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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.”

He had no idea how his words would just keep on resonating.

By Myron Gushlak

Posted by Myron Gushlak at 1:39 PM | Permalink | Comments (0)

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

to an increasingly more desperate,

where are the foreign investments?

in one short year. George Washington in his farewell address to the nation warned that a

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

http://avalon.law.yale.edu/18th_century/washing.asp . Before the United States relies too heavily on the opinion of the specialists on this matter, I would like to remind them of George Bernard Shaw’s caution that

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

The current financial crisis is becoming more complicated than a Russian novel, and every bit as intriguing.

By Myron Gushlak

Posted by Myron Gushlak at 7:16 PM | Permalink | Comments (0)

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

This was the lament of a BlueWaters lunch last week. Some of the most humorous things Ive ever heard were about money. Perhaps it is because, as Voltaire said,

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

Perhaps it is because sometimes all a man can do is laugh. The stock market, as the experts tell us, is still trying to find a bottom. Meanwhile, the government announced last week that it would sell $55 billion in bonds next week as part of the massive borrowing plan to pay for its financial rescue packages. Some say that figure might have to expand to over $300 billion by the first quarter of 2009. And that does not include any possible life preserver thrown to the US auto industry. Clearly the bottom has not yet been reached.

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

Posted by Myron Gushlak at 11:57 AM | Permalink | Comments (0)

There will be no end in the foreseeable future to talk about money. Some of it will be finger pointing to attempt to assign blame for this historic collapse. Some of it will be a constructive exchange of ideas meant to help the situation. The cost of health care will predominate for the next year, especially if the US presidential candidates follow through on their promises.

This week a study was released about the cost of diabetic care in the United States. In 2001, the cost of diabetic health care was $6.1. In 2008, that cost rose to over $12 billion, based largely on the rising costs of new drugs introduced over the past ten years. The most shocking thing about the report was not the doubling of the cost in such a short period of time, but the revelation that there is no evidence that the additional cost has improved the health of any of the patients. Several months ago, another story in the New York Times reported that there was a move toward a specific drug cancer treatment that cost the patient between $45,000 and $60,000 per year. The average patient lived an additional two years if they opted for this new treatment. If the average was two years, it is safe to assume that some patients lived four years longer, and some didn’t live any longer at all.

During the financial collapse of the past couple of months, a lot has been written and said about “mark it to market”. It was a way of describing the problem financial institutions that held these failed mortgage backed securities had in trying to determine the actual value of what they held. To explain as briefly as possible, if a trader sold a hundred shares of IBM stock, for example, at ten dollars a share, he would know that he could mark the value of that stock at ten dollars. What happened in the crash was that Lehman Brothers, again for example, may have held some mortgage backed securities that had a marked value of hundred dollars. Bear Stearns might have had a very similar, but not exact product, which they marked at eighty dollars. Goldman may have had a similar product that they valued at forty dollars. What is the value of that asset? The answer, and the reason for the collapse, was that the market could not be established. The products could not be “marked to market”.

If you find that confusing or contentious when talking about real estate, imagine the upcoming furor when someone tries to mark medical care for market. Human lives and not 401ks will be at stake. What is the value of diabetic health care? Is it based on the $6.1 billion number of 2001, or the $12 billion number today. There will be an almost infinite number of similar examples. What is the value of medical care? How can one mark it to market? And most importantly, who will decide?

By Myron Gushlak

Posted by Myron Gushlak at 12:39 PM | Permalink | Comments (0)

The Federal Home Loan Mortgage Company made more news today when it declared a quarterly loss much larger than expected. It was hoped that a rebound by Freddie Mac, as it is commonly known, would indicate a bottoming out of the mortgage crisis. Apparently, more bad news is to come with an end now forecast at the end of 2009 at the earliest. Sobering stuff.

Freddie Mac is a government sponsored enterprise, created in 1970 to help the average American citizen purchase homes. What Freddie Mac does is to buy mortgages on the secondary market, and then sell them as mortgage backed securities. Their securities declined by $1 billion, it was announced today. Freddie Mac has a total worth of $4.2 billion. To start their recovery, they hope to raise $5.5 billion in new securities. Investment banker Myron Gushlak, for one, believes that the investor must believe that an end is in sight before Freddie Mac becomes an appealing investment option again. That end was not announced today despite new funds pledged by the federal government and a new law passed this week to shore up the struggling company.

According to a National Public Radio report, when Freddie Mac was established, the government pledged to keep it in operation with no end date to that pledge. Freddie Mac will, therefore, continue to exist no matter what losses might still be announced. It might not be recognizable, but it will weather this storm in one form or another. That guarantee sounds almost naive to me. Idyllic. Optimistic. I guess that is one definition of hard times – when other times seem so desirable by comparison.

By Myron Gushlak

Posted by Myron Gushlak at 2:35 PM | Permalink | Comments (0)

Last month, I wrote about Sovereign Wealth funds, the financial vehicle that countries use to invest in other countries. At that time, China had invested heavily in both Morgan Stanley and the Blackstone Group, easing considerably the negative effect of the mortgage crisis. I quoted Lawrence Sommers, the former US Treasury secretary who warned

It was far from obvious to me that this {maximizing value of shares} will be over time the only motivation of governments as shareholders.

He was essentially questioning what impact these investments would have on future government policy. His concern was theoretical. No country had ever used such leverage to mandate policy in another country.

The future is here sooner than we thought. In this weeks Sunday New York Times, David Rieff, author of

At the Point of a Gun:Democratic Dreams and Armed Intervention

was writing about the Myanmar governments refusal to allow aid after the recent cyclone, and other areas of global need. Although the article was not about sovereign wealth funds, one seemingly innocuous sentence caught my eye. In explaining the lack of meaningful response to the situation in Darfur, Rieff explains that one of the reasons for inaction was, and I quote,

Part of the reason is that China opposes such a move, and it is a lot harder for the US in 2008 to go against a country that holds so much of its government paper….

Is anybody else paying attention here? I see movie possibilities. Im seeing a 21st century Frankenstein, one who was created in a haunted house on Wall Street by massive debt and who is ultimately able to rule the world. The villagers (debted countries) will be powerless! What horror! What terror! What a mess!

By Myron Gushlak

Posted by Myron Gushlak at 4:10 PM | Permalink | Comments (0)

Theres a new kid in town. Actually, hes not a new kid at all, but he seems to have caught everyones attention now that he’s grown up. Im talking about the “new” financial entity, the Sovereign Wealth Fund. A SWF is an investment tool used by countries to invest in other countries. Over the past five years, the number of new funds has spiked. The International Monetary Fund estimates that $3 trillion is currently being invested, and that amount could jump to 12 trillion by 2012. Though that number looks futuristic, it is only four years from now.

Chinas recent investment (I hesitate to use the word “bailout”) in the struggling US companies, Morgan Stanley and Blackstone Group has raised more than a few eyebrows. And Chinas SWF investments are less than a quarter of what the Abu Dhabi Investment Authority currently holds. Most sovereign funds do not disclose exactly where their money is being invested. The obvious big issue is whether these investing countries will continue to use Sovereign Wealth Funds solely as financial investments, or will they begin to use their power as political muscle. According to Lawrence Sommers, the former United States Treasury Secretary, right now the goal of these funds is

to maximize the value of their shares.

But, he cautions,

It is far from obvious that this will over time be the only motivation of governments as shareholders.

For a financial guy, this makes me giddy. This is as exciting as human g-nome developments to biologists. I wish I could fast forward a few years to see how this all plays out. The trenches of the next world war may be on the stock market floor, and the soldiers may all be wearing suits, pardon the hyperbole. Just thinking about this is like chugging a can of Red Bull. Now Ill never get to sleep.

By Myron Gushlak

Posted by Myron Gushlak at 12:08 PM | Permalink | Comments (0)

As seen through American eyes, Russia is falling short on the promise of democracy. But, for the people of Russia, the degree of openness and opportunity they enjoy today is without precedent.

The Russian economy has grown exponentially in the past decade-and-a-half as a reborn Russia embraced the power of the marketplace after seven decades of communist failure. Foreign investment in Russia, including $11 billion by American companies, nearly doubled in 2006 to $28.4 billion. U.S. exports to Russia climbed by 20 percent last year to $4.7 billion. Russian exports to the United States totaled $19 billion in 2006, a 30 percent increase from the year before. American businesses from candy to cars now operate in Russia. American businesses in Russia are making money at an astonishing pace. Two-thirds of U.S. companies in Russia are meeting current sales targets and 97 percent expect continued sales growth during the next three years.

To fully realise its investment potential, given its natural resources, large domestic market and relatively low wages, Russia needs to cut further the restrictions facing foreign investors looking to invest in Russian firms.

By Myron Gushlak

Posted by Myron Gushlak at 5:55 PM | Permalink | Comments (0)