Saturday, January 31, 2009

The Values Behind Market Capitalism: Panel Discussion at the 2009 World Economic Forum

The following video on this post is of a one-hour panel discussion about the values behind market capitalism. The panel was held at the 2009 annual meeting of the World Economic Forum in Davos, Switzerland.

Panel members included Tony Blair, the former prime minister of the U.K. current UN Middle East Quartet Representative, and member of the Foundation Board of the World Economic Forum, Stephen Green, Group Charimen of the HSBC, UK, Indra Nooyi, Chairman and CEO of PepsiCo, USA, Shimon Peres, President of Israel, James J. Schiro, Group CEO and Chairman of the Group Management Board, Zurich Financial Services, Switzerland, and Jim Wallis, Editor-in-Chief and CEO of Sourjourners, U.S.A.

Maria Ramos, Group Chief Executive, Transnet, South Africa and Co-Chair of the World Economic Forum Annual Meeting 2009 was the moderator of this panel. The following questions were asked of the participants:

"Regulatory and market failures have clearly damaged capitalism, but the ethical and moral lapses that led to those failures will prove to be more pernicious over time. What ethical and moral concerns need to be addressed to avoid a greater backlash to market capitalism?
Are we living by the right values?"

According to the summary of the panel's discussion, "Panellists agreed that, while the financial system needs to be fixed, the solution is not excessive regulation that stifles innovation and free enterprise. A serious reflection of the morals and ethics underpinning the system is clearly warranted and, in particular, the concept of the common good has to be revisited."

Selected quotes from the panel disccusion:

“...The best free enterprise is stakeholder free enterprise where the wider economy is at the service of wider society.” -Tony Blair

“This is about values that have developed in the markets in recent years. We have moved from the old cliché ‘my word is bond’ to a culture and atmosphere where ‘if there’s a transaction, if there’s a market for it, and I have a contract, and it’s legal, that’s it; I don’t need to think about the underlying right or wrong, suitability or unsuitability." - Stephen Greene

"You know, crisis, in the eyes of many people, sounds like an end. I think it can sound like a beginning as well..... I think the greatest document in the domain of the economy is still the 10 commandments...for all of us." - Shimon Peres

The moderator then moved the discussion to Jim Wallis. His contribution to the panel can be found on his blog post, "Davos: How Will This Crisis Change Us?"

Here are a few excerpts:

"...We should be asking, “How will this crisis change us?” How will it change the way we think, act, and decide things — how we live, and how we do business? Yes, this is a structural crisis, and one that clearly calls for new social regulation. But it is also a spiritual crisis, and one that calls for new self-regulation. We seem to have lost some things and forgotten some things — such as our values."

"We have trusted in “the invisible hand” to make everything turn out all right, believing that it wasn’t necessary for us to bring virtue to bear on our decisions. But things haven’t turned out all right and the invisible hand has let go of some things, such as “the common good.” The common good hasn’t been very common in our economic decision-making for some time now. And things have spun out of control....

...Gandhi’s seven deadly social sins seem an accurate diagnosis for some of the causes of this crisis:

“politics without principle, wealth without work, commerce without morality, pleasure without conscience, education without character, science without humanity, and worship without sacrifice.”"

The Invisible Hand via New York Times 5/25/08 "The Invisible Hand is Shaking" (Robert H. Frank)

Back to Basics: The Future of Banking and Finance Discussed at the 2009 World Economic Forum in Davos, Switzerland

This is the first time I've paid close attention to the events at the annual meeting of the World Economic Forum, held in Davos, Switzerland. The World Economic Forum is an independent, international non-profit organization. The motto of the organization is "entrepreneurship in the global public interest".

If you are interested in learning about the topics discussed during the panel discussions at the annual meeting of the World Economic Forum, a good place to visit is the Events section of the forum's website. The 2009 Annual Meeting section has a list of panel discussion topics, each linking to summaries of the key points that were debated and discussed.

(For deeper exploration of the themes and topics of the annual meeting, I've provided links to video clips, webcasts, podcasts, and social media located at the end of this post.)

Here is the short view:

Davos: More Questions than Answers 1/30/09
"Alan Murray, deputy managing editor for The Wall Street Journal, says this year's World Economic Forum took on a different tone from years past. On preventing another financial crisis, he says there were more questions than answers."

Excerpts from Wall Street Journal Article:
Signs of the Future of Banking and Finance Emerge 1/31/09 CARRICK MOLLENKAMP, JOELLEN PERRY and ALESSANDRA GALLONI

"Davos, known in the past as a celebration of profits, this year was more of a cold outpost where attendees, including regulators, bankers, and hedge-fund managers, have been sorting through a raft of back-to-basics strategies for the world's financial system."

"In the end, what we want is a financial industry and banking-sector industry where you have more capital, less debt, more rules and much stronger supervision," said Italian central-bank governor Mario Draghi. He said markets largely remain frozen and that the only thing that would attract investors -- many of which actually serve as lenders because they invest in debt -- is an assurance of safety and transparency.....Among the new rules of the game for banks are likely to be simpler models that rely less on off-balance-sheet vehicles and borrowed funds to drive profits. There also likely to be fewer opportunities for banks to offload risk to third parties -- such as
American International Group Inc. -- that then end up unable to insure themselves against losses or exposures to loans."
Angela Merkel, Chancellor of Germany, at the World Economic Forum
Photo from WSJ via AP

World Economic Forum in Davos participants enact life in a refugee camp for a day:



World Economic Forum Annual Meeting Quotes

2009 World Economic Forum Social Media Links
2009 World Economic Forum YouTube Channel
2009 World Economic Forum Podcasts, Webcasts and Videos
2009 World Economic Forum Interviews

INVESTOPEDIA (Links to a financial dictionary for those of us who have trouble with understanding the financial alphabet soup.)

Friday, January 30, 2009

Nouriel Roubini: August 2006 Predictive Blog Posts; 2008 Interview with Charlie Rose

"The Biggest Slump in US Housing in the Last 40 Years"...or 53 Years? - Nouriel Roubini 8/23/06

Eight Market Spins About Housing by Perma-Bull Spin-Doctors...And the Reality of the Coming Ugliest Housing Bust Ever....

"Then, whether this housing bust will lead to a recession or not is the only remaining uncertainty: Krugman himself does not yet share my “certainty” - as he puts it – about a recession but, short of that certainty, he is fully of the view that the housing bust will be “ugly” and has some risks of triggering a broader economy-wide recession. So, the “Shrill Order of the Reality-Based Reputable Eeyores” is growing by the day and I am proud to be in company of such distinguished academic and non-academic colleagues." -Nouriel Roubini 8/26/06


Nouriel Roubini's Global EconoMonitor (Blog)

A Conversation with Nouriel Roubini
(Charlie Rose, 10/14/08)

(Nouriel Roubini is an economics professor at New York University.)

I thought I'd provide a partial transcript of this video clip for readers who might be hearing impaired. (I will be activating a blog-reader on this blog soon.)

Charlie Rose:
"Where are we now in this continuum of this huge financial crisis?"

"The recession will last at least two years.... there will be hundreds of banks going belly up. ...What we've done is avoiding a more severe catastrophe, a disaster. But still, it is going to be very, very painful for the real economy and for financial markets. We haven't reached the bottom yet."

"We discovered that the most sophisticated financial system in the world was totally fragile. Because we created an actual system where there was not proper rules, proper institution, proper supervision, and regulation. The ideology in Washington for the last 8 years regarding the financial market has been self-regulation."

"Self-regulation is meaningless. It means no regulation. It was an ideology based on market discipline, but there was no market discipline, because when there is mania, when there are bubbles, and when there is excitement, and nobody is worried about the risk."

There was a reliance on internal risk management. But the previous CEO of Citi said, when the music is playing, you've got to dance.. so everybody is taking risks...So nobody's listening to the risk managers.

"And then there was a reliance on the rating agencies, that were being paid by the people they were supposed to rate. So the conflict of interest was huge. So we created a financial system that without proper rules and regulation, like the law of the have periods of time when there is bubbles, there is manias, and then there is panic and fear. And you go from one to another, from boom to bust."

"That's why you need an appropriate system of regulation and supervision of banks, of hedge funds, of broker-dealers, of other financial institutions. Without it, its going to be a disaster. Excessive amounts of financial innovation, if not controlled and contained, is very risky..."

Charley Rose:
"When did we last have a chance to avoid this?"

"We missed the chance a few years ago...3 months ago, the damage was done. (July of 2008) Even a year ago, the damage was done. At this point, the mistakes were done a few years ago, you know, the feds cut rates. They kept them too low for too long, there was no supervision or regulation of toxic mortgages and other credit, the entire ideology was one of laissez-faire, so we really created the biggest bubble in the US housing market."

"And it was not just one of the sub-prime mortgage problem. The same kind of excess was in subprime, in near-prime, in prime, in home equity loans and in commercial real estate, credit cards, auto loans, student loans..leveraged loans that financed LBO's that should have never occurred, excessive borrowing by the state and municipal governments, the muni-bonds that have been thrattled, commercial loans, corporate bonds, all this creation of credit ...that is going to blow up right now."

"So we created a really huge mess, because we didn't properly regulate the financial system."

Charlie Rose:
"Why this insight that you had...and why so few people?"

"I think I was right, because I've been studying financial crises for over two decades, I've written books about them, I was involved in policy making for a few years."

"...There are lots of good analysts on Wall Street, but there is all this bias of sell-side research. When your firm is underwriting stocks and bonds and securities, you can not be sticking your neck out and saying we're going to have a recession...So I think that many of the professional forecasters have this bias coming from their institution."

"And you don't have enough independent thinkers and scholars who are willing to speak the truth. But I was not the only one. Mark Schiller, and many other ones...about the housing bubble. I think some of the academics were out there realizing that this was a very severe risk."

"...You have to make sure that you separate the banks that are illiquid, but solvent, and that can be recapitalized, from those that are essentially insolvent, the sooner you shut them down, the better, otherwise they will take the deposits and make other risky loans, and it will be a disaster. That needs to be done. "

"On top of it, now we are going into a severe recession. Demand is falling, consumption by consumers is collapsing. Investment demand by corporation for new capital is also collapsing. And if the private sector is not going to spend, we need a major fiscal stimulus program, something on the order of 300 billion dollars."

"Roads, infrastructure, giving money to state and local governments, energy...otherwise, six months from now, we might try to rescue the financial system, but if the column is going to collapse, those delinquencies, those credit loses are going to mount, and therefore, anything we do to fix the financial system is going to be undone by a very severe recession. So we need to stimulate growth through fiscal expansion."

"The other problem is that the bad bank loans are also the debt of the housing sector, yet
millions of house are now on the verge of bankruptcy..people at risk for losing their homes, being foreclosed."

"Therefore you have to reduce the face value of this debt. That was what was done during the Great Depression. We created the Home Owners Loan Corporation that bought all this bad assets from the banks, reduced the face value, and refinanced home owners into longer term fixed rate mortgages that they could afford."

"If we had don't avoid this tsunami of foreclosure, consumption is going to keep on falling, because people don't have money to spend, because they are buried under a mountain of debt, and the recession is going to become more severe. And these foreclosures are going to dump more homes on the market, and push down even further home prices."

"A third of all sales today are either foreclosures or short sales. So they are distress sales, not real sales. So we really have to do a lot more to prevent this financial crisis from becoming a more severe economic crisis."

Well said!

Thursday, January 29, 2009

Crowds in France protest handling of the economic crisis; rail and air services were disrupted.

Hundreds of thousands of angry and fearful French workers mounted nationwide strikes and protests Thursday to demand President Nicolas Sarkozy do far more to fight the economic crisis." (Associated Press 1/29/09)

A million on strike as France feels pinch Angelique Chrisafis

(The Guardian 1/30/09)

Sarkozy Faces His Biggest Protest Yet on French Economic Plan
(Helene Fouquet,, 1/29/09)
"The Paris march ended with violence at the Garnier opera square. Riot police fired tear gas as protesters burned trash bins. CGT said 300,000 walked in the capital city and authorities reported 65,000 demonstrators. "

The discontent is spreading around the globe.

A look at economic developments around the world
(Associated Press 1/29/09)

Here is the latest update about what's happening in Spain:

UPDATE 1: Spanish unions call for wave of protests (Andrew Hay, Reuters, 1/29/09)

"Spain has gone from creating more than a third of new jobs in the European Union to destroying more than 40,000 a week in past months -- more than France, Britain and Italy put together -- as the collapse of its housing boom coincides with the global crisis."

Spain Bonds Signal More Pain; Yields Fail to Lure Axa (Update 2)
(Anchalee Worrachate and Esteban Duarte, 1/29/09)
"S&P cut Spain’s credit ranking one step to AA+ on Jan. 19, citing concern the budget deficit will balloon to 6.6 percent of gross domestic product this year, more than twice the European Union’s ceiling. The ratings company lowered Greece one level to A- five days earlier and Portugal to A+ on Jan. 21. "

I wonder what will erupt next week!

Tuesday, January 27, 2009

Why We Keep Falling for Financial Scams - WSJ Essay

Stephen Greenspan Ph.D., a psychologist, recently wrote a book, "Annals of Gullibility" focusing on a multi-dimensional theory that attempts to explain how so many people can find themselves in situations that could have been avoided. After Dr. Greenspan wrote his book, he found that much of his retirement savings had been invested in the Rye Prime Bond Fund, part of the Tremont family funds, a subsidiary of Mass Mutual Life. Unfortunately, the Rye Prime Bond Fund was a feeder fund of Madoff's Ponzi scam.

Why We Keep Falling for Financial Scams (Stephen Greenspan, WSJ, 1/3/09)

The following is a quote from Greenspan's essay:
"In my own case, the decision to invest in the Rye fund reflected both my profound ignorance of finance, and my somewhat lazy unwillingness to remedy that ignorance. To get around my lack of financial knowledge and my lazy cognitive style around finance, I had come up with the heuristic (or mental shorthand) of identifying more financially knowledgeable advisers and trusting in their judgment and recommendations. This heuristic had worked for me in the past and I had no reason to doubt that it would work for me in this case."

The article explores the topic in-depth.

Latest Ponzi Scheme:

Cosmo Ponzi Scheme Took in $370 Million, U.S. Says (Bob Van Voris and Patricia Hurtado, Bloomberg, 1/27/09)

Nicholas Cosmo of Agape World Inc. was accused of running a Ponzi scheme from 2003 through December 2008. He lied to his investors by telling them that the money was invested in "bridge loans". In reality, he invested in commodity futures, loosing about $80 million dollars out of an investment of $100 million.

According to the article, Cosmo was sentenced to prison in 1999 for misappropriating funds when he was a stockbroker. He also was ordered to receive therapy for a gambling problem. That information should have caused his investors to think twice before plunking down large sums of money into his scheme.
Nicholas Cosmo
Photo from

Bernie Madoff
Photo from NY Times

Perjury Charges Against Madoff? SEC Officials Believe That He Lied to Them During Past Examinations (Kara Scannell, WSJ, 1/27/09)

"Lawmakers expressed frustration at regulators' explanations for failing to catch Bernard L. Madoff's alleged multibillion-dollar fraud but drew little blood because officials declined to discuss details of the case.

Linda Thomsen, chief of the Securities and Exchange Commission's enforcement division, suggested in Tuesday's hearing at the Senate Banking Committee that federal prosecutors may pursue charges against Mr. Madoff over what they believe were his lies to SEC officials during past examinations."


Madoff's list of victims is getting longer. Alexandra Penney, the former editor of Self Magazine, gave her life savings to Madoff's firm. She has shared her experience on her blog, "The Bag Lady Papers", on The Daily Beast.


Zsa Zsa Gobor lost millions due to Madoff (Reuters, 1/24/09)

91-year old actress Zsa Zsa Gabor lost up to $10 million dollars investing in Bernie Madoff's fraudulent investment firm.

Report: Larry King the Latest Big Loser in Bernie Madoff Scandal ( 1/23/09)

Of Human Competence - Stephen Greenspan's Blog

Keynesian + Behavioral Finance?

Robert J Shiller: Irrational Exuberance

George A. Akerlof and Rober J. Shiller
Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism

Monday, January 26, 2009

WSJ's Video: How Iceland's Financial System Crashed - massive debts, government falls

Over the past few months, Iceland's financial sector imploded, and recently, the government collapsed. The following two videos, from the Wall Street Journal Online, explain some of the dynamics behind this country's reverse of fortune.


"WSJ's Andy Jordan examines how Iceland's economic miracle came to an abrupt end and explains why the world should care about the collapse of the small country's financial system."


"Iceland's Prime Minister Geir Haarde is preparing to step down after announcing the collapse of the county's coalition government. Video courtesy of Reuters."

Website: The Icelandic Government Information Center: The Icelandic Government Center regarding the current financial circumstances in Iceland
ABC News Video: Iceland's Banking Meltdown (10/21/08)
BBC News Video: Icelanders' fury over economy (12/19/08)
"Iceland's people have been venting their fury over Iceland's economic collapse at public meetings."
"27 years on my job, is like you say, thrown out the window."

BBC News Video: Protesters hit Icelandic PM's car

BBC News Video: Crisis claims Icelandic cabinet (1/26/09)

Timeline: Iceland economic crisis (BBC News, 1/26/09)
Iceland's Coalition Government Collapses (Charles Forelle, WSJ, 1/26/09)
Banking Crisis Brings Down Iceland Government (Guardian UK, 1/26/09)
"Ruling coalition falls; First government to fail as result of global economic crisis"
Waking up to reality in Iceland (Analysis by Jon Danielsson, Economist, Financial Markets Group, London School of Economics - BBC News, 1/26/09)

"The bankers and government effectively turned Iceland into a gigantic hedge fund sitting in the middle of the North Atlantic...What they failed to implement was the necessary supervision or enforcement of banking regulations."

Sound familiar?

Sunday, January 25, 2009

71-year-old Edward M. Solomon, Financial Adviser, Disguised as Groucho Marx, Robs Trustco Bank

New York Times Article: White Collar, and Accused in a Bank Holdup
Peter Applebome, 1/24/09
"The accused was a 71-year-old financial adviser with an office on Fifth Avenue and a ranch house in Westchester County. The disguise was Groucho Marx glasses, nose, eyebrows and mustache."

“...He wasn’t your typical bank robber per se,” Lieutenant Johansen said. “He’s 71 years of age. He has no criminal history whatsoever. I would imagine everyone who knows him is completely surprised he would have resorted to this for whatever reason. There’s nothing in his past to suggest he would do this.”

The Journal News: Bonk robbery suspect, 71, remains in jail

(Terence Corcoran, 1/24/09)

"Police say the armed robbery used this Groucho Marx disguise."

"He fled with $5,900 in a Lexus SUV that was later recovered. Police said there is not indication he had any help....Solomon works at Prudential Financial Services, 630 Fifth Ave., Manhattan."

That must have been an interesting sight!

Saturday, January 24, 2009

CNBC's American Greed Series

I just started watching CNBC's "American Greed: The Scams, the Schemes, the Broken Dreams". This is the third season of the show, so I visited the American Greed website to learn about what I've missed.

If you are looking for more information about this topic, visit the website to find information related to the theme of each show, including producer's notes, slideshows, links, video clips, evidence files, and "web extras".

Wednesday, January 21, 2009

Hedge Fund Drama: SEC Case Filed on Arthur Nadel, more about other scandals

"From at least January 2008 through the present, the Defendants, who provide investment advice to Scoop Real Estate, Valhalla Investment Partners, Victory IRA Fund, Viking IRA Fund, and Viking Fund (collectively the "Hedge Funds") have issued materially false and misleading account statements tot eh Hedge Funds' investors. The false account statements overstated the value of investments in the Funds by approximately $300 million."

US Securities and Exchange Commission
Litigation Release No. 20858/January 21, 2009
Securities and Exchange Commission v. Arthur Nadel, et al.
SEC Compliant (pdf)

"Poof! Another Fund Manager Disappears"
Liz Moyer, Forbes 1/21/09
"Some of the money in the funds was transferred to secret bank accounts only Nadel controlled.."

Other Money Managers of Note:

Marcus Schrenker - Faked his death by crashing his airplane, and was found in a campground.
Regulators were warned about parachuting financer (Rick Callahan, Associated Press, 1/19/09)

Adolf Merckle - Killed himself after losing several hundred million euros on the wrong end of a short sell.
Financial Casulty: Why Adolf Mercle Killed Himself (William Boston, TIME, 1/6/09)
Phoenix MAy Be Sold for Up to EU6 Billion After Merckle's Death (Ambereen Choudhury, Bloomberg, 1/22/09)
Photo from Bloomberg

Daren Palmer - Idaho Investigates Alleged Hedge Fund Fraud FINalternatives 1/20/09
Rod Stringer- SEC Charges Texas Man With Hedge Fund Fraud FINalternatives 1/21/09
Marc Dreier - Dreier Said to Promise Son $12.5 Million in Property (David Glovin, Bloomberg 1/21/09)
Bernie Madoff- List of Entities Announcing Exposure to Madoff Investment Fraud Wall Street Journal 1/20/09
Sam Isreal - Faked his death to escape a prison sentence and lived in a campground until he turned himself in.
Wanted fund chief rides scooter to police HQ, turns himself in. USA Today, 7/2/08

More from the past:

Steven Markovitz
- Mellennium Partners Hedge Fund Trader
Small-Time Crooks Michael Maiello, Forbes 10/2/03
Three Merrill Brokers Fired in Hedge Fund Scandal Matthew Goldstein, The 10/2/03

Investors rush to exit hedge funds after record losses Miles Costello, Times Online 1/22/09

FBI sees more indictments from backdating: An assistant director says FBI is vigorously investigating 55 corporations.
Shaheen Pasha, CNN Money, 10/12/06
"Hedge funds are the wild, wild west of investing," he said. "The problem comes when hedge funds become more and more like Ponzi schemes." - Chip Burrus, Assistant Director, FBI

Focus in Fund Scandal Turns to Bear Stearns Matthew Goldstein, The 11/13/03

The $500 Billion Hedge Fund Folly James M. Clash, Robert Lenzner, Michael Maiello, Josephine Lee, Forbes 08/06/01

"The industry--or, at least, the term "hedge fund"--dates back to 1949 and money manager Alfred Winslow Jones. He pitched the notion that a smart money man could protect investors against market spills by going long some stocks and short others."

Tuesday, January 20, 2009

Economic Updates: WSJ's Madoff Interactive Graphic; "Sins of Omission" regarding BofA-Merrill & the US Government

The above picture will link you to the Wall Street Journal's interactive graphic, "Madoff's Circle of Friends". The larger circles represent larger investors. Mousing over the circles and dots will provide more information.

Related Article
Family Filled Posts at Industry Groups

US Government: BofA-Merrill Matchmaker or Godfather? (Dennis Berman and Evan Newmark)

The main question asked in this video: Just what is going on with Bank of America?
Sins of commission, sins of omission?

"WSJ's Dennis Berman says the Bank of America and Merrill Lynch merger is raising questions about the government's role during negotiations. He tells colleague Evan Newmark its apparent actions conflicted with shareholders' rights."

More Hedge Fund Drama: Authur Nadel, Fund Manager, Goes Missing.

Authur G. Nadel, a Florida hedge fund manager, went missing on January 14th, and a story of fraud and lost fortunes unfolded:

Mace Loses $2 Million in Nadel Hedge Fund; FBI Takes Over Probe
"Mace Security International Inc., the maker of Mace self-defense sprays, said it lost $2.2 million in a hedge fund run by Arthur Nadel, the Sarasota, Florida, investor being sought by the FBI after disappearing last week."

FBI and SEC Probe Missing Fund Manager (Bloomberg News, New York Times, 1/18/09)
The F.B.I. and securities regulators have joined the investigation of Arthur Nadel, a Florida hedge fund manager who disappeared four days ago, leaving clients concerned that they might have lost as much as $350 million."

FBI joins search for missing Florida money manager
(Michael Peltier, Reuters, 1/18/09)
"Nadel and his wife Peg were prominent philanthropists and socialites in Sarasota, an upscale community south of Tampa, Florida. The couple was involved in many community organizations including Habitat for Humanity."

In Nadel Case, Warning Signals (John Hielscher, Anthony Cormier & Michael Pollick, Herald Tribune, 1/20/09)
"Two sources who have seen or been briefed on the note indicated Nadel told family members that he made a grave mistake and planned to kill himself. Once he spoke with family members by phone, however, the suicide fears dissipated and FBI agents began hunting him as a missing person"

Authorities think money manager planned to vanish
(Christine Armario, Associated Press)
"... Later, Nadel called and said he'd left something for her in a desk drawer at their ranch-style home in Sarasota. That's where she found a suicide note, the sheriff's report states. In it, Nadel told his wife how much he loved her. He also said he felt guilty over losing other people's money....Nadel operated Scoop Management Inc., and was a trader for six different funds. According to Scoop's internal accountant, there are between 500 and 600 investors across the country. Last week, many were told that the funds are empty."

Monday, January 19, 2009

Revisiting the NY Times Interactive Timeline: 10 Weeks of Financial Turmoil

The New York Times developed an interactive timeline of the events surrounding the economic crisis from September 7 through November 17 2008. It is worth taking a look at the timeline, even if you've seen it previously.

Ten Weeks of Financial Turmoil

More Jokes and Quotes, via Jon ( posted on the CodeProject's soapbox & rants message board)

Jon, a member of the CodeProject, posted the following quotes from movers and shakers from the 2007 financial world. In most cases, the opposite turned out to be true:

Note: I did not check the accuracy of these quotes.

"More Jokes from Bigtime Capitalists"

AIG Comedy Hour

"We are confident in our marks and the reasonableness of our valuation methods. We have a high degree of certainty in what we have booked to date." -- CEO of AIG, Martin Sullivan, Dec. 5, 2007

Bear Sterns Two-Face Show
Matthew Tannin, Bear Stearns portfolio mgr.(later arrested by the FBI): "If we believe the report is ANYWHERE CLOSE to accurate, I think we should close the funds now.... If [the report] is correct, then the entire subprime market is toast." -- Internal memo to another portfolio manager, April 22, 2007.

"So from a structural point of view, from an asset point of view, from a surveillance point of view, we're very comfortable with exactly where we are." -- Tannin to investors on April 25, 2007 (three days later)

"Our liquidity and balance sheet are strong.... We don't see any pressure on our liquidity, let alone a liquidity crisis." -- CEO Alan Schwartz to CNBC on March 12, 2008 - One day before he asked the Feds for emergency funding.

Countrywide ain't on your side
An analyst report suggesting that Countrywide faced liquidity problems "was totally irresponsible and baseless." On the contrary, "every one of these [crises] you come out of stronger, better, and with less competition." -- CEO Angelo Mozilo to CNBC on Aug. 23, 2007 - sold to BoA 11 months later.

Fannie is another name for a--
"There are no current plans to go back to the market for capital because we have all of those other levers that are turned on, producing capital, putting us into an increasingly - into a comfortable position based on where we are in the market right now." -- CEO Daniel H. Mudd, Feb. 27, 2008

Lehman Bros need glasses
"We are on the right track to put these last two quarters behind us." -- CEO Richard Fuld on Sept. 10, 2008 (6 days until it implodes and goes belly up.) These days, he's answering questions for federal prosecutors in Brooklyn, Manhattan, and Newark.

Merrill Lynch " ...."
"I think proactive, aggressive risk management has put us in an exceptionally good position.... We have seen significant reductions in our exposure to lower-rated segments of the market." -- CFO Jeffrey N. Edwards, July 17, 2007.

Wamu puts the whammy on you
As the housing market has softened as expected, what I have really seen is a continued very good performance out of most parts of the portfolio." -- CEO Kerry K. Killinger on Jan. 17, 2007 (He's presently under investigation for fraud.).

Is everybody laughing?

(Thanks, Jon, for your insight!)

Saturday, January 17, 2009

The End of Wall Street as We Know It: Compelling 3 part on-line video introduction to the WSJ book by David Kansas

The following three videos are from the Wall Street Journal's website and are adapted from the book, The Wall Street Journal Guide to The End of Wall Street As We Know It, by David Kansas. The book, published by Collins books, will be released in paperback on January 27, 2009. The Kindle Edition is currently available.

Below each video, I've added some quotes and paraphrased some of the content. (I wasn't able to get the names of some of the people quoted from the videos.)

You'll have to buy the book to catch it all.

End of Wall Street: What Happened
(Wall Street Journal, 1/05/09)

Chapter One:

"In the first of this three-part series, Journal reporters explain how the housing bubble inflated and burst, and why easy money led to the collapse of Wall Street's biggest financial institutions"

The push for home ownership from the government led Fannie Mae and Freddie Mac to lend home loans at lower rates than others. Banks tried to follow suit, in order not to lose market share, and look for ways to make money, such as offering sub-prime mortgages, which were offered to people with a higher risk, at a higher rate than prime mortgages.

To make more money, banks developed a strategy of "mortgage bundling", which in theory, would reduce the risk if a few of the mortgages weren't being paid. The bundles then were traded back. and forth. According to the WSJ video, these bundles were really like poisoned sausages.

In 2002, the Federal Reserve reduced short term lending rates to 1%, known on Wall Street at easy money. "All of the constraints seemed to go out the window". It was easy for everyone to borrow money and rely on credit cards. This period of easy money went on into 2007. People were qualified for large mortgages for homes that they should not have been allowed to purchase, given their incomes.

Investment banks found that they could rely on large amounts of borrowed money to finance their operations. This resulted in a surge of growth in Wall Street, and a growth in the amount of debt (leverage). New ways of dealing with investments emerged that were complicated to understand. These strategies and deals, on the surface, made Wall Street folks richer than before. The "herd" mentality set in, and the new sophisticated practices, relying on computer modeling to minimize the "risk", became acceptable for the norm.

As the market increased in size, banks came up with even new ways of managing risk. During the late 1990's, JP Morgan developed the concept of credit default swaps, which is insurance on the debt of a company. Once the insurance was purchased, if the company went belly-up, the owner of the insurance would make money. This concept was initially practiced during the 1800's when people laid bets on weather or not a ship would return from sea. People were greedy and sank ships, so friends could collect the insurance.

The same sort of thing happened during the present crisis. Two hedge funds managed by Bear Stearns, a large Wall Street investment company, imploded. Billions of dollars of bonds were sold, and investors demanded to get back cash.

End of Wall Street: Why it Happened
(Wall Street Journal, 1/05/09)

Chapter Two:

"What was going through the minds of CEOs, corporate boards, fund managers and mortgage lenders as they created hard-to-understand derivatives Warren Buffett once called "weapons of financial mass destruction."

"There is plenty of blame to go around. I think in retrospect that lots of people who were doing stupid things." -Alan Murray, WSJ Deputy Managing Editor

"..The regulators did not keep a careful eye on what was happening on Wall Street. Indeed, in some cases, they looked the other way. The regulators were too interested in watching Wall Street succeed in going from rich to riches. -Dave Kansas

"The purpose of a regulator is to make sure that the banks DO have risk controls, and that they are aware of what is going on."- Daniel Hertzberg

"Alan Greenspan... believed that complex derivatives, complex investment instruments, were ultimately good, healthy, and safe for the economy. Warren Buffet, the greatest investor in America, said these were weapons of financial mass destruction...After his term, he was called back to congress to testify in relation to the financial crisis. In that testimony, he conceded that perhaps he had been wrong about derivatives and the need for greater regulation in the financial system." -David Kansas

" the things we got wrong were not details. The things we got wrong were major checks and balances and safety valves in the global financial system." -David Wessel, WSJ Economics Editor

"The story of the credit rating agencies is a story of a colossal failure"
-Henry Waxman, House Oversight Committee Chairman

"There were huge failures of the ratings agencies, who clearly didn't understand what they were giving triple A ratings to, because suddenly they don't have triple A ratings any more, and that is a huge failure..."

(Banks stopped lending money. The economy basically stopped.)

"At some point, there needs to be a longer term solution. We're still in crisis management mode. They haven't even started to figure this thing out, but the entire financial architecture is going to have to be reconsidered as a result of what we've just been through."

End of Wall Street: What Happens Next (Wall Street Journal, 1/05/09)
Chapter Three:

"This final chapter of the crisis on Wall Street tells the story of the $700-billion bailout, as seen through a reporter's eyes, and looks at what's ahead for the global economy."

"You have the destruction of the US financial industry. People don't want to say it, but, it's been destroyed."

"...This is one of the reasons why the calamity was so severe, because everyone had the same bets going on at the same time."

"We've come to believe all these things about the institutions in our country, that is supposed to give you a sense of well-being or confidence, but the financial system has failed us. The governmental system that is supposed to regulate, oversee this, direct this financial system utterly failed us. We as individuals took as much money as we could, as fast as we could, in a way that has failed the country."

"For too many years, people borrowed too much, spent too much, lived beyond their means, and the time of reckoning has come, too all of us."

"I think we've been living in a consumer-debt driven era for quite a long time."


Interview of Dave Kansas, Amazon Kindle's Blog

Timeline of Songs about the Economic Crisis (some humorous), from Williambanzai7

I recently discovered Williambanzai7 when I came across his comment to an article on the Seeking Alpha financial information website, "Madoff Hedge Fund: Wall Street's Biggest Ponzi Scheme Yet? " Sean Maher, Seeking Alpha 12/14/08

Williambanzai7's comment consisted of the lyrics to a song about the Bernie Madoff scandal, set to the tune of Rudolf the Red Nosed Reindeer. It gave me a chuckle, even though it is well past the holiday season. (Williambanzai7 often posts his lyrics as comments in response to on-line articles and blog-posts related to the current economic crisis.)

I checked out his blog, and discovered that most of his posts are lyrics dedicated to the "Great American Subprime Disaster". A few posts relate to the politics of our times. The songs are in lyrical form only. As far as I know, there is no audio.

Here is a solution- KARAOKE. Gather some friends and belt out the tunes while singing Williambanzai7's lyrics! (Your economic woes will disappear, at least for a while.)


September 2008
SUBPRIME BAILOUT PROTEST SONG (One, Two, Three What Are We Fighting For? -Joe McDonald)

I AM THE WAMU ("I am the Walrus" -the Beatles)
"I am he as you are he as you are me and we are all together. See how they run like hedge fund bums from a gun, see how they fly. I'm crying."

STUCK IN A MORTGAGE WITH YOU (Stuck in the Middle- Stealer's Wheel)

October 2008

MONEY FOR NOTHING -Residential Mortgage Backed Securities (Money for Nothing - Dire Straits)

I like the following two songs, because you can sing AND dance to them:
LET'S DO THE SUBPRIME WARP AGAIN! (Let's Do the Time Warp - Rocky Horror Picture Show)
BAILOUT THRILLER RETURNS (Thriller- Michael Jackson)

November 2008

BABY CAN YOU BAIL OUR CARS (Baby You Can Drive My Car - the Beatles)
WHERE HAVE ALL THE BAILOUT BUCKS GONE? (Where Have All the Flowers Gone- Pete Seeger)

December 2008
(Rudolph, the Red-nosed Reindeer)
(Chestnuts Roasting on an Open Fire)
(The Twelve Days of Christmas)

January 2009

YOU'RE JOHN THAIN (You're so Vain - Carley Simon)
CITIGROUP BITES THE DUST (Another One Bites the Dust- Queen)

"Wall Street: The Musical", anyone?

(Think Mama Mia and Moulin Rouge.)


Seeking Alpha
THE WILLIAMBANZAI7 BLOG: The Great American Subprime Disaster

Friday, January 16, 2009

The Power of Pictures: The Financial Crash and Survival on the Hudson

Pictures, graphs, and charts, if done well, provide a powerful way of representing information that will be part of our historical time-line in the future.

We've all read about the growing mortgage foreclosure problem. Most people probably pass at least one foreclosed property when they are out and about. The following picture puts it the problem in perspective:
Detroit Metropolitan Area Foreclosures 2006, 2007 & 2008 -Detroit Free Press

It might make a powerful impression if this graphic was integrated into an interactive map of the states, along with related info-graphics & data visualizations. In my opinion, the impact would last in my memory more so than the volume of text I'd have to read if I did not have access to the visualization.

Another example of powerful imagery is the slideshow of photographs related to the events surrounding the financial crash, posted on the Wall Street Journal website:

(I was not able to embed the slideshow.)

Photo Journalism By and For the People

Now that so many people carry around cell phones with cameras, recording powerful images as history is in the making is becoming common. A recent example, pointed out by Matthew Reichbach, of the New Mexico Independent, is the pictures that were taken after a US Airways plane safely "landed" in the Hudson River on 1/15/09.

The flight was on the way to Charlotte, NC, from New York City. Many of the passengers were employees of Bank of America who were flying home after talks regarding the merger with Merrill Lynch, according to an article in the Charlotte Observer. I shudder to imagine how the story would unfold if there were no survivors. The family, friends, and colleagues of the passengers would be devastated. The loss of so many key bankers involved in the merger of two corporate cultures would have dire consequences as well.

The following picture crashed Twitpic not long after it was uploaded by

"There's a plane in the Hudson. I'm on the ferry to pick up the people. Crazy."

Photo of Hudson River plan crash downs TwitPic
(Daniel Terdiman, cNET News, 1/15/09)

Social Media, citizen journalism trumps traditional media--on the plane crashes beat
(Matthew Reichbach, the New Mexico Independent, 1/16/09)

As the news was breaking, CNN encouraged eye-witnesses to upload pictures and video to their iReport website, resulting in some moving pictures of what now is called a miracle:

iReport photos by EricinParis, a passenger on Flight 1549:

Miracle on the Hudson (Ann Doss Helms and Steve Lyttle, Charlotte Observer 1/16/09)

Finally, Charlotte Catches a Break (Corey Dade and Betsy McKay, Wall Street Journal 1/17/09)

Economists and Garbage - Link to article by Steven D. Levitt (Freakonomics)

Steven D. Levitt is the author of the opinion blog in the New York Times, Freakonomics: The Hidden Side of Everything. He is known for his unusual sense of "humor" as well as pushing the limits from time-to-time. Levitt's recent post, "What Do Economists Have in Common with Garbage?" asks readers to respond to this question.

"And to compare economists to garbage, well that obviously means that I think all economists are garbage, including myself. " -Steven D. Levitt

For a humorous spin on the current economic crisis, read the the comments to Levitt's post.

Note: I do not intend to mock economists. I'm sharing these quotes because they fit the theme of the title of this blog.

Here are a few quotes:

"Both produce a Gross Domestic Product." -George

"Garbage creates micro-parasites. Economists create macro-parasites. Unchecked, both lead to epidemic catastrophes." -jbharshaw

"You do
n’t really notice them until things start to stink." Cara

"Each one points to a stinky 2009." - Mitch

"You can learn a lot from both, if you take the time to look." -Chad Bergeron


If you are a bit tired of economic doom and gloom, take a look one of my earlier blog posts with links to economic jokes and quotes.

Update: Also see my post with links to Williambanzai7's humorous lyrics about the economic crisis, set to tunes of popular songs - "Time-line of Songs about the Economic Crisis (some humorous).

Wednesday, January 14, 2009

Another one bites the dust: Nortel is going bankrupt.

Nortel bites the dust, and fraud is part of the drama behind the headlines. I've collected a few articles, quotes, and links that I'm looking at right now, and I'll update this post as I dig a little more.

Long-struggling Nortel files for bankruptcy:
(Rob Gillies, Associated Press)

"Nortel was founded as Northern Electric and Manufacturing in 1895, supplying equipment for Canada's telephone system. The company pioneered digital network switches in the 1970s and grew into a major telecommunications supplier after the U.S. breakup of AT&T in 1984 expanded competition in the industry."

"In 2004, the U.S. Securities and Exchange Commission launched a formal investigation into Nortel's financial statements. The agency accused Nortel of manipulating its books in 2000, 2001 and 2003 to make it appear the company was holding up better during the technology implosion."

Nortel Files for Bankruptcy After Losses Mount (Bob Van Voris and Joe Schneider, Bloomberg, 1/14/09)

How did Nortel get to this point?

SEC Charges Four Former Senior Executives of Nortel Networks Corporation in Wide-Ranging Financial Fraud Scheme (US Securities and Exchange Commission, 3/12/07)

Named in the Commission's complaint are Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly and MaryAnne E. Pahapill."

""The fraudulent conduct at issue here was egregious and long-running. Each of the defendants betrayed Nortel's investors and their misconduct gave rise to billions of dollars in shareholder losses," said Linda Thomsen, Director of the Commission's Division of Enforcement. "The action we take today sends a strong message that officers of U.S.-filing foreign corporations will be held to the same standards of accountability that are required of all participants in the U.S. financial markets."

Nortel Networks Pays $35 Million to Settle Financial Fraud Charges
(U.S. Securities and Exchange Commission, 10/15/07)

Of course, human greed had something to do with this:

SEC Complaint (pdf)
"This case involves two fraudulent accounting schemes, a revenue fraud scheme and an earnings management scheme, which enabled Nortel Networks Corporation (“Nortel” or “the Company”) to meet the unrealistic revenue and earnings guidance that its top executives had provided to Wall Street in 2000 and again in 2002 and 2003. The first scheme – led by three corporate executives – accelerated material amounts of revenues into 2000 and created the false appearance that Nortel was weathering an industry-wide economic downturn better than its competitors. The second scheme – led by two of the same corporate executives, a third (but different) corporate executive and four business unit executives – reduced or increased Nortel’s earnings as necessary to create the false appearance that Nortel had stabilized its operations and returned to profitability for the first time in over three years, and was designed to pay bonuses..." (My emphasis)

Accounting Scandals (Wikipedia)

Called to Account: Fourteen Financial Frauds that Shaped the American Accounting Profession

"Chapters describe the tricks fraudsters such as 'Crazy Eddie' Antar and 'Chainsaw Al' Dunlap used to fool their auditors. Readers will learn how MiniScribe employees disguised packages of bricks as inventory; how Equity Funding personnel programmed the company's computer to generate 64,000 phony life insurance policies; and how Enron inflated its profits by selling and then repurchasing money-losing assets.Complementing these chapters on high-profile crimes and criminals are chapters that trace the development of the public accounting profession and explain how each scandal shaped current accounting practices."