Namuah Blogs

RBS Managers Condoned Libor Manipulation

2012-09-26T04:33:00.000-07:00

Never ending saga of financial scandals with no end in sight! The less said the better! Read on!

RBS Managers Condoned Libor Manipulation

Royal Bank of Scotland Group Plc managers condoned and participated in the manipulation of global interest rates, indicating that wrongdoing extended beyond the four traders the bank has fired.

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A visitor enters the headquarters of the Royal Bank of Scotland Group Plc in London. Photographer: Chris Ratcliffe/Bloomberg

Royal Bank of Scotland Group Plc managers condoned and participated in the manipulation of global interest rates, indicating that wrongdoing extended beyond the four traders the bank has fired.

Regulators are now probing RBS’s yen, Swiss franc and U.S. dollar sales-and-trading businesses, all part of the fixed-income division Fred Goodwin expanded before he was ousted as CEO in 2008, said two people who asked not to be identified. Photographer: Raul

In an instant-message conversation in late 2007, Jezri Mohideen, then the bank’s head of yen products in Singapore, instructed colleagues in the U.K. to lower RBS’s submission to the London interbank offered rate that day, according to two people with knowledge of the discussion. No reason was given in the message as to why he wanted a lower figure. The rate-setter agreed, submitting the number Mohideen sought, the people said

Mohideen wasn’t alone. RBS traders and their managers routinely sought to influence the firm’s Libor submissions between 2007 and 2010 to profit from derivatives bets, according to employees, regulators and lawyers interviewed by Bloomberg News. Traders also communicated with counterparts at other firms to discuss where rates should be set, one person said.

“This kind of activity was widespread in the industry,” said David Greene, a senior partner at law firm Edwin Coe LLP in London. “A lot of the traders didn’t consider this behavior to be wrong. They took it as the practice of the trade. This is how things operated, and it seemed harmless.”

Internal Investigation

RBS, 81 percent owned by the British government, is one of at least a dozen banks being probed by regulators worldwide over allegations that traders colluded to manipulate the benchmark interest rate so they could profit from bets on interest-rate derivatives. Barclays Plc (BARC), Britain’s second-biggest bank, was fined 290 million pounds ($470 million) in June for rigging the rate, used for more than $300 trillion of securities ranging from mortgages to student loans. Chief Executive Officer Robert Diamond and Chairman Marcus Agius resigned in the aftermath.

Regulators are now probing RBS’s yen, Swiss franc and U.S. dollar sales-and-trading businesses, all part of the fixed- income division Fred Goodwin expanded before he was ousted as CEO in 2008, said two people who asked not to be identified because the bank’s internal investigation, begun more than two years ago, is still in progress. Investigators are focusing on the firm’s swaps, inflation-trading and foreign-exchange teams, as well as on money-market traders who made daily Libor submissions, the people said.

Source -- read more: http://www.bloomberg.com/news/2012-09-24/rbs-managers-said-to-condone-manipulation-of-libor-rates.html

2012-06-04T01:20:00.000-07:00

I knew it would eventually come to this! Some heads must roll and the Chief Investment Officer (CIO) is the first person that has to go! I am glad that Jamie Dimon is also feeling a bit more contrite -- actually I think he feels very humbled.now that it is clear to him that the financial world as he knew it has changed in terms of the expectations of the people on "Main Street", Congress and the regulators. It is no longer business as usual.

The days of swashbuckling traders that take excessive risks so they can have bragging rights at happy hour are definitely over! Therefore, the so-called "London Whale" must now find another line of work! Putting shareholder capital and depositors funds at excessive risk in not acceptable in the new order of things!

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JPMorgan CIO To Retire Over $2-Billion Loss

Two other executives are also expected to lose their jobs in the wake of the stunning loss.

By Daniel Politi and Abby Ohlheiser | Posted Monday, May 14, 2012, at 10:27 AM ET

JPMorgan Chase headquarters in New York

Photo by Michael Kappeler/AFP/Getty Images.

UPDATE: JPMorgan Chase's chief investment officer will lose her job in the wake of the company's $2 billion loss.

Bloomberg reports that Ina Drew, 55, will retire. The head of global fixed income at the company, Matt Zames, will take over the CIO position. According to the Associated Press, sources say that Drew had offered to resign "several" times since the disclosure on Thursday of the loss.

Drew made $15.5 last year and $16 million the year before, and was one of the company's highest-paid employees, as well as one of two women on its operating committee. The Wall Street Journal is reporting that two other executives are expected to resign over the loss as well, including Bruno Iksil, aka the "London Whale."

Sunday, May 13 Jamie Dimon, the CEO of JPMorgan Chase acknowledged Sunday he had been “dead wrong” to dismiss concerns about the bank’s trading loss as a “tempest in a teapot.” Dimon added: "We got very defensive. And people started justifying everything we did." Although the country’s largest bank lost at least $2 billion, the bank isn’t threatened, Dimon said in an interview that aired Sunday on NBC’s Meet the Press.

Still, Dimon emphasized that he understood the loss was no small matter. “We made a terrible, egregious mistake,” Dimon said, according to the Associated Press. “There's almost no excuse for it.”

Source -- click to read more:
http://slatest.slate.com/posts/2012/05/12/jpmorgan_2_billion_loss_could_lead_to_more_oversight_regulations.html?wpisrc=obinsite

Andrew Nikiforuk on the "Tar Sands" of Alberta!

2012-05-24T09:02:00.000-07:00

I listened to an NPR interview of Andrew Nikiforuk where he talked about his book "Tar Sands". He made very interesting points about the effect of petroleum use on the world's economy, democracy, and freedom. He asserted that ever since the auto was invented and the US became the first Petrostate in the world, the world's affairs have revolved around the pursuit of extraction of oil.

Andrew noted the use of divine provenance to justify the extraction and use of energy. He made an analogy between energy and slave labor. He indicated that divine provenance was also used to justify the slave trade which eventually led to the US Civil War. He drew parallels between the leaders of most of the PetroStates, and US States and Canadian Provinces where oil dominates the economy. He noted that apart from Norway where there was an open dialog about the social and political implications of the effect of the North Sea oil, the citizens of the Petrostates have conceded power to the few companies that dominate the petroleum industry.

"Tar Sands" by Andrew Nikiforuk is about the extraction of petroleum from the tar sands located in Alberta Canada. With most of the low hanging oil fields close to depletion, the oil industry has turned its attention to extraction of petroleum from Alberta's tar sands. This has fueled a boom with significant social and environmental consequences for Alberta.

Frank Kaminski's review of Tar Sands indicates that the hype about Alberta's tar sands becoming an important source of oil supply is just that -- hype! According to Frank, the soaring greenhouse gas emissions, colossal ponds of toxic waste that are known to leak, the spike in health problems that has been seen in communities downstream from these leaking ponds is the result of local and national politicians bending to the will of the tar sands lobby.

Tar Sands helps to sharpen the discussion about whether the negative environmental and health impact of extractive industries is worth the risk!

JPMorgan Chase Total Losses Eclipse $30 Billion!

2012-05-21T21:47:00.000-07:00

Well, initially, I said I felt sorry for Jamie Dimon, CEO of JP Morgan Chase -- now not so much! With CNN Money reporting that the initial trading loss estimate of $2 billion is now closer to $6 billion -- we are talking speculation and not hedging! There is a big difference!

When market trading losses from the decline in the market price is considered it is estimated that the overall loss is close to $30 billion! So with a trading loss that is estimated to be close to $6 billion, we are no longer talking about a loss from hedging This must be due to major speculative trading -- gambling, so to speak!

There really is no excuse for this sort of trading activity post 2008! The market reforms were intended to protect investors and depositors from precisely this type of speculative trading.

Jamie Dimon has some major questions to answer to JP Morgan Chase's Board, shareholders and regulators!

Source: Please read the snippet below and scroll down to click on the link to read more --

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Jamie Dimon Complains More, As JPMorgan Chase Losses Eclipse $30 Billion

Posted: 05/21/2012 12:23 pm

Champion American complainer Jamie Dimon complained on Monday about Wall Street regulation, while also insisting he not be described as a complainer. All the while, his bank's losses, partly resulting from lax regulation, continued to grow.

An initial $2 billion trading loss has likely resulted in a total loss of more than $30 billion, when you include a 19 percent drop in the bank's stock price. By itself, the trading loss alone might balloon to more than $6 billion, according to one estimate.

To strengthen the Cognitive Dissonance Vortex he had created, the JPMorgan Chase CEO's comments came as the ink was still drying on news reports that reminded everybody of why the Wall Street regulation he complains about constantly is necessary in the first place. Namely, theWall Street Journal reported that a top risk-management officer at JPMorgan apparently had a spotty track record of risk-management. And CNNMoney said estimates of the bank's initial $2 billion loss due to poor risk-management have tripled to at least $6 billion.

But first, to the Dimon Complain-Bot 9000: Speaking at the Deutsche Bank Securities Global Financial Services Investor Conference in New York, Dimon rolled out several of his standard complaints about post-crisis efforts to regulate the financial sector, according to the Wall Street Journal's Deal Journal blog, which live-blogged his comments.

On the Volcker Rule, which -- if it is ever actually put in place in any real way -- would prohibit banks with federally insured customer deposits from being able to blow billions of dollars on stupid market gambles, Dimon warned that regulators should be very careful not to "throw the baby out with the bathwater." Typically in this analogy, which he has used more than once before, Dimon implies that JPMorgan is the squeaky-clean baby and other banks are the nasty bathwater. But now that JPMorgan Chase has done exactly the sort of thing the Volcker Rule was designed to stop, the analogy is less effective -- the baby a bit scummier, if you will.

Source: http://www.huffingtonpost.com/mark-gongloff/jamie-dimon-jpmorgan-chase_b_1533126.html

Geithner Says Dodd-Frank Opponents Add to Market Uncertainty - Businessweek

2012-05-11T13:04:00.001-07:00

Geithner Says Dodd-Frank Opponents Add to Market Uncertainty

February 09, 2012, 12:20 AM ESTBy Cheyenne Hopkins and Ian Katz

U.S. Treasury Secretary Timothy F. Geithner criticized opponents of new financial industry regulations and said the first non-banks deemed systemically risky will be named this year.

“Those who are working to slow the pace of reform will only increase uncertainty, and they will damage our efforts to try to get the rest of the world to adopt a level playing field,” Geithner said in Washington yesterday.

Geithner defended the 2010 Dodd-Frank Act and said regulators are “making considerable progress in implementing reform.” The law has come under attack from Republicans in Congress and presidential candidates.

“We have forced a necessary and fundamental restructuring of the financial system,” Geithner told reporters at the Treasury Department. “But even with these changes, and even with the remaining damage caused by the financial crisis, our financial system is once again helping support economic growth by meeting the growing demand for credit and capital at lower cost.”

The financial industry has fought Dodd-Frank, arguing that the regulatory overhaul imposes excessive capital requirements on banks. President Barack Obama and congressional Democrats say it tightens oversight of financial markets and companies in the wake of the credit crisis that led to the 2008 collapse of Lehman Brothers Holdings Inc.

Source: Click to Read More --

Geithner Says Dodd-Frank Opponents Add to Market Uncertainty - Businessweek

NY Fed sells AIG bailout assets to Merrill Lynch | Reuters

2012-05-11T08:32:00.001-07:00

NY Fed sells AIG bailout assets to Merrill Lynch | Reuters

Proposed money market mutual fund rules!

2012-05-11T07:35:00.001-07:00

A money market fund manager's worst nightmare is large redemptions which can cause a money market fund to break the proverbial "buck", particularly, in a volatile market. The new rule that the SEC is considering would make shareholders much more mindful of the actual value of each share held in a money market mutual fund portfolio, generally, referred to as the net Asset Value or NAV.

If shareholders panic unnecessarily in a volatile market and make redemption requests, it could actually force the Portfolio Manager of the Money Market Fund to redeem securities whose current market value may have declined significantly or below par in order to raise the cash needed to meet redemptions.When a money market fund sells securities prior to the security's redemption date, a gain or loss is recognized which is then distributed to all shareholders. Therefore, the actions of some shareholders can result in tax consequences for all the shareholders of a money market fund.

As a Portfolio Manager of a Money Market Fund, I once had to placate a large shareholder that was irate because a family member did not receive a duplicate statement that he requested from the funds' shareholder services subsidiary. He was a Trustee of a large family trust that represented 60% of a state specific tax-exempt money market fund. Liquidating 60% of the entire portfolio in and making the funds available in three business days would cause the fund to break the buck.

I decided not to panic! First, I called the Shareholder Services people and read them the Riot Act! The amazing thing is that they still hadn't sent the shareholder the duplicate statement! They had merely entered a change in the statement so he would receive duplicate statements at the beginning of the following month. I asked them to send duplicate statements for the previous six months, an apology letter signed by a Vice President, and a small gift. Turned out they had a Starbucks coffee boxed gift that included a mug! Perfect -- who does not like Starbucks!

Next I called the shareholder, he was entertaining friends to an early dinner -- his AARP club! He was very irritated by the call -- I had interrupted his dinner! This wasn't looking good -- not going according to my plan! I told him I was the Money Market Portfolio Manager and asked him politely, if I could call back the next day -- making sure that I said, "Sir", "Please" and "Thank you" in the most perfect English accent. By the time I put the phone down, he was very calm.

The next day I called the Shareholder -- thank God for FedEx and Starbucks! FedEx had already delivered the duplicate statements, the apology letter, and the Starbucks gift. Mr. Shareholder was beaming and very proud that he was actually talking to the Money Market Portfolio Manager! After a profuse apology and assurance that duplicate statements would be delivered going forward, Mr. Shareholder decided not to withdraw the funds.

I was so relieved -- a Starbucks gift and an apology had saved the day! There was no need to sale securities to generate cash to meet the large redemption request! Phew! One of the Vice Presidents of Shareholder Services called to congratulate me for pulling it off; otherwise, we would have had a major disaster and all because of a duplicate statement!

Scroll down to read the snippet below and the full article at the link.

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Proposed money market mutual fund rules draw fire

By John Waggoner, USA TODAY

Updated 2/19/2012 3:43 PM
The Securities and Exchange Commission is considering proposals they say will make money market mutual funds safer — and the mutual fund industry loathes them.

Thinkstock

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Thinkstock

Money market funds, unlike bank money market accounts, are uninsured mutual funds that invest in high-quality, short-term debt issued by the government, corporations and municipal entities. The funds have $2.6 trillion in assets. The two proposals, each considered an alternative to the other, will be put out for public comment in late March or early April.

•Money funds would abandon the accounting convention that lets them keep share prices at a constant $1. The change would drive home the point to investors that money funds aren't federally insured, thus discouraging panic if a fund's share price fell below $1 — breaking the buck, in fund parlance.

Money funds already have to calculate and disclose their "shadow net asset value" — what the share price would be if each security were priced each day as a stock fund's is. For example, the Fidelity Cash Reserves money fund had a shadow price of $1.0002 on Nov. 30, according to a filing with the SEC. You can find a money fund's shadow price by looking at form N-MFP via the SEC's Edgar system.

The change could make every money fund transaction into a taxable event, forcing investors to calculate miniscule gains and losses in share prices, the fund industry argues. And institutional investors don't like the risk of losing money. "One company treasurer told me, 'If I don't get a dollar in and a dollar out, you don't get my dollar,' " says Paul Stevens, CEO of the Investment Company Institute, the funds' trade group.

•Money funds would have to keep a capital reserve in case of large redemptions. They would also put a 30-day hold on 3% to 5% of an account — a move also aimed at discouraging massive redemptions.

Source -- click on the link to read more:
Proposed money market mutual fund rules draw fire – USATODAY.com

A Brief History of Capital Markets Debacles and Other Events

2012-05-11T07:13:00.000-07:00

I first wrote this article back in 2008 and published it on a discussion forum. I expanded and then posted it to this blog. I just never published it. As I was going through my posts, I realized that I have had this gem in draft form since 2008! as I went through and updated some of the information, I could not help thinking that the only thing left of some of these once powerful companies is a Wikipedia page! So here goes!

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In all of my 21 years of involvement in the capital markets, I never thought I would live to see the collapse of Lehman Brothers, and the sale of Merrill Lynch (ML), and AIG tottering on the brink of collape! Never in my wildest dreams could I have imagined the collapse of 158 year old bond power house -- Lehman Bros. coming soon after the collapse of Bear Stearns.

The sale of Merrill Lynch, a once proud institution and investment firm that was otherwise known as "Mother Merrill" was unthinkable prior to the sale!

My thoughts go out to my former Merrill Lynch colleagues and the investors that ultimately had to bear the brunt of the effect of capital market debacles. The mantra when I was at Merrill Lynch was -- "No, it has nothing to do with our clients". Not true, it has everything to do with all investors since declines in capital market valuations do affect client portfolios! Hopefully, investors have learned their lessons from past years and now hold diversified portfolios.

http://www.forbes.com/business/2008/09/15/aig-goldman-jpmorgan-biz-wall-cx_lm_0915aigcredit.html
http://www.businessweek.com/1999/99_19/b3628042.htm

http://www.latimes.com/business/la-fi-wallstreet16-2008sep16,0,7391834.story

In October 2007, Stan O'Neal, the former CEO of Merrill Lynch, angered employees when he approached another bank about a possible merger prior to disclosing $8.0 billion in losses arising from the sub-prime mess. I really liked Stan -- I was proud to be working for a company headed by a brother! However, there was such a deep sense of betrayal that most of the employees felt that the CEO had to go! I recall thinking "Subprime? That's the other guys not us! What does it have to do with us and our clients?" Most employees were not even aware of the extent of the firm’s exposure. Needless to say -- Stan had to resign and he left with a golden parachute that just angered employees some more!

Municipal Bonds: My relationship with Lehman Bros. goes back to 1990 when I worked with one of their investment bankers on the issuance of municipal bonds to finance projects for seven California health facilities. It was an experience of a lifetime! I did most of the work while Joe, the ever so friendly investment banker, conveniently spent most of his time making calls for his next deal! It was not funny then -- but when I look back on it,Joe gave me the chance to learn a lot more about the issuance of municipal bonds than I would have otherwise. Oh yes, he thought I was very sweet until I cut his underwriting fee, and then he was not too happy with me but I was not going to let him get way with too much!

Municipal Analysts: A few years later, I met a group of Lehman Bros. analysts at a Municipal Analysts conference in Seattle in the early 1990s. That was my first visit to Seattle which would later become my home. I subsequently met the Lehman Brothers Analysts again at other conferences and developed a great working relationship with them over the years. They were some of the best analyst in the municipal credit field at the time. I remember overcoming my morbid fear of New York City when I took the train from the Port Authority at 45^th Street in Mid-Manhattan to the World Trade Center (WTC) to have lunch with them in the Atrium at WTC. They survived 9-11 -- so I hope they made it through this debacle too!

Broker: Another Lehman Brothers connection was my all-time favorite Lehman broker, Peter B., in San Francisco – a real Scandinavian gentleman -- a fellow who never lost his cool and would go to great lengths to locate specific bonds, in specific maturities to enable me to effectively round out one of the money market portfolios. Yes, believe it or not -- there are some good people on Wall Street!

Credit Derivatives

I have absolutely no problem with the use of derivatives as long as they are used as a hedging tool for purposes of reducing and managing risk and not for speculative purposes! Derivative contracts are part of the Over-the Counter (OTC)) market and they include forward contracts, futures contracts, options and swaps. A derivative is an instrument whose value or price is derived from or linked to the value or price of another instrument or element. Thus credit derivatives are securities whose value or price is linked to credit instruments such as bank loans or mortgage loans.

The fear of derivatives stems from several high profile losses that were related to derivatives. I will discuss most of these cases in this article. Despite the high profile losses, derivatives remain an important part of the capital markets.

Each year, I would ask myself, "What is the next stupid thing that the banks could possibly do?" Before the subprime mess hit the fan, I knew it was credit derivatives that would prove to be the undoing of the market. The exact extent and breath of the credit derivatives market was unknown because the securities are difficult to price. Most firms have their own pricing model. You just knew the credit derivatives market was big and you were only seeing the tip of the iceberg -- just like the Titanic! You could almost see the writing on the wall! To compound the problem, well-thought out risk management systems went out the door as greed took over.

http://www.economist.com/finance/displaystory.cfm?story_id=11985964

http://www.economist.com/finance/displaystory.cfm?story_id=11990589

http://www.toomre.com/node/466

Greed

Wall Street's debacles are often fueled by greed and recklessness involving the taking of excessive risk and wrong bets on interest or currency rates or commodities. The market can be so unforgiving for those who take huge bets and are wrong or economic events don’t pan out as expected.

In addition, unfortunately, the ubiquitous "Gordon Gekko" the fictional corporate raider played so brilliantly by Oscar winner Michael Douglas in Oliver Stone's "Wall Street" is still revered by some players on Wall Street. I am not kidding, I know a fellow that has memorized most of Gordon Gekko's speeches and can recite them without reference to a script. He would often strut around the office reciting this particular favorite Gordon Gekko speech –

“The point is, ladies and gentleman, that greed, for lack of a better word, is good. Greed is right, greed works. Greed clarifies, cuts through, and captures the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge has marked the upward surge of mankind. And greed, you mark my words, will not only save Teldar Paper, but that other malfunctioning corporation called the USA. Thank you very much.”

Who’s to Blame?

I will leave it to Michael Lewis, author of “Liars Poker” and a Bloomberg writer, and others to tell the story. Nobody says it as well as Michael does. Read on:

"O'Neal's Agony, or, in the Bunker with Stan": Michael Lewis

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ajTvXXdpb748

Cayne

http://money.cnn.com/2007/11/01/news/companies/bearstearns_ceo/index.htm

http://www.reuters.com/article/businessNews/idUSN0144473820080804?feedType=RSS&feedName=businessNews

http://nymag.com/daily/intel/2008/08/jimmy_cayne_speaks.html

The Decades
Wall street has always had drama and some very interesting characters! Each decade is defined by the people that dominated the news and created change with its attendent drama and debacles!

Big corporations: The 1970s was the era of big industrial and manufacturing corporations – Boeing, Campbell's, Ford, GM, 3M, Johnson & Johnson, Kellogs, McDonnell Douglas, Martin Marietta, Phillip Morris. Mary Cunningham and William (Bill) Agee, CEO of Bendix Corp. epitomized the 1970s era. Their personal drama dominated the news!

Mergers and Acquisitions: The mid to late 1980s was the era of mergers and acquisitions, corporate raiders and leveraged buyouts! Those were some heady times! Most MBA graduates wanted to work for JP Morgan's Mergers and Acquisition Division, and business students scrambled to campus events to listen to Ivan Boesky and T. Boone Pickens.

Junk Bonds: Drexel Burnham Lambert's investment banker Michael Milken, nicknamed the “Junk Bond King”, reigned supreme! It was a period of obscene excesses! Some of my fixed income investment management colleagues recalled the opulent balls that Drexel hosted for portfolio managers and analysts. I just barely missed the spectacles!

A Brief History of Capital Markets Debacles and Other Events Over the Last 20+ years and the Spectacular 2008 Meltdown of the Financial Services Industry!

Folks, after 20+ years in the financial markets, I have seen it all and experienced enough to give me a few grey hairs! For finance students and professionals, you may want to keep this for your records. Just click on the links, if you want to read more. I recall -

1) October 1987 -- "Black Monday" - we stood in stunned disbelief in front of a Bloomberg monitor in the Investments Division of the State Treasurer's Office, trying to assess the impact on investment securities held by the State of California of a 508 point drop (22.68%) on the stock market (DJIA). I was then a young Associate Auditor undertaking my first audit of the State of California's Treasurer's office. This was a real rude awakening to the realities of the capital markets. However, that did not stop me from seeking the thrill of the capital markets a few years later. Lehman analyst Elaine Gazarelli became a star for accurately predicting the stock market crash only to lose fans later for her Hanes “My Way” stockings ads.

2) 1989 – Charles Keating, former Chairman of Lincoln Savings & Loan Association, epitomized the greed of the Savings and Loan Bank crisis of the mid 1980s. A lot of elderly people lost their savings and the Fed increased regulation of the S&Ls, and formed the Resolution Trust Corporation (RTC) to purchase the assets of failed S&Ls. I had an opportunity to visit Lincoln Savings’ headquarters in Scottsdale , Arizona – an ornate Spanish-style mansion that is located on a golf course -- when I interviewed for a position with First Interstate Bank in 1995 before Wells Fargo took over First Interstate. As soon as the limo drove through the ornate wrought iron gate toward the mansion, I knew there was a story to tell. After the interview, I asked the Exec. VP the story about the ornate office, with expensive art, that we were sitting in – turned out it was Charles Keating’s former office! Wells Fargo purchased First Interstate Bank soon after the interview, and, subsequently, closed the infamous Lincoln Savings “Keating” Scottsdale office.

3) 1990 - the bailout of Citibank by the Saudi Prince Al-Waleed bin Talal in 1990 following write-downs related to Latin American sovereign debt crisis. The Latin American debt crisis led to the creation of “Brady Bonds” by the US Treasury to securitize bank loans extended by US banks to Latin American governments.

4) the post-Iraq war recession and decline in real estate values following military base closures and cut-backs in military spending otherwise known as the “Defense Base Closure and Realignment of 1990” (BRAC).

5) The real estate bubble of the early 1990s -- Donald Trump (“La Donald”) used his bravado to obtain more loans to shore up his empire. He survived and lived to tell about it and became the host of a popular TV show, “The Apprentice”!

6) The 1990s post Iraqi war recession, led to a spate of defaults - notable defaults include Triad Healthcare, a nonprofit health system located in California. The State of California which insured $167 million of revenue bonds issued by Triad sued Goldman Sachs, the underwriter of the municipal bonds, and won the lawsuit.

7) 1994 - collapse of Kidder Peabody: bond trader Joseph Jett's role in the treasury bonds scandal led to the collapse of investment banking firm, Kidder Peabody in 1994. There was an overwhelming feeling of shame among African-Americans on Wall Street. Joseph Jett was then among the highest ranking African-American's on Wall Street. I had never heard of him until the scandal but I remember the pain we all felt!

Joseph Jett and Kidder Peabody -
http://query.nytimes.com/gst/fullpage.html?res=9A0DE2D61F3FF93BA35750C0A9629C8B63
http://query.nytimes.com/gst/fullpage.html?res=9C04EFD9123CF932A05750C0A9669C8B63
http://www.businessweek.com/1999/99_19/b3628042.htm

8) 1994 - up next, another devastating event in 1994 when Calvin Grigsby, founder of the then largest African-American owned investment bank in the US saw his firm, Grigsby Brandford & Co., collapse following an alleged scandal. To add more to the drama, Calvin was defended by the famous O. J. Simpson lawyer, the late Johnny Cochrane. Calvin’s unfortunate experience taught African-Americans on Wall Street that they need to be extremely cautious;

http://articles.latimes.com/1998/jan/09/news/mn-6621
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/23/BAN410R4CC.DTL
http://query.nytimes.com/gst/fullpage.html?res=9C00E2D8143FF930A35753C1A960958260

9) 1994 - Ginnie Mae interest-only (IO), principal-only (PO) debacle and the near collapse of some GNMA mutual funds that held the IO/PO securities when Fed Reserve started tightening and interest rates began to rise.

10) 1994 - Community Bankers US Government Money Market Fund an institutional money market fund broke the proverbial “buck” when its net asset value (NAV) declined to 94 cents per share.

11) 1994 - Proctor & Gamble (PG) incurred losses on speculative derivatives contracts that Bankers Trust had created for P&G. However, P&G's executives claimed they did not understand the derivatives contracts.

12) 1994 - good old Robert Citron whose trusted Hollywood sage failed to alert him to the rise in interest rates and the ensuing margin calls that created a liquidity crisis and led to the December 1994 Orange County bankruptcy filing. Orange County ran an investment pool that was highly leveraged. Orange County's Treasurer borrowed funds through reverse repurchase agreements (repos) and then invested the repos in US Agency structured notes that were inverse floaters. When interest rates started to rise, Orange County did not have sufficient liquidity to meet margin calls. Investors panicked and the State of California took over the investment pool to stabilize it and prevent further losses. Citron claimed he really did not understand the securities – the investment bankers and brokers were to blame! (I have to say this for the Hollywood sage – she predicted that if everyone would just keep calm things would get back to normal!) Other counties, including Cuyahoga County, OH, Contra Costa County, CA, and San Diego County, CA, also came close to filing for bankruptcy – their saving grace was that they had not opened their investment pools to the whole world and were able to negotiate with their municipal investors and prevented a run on the bank! The bond rating agencies are criticized for maintaining high ratings of the investment pools despite the risky assets held in the pool.

13) 1995 – Baring Bank collapses following rogue trader, Nick Leeson’s unauthorized bets on Nikkei futures contracts.

14) 1995 – longest running Bull market starts and Goldman Sachs equity investment analyst Abby Joseph Cohen became a star for her accurate predictions of stock market highs and was later ridiculed when she continued to predict stock market highs even as the market tumbled!

15) 1997 -- the Japanese bank loan problem and subsequent consolidation of Japanese banks. In addition to other structural reasons – turns out the Japanese had a pesky little problem with underworld types known as “yakuza” that would entice bank executives to visit their clubs for R&R. The "yakuza" would then use incriminating evidence to blackmail the executives to purchase club memberships, and also extend loans to them on favorable terms – not good for the banks! Most of the banks folded or were acquired by other banks in the 1990s leading to a consolidation of the Japanese banking system.

16) 1997 - the Asian financial and currency crisis was attributed to IMF policies that resulted in foreign exchange problems as the US dollar rose and many of the Asian Tigers were unable to pay debts owed in US dollars. The Asian financial crisis had a ripple effect on other markets worldwide;

17) 1998 - the Russian debt crisis! Apparently, a bit of Russian roulette and caviar goes a long way – just kidding! Structural imbalances in the Russian economy – high commodity risk exposure, foreign exchange rate regime, budget deficits and the prolonged Chechnya war were the primary cause of the crisis. Sale of Russian assets by investors put pressure on the ruble and exacerbated an already bad situation. Long-term Capital and Bankers Trust were some of the victims of the Russian debt crisis;

18) 1999 - former Fed Reserve Chairman, Alan Greenspan's infamous bailout of hedge fund Long-Term Capital Management. Two of the Board members of Long-Term Capital were the brilliant Nobel Economic Prize winners , Myron Scholes of “Black and Scholes - Option Pricing Model” fame and Robert C. Merton. Another principal of Long-term Capital was John Merriwether, the former Salomon Brothers bond trader and senior executive of “Liars Poker “fame. Long-Term Capital bet on interest rates and lost the bet big time when the Russian debt crisis caused interest rates to rise! This caused a near collapse of Banker's Trust in 1999 which led Deutsche Bank to acquire Bankers Trust which had extensive exposure to both LTCM and Russian debt.

19) 2001 - deregulation of the California electric industry to separate power generation from transmission. Manipulation of the power industry by Enron and inadequate generation capacity to meet rising demand for power during the Dot com era led to the eventual bankruptcy filing of California's electric utilities - Southern California Edison and Pacific Gas and Electric.

20) 2001 -- auto manufacturers Ford and GM faced a spate of recalls and stiff competition from Japanese auto makers after decades of not responding quickly to producing more fuel efficient cars leading to deterioration in credit outlook and ratings of the US auto makers. Detroit is still reeling while the Japanese auto-makers who started to revamp their products after the Oil Crisis of 1972 and began implementing future car concepts in the 1980s continue to soar. The bond ratings of the US auto makers started a downward slide!

21) 2001 -- Enron's manipulation of the power market post deregulation and its eventual collapse;. The Enron scandal also engulfed accounting and consulting firm, Arthur Andersen, which folded. Global Crossing, HealthSouth, Tyco, WorldCom and other annoying accounting scandals all led to the enactment of the Sarbanes-Oxley Act (SOX) and increased regulation of and disclosure by corporations. SOX also increased the responsibility of corporate Board of Directors.

http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html

http://www.scu.edu/ethics/dialogue/candc/cases/worldcom-update.html

http://books.google.com/books?id=3-qvLpoYXUIC&pg=PA26&lpg=PA26&dq=hallmark+derivatives&source=web&ots=gFEdlSYTao&sig=TqYy-BjWgwHMLf0GgNlq03GRhRg&hl=en&sa=X&oi=book_result&resnum=2&ct=result

22) 2001 - the Dot com and telecommunications bubble should not have been a surprise. There have been new technology bubbles since the advent of tulips and the telephone – that is the capitalist system but no one paid any attention to history! Silicon Valley was the place to be -- Fry’s Electronics was the most happening place on Friday nights and one had to put up with Adobe geeks playing roller-derby hockey in our company parking lot when I worked for The Benham Group (now merged into American century Investors). The Dot com bubble burst and many start-up Dot coms were gone in a flash! At least the technology bubble created some great technology products, productivity enhancements, collectors’ refrigerator magnets, and brought Steve Jobs back to Apple, yeah! [Unfortunately, Steve Jobs passed away in 2011. May his soul rest in peace!]

http://news.cnet.com/Assessing-the-carnage/2009-1017_3-253125.html
http://www.neweconomics.org/gen/uploads/gx2dcv45szxpsn55yohg3rjh01082003160019.pdf

23) 9-11-2001 – The world as we knew it changed forever as we all watched in stunned disbelief as the Twin Towers of the World Trade Center tumbled down following the terrorist attack. Several firms lost scores of employees. I never heard again from a Trustee Officer that was researching a New York Port Authority Bond that had been refunded – I don’t know if she survived or was buried in the rubble with thousands of others who perished in the tragedy. The Fed Reserve acted quickly to provide liquidity to prevent disruptions to the financial markets.

24) 2002 - Salomon Smith Barney telecom analyst, Jack Grubmann, became the “poster boy” for the greedy self-conflicted stock analyst who continued to tout stocks even as the market valuations of telecom stocks plummeted. The SEC and State of New York reached agreement to limit research analysts’ access to corporate management and increase transparency and availability of ratings and research information to investors. Wall Street firms paid fines totaling $1.4 billion to settle the case and agreed to undertake training and implement procedures to eliminate conflicts of interest.

http://query.nytimes.com/gst/fullpage.html?res=9D06E6D8153DF93BA2575BC0A9649C8B63

http://www.xchangemag.com/articles/321front.html

25) 2003 – SEC charged Credit Suisse First Boston (CSFB) with fraudulent behavior in a global settlement with Wall Street firms. CSFB paid $200 million in fines for allowing its investment banking goals to undermine the integrity of its stock research. CSFB investment banker and executive, Frank Quattrone, faced criminal charges in New York due to an alleged attempt to impede a SEC investigation into his IPO activities in 2000.

26) 2004 – Elliot Spitzer, then the State of New York’s Attorney General, investigated AIG for accounting fraud and forced out its Chairman Maurice “Hank” Greenberg who he sued for conflict of interest regarding a Foundation. AIG settled the accounting case for $1.6 billion. Spitzer then sued Marsh and McLennan (Marsh), and other insurance firms for fraud and collusion. AIG and Marsh shares dropped as a result of the investigation and some employees lost most of their retirement assets. Spitzer was later investigated for his involvement with a call girl sex scandal and he resigned from office in disgrace.

http://www.nytimes.com/2004/12/23/business/23insure.html

http://www.slate.com/id/2108509/

http://www.npr.org/templates/story/story.php?storyId=88140092

http://www.cnbc.com/id/23590541

http://www.cbc.ca/money/story/2006/02/09/aig-060209.html

27) 2004 - Fannie Mae chief, Franklin Raines – an African-American, retires early amid allegations of accounting errors, overstatement of earnings, and large bonuses. Fannie Mae paid a record fine of $400 million to settle the case. Raines got to keep part of his bonus but gave up a significant portion.

28) 2004 – Collateralized Debt Obligations (CDOs) or Mortgage-Backed Securities (“MBS”) created from securitization of mortgage loans and CDOs became a more important source of lending for mortgages while bank lending declined.

History of the Subprime Mess: http://www.ghb.co.th/en/Journal/Vol2/04.pdf

29) 2006 - Defaults on mortgage loans rose and the subprime implosion began. Subprime mortgage lenders began to collapse – a total of 283 mortgage lenders were then listed on the mortgage lenders implosion list.

Two classic examples of the excesses of subprime mortgage lenders: http://seattletimes.nwsource.com/html/businesstechnology/2003459108_merit03.html

http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a8VFwgtdQ9FM

30) 2007 - bond insurers MBIA, AMBAC, and FGIC disclosed large exposures to subprime loans raising questions about whether they are adequately capitalized and leading to downgrades of the bond insurer’s venerable AAA ratings. Again, the bond rating agencies are criticized for maintaining high ratings of the bond insurers even as their risk expose to credit derivatives increased.

http://origin.foxnews.com/printer_friendly_wires/2007Dec20/0,4675,MBIA,00.html

http://www.inman.com/news/2008/01/5/mortgage-bond-insurers-could-be-facing-big-losses

31) 2007 – Concerns begin to mount about Fannie Mae and Freddie Mac’s exposure to subprime mortgage loans.

32) 2007 – UBS' CEO stepped down due to writedowns related to subprime and other debt.

33) 2007 Merrill Lynch, Citibank and Bear Stearns disclosed large writedowns related to subprime obligations leading to the ouster of their CEOS – Stan O’Neal, Charles Prince and Jim Cayne.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=auu9kl756TE4

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=anPpji_PBsF8

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7zJwM4.j16U

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a8pSY1j15Z6g

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aB77wTjMfTEw

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aoTOISycUzi4

http://www.silobreaker.com/DocumentReader.aspx?Item=5_903061261

http://news.bbc.co.uk/2/hi/business/7078251.stm

http://www.iht.com/articles/2008/03/27/business/27bank.php

34) 2007 Bank of America acquired mortgage lender Countrywide which was close to failure.

http://www.reuters.com/article/bankingFinancial/idUSN0541946120080505

http://findarticles.com/p/articles/mi_qn4188/is_20080112/ai_n21201815?tag=content;col1

http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=akJyPTzQOcM0

35) 2008 - Wall Street firms paid record bonuses amidst writedowns from subprime losses.

36) 2008 - Societe General trader, Jerome Kerviel, caused losses estimated at 4.9 billion Euros due to unauthorized and fictitious trades.

37) 2008 – UBS reported the largest loss ever recorded by a bank following the ouster of its CEO.

38) 2008 - Bear Stearns nearly collapsed from writedowns arising from subprime losses and was purchased by JP Morgan;

http://money.cnn.com/2008/03/28/magazines/fortune/boyd_bear.fortune/

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=anMNUEv7YGAM

39) 2008 - Morgan Stanley recorded writedowns on subprime losses.

40) 2008 - Rating agencies, Moodys, Standard and Poors and Fitch, came under fire again for their role in the structured finance debacle. The rating agencies assigned “AAA” ratings to certain tranches of mortgage-backed securities including subprime loans; kept ratings of bond insurers, insurance companies, banks and investment firms unchanged even when the subprime mortgage loan implosion was underway. Some blamed them for conflicts of interest since they are paid by issuers of debt securities, and for not alerting investors about the risks of the subprime mortgage loans. Also, fund managers were blamed for relying on rating agencies and not doing their own independent research.

41) 2008 - Wachovia Bank ousted its CEO Thompson following disclosure of writedown of subprime losses.

42) 2008 - Washington Mutual’s CEO Kerry Killinger resigned following pressure from shareholders and a new CEO was appointed.

43) 2008 - the Federal government bailed out federal mortgage lenders - Fannie Mae and Freddie Mac

http://www.economist.com/finance/displaystory.cfm?story_id=11735141

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/05/AR2008090503351.html

http://www.economist.com/finance/displaystory.cfm?story_id=11958334

44) 2008 - Lehman Brothers files for bankruptcy due to a credit and liquidity crunch following rumors about the extent of its subprime debt exposure. KfW Bankengruppe, a German development bank, inexplicably transferred $300 million Euros ($476 million) to Lehman on the day it filed for bankruptcy and earned itself the title of the “dumbest” bank! Barclays Bank obtained approval to purchase some of Lehman’s US and Canada units for $1.75 billion.

45) 2008- Bank of America acquires Merrill Lynch which was also reeling from subprime losses in a deal that angers BA’s shareholders but works out great for ML!

46) 2008 - Federal Reserve takes over AIG – the world’s largest insurer to prevent market disruption and protect assets. AIG is also the largest issuer of Guaranteed Insurance Contracts (GICs) for the municipal market. Questions abound about whether the Fed ought to use taxpayer funds to bailout companies like AIG. The implications of “too big to fail” may have been at play here. The move definitely helped to protect and prevent a run on Money Market Funds which are the first in line to feel the impact of failure of major financial institutions.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aQdytVbjG_oQ

http://www.latimes.com/business/la-fi-aig16-2008sep16,0,120479.story

http://www.msnbc.msn.com/id/26752313/

http://www.bloomberg.com/apps/news?pid=20601109&sid=aIaOyCf.U_bU&refer=exclusive

http://www.newsday.com/news/local/wire/newyork/ny-bc-ny--aig-spitzer0917sep17,0,4571686.story

47) 2008 – “Reserve Primary Fund”, the first money market fund to be approved by the SEC and established in the US in 1970, broke the proverbial “buck” because it held Lehman Brothers debt. Reserve Primary Fund’s net asset value (NAV) declined from $1.00 per share to $0.97 - an unthinkable event for a money market fund! The SEC charged the Reserve Fund with fraud and the Reserve Fund distributed assets to shareholders. Putnam also closed its Putnam Prime Money Market Fund and returned funds to investors.

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/19/AR2008091901068.html

http://www.msnbc.msn.com/id/26760606/

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=atgMGzTf41kw

48) 2008 – Federal Reserve announced a plan to create a temporary guaranty program for the U.S. money market mutual fund industry to prevent a run on the bank and assure money market investors about the safety of their investments.

http://www.cranedata.us/

http://www.treas.gov/press/releases/hp1147.htm

http://www.treas.gov/press/releases/hp1151.htm

49)2008 - Which bank or financial institution will be the next to fail? I have a clue but I am not saying! [Actually, I was thinking of Washington Mutual which was acquired by JP Morgan Chase.]

50) Partial list of trading losses including some losses that I have not detailed above - compiled by Wikipedia

Will it happen again?

Recounting all these debacles makes it seem like people on Wall Street have very short memories. Believe me, they do -- and it will happen again. It seems like a three to four year cycle! The “performance is everything” and “winning at any cost” mentally is still very pervasive among some investment bankers, traders and advisors.

Even as we speak, some financial engineering guru is probably busy trying to figure out how to profit from the current debacle. Some advisors are also probably busy trying to get more commissions so they can buy the latest model Mercedes Benz for their wife or girlfriend at Christmas.

However, I don’t blame them entirely because the greed is on both sides. Some investors are just as greedy and want to reach for high yields so they can feel good that they outperformed the market. Such greedy investors are just ripe for the picking or taking!

“Reversion to Mean”

Historically, ultimately the US stock market’s return has always reverted to mean (average) but most investors believe they can still outperform the market! Good luck!

Regulation

There will definitely be more regulation of the capital markets. Fed Reserve Chairman Bernanke wants more integrated regulation but will it be sufficient? I doubt it, so let's hold our collective bated breath until the next capital markets debacle hits the fan!

http://news.bbc.co.uk/2/hi/business/7500176.stm

http://www.federalreserve.gov/newsevents/speech/bernanke20080822a.htm

http://www.nytimes.com/2008/08/23/business/economy/23fed.html?em

Follow-up:
Congress has enacted the "Dodd–Frank Wall Street Reform and Consumer Protection Act"; however, some financial industry participants oppose it and the Republicans plan to repeal it. Second, we did not have to hold our collective bated breath for too long -- oops, they did it again! So will Wall Street ever learn? Just don't bet on it!

Disclaimer: this is intended for information purposes only and not intended to constitute investment advice! Please contact your own personal financial advisor for investment guidance.

Copyright 2008: Audrey Quaye

More Stocks May Not Make a Portfolio Safer

2012-05-11T06:46:00.000-07:00

"As many studies have shown, at least 40% of the variability in returns can be reduced by moving from a single company to 20. Once a portfolio contains 20 or 30 stocks, adding more does little to damp the fluctuations in wealth over time."

The question that you may have about the statement above is why is 30 stocks about the magic number for a diversified portfolio -- the answer can be found from probability theory and the statistical concepts of central limit theorem and normal distributions. In simple words, in order of a sample (your portfolio) to reflect the characteristics of the population (stock market represented by S&P 500), you must have at least 30 observations (your stock selctions). Any additions to the sample (your portfolio) beyond the initial 30 obeservations will not incrementally improve the sample's predictive ability of the populatiion (the stock market).

I hope this helps to explain the concept! Read the article below to learn more.

=================

More Stocks May Not Make a Portfolio Safer

WSJ: NOVEMBER 21, 2009

By Jason Zweig

Not putting all your eggs in one basket is the most basic principle of investing. It also may be the hardest to get right.

Investors have long been told by stockbrokers and financial planners that to have a properly diversified stock portfolio, you need shares in only 10 to 40 companies. Even the great investment analyst Benjamin Graham urged "adequate though not excessive diversification," which he defined as between 10 and about 30 securities.

How Investors Can Diversify the Right Way

WSJ columnist Jason Zweig explains why investors may not be as diversified as they think. He talks with Kelsey Hubbard about some options that can help make sure all your eggs aren't in one basket.

As many studies have shown, at least 40% of the variability in returns can be reduced by moving from a single company to 20. Once a portfolio contains 20 or 30 stocks, adding more does little to damp the fluctuations in wealth over time.

But this research on diversification was based on the average results of a large number of portfolios randomly generated by computer.

Something entirely different happens when flesh-and-blood humans try to pile up stocks one at a time.
Don Chance, a finance professor in the business school at Louisiana State University, asked 202 business students to select one stock they wanted to own, then to add a second, a third and so on until they each held a portfolio of 30 stocks.

Prof. Chance wanted to prove to his students that diversification works. On average, for the group as a whole, diversifying from one stock to 20 cut the riskiness of portfolios by roughly 40%, just as the research predicted. "It was like a magic trick," says Prof. Chance. "The classes produced the exact same graph that's in their textbook."

But then Prof. Chance went back and analyzed the results student by student, and found that diversification failed remarkably often. As they broadened their holdings from a single stock to a basket of 30, many of the students raised their risk instead of lowering it. One in nine times, they ended up with 30-stock portfolios that were riskier than the single company they had started with. For 23%, the final 30-stock basket fluctuated more than it had with only five stocks in it.

The lesson: For any given investor, the averages mightn't apply. "We send this message out that you don't need that many stocks to diversify," says Prof. Chance, "but that's just not true."

What accounts for these odd results? Leave it to a professor called Chance to show that even a random process produces seemingly unlikely outliers. Thirteen percent of the time, a 20-stock portfolio generated by computer will be riskier than a one-stock portfolio.

Humans are even more fallible. Prof. Chance's students started by picking companies they were familiar with: Exxon Mobil, Wal-Mart Stores, Apple, Starbucks, Nike and the like. But after a handful or two, they ran out of household names. By the fifth company, they were picking stocks that had less than half the market capitalization of the one they started with. Adding these riskier small stocks made their portfolios more volatile. And one in five students picked 1-800-Flowers.com as a top holding, perhaps because Prof. Chance happened to schedule the assignment near Valentine's Day, when they may have had bouquets on their minds. (They weren't just picking from the top of an alphabetical list; almost nobody chose 1-800 Contacts.)

Heath Hinegardner

These results are no surprise to Allan Roth, a financial planner at Wealth Logic in Colorado Springs, Colo. "Humans can't think randomly," says Mr. Roth. "Once people think of Exxon Mobil, they're a lot more likely to think of Chevron or another oil stock. For a lot of investors, diversification is like doing a word-association game."

Gur Huberman, a finance professor at Columbia University, points out that investors tilt toward stocks that match their own beliefs about risk. People who regard themselves as risk-averse will assemble portfolios of highly similar stocks that all seem to be "safe." The result, paradoxically, is a risky portfolio with every egg in one basket. As bank-stock investors learned last year, owning a greater number of the same kind of company isn't diversification at all.

According to the Federal Reserve's Survey of Consumer Finances, 84% of households that own shares directly have no more than nine stocks; 36% hold shares in only a single company.

“Enough”

2012-05-11T06:38:00.000-07:00

“Enough”

Commencement Address
MBA Graduates of the McDonough School of Business
by John C. Bogle, founder, The Vanguard Group
Upon receiving the Honorary Degree of Doctor of Humane Letters from Georgetown University
May 18, 2007

Here’s how I recall the wonderful story that sets the theme for my remarks today: At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, “Yes, but I have something he will never have . . . Enough.”

Enough. I was stunned by its simple eloquence, to say nothing of its relevance to some of the vital issues arising in American society today. Many of them revolve around money—yes, money—increasingly, in our “bottom line” society, the Great God of prestige, the Great Measure of the Man (and Woman). So this morning I have the temerity to ask you soon-to-be-minted MBA graduates, most of whom will enter the world of commerce, to consider with me the role of “enough” in business and entrepreneurship in our society, “enough” in the dominant role of the financial system in our economy, and “enough” in the values you will bring to the fields you choose for your careers.

Kurt Vonnegut loved to speak to college students. He believed, if I may paraphrase here, that “we should catch young people before they become CEOs, investment bankers, consultants, and money managers (and especially hedge fund managers), and do our best to poison their minds with humanity.” And in my remarks this morning, I’ll try to poison your minds with a little bit of that humanity.

Over the past two centuries, our nation has moved from being an agricultural economy, to a manufacturing economy, to a service economy, and now to a predominantly financial economy. But our financial economy, by definition, subtracts from the value created by our productive businesses. Think about it: while the owners of business enjoy the dividend yields and earnings growth that our capitalistic system creates, those who play in the financial markets capture those investment gains only after the costs of financial intermediation are deducted. Thus, while investing in American business is a winner’s game, beating the stock market before those costs is a zero-sum game. But after intermediation costs are deducted, beating the market—for all of us as a group—becomes a loser’s game.

Yes, the more that our financial system takes, the less our investors make. Yet the financial field is where the money is made in modern-day America, the breeding ground for the wealthiest of our citizens. (If you made less than $140 million dollars last year, you didn’t make enough to rank among the 25 highest-paid hedge fund managers.) When we add up all those hedge fund fees, all those mutual fund management fees and operating expenses; all those commissions to brokerage firms and fees to financial advisors; investment banking and legal fees for all those mergers and IPOs; and the enormous marketing and advertising expenses entailed in the distribution of financial products, we’re talking about some $500 billion dollars per year. That sum, extracted from whatever returns the stock and bond markets are generous enough to deliver to investors, is surely enough, if you will, to seriously undermine the odds in favor of success for our citizens who are accumulating savings for retirement.

Yet the fact is that the finance sector has become by far our nation’s largest generator of corporate profits, larger even than the combined profits of our huge energy and health care sectors, and almost three times as much as either manufacturing or information technology.1 Twenty–five years ago, financials accounted for only about 6 percent of the earnings of the 500 giant corporations that compose the Standard & Poor’s 500 Stock Index. Ten years ago, the financial sector share had risen to 20 percent. And last year, the financial sector profits had soared to an all-time high of 27 percent. If we add the earnings of the financial affiliates of our giant manufacturers (think General Electric Capital, for example, or the auto financing arms of General Motors and Ford) to this total, financial earnings now likely exceed 33 percent of the earnings of the S&P 500. While that share may or may not be enough, it seems likely to continue to grow, at least for a while.

We’re moving, or so it seems, to a world where we’re no longer making anything in this country; we’re merely trading pieces of paper, swapping stocks and bonds back and forth with one another, and paying our financial croupiers a veritable fortune. We’re also adding even more costs by creating ever more complex financial derivatives in which huge and unfathomable risks are being built into our financial system. “When enterprise becomes a mere bubble on a whirlpool of speculation,” as the great British economist John Maynard Keynes warned us 70 years ago, the consequences may be dire. “When the capital development of a country becomes a by-product of the activities of a casino, the job of capitalism is likely to be ill-done.”

Once a profession in which business was subservient, the field of money management and Wall Street has become a business in which the profession is subservient. Harvard Business School Professor Rakesh Khurana was right when he defined the conduct of a true professional with these words: “I will create value for society, rather than extract it.” And yet money management, by definition, extracts value from the returns earned by our business enterprises. Warren Buffett’s wise partner Charlie Munger lays it on the line:

“Most money-making activity contains profoundly antisocial effects . . . As high-cost modalities become ever more popular . . . the activity exacerbates the current harmful trend in which ever more of the nation’s ethical young brain-power is attracted into lucrative money-management and its attendant modern frictions, as distinguished from work providing much more value to others.”

Source: http://www.vanguard.com/bogle_site/sp20070518.htm

Michael Lewis Says the Bond Market Will Never Be the Same

2012-05-11T06:31:00.000-07:00

Michael Lewis is having way too much fun with the SEC's Goldman Sachs case. This case has all the makings of a good Hollywood movie.You just can't create some of the characters involved -- "Fabulous Fab", the Frenchman! "Wall Street's Gordon Gekko is almost boring in comparison.

Michael Lewis Says the Bond Market Will Never Be the Same

By Michael Lewis

Posted Thursday, April 22, 2010 - 10:04am

If you happen to be sitting on the Goldman Sachs (GS) bond-trading floor, life must feel horribly unfair.

You did nothing worse than live by the ethical assumptions of your market—any money-making event short of obviously illegal is admirable—and now your own grandfather thinks you’re some kind of monster. Your world feels upside down: What was right is now wrong; what was good is now bad; what once felt like winning now feels like losing.

You are probably wondering: What next? What will the angry rabble—all those ordinary people who can never really understand your business—now demand that you explain to them, so they can disapprove of you all over again?

A few possibilities:

No. 1: Full knowledge of the inner workings of your proprietary trading desk.

In particular: The moment-to-moment dealings of your correlations traders from late 2004 (when they first exploited American International Group’s (AIG) idiotic willingness to sell cheap insurance on pools of subprime mortgage loans) until the end of 2007, when they would have taken most of their profits from the total collapse of the subprime bond markets.

Your bosses claim to have lost almost $100 million on the Abacus trade for which your firm is being sued. This seems, to put it mildly, disingenuous. In March 2007, the time of this particular Abacus trade, your prop traders were already short the subprime market. Would they really have taken a naked long position in a deal you helped to construct precisely so that it would fail without offsetting in some other way on their books?

Ritual Sacrifice

Sadly, it will not suffice to offer up Fabrice Tourre as a ritual sacrifice. No one is going to accept a then-27-year-old Frenchman, whose job was apparently to keep sweet the patsies on the other end of your trades, as the world’s authority on your trading positions.

His name isn’t even on the top of the list of Goldman traders listed on the $2 billion Abacus deal for which you are being sued. The name on top of that document is Jonathan Egol. Egol appears to have been the bond trader at the center of your Abacus program. The same Jonathan Egol who told fellow traders in 2006—a year before this transaction—that the subprime market was doomed.

The public eventually will ask: Who is Jonathan Egol, and what exactly was his game?

No. 2: A far better understanding of your relations with the inaptly named “CDO manager.”

Source: http://www.bloomberg.com/news/2010-04-22/bond-market-will-never-be-same-after-goldman-commentary-by-michael-lewis.html

Lesbian seeking marriage license arrested in NC - CBS News

2012-05-11T05:12:00.001-07:00

Expect to see more protests over gay rights as people try to assert their human rights in defiance against States that do not recognize or allow gay marriage. When one views the issue in terms of human rights -- really, who are we to tell others what they should or shouldn't do? I said it before -- people are going to have to fight for gay rights. It will not be handed over to gay people on a silver platter!

Lesbian seeking marriage license arrested in NC - CBS News

Time magazine cover of breastfeeding mom sparks intense debate on "attachment parenting" - CBS News

2012-05-11T05:02:00.001-07:00

I am all for breast-feeding but Time Magazine's cover is a bit much! It is the wrong way to provoke discussion about the benefits of breast-feeding. First of all, the little tyke looks too big for a three-year old -- looks more like a five year old. Second, the poor kid is likely to be teased at school about it. Finally, the photo just looks weird! That is just my opinion! The issue of breast-feeding, especially, in developing countries is just too important to be trivialized in such fashion.

Turns out the breast-feeding Mum is all about attachment parenting. The cover was part of a story that included several other Mums; and the little tyke is in fact three years old.

Still Time Magazine should have done a better job of covering the story.

Source - click to read more:
Time magazine cover of breastfeeding mom sparks intense debate on "attachment parenting" - CBS News

JPMorgan Chase: London whale swallows $2B - CBS News

2012-05-11T04:54:00.001-07:00

Too bad for Jamie Dimon! There are very few really likeable people on Wall Street and he is one of them. This must be difficult for him after he skillfully steered JP Morgan through the 2008-2009 mess on Wall Street. I hope he survives this mess too!

JPMorgan Chase: London whale swallows $2B - CBS News

Romney says sorry for high school bullying episode - CBS News

2012-05-11T04:50:00.001-07:00

Okay -- this is one that Mitt is going to have a hard time living down! Lesson learned --your sins from high school can come back to haunt you on the campaign trail! At least, he redeemed himself by appointing a spokesperson that is a gay man. It is not his fault that the Republican right wing wasn't as thrilled about his choice! I am just waiting for the people that bullied me in high school to run for public office and I am going to make sure everyone hears about it! LOL! :)

Romney says sorry for high school bullying episode - CBS News

JPMorgan $2 bln trading loss spooks bank stocks | Reuters

2012-05-11T04:40:00.001-07:00

Here we go again! What did the trader expect? If you amass a large position, hedge funds are likely to bet against it, and they will have a field day! That is what they are in business for -- taking contrarian positions. Another slip-up by a big bank that investors have to absorb!

JPMorgan $2 bln trading loss spooks bank stocks | Reuters

The case against Lehman Brothers - CBS News

2012-04-23T00:03:00.001-07:00

This has been a long time coming. It is amazing how so many people's lives were negatively impacted by the 2008 collapse of Bear Stearns, Lehman Bros., Washington Mutual, several Mortgage Financing companies, several several firms such as Merrill Lynch that tottered on the brink of collapse and so far no one has bit the literal bullet! Amazing!

Click the link below to read the transcript of the 60 minutes story:
The case against Lehman Brothers - CBS News

Promote Your Blog - Blogger Help

2012-04-01T18:45:00.001-07:00

Promote Your Blog - Blogger Help

Rock Center with Brian Williams - Return of 'third shift' for automakers brings hope, economic ripple effect

2012-02-21T16:03:00.000-08:00

Rock Center with Brian Williams - Return of 'third shift' for automakers brings hope, economic ripple effect

Rock Center with Brian Williams - Made in America: Trend against outsourcing brings jobs back from China

2012-02-21T15:45:00.000-08:00

Rock Center with Brian Williams - Made in America: Trend against outsourcing brings jobs back from China I am back to active blogging again on this site which I started in 2008. Things were so dreary back then that I had a hard time dealing with the economic news. I believe we are beginning to see the light at the end of the tunnel. The war in Iran is over -- the troops are coming home; Afghanistan still remains uncertain; Iran may continue to ruffle feathers over their nuclear projects; most of the uncertainty in the Middle East and North Africa is beginning to be resolved! I have hope for a brighter future where resources can be directed to more productive uses. I am back to blogging again!

GAO Report That Retail Pays More Isn t New News - The Bond Buyer Article

2012-02-21T15:25:00.000-08:00

GAO Report That Retail Pays More Isn t New News - The Bond Buyer Article

I agree with the comments of the industry specialists regarding retail versus institutional pricing. It does cost more in terms of time, staffing and overhead and more effort is involved in retail trading of bonds versus institutional trading of bonds.

As a money market portfolio manager, I expanded the list of brokers that I traded with beyond the three brokers that typically did most trades for the portfolios. It resulted in some resistance and hostility from the brokers that felt the book of business belonged to them but, ultimately, I got better pricing and the shareholders benefited.

=======

GAO Report That Retail Pays More Isn't New
News Tuesday, February 21, 2012
By James Ramage

GAO: Institutions Trade at Better Prices Than Individuals - January 18, 2012

A government report that describes how institutional investors pay less than individual investors when buying or selling municipal bonds isn’t news to market participants.

The Government Accountability Office report on muni bond transactions released in January said that retail investors paid an average 2.5% markup when buying $5,000 worth of municipal securities in the secondary market.

By comparison, investors paid an average of 0.4% markup when buying $2 million worth of securities. This is significant because the report found that individual investors typically trade municipal securities in amounts of $100,000 or less, while institutional investors typically trade in amounts of $1 million or more. And individual investors make up a significant percentage of the market. They own roughly 75% of the estimated $3.7 trillion in outstanding muni bonds, whether through direct purchases or through funds.

Those in the industry say higher markups for retail boil down to the fact that there is a market for each investor group, and they behave differently. Retail investors do smaller trades that require more time, effort and risk to execute. And retail investors require of their broker-dealers more assistance, explanation and services along the way than do institutional customers.

“It’s not surprising,” said Steven Schrager, director of research at SMC Fixed Income Management, a boutique fixed income management firm. “If you look at a [bond issue], one that’s active, you’ll see that the interdealer trades are much closer to par, or whatever the price is, as opposed to a retail trade. I’m not saying the retail client is getting ripped off, but you have smaller retail trades, the dealer is taking his markup to some extent, and that’s reflected in the price and the data.”

Various factors affect the markup, including the size of the trade, maturity, credit rating, and liquidity of the credit. In the primary market for new muni bond issues, broker-dealers share what the underwriters charge issuers for selling the securities. The secondary market for municipals functions as an over-the-counter market where the difference between a bid price to buy and offered price to sell is the markup.

Critics say the muni market lacks transparency, often suffers from inadequate disclosure of financial information and is generally a treacherous place for the small investor.

Industry reaction to the GAO report may differ from the tone of news articles published shortly after its release back in mid-January. Many carried headlines that implied that retail investors were getting gouged in their trades. And to one retail trader in New York who did not want to be identified, a 2.5% average markup does seem excessive. His firm, which mostly prices the bonds it offers to retail and institutional customers the same, has markup restrictions based on maturity and size that never exceed 2%.

“Obviously, markets fluctuate,” the trader said. “So you can’t look at something that was bought three months ago and say, 'Oh, look. They’re marking it up more than 2.5%,’ if they’re just holding onto it for a while.”

But the 2.5% markup makes sense when the costs of a retail trade are considered, according to Michael Decker, managing director and co-head of the municipal securities division at the Securities Industry and Financial Markets Association, an industry trade group. If a dealer owns $2 million of bonds and is selling that to 100 retail customers in different transactions instead of a single transaction with an institutional investor, the costs associated with paying the sales staff and the infrastructure associated with supporting 20 trades instead of just one affect the cost that the customer pays, he said.

In addition, the time that individual sales people take on trades for retail clients tends to be greater than the time institutional sales people take with their customers. That’s because there’s a higher duty of care that dealers have to their retail customers, Decker said.

For example, dealers to retail customers must explain the characteristics and relative risks of the bonds, answer questions, and comply with regulatory requirements that control broker-dealer transactions with individual investors.

“There’s more explanation involved, more time on the phone, associated with making sure the investor is comfortable with the trade that the dealer is suggesting,” Decker said. “Those factors come into play.”

Institutional customers also have a propensity for getting better pricing because they work with many more dealers. A typical institutional client sometimes does business with more than 100 dealers. Thus, they can sometimes play different dealers against one another to negotiate the best possible price on the trade.

“Typically, a retail customer has all or most of their portfolio with one dealer, or maybe up to three dealers,” Decker said. “They clear through the same dealer with whom they trade, and so they’re really limited, in terms of their ability to shop a trade around, which may affect the price they get.”

Ultimately, though, the prices for trades in the retail and institutional markets should be looked at separately, said Matt Fabian, managing director at Municipal Market Advisors. This makes any kind of study on bond prices for the entire municipal marketplace difficult to apply to the real world. It’s very difficult to compare those two markets; they’re separate markets, according to Fabian. “You have two different systems for buying bonds,” he said. “They’re built differently, they’re staffed differently — you have a whole different set of services, different expectations of the client. It’s hard to say that one is more expensive than the other.”

The GAO report, entitled “Municipal Securities: Overview of Market Structure, Pricing, and Regulation,” was mandated by the Dodd-Frank Act. It was sent to Sen. Tim Johnson, D-S.D., chairman of the Senate Banking Committee, and Rep. Spencer Bachus, R-Ala., chairman of the House Committee on Financial Services, along with the ranking members of both panels: Sen. Richard Shelby, R-Ala., and Rep. Barney Frank, D-Mass.

The Senate Banking Committee has asked the Securities and Exchange Commission to follow up on the report, said Sean Oblack, spokesperson for Sen. Johnson’s Banking Committee.

“The GAO’s report offered reasonable recommendations and Chairman Johnson looks forward to the SEC following up on them and conducting inspections accordingly,” he said.

Source: http://www.bondbuyer.com/issues/121_34/institutional-investors-pay-less-individual-1036516-1.html

Bottom Line - Oil price surge could dampen global recovery

2012-02-21T13:44:00.000-08:00

Bottom Line - Oil price surge could dampen global recovery

More misery ahead as pump prices are predicted to increase. Hosusehold budgets are tight enough as is!

Bottom Line - Deal done: Europe seals new $170B Greece bailout to avoid chaotic default

2012-02-21T13:31:00.000-08:00

Bottom Line - Deal done: Europe seals new $170B Greece bailout to avoid chaotic default This continuous cycle of debt and misery needs to end. The time has come for a serious review of the world's banking system. It is sad to see the Greeks lose hope over their future!

The Money Masters [Full Documentary] - YouTube

2012-02-21T02:51:00.000-08:00

The Money Masters [Full Documentary] - YouTube

Euro Region’s Boost to Bailout Fund Falls Short of 1 Trillion-Euro Target - Bloomberg

2011-11-29T18:02:00.000-08:00

Euro Region’s Boost to Bailout Fund Falls Short of 1 Trillion-Euro Target - Bloomberg

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Lesbian seeking marriage license arrested in NC - CBS News

Time magazine cover of breastfeeding mom sparks intense debate on "attachment parenting" - CBS News

JPMorgan Chase: London whale swallows $2B - CBS News

Romney says sorry for high school bullying episode - CBS News

JPMorgan $2 bln trading loss spooks bank stocks | Reuters

The case against Lehman Brothers - CBS News

Promote Your Blog - Blogger Help

Rock Center with Brian Williams - Return of 'third shift' for automakers brings hope, economic ripple effect

Rock Center with Brian Williams - Made in America: Trend against outsourcing brings jobs back from China

GAO Report That Retail Pays More Isn t New News - The Bond Buyer Article

Bottom Line - Oil price surge could dampen global recovery

Bottom Line - Deal done: Europe seals new $170B Greece bailout to avoid chaotic default

The Money Masters [Full Documentary] - YouTube

Euro Region’s Boost to Bailout Fund Falls Short of 1 Trillion-Euro Target - Bloomberg