new work “BFF’s”. They probably text message each other into the night and have designated ringtones for each other. (Ben Don’t Go! …or at least until Tim takes the over TARP responsibilities.) God bless America. : )
OK, maybe the headline of this post is a little dramatic. However, with the news this week that General Motors (which I now refer to as Government Motors) will be issuing 60 Billion (Billion!) new shares and effectively wiping out the common shareholders is proof positive of the Governments manipulation and influence of the company. If this isn’t nationalization I don’t know what is – specifically when you take into account the circumstances.
There is no question that GM had very few options here, and all of them were bad. What GM really could not do is screw over the bondholders or the unions, so instead they are essentially converting the Government’s preferred shares into common equity which effectively dilutes the current equity holders down to 1% of the company and creates the U.S. Government as the largest shareholder.
While this decision might have seemed like the lesser of several evils, it totally screws up the shareholders, who couldn’t even vote on this issue since this move needed only Treasury approval to become effective.
So what does this do to the stock price? More directly, what does it mean if you own GM stock? Well, if you owned GM stock before it took a suicidal cliff dive then perhaps you’ve already incurred the majority of your loss. However, as an example currently that shares of GM are a little under $2.00 – this conversion play by Government Motors & Assoc. would render the stock worth slightly over one penny…
I suppose the logic (if logic was applied in this situation), is that in the normal scheme of things equity investors make investments in common stock on the hopes (based on some sort of analysis) that the company will perform and the stock will go up. However, stock can move up and down relative to a company’s performance and market conditions. So, maybe the Gov’t figured that since equity investors chance the risk that they could loose a substantial portion or all of their capital in any one investment (as many prospectus’ warn is possible) - then who cares if the GM common shareholders are wiped out because the same could happen irrespective of the Governments involvement and especially if GM actually goes bankrupt?
I’m not sure what the answer is, but all I know is that I’m sure this decision was easier than attempting to go up against the bond holders and unions.
Sound Off: Do you think this is the right move to “save” GM by the Government?
Nearly nine straight weeks of upward momentum have given bullish spirit to many investors who’ve “felt the pain” over the last six or eight months. It almost seems as if the markets don’t care about any negative news: Poor earning, not a problem – joblessness continuing to rise (albeit at a slightly slower pace), no big deal – Chrysler bankrupt, whatever…
Are we being lulled into a false sense of optimism? Before you charge me with being the perpetual pessimist lets try to lend some cautious analysis to the overall picture.
First: we’ve had an extremely long run of upside momentum. Even in non recessionary markets we typically only see 25-35 trading sessions of upward momentum before we get significant pull back. We have not really seen that here. Second: Fundamentally there is nothing that supports nor warrants certain upward movement is particular stocks, for example Capital One (COF), U.S. Steal (X), and Cliff Natural Resources (CLF); whereby business is impacted by rising credit card defaults, earnings were twice as bad as expected, and management is shutting down production at certain plants for extended periods of time in addition to layoff, respectively.
These specific examples of a lack of fundamental support coupled with very, very light trading volume tell me (or at least suggest to me) that there is a lack of stability behind this rally. Furthermore, when you look at oil inventories stacking up coupled with a lack of demand for raw materials and manufactured goods it leaves little insight to justify the rally.
Psychologically what I believe is occurring here is that people who were burned in late fall 2008 and March 2009 at first didn’t trust this rally through the end of March and beginning of April. Now, they’re clamoring to throw cash at this market in the hopes of making up their previous losses. I know this as fact in specific cases where broker friends of mine have told me they’ve needed to calm their clients down and advise them not to make hasty decisions trying to ‘chase’ this market as people who feel left out of this rally are desperate to “get in”.
However, this is precisely the attitude which is most dangerous in these circumstances as late-comers to the party are likely to show up and all the food and beer will already be gone… What’s worse is the never-ending “spin” and cheerleading perpetuated by nitwitted media personas such as Bob Pisani, Larry Kudlow (though sometimes Kudlow has moments of clarity) and Steve Liesman via CNBC. Their commentary is rotten with hypocrisy and is disingenuous in its presentation and thus short changes viewers into a misguided understanding of what’s truly occurring. Rick Santelli is the only person on that channel who has a brain!
So how do you navigate this market? Do you buy-in long and run with the bulls, or are the bears simply hibernating and waiting for the right time to awake from their slumber and ruin everyone’s picnic? Even some slightly bullish analysists have indicated that a correction from this extended upward run is needed. My call is to play both sides, or “lift legs” as some call it. Meaning: take a long position via some type of ETF correlated to a market index (like SSO, DDM, or something equivalent), BUT, hedge yourself by taking some downside positions against things like basic materials (SMN is a good tool for that). If you want to play in the financials, be careful, I would recommend picking up some SKF to be prepared for downside buzzaws in case we get impacted by credit defaults and what seems to be an emerging pattern in prime mortgage defaults as well – but also buy some UYG to cover yourself incase certain key banks do go on a run.
While I’m not an investment advisor or registered broker, or by any means claim to be an investment professional I’ve used the concept of “lifting legs” to help reduce volatility in my own portfolio. Remember: don’t take exactly reciprocal positions (i.e. don’t buy 100 shares of SKF and 100 shares of UYG), you can do that if you wish but my specific strategy when I use this technique is to set up hedged positions in a ratio to each other by taking a smaller percentage of my hedge side so that in the event my real position goes against me I’m reducing downside risk but in the event it goes in the right direction with my prediction I don’t cancel out my profit potential.
As always, invest carefully, do your homework, and seek the advice of a real professional.
Sound Off: Do you invest for yourself? Do you want to share your tips with readers, or have a different opinion that mine? Let us know by sharing your comments.
Don’t think that the trail has gone cold in the real life Law & Order drama of Bernard Madoff, Fraudster extraordinaire. While the news over the last month or so has been slightly stale and mostly procedural, this past week we heard from the long time secretary to Bernard Madoff, Ms. Eleanor Squillari about some of the pompous ponzi purveyors actions leading up to his arrest last December. We also learned a little about where exactly Madoff threw money around from his fraudulent business unit.
The June ’09 issue of Vanity Fair magazine will feature the full article co-written by Squillari which goes into more specific details about what it was like in the lion’s den leading up to the climax of Bernie’s arrest. Some brief details we’ve heard include tid-bits like Madoff checking his blood pressure every fifteen minutes as he nervously paced around his offices in the weeks leading up to his arrest, refusing to look at his mail, and calling his feeder fund “friends” and other key people practically every hour like a crazy girlfriend.
While I have not read or seen a preview of the full article I am certainly interested in reading it. I’m also curious of the motives behind Squillari’s story; is she trying to clear her conscious? Is this a means by which to profit from her direct experiences? Maybe the feds are pressuring her? Who knows, all I know is that the writing is on the wall and it says that all involved will eventually follow Squillari’s example and share what they know and while this doesn’t necessarily hurt Madoff further than he already is it could implicate many of his co-conspirators.
Some other Madoff news this week included some interesting insight into just how much Madoff used his own firm as his personal debit card. Among other multi-million-dollar payments, Madoff reportedly lent his brother, Pete Madoff, over $9 Million from the business. Madoff paid nearly $11 Million to law firms who represented his sons on real estate transactions. Other notable items included more than $7 Million in capital investments for start-up company’s run by certain Madoff family members, and almost $12 Million for the family yachts.
Then there’s the roster of “employees” who never were like the boat captain for Frank DiPascalli who was Madoff’s head compliance officer. There were many people on the payroll who never actually worked at Madoff’s firm according to reports.
This is where the story will start to unravel a little more. It’s obvious that Madoff used funds from the firm to support his own lifestyle and the lifestyles of his immediate family and close friends. It’s likely that many of the faux employees were either paid to individual tasks for Madoff, or, otherwise served some purpose for Madoff to perpetuate his scheme. If he’s as maniacal as I believe him to be he probably spread around his network of people who managed certain small tasks – this way it would take a longer time connecting all the dots in order to ever make a case against him and, no one person or source would ever have total access to key information but him.
Furthermore, it appears that Madoff made a lot of multi-million-dollar payments to various law firms on both his own behalf and that of his sons. In one alleged case he paid nearly $3 Million to a law firm representing one of his employees in a real estate deal. This may have been a move in order to establish conflict in case any investor or entity sued Madoff as the specific attorney paid by Madoff couldn’t be used against him.
While I’m speculating a little here you get the point. I’m looking forward to the full Vanity Fair article coming out next month which is supposed to be over 9,000 words (whoa).
Sound Off: Do you think more people will be exposed as being part of Madoff’s scheme?
You really need to study this image for a few minutes to take in how much is going on. Politicians “drunk” on power, shoveling money from an out-of-control cart drawn by a donkey (channeling the Democratic Party?) – The “Spend! Spend! Spend!” billboard with what seems like a modern day interpretation of how many feel over the recent Government cash machine, and the ominous figure of Stalin in the background is a scary reference of the times, then and potentially now.
Look at this image and think about what was going on in the world and our country in 1934. A post market collapse, depression gripped economy steaming towards another World War like an out-of-control freight train.
While we may not be on the brink of World War or a prolonged depression (though I disagree with the cheerleaders in declaring hooray for the recovery this early in the game); one cannot deny the fact that all of the recent Government spending is at best recklessly ignorant and at worst an invitation for wild inflation (look at the recent increases in the 10-year note yield) and likely insurmountable debt that our grandchildren will be paying off till they have grandchildren themselves.
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We keep hearing this new catch-phrase, “Green Shoots”, being slung around by media personalities everywhere – it pertains to a quick shot of positive upside momentum/news/forecast, whatever within this current down-cycle of the economy.
There’s no doubt over the last two months we’ve watched one heck of a rally unfold, and everyone from around the world is beginning to jump on the concept and hail the recovery as here to stay. Green Shoots all over the place, everything is great again, we’ve fixed the economy in three months and we shouldn’t look back because we’re all full-steam-ahead! …or, are we?
I know I’ve continually been the perpetual pessimist with my commentary, and while I’m happy that the markets have had some breathing room over the last several weeks even the most bullish economists, traders, and investment advisors are starting to hold back their optimism going forward. The doom and gloom period may be behind us; O.K., the walls didn’t come tumbling down in a furious crash, BUT, a lot of people endured a lot of pain for a long time and I don’t believe we’re out of the woods yet.
The fundamentals don’t matter until they do… Interest rates are at ‘0’, with the effective interest rate at -5; rates have nowhere to go but up which translates into inflation at some point (many economists forecast hyper inflation of 10-20% within 24 months from now). Housing starts are still low, and foreclosures still on the rise – company’s like American Express, HP, Yahoo, and other’s are announcing layoffs in the thousands (this will continue to impact unemployment significantly and although unemployment is a lagging indicator, people without jobs and income cannot spend this economy into recovery). Corporate earnings, while seemingly positive are really false-positives if you look hard at the data since much of the “profits” are paper profits based on savings in operating expenses (like firing a lot of people) and are not earnings derived from real profits.
Furthermore, many economists/analysis that two years predicted the housing collapse and at the time were considered crazy are now being hailed as “experts”. These experts are now forecasting a blow-out in Commercial Real Estate as well as a continued rise in consumer credit defaults.
How can any of the aforementioned fundamental circumstances sustain this rally? While I agree that the aggressive pace of the declines have slowed, and perhaps we don’t get a tremendous pullback (DOW back below 6K) even the most amateur of investors should see that this rally is overbought and be very careful about where you place your money.
If you want to go long, and join the bulls, that’s fine but make sure you hedge your downside risk with an inverse position somewhere. Furthermore, be careful of hot-shot brokers pumping up this rally and telling you, “You gotta get in now!” Be relaxed, be patient and most of all be cautious.
There’s an expression which has served me well in my quest as an independent investor, “Pigs make money, and Hogs get slaughtered”. Enjoy the upside but don’t leverage your entire account to the max in one direction, and keep some reserves in case your positions go against you. All the bulls will be scrambling for some Charmin Ultra-Soft once the correction comes and their ‘green-shoots’ turn into ‘green-sh*ts’.
There’s been some news recently that the anointed administration may be on track to strip the Securities and Exchange Commission (SEC) of some of their regulatory powers and hand them over to the Fed. Specifically, some of the ideas include giving the Federal Reserve more power and oversight to monitor firms that are “too big to fail”, and give a special “bank regulator” (a.k.a. Bank Czar) powers separately from the SEC to regulate and control consumer finance products like mortgages and credit cards.
What seems to be happening here is that the Obama Administration is having these conversations and is said to be in the process of drafting written proposals for congress related to the aforementioned regulatory powers; however, the SEC and specifically Mary Shapiro (current SEC chairperson) don’t seem to be apart of the discussions!
How can the Administration and other Government officials have discussions about removing certain powers from the SEC without the SEC’s input? Seems weird, although apparently it’s O.K. these days for the Government to do whatever they want because in the near term appearances suggest they’ve done everything right (did I mention I use sarcasm a lot?) I get it, though. The SEC has a black eye (maybe two black eyes and a broken jaw) over their apparent doltishness in handling recent issues in the markets – like how they missed our buddy Madoff’s $65 Billion ponzi fraud, and R. Alan Stanfords firm, and numerous “droppings-of-the-ball” on other regulatory issues and oversight requirements.
However, is this the right step? Is it right to punish the SEC for their previous mistakes by stripping them of power and their ability to regulate markets? Is it right to centralize everything in the Government? This seems to be a recurring theme in this Administration and I’m surprised more people aren’t concerned. Centralized banking, manufacturing (autos), healthcare, energy…the list goes on. Is this not a deliberate albeit quietly executed maneuver towards Socialism? Oops, I said the dirty word…
That is what appears to be the motive behind this Government. What’s worrisome is that many people are hurt and scared from being hit in this recession that they’re embracing the Government intervention thereby making it easy for these goofballs to come in and push their agendas.
I say leave the powers with the SEC and instead of taking away their powers help them work towards refining their powers and process of regulating the markets to make them more effective. No Centralized Government!
Sound Off:
Do you feel that the administration is moving towards a socialistic policy? Do you think the SEC should loose powers and that the Fed should regulate certain parts of the markets?
It is absolutely astounding to me that AIG executives received in excess of $165 Million in bonus payments, after being bailed-out by the U.S. Government to the tune of over $80 Billion (with a ‘B’) and counting…
It’s really had to pinpoint the catalyst that caused markets to plummet, the exposure of unethical practices in the financial world, and the credit crisis that we are in today. Is it because working in financial services (in many instances) had become so goddamn profitable or is it because Americans (as consumers) are weak and gravitate toward exotic equities trades (from a hotshot broker in New York!) and complicated mortgages structured by now defunct banks. Asking a question like that is like asking what came first, the chicken or the egg?
Is this story ever going to end? It feels like it keeps getting deeper and uglier by the day. Apparently, according to the Connecticut State Attorney General, AIG may have paid as much as $218 Million in bonus payments! This is an additional $53 Million beyond what they apparently were already accused of paying out.
One of the big questions, among many, that have been swirling around the Madoff case is what will become of his wife (Ruth) and two sons (Andrew and Mark)? 
