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“Finance,” according to Robert Sarnoff, “is the act of passing currency from hand to hand until it disappears.” Sarnoff’s words resonate strongly today among the world’s investors. If there were a way to measure such things, I’m certain many people would agree with his cynical appraisal of the industry at large. Many believe that the epidemic outbreak of scams and fraudulent acts that have been discovered over the past year are merely the norm of business activity. Or worse, that people like Madoff and Stanford represent only the unfortunate who were unlucky enough (or sloppy enough) to get caught. The pre-occupation with scams, particularly in the tabloid news venues has cast a distorting light on finance and business. But frauds and scams are really only a very small part of the whole.

In baseball, it is said that the perfect player trade is one where both teams feel they got the better player in return for their own player who they obviously viewed as expendable. And so it is in business. The perfect deal is the one where both parties are convinced that their acumen has gotten them the better deal. Fraud can be claimed, therefore, by any party who discovers further down the road that he, in fact, did not get the better deal after all. A good friend of mine bought a fair amount of GM stock last week for seventy-nine cents a share. This week it traded at $1.44. Did the party who sold it at 79cents feel scammed? The conundrum of finance where one man’s ceiling is usually another man’s floor brings to mind the words of one of the great misanthropes of the last century, Ambrose Bierce. “Happiness,” he said, “is the agreeable sensation arising from contemplating the misery of another.”

It is a curious cultural condition we find ourselves in that Bierce’s words resonate so deeply. But this attitude that the big fish eats the smaller fish right on down the line negates one very important tenant of finance. That is, we are all in this together. The current downtown should have made this abundantly clear. Instead, it seems to have created a fascination with scams that inherently assumes the worst- that one man can only succeed at the expense of another. It becomes almost a religious argument. Does a high tide raise all boats, or can one succeed only at the expense of another.

By Myron Gushlak

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You may have read that recently that Picard is continuing to fight the good fight for recent victims. It’s been in all the papers. I don’t mean Jean Luc Picard, the Star Trek captain played by British actor Patrick Stewart. I’m talking about Irving Picard, the court appointed trustee who has the unenviable task of trying to recover monies for the victims of Bernard Madoff’s Ponzi scheme- the scam that will ultimately make Madoff the King of All Scams if it hasn’t already.

But in a curious decision this week, investors who cashed out before Madoff’s $65 billion dollar scam was discovered, were told they may have to return what they took out (www.nydailynews.com/money/2009/04/25/2009-04-25) In recent weeks, according to the article, the Federal Bankruptcy Court trustee in charge of hunting down Madoff’s assets sent out 223 letters to investors seeking the return of as much as $735 million. The so-called "clawback" could impact investors who cashed out as long as six years before the collapse. "These amounts were paid to you at the expense of other customers while [Madoff's firm] was insolvent," read a letter to an investor from Trustee Irving Picard.

Can you imagine? Theoretically, the investor who received a check from Madoff in June of 2004, long before there was a hint of a scam, will have to pony up said check. I assume that he in return will dun the BMW dealer who took a portion of that ill-gotten money as payment for a car. The car dealer will dun the house painter who received a portion of these illegal funds in exchange for a coat of paint on the dealer’s residence. The house painter will attempt to get a portion of that money back from his wife’s father who used it to but a couple of tickets for a Mets game. And on and on. Until Hi ho the dairy-o, the cheese stands alone.

Once again, reality is far stranger than fiction. Nothing that Jean Luc Picard had to deal with on any planet in any galaxy, could have prepared him for the intricacies of this real life Pandora’s box. “The effect of these letters is to scare the living daylights out of people who have already been victimized once by Bernard Madoff," said lawyer Jonathan Landers, who represents several victims.
Yeah, no kidding.

By Myron Gushlak

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To paraphrase Oscar Levant, when it comes to Bernard Madoff,

“the line between genius and insanity has been erased.”

Madoff is a fascinating story, and shows no signs of becoming less so. The questions about how he did what he did are only partially legal questions. There is a sense of awe inherent in the inquisitiveness of the average person. How did he do it? People want details. Gory details, minuscule antidotal details. Anything. Americans have always had a soft spot for the criminal mind. John Dillinger was a hero during the Great Depression as he stole and murdered his way through rural America. More people today know his name than any other figure of the 1930’s with the possible exception of Franklin Roosevelt. “The Godfather” is the favorite film of more American men than any movie in the past hundred years, and only a few were rooting against the Marlon Brando lead character. People will flock to a movie about a great scam. Leonardo DeCaprio’s “Catch Me if You Can” is the most recent film that comes to mind, but there is no shortage. Will there be movies based on Madoff’s life, both fictional and bio-pics? I’m certain they’re already begun. If it is possible to get enough of this story, than certainly we are nowhere near that point.

In this case, the interest in the scam itself is enhanced by the innate curiosity about the wealthy. What you have here is a perfect storm of a scam and a peek into the private lives of the rich- a lethal American combination. And I don’t just mean Madoff’s life. His yachts and various homes around the globe are interesting, but not more interesting than the peek into the lives of his victims. Surely I am not the only one who read the e-mails entered as evidence in Madoff’s trial by some of his victims (as well as others who just wanted their opinions registered.) It is a train wreck. Each one elicits sympathy as we trip over ourselves to read the next. Captivating and mesmerizing. Bubble gum for the eyes and ears. And for the fans of this sort of thing, rest assured, the end is nowhere in sight.

By Myron Gushlak

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Everyone thought that comedy would fall into a recession after the Bush presidency ended. Not so fast you doomsayers of humor. Enter the era of the exposed scam. It seems that every few weeks a new scam is uncovered. Todays entry is Allen Stanford whom the SEC has seen fit to pin more allegations on than a donkey’s cartoon butt at an eight year old’s birthday party. Those allegations against Mr. Stanford and his bank, the Stanford International Bank, include, but are not limited to, attempting to drain $178 million in the past two weeks alone and selling 8 billion pounds sterling in certificates of deposit claiming unrealistically high rates of return. It is also alleged that the Stanford Group sold 1 billion of a proprietary mutual fund by

"using materially false and misleading historical performance data."

www.timesonline.co.uk/tol/news/world/us

The nefarious doings started to unravel when the attorney cooperating with the SEC investigation disaffirmed everything he had told authorities up to that point. www.bloomberg.com/apps/news?pid. This disaffirmation was a bit of a red flag to the investigators who did not, apparently, mis-underestimate the ramifications of such a denial.

But wait, it gets better. Apparently Mr.Stanford was on the long list of people and organizations swindled by Bernard Madoff; this according to the SEC, though Stanford denies it. The writers for Letterman, Leno, Mahr and all the others are scrambling as I write this. Open your window; you can almost hear the sound of pens scratching off in the distance.

"So, Bernie Madoff and Allen Stanford walk into a bar…."

I would pay good hard-earned money to see a transcript of the conversation between the two of them. Stanford bought some of what Madoff was peddling. Did Madoff invest in any of the SIB offerings? Isnt this kind of like when you hold a mirror up to a mirror? We have uncovered a new Zen meditation point for the 21st century. If a swindler swindles a swindler, is it really a scam at all? I wonder if they liked each other on a personal level, or if one thought the other particularly honest or trustworthy. I wonder if they had plans to meet again socially. H.L. Mencken said

“never overestimate the decency of the human race.”

By Myron Gushlak

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The down time at Blue Water Partners (http://bluewater.ky/) is always interesting. I dont think that would be too surprising to many people. When men work in high pressure jobs, handling large sums of money, things tend to get a little unpredictable during the breaks. Bond traders are notorious for this sort of behavior. A bond trader will work at warp speeds for hours at a time manning several telephone lines and computer screens simultaneously, and then bam, everything stops, and traders find themselves staring at one another in a minor daze. I knew of one bond trader in New York who caught mice and threw them out the window after making little parachutes for them during the down time. Things get weird. Conversations are often unrepeatable.

The talk the other day centered around the Bernard Madoff scam. It’s hard not to talk about Madoff, or made-off as Ive heard him called recently, as in he made-off with all the money. We started by talking about other scams, the original pyramid scheme of Charles Ponzi in the 1920s to the Nigerian money laundering scheme that still surfaces every now and again. Madoff seems to have the biggest scam to date, at least in terms of dollars. The Albanian pyramid scheme of 1997 was the hands down biggest in terms of the numbers of people involved. It was estimated that two-thirds of that countrys entire population and government were caught up in it. Riots ensued when the whole thing collapsed, and the country still hasnt fully recovered. But in terms of dollars, Madoff seems to have won a rather dubious prize.

Which led to the main topic of discussion – Where is the money?

If the totals that are being thrown around in the newspapers are remotely accurate, Madoff took hundreds of millions, and possibly billions of dollars. Think about that. In these days of billion dollar buyouts numbers get thrown around and lose their meaning. But he may have taken billions of dollars. A million dollars is a lot of money. If you spent a dollar a day for a million days you would have had to begin in the fifth century BC to be broke today. (without interest, of course.)

It was the esteemed consensus of BWP that a single man cannot spend that much money in his lifetime, never mind the forty or fifty years Madoff may have been at it. There just isnt enough time in the day. It would take a foundation with many employees to spend at a fast enough rate. Its a funny idea, not being able to spend a fixed amount of money, a Brewsters Millions sort of fantasy, but think about it. If you stole one billion dollars, you would have to spend ten million dollars a day to make it disappear in a couple of decades. Now think about how much work it would be to spend ten million dollars a day every day for a couple of decades. If you gave it away in huge allotments. far too much attention would be drawn to you. Did he buy an estate a day for a year? A roomful of Picassos? Where are they? What a dilemma! So the question remains, where is the money?

I was reminded of a story I read many years ago. A man in France stole what is the equivalent to one million dollars in quarters. Do you know how much space you need to store a million dollars in quarters? What are you going to do with them? Sell them each for a nickel to neighborhood children? Go to quarter casino machines every day for eight hours? You would draw so much attention to yourself that you would be caught in weeks, which leads me to the what the police chief in charge of the case was quoted as saying,

Stealing this much money is its own punishment.

By Myron Gushlak

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I have been writing about sovereign wealth funds on and off for months. I warned about the possible political ramifications of having foreign countries heavily invested in the United States and the political leverage that might lead to. I quoted a New York Times story about the reluctance of the US to press China too hard during the Olympic buildup period for fear of antagonizing a friendly investor. Larry Summers, (who was not the Secretary of the Treasury at the time) shared my concerns, or I should say, I shared his, and he said months before he was to become part of this new administration’s cabinet, that he would keep a watchful eye on that particular situation. (www.huffingtonpost.com/2008/10/27/obamas-treasury-secretary_n_138195.html)

It is beyond ironic to me the way things are turning out. The current bailout has a possible price tag of nearly one trillion dollars. (www.nytimes.com/2008/09/21/business/21draftcnd.html) This at a time when national deficit in the United States is currently ten percent of the GNP. Very little is being said about where that money is going to come from. There is a constant footnote to anything TARP (bailout) related that the cost would be passed on to the American taxpayer. That is all well and good for the long term, but what about the short term? It seems that the US is counting heavily on foreign investments to fund a lot of this recovery money.

But how likely is this to happen? Much was made of China’s investment in Morgan Stanley in December, 2007. (www.iht.com/articles/2007/12/19/business/morgan.php) I am curious to know how much that investment is currently worth to China. I am fairly certain that it is worth at least one third less than what was originally invested. How eager will China be to return to the US for further investment? The situation may be worse in the oil producing countries. Sovereign wealth fund investment in the US by the United Arab Emirates is well into the tens of billions of dollars. With the price of oil under fifty dollars a barrel, (down from a high of nearly $150 a barrel in July, 2008) how eager are those countries to invest in the US? And if they still have full confidence in the strength of the US dollar, where will they get the money to invest?

This is an intriguing turn of events. The United States has gone form a cautionary

be careful of foreign investors

where are the foreign investments?

passionate attachment of one nation for another produces a variety of evils.

If all economists were laid end to end, they would not reach a conclusion.

By Myron Gushlak

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There is a sense of anticipation this week as the final days of the Bush presidency are spent. I dont remember in my lifetime such an urgency for change. There is a distinct feeling of being in the midst of history. Without a doubt the combination of the impending Obama inauguration and equally historic financial crisis has marked these days for inclusion in future history books. It is a peculiar sensation, the notion that one is living through history. Of course, one always is, but the realization comes and goes. One gets the sense in these early days of 2009 that the whole world is watching.

I sense an optimism that contradicts the woeful facts of the current financial collapse. I particularly enjoyed the op-ed piece in the New York Times today by Roger Cohen (www.nytimes.com/2009/01/15/opinion/15cohen.html?_r=1&ref=opinion) not just for what was said, but for Mr. Cohens ability to capture this curious contradiction. There is more of a sense of a collective rolling up of sleeves preparing for a tough job ahead, than

a sky is falling panic

It was Gore Vidal who said,

On the whole history tends to be rather poor fiction-except at its best.

By Myron Gushlak

Posted by Myron Gushlak at 9:41 PM | Permalink | Comments (0)

No one seems to be complaining about the falling price of oil. I suppose it would be naïve to think there was no connection between the current condition of many trading houses in the United States and the plummeting price. Before the recent election, there were innumerable television ads calling for the closing of the so called Enron loopholes. The backers of this movement were convinced that trading practices were driving the price of oil to the heights we saw in the spring of 08. The lower volume of trades being made throughout the entire financial spectrum today (as a result of the tight credit markets) certainly adds a great deal of ammunition to those who thought the price of oil was being artificially inflated. The lack of speculative trading has resulted in the falling price, they would argue. I do not mean to suggest that this is the only driving force of the drop of the price of a barrel of oil. For example, it seems the estimate of growth in Chinese demand was greatly overstated.

There are other factors as well. But I thought there was merit in the Enron loophole argument. So it was with no little interest that the open letter to president elect Barack Obama by the Commodities Market Oversight Coalition caught my eye. The entire letter can be found at http://accidentalhuntbrothers.com/ The committee calls for more oversight into the overseas markets, the so called dark markets and more transparency in the transactions within the United States. There are sixteen signers of this letter including such varied interests as the Consumer Watchdog group, The Air Transport Association, the Illinois Petroleum Marketers Association and the Independent Oil Merchants of New York. When there is a cry from a particular industry imploring the government to add regulation to their own industry, it tends to make more of an impression on me. Their letter is a cry for stability in what has been a particularly volatile commodities market.

I suspect the president-elect gets a few hundred of these things a day, but this one, I think deserves his attention.

And by the way, there are those who feel the price of oil is no where near bottom. Reuters reports that crude oil prices could drop as low as $20 a barrel in 2009. That sounds outlandish, but so did the July 2008 prediction by the same people of $50 a barrel when it was trading at three times that level at the time. www.guardian.co.uk/business/feedarticle/8119626

Just another thing to watch as this new administration begins its already historic reign. Who needs reality tv with all this real life drama?

By Myron Gushlak

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President elect Barack Obama has named his choices for a new economic team. Citing

an economic crisis of historical proportions

Lawrence Summers is nominated for director of the National Economic Counsel. Summers was Treasury Secretary to President Clinton, and as been quoted numerous times in this series of blogs. Mr. Summers is an unusually gifted man having enrolled at MIT at age 16 and at age 28, he became one of Harvards youngest ever tenured professors. His personal kryptonite is women, environmentalists and civil rights activists who he continually alienated during his five years as Harvard University President. Though he can neither fly, nor see through walls, it is believed he can breathe underwater, making him the ideal candidate in this current flood of debt.

Timothy Geitner is nominated for Treasury secretary. He is the former president of the Federal Reserve Bank of New York and has been working alongside of Henry Paulson trying to fix the country’s credit markets. He is bulletproof. He operates from a cave and drives a specially built car that can cause the market to fluctuate three hundred points with the push of a button. His known enemies on both sides of the aisle are all easy to spot because of their various eccentric outfits or nicknames. He works best at night, for some reason.

Melody Barnes was chosen to lead the White House Domestic Policy Council, and has been an advocate for the progressive policies of the Democratic Party. According to the Dallas Morning News, she looks particularly good in a cape, and has a golden magical lasso that can do things that unambiguously aid the general population, though no one could specifically say exactly what it is that she does with her powers.

And finally, Christina Romer will chair the White House Council of Economic Advisors. She is a student of the Great Depression, and an economic professor at the University of California at Berkeley. She believes in the idea that tax increases restrain economic output, and in truth, justice and the American way. It is not yet clear whether she will generally wear tights and a cape, but assures the American people that in the very least, she will carry around a green lantern. Her spokes people would not say why.

Both Marvel and DC Comics are currently negotiating long term deals with all economic members. Fear not America! Help is on the way!

By Myron Gushlak

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The difference between playing the stock market and the horses is that one of the horses must win.

when it comes to money, everybody is of the same religion.

Ive given my opinion several times over the past year about the possible dangers of other countries buying our bonds as part of their Sovereign Wealth Funds, and using the influence that investment provides as political leverage in the future. Id feel a little bit better about the proposed sale of stocks if the US government released some sort of statement that might indicate that they are at least aware of the possibility of such a conflict of interests in the future. I havent heard a word about it. And maybe that is to be expected. A drowning man doesnt much care who is throwing him a rope. I (still) would like to think that someone at the upper levels of government has their eye on this sort of thing, and a contingency plan for the future exists should the United States suddenly find itself leveraged into decisions it would not otherwise make.

I admit to being snowed under by all the negative economic news on the heels of the exhaustive (and exhausting) presidential campaign. I look back nostalgically to the pre-crisis and pre-election days when Janet Jacksons exposed breast might be the most compelling story of the day. Today she could run naked through the stock market and all anyone would want to know was what she was buying or selling.

By Myron Gushlak

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