After enthralling readers with a wonderful treatise on how good corporate governance need to be practiced at firms in his 2002 letter to shareholders, Warren Buffett rounded off the discussion with three suggestions that could go a long way in helping an investor avoid firms with management of dubious intentions. What are these suggestions and what do they imply? Let us find out.
The 3 that count
The master says, "First, beware of companies displaying weak accounting.There is seldom just one cockroach in the kitchen." If a company still does not expense options, or if its pension assumptions are fanciful, watch out. When managements take the low road in aspects that are visible, it is likely they are following a similar path behind the scenes.
On the second suggestion he says, "Unintelligible footnotes usually indicate untrustworthy management. If you can't understand a footnote or other managerial explanation, its usually because the CEO doesn't want you to."
And so far the final suggestion is concerned, he concludes, "Be suspicious of companies that trumpet earnings projections and growth expectations. Businesses seldom operate in a tranquil, no-surprise environment, and earnings simply don't advance smoothly (except, of course, in the offering books of investment bankers)."
Attention to detail
From the above suggestions, it is clear that the master is taking the age-old adage, 'Action speak louder than words', rather seriously. And why not! Since it is virtually impossible for a small investor to get access to top management on a regular basis, it becomes important that in order to unravel the latter's conduct of business; its actions need to be scrutinized closely. And what better way to do that than to go through the various filings of the company (annual reports and quarterly results) and get a first hand feel of what the management is saying and what it is doing with the company's accounts. Honest management usually does not play around with words and tries to present a realistic picture of the company. It is the one with dubious intentions that would try to insert complex footnotes and make fanciful assumptions about the company's future.
We would like to draw curtains on the master's 2002 letter to shareholders by putting up the following quote that dispels the myth that manager ought to know the future and hence predict it with great accuracy. Nothing could be further from the truth.
CEOs don't have a crystal ball
The master has said, "Charlie and I not only don't know today what our businesses will earn next year; we don't even know what they will earn next quarter. We are suspicious of those CEOs who regularly claim they do know the future and we become downright incredulous if they consistently reach their declared targets. Managers that always promise to 'make the numbers' will at some point be tempted to make up the numbers."
Hence, next time you come across a management that continues to give profit guidance year after year and even meets them, it is time for some alarm bells.
http://www.equitymaster.com/p-detail.asp?date=8/20/2008&story=2
Thursday, 10 June 2010
Buffett (2002): The primary job of an Audit committee and the four questions the committee should ask auditors.
Buffet explained some key corporate governance policies in his 2002 letter to shareholders. After driving home his views on independent directors and their compensation, he has now turned his attention towards the audit committees that are present at every company.
Audit committees - Substance and not form
The primary job of an audit committee, says Buffett, is to make sure that the auditors divulge what they know. Hence, whenever reforms need to be introduced in this area, they have to be introduced keeping this aspect in mind. He was indeed alarmed by the growing number of accounting malpractices that happened with the firm's numbers. And he believed this would continue as long as auditors take the side of the CEO (Chief Executive Officer) or the CFO (Chief Financial Officer) and not the shareholders. Why not? So long as the auditor gets his fees and other assignments from the management, he is more likely to prepare a book that contains exactly what the management wants to read. Although a lot of the accounting jugglery may well be within the rule of the law, it nevertheless amounts to misleading investor. Hence, in order to stop such practices, it becomes important that the auditors be subject to major monetary penalties if they hide something from the minority shareholders behind the garb of accounting. And what better committee to monitor this than the audit committee itself! Buffett has also laid out four questions that the committee should ask auditors and the answers recorded and reported to shareholders. What are these four questions and what purpose will they serve? Let us find out.
The acid test
As per Buffett, these questions are -
1. If the auditor were solely responsible for preparation of the company's financial statements, would they have in any way been prepared differently from the manner selected by management? This question should cover both material and nonmaterial differences. If the auditor would have done something differently, both management's argument and the auditor's response should be disclosed. The audit committee should then evaluate the facts.
Toe the line or else...
Buffett goes on to add that these questions need to be asked in such a manner so that sufficient time is given to auditors and management to resolve any conflicts that arise as a result of these questions. Furthermore, he is also of the opinion that if a firm adopts these questions and makes it a rule to put them before auditors, the composition of the audit committee becomes irrelevant, an issue on which the maximum amount of time is unnecessarily spent. Finally, the purpose that these questions will serve is that it will force the auditors to officially endorse something that they would have otherwise given nod to behind the scenes. In other words, there is a strong chance that they resisting misdoings and give the true information to the shareholder.
http://www.equitymaster.com/p-detail.asp?date=8/13/2008&story=1
Audit committees - Substance and not form
The primary job of an audit committee, says Buffett, is to make sure that the auditors divulge what they know. Hence, whenever reforms need to be introduced in this area, they have to be introduced keeping this aspect in mind. He was indeed alarmed by the growing number of accounting malpractices that happened with the firm's numbers. And he believed this would continue as long as auditors take the side of the CEO (Chief Executive Officer) or the CFO (Chief Financial Officer) and not the shareholders. Why not? So long as the auditor gets his fees and other assignments from the management, he is more likely to prepare a book that contains exactly what the management wants to read. Although a lot of the accounting jugglery may well be within the rule of the law, it nevertheless amounts to misleading investor. Hence, in order to stop such practices, it becomes important that the auditors be subject to major monetary penalties if they hide something from the minority shareholders behind the garb of accounting. And what better committee to monitor this than the audit committee itself! Buffett has also laid out four questions that the committee should ask auditors and the answers recorded and reported to shareholders. What are these four questions and what purpose will they serve? Let us find out.
The acid test
As per Buffett, these questions are -
1. If the auditor were solely responsible for preparation of the company's financial statements, would they have in any way been prepared differently from the manner selected by management? This question should cover both material and nonmaterial differences. If the auditor would have done something differently, both management's argument and the auditor's response should be disclosed. The audit committee should then evaluate the facts.
2. If the auditor were an investor, would he have received - in plain English - the information essential to his understanding the company's financial performance during the reporting period?
3. Is the company following the same internal audit procedure that would be followed if the auditor himself were CEO? If not, what are the differences and why?
4. Is the auditor aware of any actions - either accounting or operational - that have had the purpose and effect of moving revenues or expenses from one reporting period to another?
Toe the line or else...
Buffett goes on to add that these questions need to be asked in such a manner so that sufficient time is given to auditors and management to resolve any conflicts that arise as a result of these questions. Furthermore, he is also of the opinion that if a firm adopts these questions and makes it a rule to put them before auditors, the composition of the audit committee becomes irrelevant, an issue on which the maximum amount of time is unnecessarily spent. Finally, the purpose that these questions will serve is that it will force the auditors to officially endorse something that they would have otherwise given nod to behind the scenes. In other words, there is a strong chance that they resisting misdoings and give the true information to the shareholder.
http://www.equitymaster.com/p-detail.asp?date=8/13/2008&story=1
Buffett (2002): Guidelines for choosing independent directors who will think for the shareholders and not against them.
We learnt how independent directors at a lot of investment partnerships have put up disastrous performance through Buffett’s 2002 letter to shareholders. Let us further go down the same letter and see what other investment wisdom he has on offer.
Of practicing and preaching
Ok, we have heard a lot about the failings of independent directors and their apathy towards shareholders. However, preaching is one thing and practicing and offering a solution is completely another. Since Buffett himself runs a company, it will be fascinating to understand the guidelines he has set forth for choosing independent directors on his company's board as well as the compensation he pays them. He has the following views to offer on the kind of 'independent' directors he would like to have on his company's board:
Buffett says, "We will select directors who have huge and true ownership interests (that is, stock that they or their family have purchased, not been given by Berkshire or received via options), expecting those interests to influence their actions to a degree that dwarfs other considerations such as prestige and board fees."
Interesting, isn't it? If a person derives most of his livelihood from a firm and if he is made a director of the firm, he is quite likely to take decisions that result in maximum value creation. While this approach may not be completely foolproof, it is indeed lot better than approaches at other firms where such a criteria is not set forth while looking for independent directors.
Furthermore, on the compensation issue, Buffett has the following to say:
"At Berkshire, wanting our fees to be meaningless to our directors, we pay them only a pittance. Additionally, not wanting to insulate our directors from any corporate disaster we might have, we don't provide them with officers' and directors' liability insurance (an unorthodoxy that, not so incidentally, has saved our shareholders many millions of dollars over the years). Basically, we want the behavior of our directors to be driven by the effect their decisions will have on their family's net worth, not by their compensation. That's the equation for Charlie and me as managers, and we think it's the right one for Berkshire directors as well."
Buffett's superb understanding of human psychology is on full display here. If a person is not behaving rationally, force him to behave rationally by smothering his options.
http://www.equitymaster.com/detail.asp?date=8/6/2008&story=1
Of practicing and preaching
Ok, we have heard a lot about the failings of independent directors and their apathy towards shareholders. However, preaching is one thing and practicing and offering a solution is completely another. Since Buffett himself runs a company, it will be fascinating to understand the guidelines he has set forth for choosing independent directors on his company's board as well as the compensation he pays them. He has the following views to offer on the kind of 'independent' directors he would like to have on his company's board:
Buffett says, "We will select directors who have huge and true ownership interests (that is, stock that they or their family have purchased, not been given by Berkshire or received via options), expecting those interests to influence their actions to a degree that dwarfs other considerations such as prestige and board fees."
Interesting, isn't it? If a person derives most of his livelihood from a firm and if he is made a director of the firm, he is quite likely to take decisions that result in maximum value creation. While this approach may not be completely foolproof, it is indeed lot better than approaches at other firms where such a criteria is not set forth while looking for independent directors.
Furthermore, on the compensation issue, Buffett has the following to say:
"At Berkshire, wanting our fees to be meaningless to our directors, we pay them only a pittance. Additionally, not wanting to insulate our directors from any corporate disaster we might have, we don't provide them with officers' and directors' liability insurance (an unorthodoxy that, not so incidentally, has saved our shareholders many millions of dollars over the years). Basically, we want the behavior of our directors to be driven by the effect their decisions will have on their family's net worth, not by their compensation. That's the equation for Charlie and me as managers, and we think it's the right one for Berkshire directors as well."
Buffett's superb understanding of human psychology is on full display here. If a person is not behaving rationally, force him to behave rationally by smothering his options.
- First, choose those people that have a large and true ownership in a firm so that they really think of what is good and what is bad for the firm in the long run.
- Secondly, pay them a pittance so that like other shareholders, they too derive greater portion of their income from the firm's profits and not take a higher proportion of its expense. This is also likely to pressurise them further to take decisions that are in the shareholders' interest.
http://www.equitymaster.com/detail.asp?date=8/6/2008&story=1
Buffett (2002): "Independent" directors: How independent are they?
Warren Buffett complained about failings of independent directors in his letter to shareholders for the year 2002. Let us go further down the same letter and see what other investment wisdom he has on offer.
'Independent' directors: How independent are they?
It is a known fact that Buffett pays a great deal of attention to the management of companies before investing in them. And the reasons behind this obsession may not be difficult to find. Since it is the management that is responsible for making most of the capital allocation decisions in a business, which in turn are central for creating long-term shareholder value, it is imperative that a management allocates capital in the most rational manner possible.
However, as we saw in the last article, the list of managers or CEOs with a 'quick rich' syndrome is swelling to dangerous proportions, thus forcing shareholders to pin all their hopes on the board of a company or more importantly on the independent directors for a bail out. But as mentioned by Buffett, most independent directors (including him) on several occasions have failed in their attempt to protect the interest of shareholders owing to a variety of reasons.
After narrating his experience as an independent director, the master moves on and gives one more example where independent directors have failed miserably to protect shareholder interest. The companies under consideration are investment companies (mutual funds). The master says that directors in these companies have only two major roles,
Even in an era where shareholdings have gotten concentrated, some institutions find it difficult to make management changes necessary to create long-term shareholder value because these very institutions have been found to be sailing in the same boat i.e., neglecting shareholder value so that only a handful of people benefit. Buffett goes on to add that thankfully there have been some people at some institutions that by virtue of their voting power have forced CEOs to take rational decisions.
Let us hear in Buffett's own words, his take on the issue:
Master's golden words
Buffett says, "So that we may further see the failings of 'independence', let's look at a 62-year case study covering thousands of companies. Since 1940, federal law has mandated that a large proportion of the directors of investment companies (most of these mutual funds) be independent. The requirement was originally 40% and now it is 50%. In any case, the typical fund has long operated with a majority of directors who qualify as independent. These directors and the entire board have many perfunctory duties, but in actuality have only two important responsibilities:
On the increased ownership concentration and how certain people are forcing managers to act rational, Buffett has the following to say - "Getting rid of mediocre CEOs and eliminating overreaching by the able ones requires action by owners - big owners. The logistics aren't that tough: The ownership of stock has grown increasingly concentrated in recent decades, and today it would be easy for institutional managers to exert their will on problem situations. Twenty, or even fewer, of the largest institutions, acting together, could effectively reform corporate governance at a given company, simply by withholding their votes for directors who were tolerating odious behavior."
He goes on, in my view, this kind of concerted action is the only way that corporate stewardship can be meaningfully improved. Unfortunately, certain major investing institutions have 'glass house' problems in arguing for better governance elsewhere; they would shudder, for example, at the thought of their own performance and fees being closely inspected by their own boards. But Jack Bogle of Vanguard fame, Chris Davis of Davis Advisors, and Bill Miller of Legg Mason are now offering leadership in getting CEOs to treat their owners properly. Pension funds, as well as other fiduciaries, will reap better investment returns in the future if they support these men."
'Independent' directors: How independent are they?
It is a known fact that Buffett pays a great deal of attention to the management of companies before investing in them. And the reasons behind this obsession may not be difficult to find. Since it is the management that is responsible for making most of the capital allocation decisions in a business, which in turn are central for creating long-term shareholder value, it is imperative that a management allocates capital in the most rational manner possible.
However, as we saw in the last article, the list of managers or CEOs with a 'quick rich' syndrome is swelling to dangerous proportions, thus forcing shareholders to pin all their hopes on the board of a company or more importantly on the independent directors for a bail out. But as mentioned by Buffett, most independent directors (including him) on several occasions have failed in their attempt to protect the interest of shareholders owing to a variety of reasons.
After narrating his experience as an independent director, the master moves on and gives one more example where independent directors have failed miserably to protect shareholder interest. The companies under consideration are investment companies (mutual funds). The master says that directors in these companies have only two major roles,
- that of hiring the best possible manager and
- negotiating with him for the best possible fee.
Even in an era where shareholdings have gotten concentrated, some institutions find it difficult to make management changes necessary to create long-term shareholder value because these very institutions have been found to be sailing in the same boat i.e., neglecting shareholder value so that only a handful of people benefit. Buffett goes on to add that thankfully there have been some people at some institutions that by virtue of their voting power have forced CEOs to take rational decisions.
Let us hear in Buffett's own words, his take on the issue:
Master's golden words
Buffett says, "So that we may further see the failings of 'independence', let's look at a 62-year case study covering thousands of companies. Since 1940, federal law has mandated that a large proportion of the directors of investment companies (most of these mutual funds) be independent. The requirement was originally 40% and now it is 50%. In any case, the typical fund has long operated with a majority of directors who qualify as independent. These directors and the entire board have many perfunctory duties, but in actuality have only two important responsibilities:
- obtaining the best possible investment manager and
- negotiating with that manager for the lowest possible fee.
On the increased ownership concentration and how certain people are forcing managers to act rational, Buffett has the following to say - "Getting rid of mediocre CEOs and eliminating overreaching by the able ones requires action by owners - big owners. The logistics aren't that tough: The ownership of stock has grown increasingly concentrated in recent decades, and today it would be easy for institutional managers to exert their will on problem situations. Twenty, or even fewer, of the largest institutions, acting together, could effectively reform corporate governance at a given company, simply by withholding their votes for directors who were tolerating odious behavior."
He goes on, in my view, this kind of concerted action is the only way that corporate stewardship can be meaningfully improved. Unfortunately, certain major investing institutions have 'glass house' problems in arguing for better governance elsewhere; they would shudder, for example, at the thought of their own performance and fees being closely inspected by their own boards. But Jack Bogle of Vanguard fame, Chris Davis of Davis Advisors, and Bill Miller of Legg Mason are now offering leadership in getting CEOs to treat their owners properly. Pension funds, as well as other fiduciaries, will reap better investment returns in the future if they support these men."
Buffett (2002): "Independent" directors must be business-savvy, interested and shareholder oriented, and who think and speak "independently".
In Warren Buffett's 2002 letter to shareholders, we got to know the master's views on derivatives and the huge risks associated with them. Let us go further down the same letter and see what other investment wisdom the master has to offer.
The demise of the good CEO?
The great bull run of the 1980s-1990s in the US also brought with it a host of corporate scandals. A lot many CEOs, in their attempt to amass wealth quickly did not think twice to do so at the expense of their shareholders. It is fine for a CEO to take home a hefty pay package if the company he heads has put up an impressive performance. But to rake in millions when the shareholders i.e., the real owners of the business get nothing or only a tiny percentage of what the CEOs earn, amounts to nothing but daylight robbery. This is of course impossible without the complicity of the board of directors, whether voluntary or forced. Sadly, these people are increasingly failing to rise to the responsibilities entrusted to them by the shareholders, allowing CEOs to get away scot-free. It is this very issue of corporate governance that the master has talked about at length in his 2002 letter to shareholders. Alarmed by the rising incidents of CEO misconduct, Buffett argues that in a room filled with well-mannered and intelligent people, it will be 'socially awkward' for any director to stand up and speak against a CEO's policies and hence he fully endorses board meetings without the presence of the CEO. Furthermore, he is also in favour of 'independent' directors provided they have three essential qualities. What are these essential qualities and why he deems them to be so important? Let us find out in the master's own words.
The master's golden words
On the nature of directors, Buffett said, "The current cry is for ‘independent’ directors. It is certainly true that it is desirable to have directors who think and speak independently - but they must also be business-savvy, interested and shareholder oriented."
He goes on to add, "In my 1993 commentary, those are the three qualities I described as essential. Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire's) and have interacted with perhaps 250 directors. Most of them were ‘independent’ as defined by today's rules. But the great majority of these directors lacked at least one of the three qualities I value. As a result, their contribution to shareholder well-being was minimal at best and, too often, negative. These people, decent and intelligent though they were, simply did not know enough about business and/or care enough about shareholders to question foolish acquisitions or egregious compensation. My own behavior, I must ruefully add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders. In those cases, collegiality trumped independence."
The demise of the good CEO?
The great bull run of the 1980s-1990s in the US also brought with it a host of corporate scandals. A lot many CEOs, in their attempt to amass wealth quickly did not think twice to do so at the expense of their shareholders. It is fine for a CEO to take home a hefty pay package if the company he heads has put up an impressive performance. But to rake in millions when the shareholders i.e., the real owners of the business get nothing or only a tiny percentage of what the CEOs earn, amounts to nothing but daylight robbery. This is of course impossible without the complicity of the board of directors, whether voluntary or forced. Sadly, these people are increasingly failing to rise to the responsibilities entrusted to them by the shareholders, allowing CEOs to get away scot-free. It is this very issue of corporate governance that the master has talked about at length in his 2002 letter to shareholders. Alarmed by the rising incidents of CEO misconduct, Buffett argues that in a room filled with well-mannered and intelligent people, it will be 'socially awkward' for any director to stand up and speak against a CEO's policies and hence he fully endorses board meetings without the presence of the CEO. Furthermore, he is also in favour of 'independent' directors provided they have three essential qualities. What are these essential qualities and why he deems them to be so important? Let us find out in the master's own words.
The master's golden words
On the nature of directors, Buffett said, "The current cry is for ‘independent’ directors. It is certainly true that it is desirable to have directors who think and speak independently - but they must also be business-savvy, interested and shareholder oriented."
He goes on to add, "In my 1993 commentary, those are the three qualities I described as essential. Over a span of 40 years, I have been on 19 public-company boards (excluding Berkshire's) and have interacted with perhaps 250 directors. Most of them were ‘independent’ as defined by today's rules. But the great majority of these directors lacked at least one of the three qualities I value. As a result, their contribution to shareholder well-being was minimal at best and, too often, negative. These people, decent and intelligent though they were, simply did not know enough about business and/or care enough about shareholders to question foolish acquisitions or egregious compensation. My own behavior, I must ruefully add, frequently fell short as well: Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders. In those cases, collegiality trumped independence."
A Simple, Winning Stock Picking Strategy
A Simple, Winning Stock Picking Strategy
Not advocating or practising this method. However, it is nice to know what other investors do.
Not advocating or practising this method. However, it is nice to know what other investors do.
Risks to global economy have 'risen significantly', top IMF official warns
Risks to global economy have 'risen significantly', top IMF official warns
The risks to a robust global recovery have 'risen significantly' as many governments struggle with debt, a leading official from the International Monetary Fund has warned.
Published: 9:24AM BST 09 Jun 2010
10 Comments
The G20 summit in April. 2009, was the high watermark for international co-operation in tackling the financial and economic crisis.
“After nearly two years of global economic and financial upheaval, shockwaves are still being felt, as we have seen with recent developments in Europe and the resulting financial market volatility,” Naoyuki Shinohara, the IMF's deputy managing director, said in Singapore on Wednesday. “The global outlook remains unusually uncertain and downside risks have risen significantly.”
Countries across Europe are under pressure to tackle their deficits that were deepened by the financial crisis and governments own response to it. Some economists fear that moves by countries ranging from Britain to Spain to rein in public spending at the same time will set back a global recovery.
Stock markets have declined in the past couple of months as Europe's debt crisis and the prospect of higher interest rates in the faster-growing Asian economies cast a shadow over the recovery.
“Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,” Mr Shinohara said. “In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus.”
Mr Shinohara, the former top currency official in Japan, added that "a key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”
http://www.telegraph.co.uk/finance/economics/7812903/Risks-to-global-economy-have-risen-significantly-top-IMF-official-warns.html
The risks to a robust global recovery have 'risen significantly' as many governments struggle with debt, a leading official from the International Monetary Fund has warned.
Published: 9:24AM BST 09 Jun 2010
10 Comments
The G20 summit in April. 2009, was the high watermark for international co-operation in tackling the financial and economic crisis.
“After nearly two years of global economic and financial upheaval, shockwaves are still being felt, as we have seen with recent developments in Europe and the resulting financial market volatility,” Naoyuki Shinohara, the IMF's deputy managing director, said in Singapore on Wednesday. “The global outlook remains unusually uncertain and downside risks have risen significantly.”
Countries across Europe are under pressure to tackle their deficits that were deepened by the financial crisis and governments own response to it. Some economists fear that moves by countries ranging from Britain to Spain to rein in public spending at the same time will set back a global recovery.
Stock markets have declined in the past couple of months as Europe's debt crisis and the prospect of higher interest rates in the faster-growing Asian economies cast a shadow over the recovery.
“Adverse developments in Europe could disrupt global trade, with implications for Asia given the still important role of external demand,” Mr Shinohara said. “In the event of spillovers from Europe, there is ample room in most Asian economies to pause the withdrawal of fiscal stimulus.”
Mr Shinohara, the former top currency official in Japan, added that "a key concern is that the room for continued policy support has become much more limited and has, in some cases, been exhausted.”
http://www.telegraph.co.uk/finance/economics/7812903/Risks-to-global-economy-have-risen-significantly-top-IMF-official-warns.html
Aussie firm sues Goldman over 'shitty deal': Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc
Aussie firm sues Goldman over 'shitty deal'
June 10, 2010 - 6:42AM
An Australian hedge fund is suing Goldman Sachs Group over an investment in a subprime mortgage-linked security that contributed to the fund's demise in 2007.
The lawsuit, filed Wednesday afternoon, New York time, accuses Goldman of misrepresenting the value of the notorious Timberwolf collateralized debt obligation, which garnered a lot of attention during a recent congressional hearing.
Basis Yield Alpha Fund sued Goldman to recoup the $US56 million ($67.5 million) it lost on the CDO, said Eric Lewis, a Washington-based lawyer for the fund. The suit also seeks $US1 billion in punitive damages.
The litigation is the latest in a string of legal and public relations headaches for Goldman. In April, US securities regulators charged the powerful Wall Street bank with civil fraud in connection with the structuring and sale of another CDO called Abacus 2007.
The hedge fund decided to file suit after months of settlement talks with Goldman broke down. Reuters on Tuesday first reported on the likelihood of a lawsuit. The suit was filed in US District Court for the Southern District of New York.
The 36-page complaint opens with a rhetorical flourish that repeats a Goldman executive's description of the Timberwolf CDO as "one shitty deal."
The suit alleges that Goldman pitched the Timberwolf deal to Basis even as the bank's sales force and mortgage traders knew the market for CDOs could soon crumble. In June 2007, Basis paid $US78 million for two pieces of the CDO with a face value of $US100 million.
Basis, which financed the transaction with a loan from Goldman, said it lost more than $US50 million when the bank began making margin calls on the product just weeks after selling the deal. Basis said the margin calls quickly forced it into insolvency.
"You can't say you are basically selling a strong performing high-yielding security that you know is going to tank," said Lewis, a partner with the law firm Baach Robinson & Lewis.
'Misguided attempt'
Goldman called the suit "a misguided attempt by Basis ... to shift its investment losses to Goldman Sachs."
Michael DuVally, a Goldman spokesman, said, "Basis is now trying to recoup its losses based on false allegations that it was misled about aspects of the transaction and market conditions."
The $US1 billion Timberwolf CDO and the aggressive tactics Goldman employed to sell the deal were a focal point of an April hearing by the Senate Permanent Subcommittee on Investigations. One of the documents unearthed by the panel was an email in which former Goldman mortgage executive Thomas Montag called Timberwolf "one shitty deal," just days after the firm completed the sale to Basis.
The hedge fund's lawsuit, which draws on other documents introduced by the Senate panel, alleges that Goldman misrepresented the value of the Timberwolf securities and failed to disclose that Goldman's trading desk had a role in working with Greywolf Capital Management in picking Timberwolf's underlying securities.
Goldman coordination
During the Senate subcommittee hearing in April, Goldman Chief Executive Lloyd Blankfein said the bank's employees are often unaware of what strategies are being employed elsewhere at the firm.
"We have 35,000 people and thousands of traders making markets throughout our firm," Blankfein said in response to a question from Senator Carl Levin. "They might have an idea. But they might not have an idea."
But the Basis lawsuit raises new questions about the coordination between Goldman's trading desks and its sales staff.
David Lehman, who joined Goldman in 2004 and worked as a managing director in Goldman's mortgage trading operation, met with representatives of Basis to convince them that the prices Goldman was selling the Timberwolf deal at were fair and legitimate.
The lawsuit alleges that Goldman's sales and trading desks worked together to sell the deal, while Goldman itself was betting against the performance of the CDO.
"This is not a bad case for dealing with the whole issue of how Goldman was conducting its business," said Lewis. "They were selling bonds like they were used cars, in that you say what you need to get it done."
More lawsuits?
Other investors in Goldman's CDO products are likely to keep a close eye on the Basis case.
"If they can prove there is some smoke there, many investors could feel they have a right to say they were also harmed in some way," said Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati.
Still, lawsuits against firms over the marketing of toxic CDOs have been rare.
Scott Berman, a partner with Friedman Kaplan Seiler & Adelman who frequently represents institutional investors, said it's a bit of mystery that the financial crisis hasn't spawned more private litigation over CDOs and other exotic investments.
"Some of it may be being dealt with in private arbitration rather than litigation," said Berman. "It's also possible that many institutions are simply wary of suing each other."
The case is Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc, US District Court, Southern District of New York, No. 10-04537.
Reuters
June 10, 2010 - 6:42AM
An Australian hedge fund is suing Goldman Sachs Group over an investment in a subprime mortgage-linked security that contributed to the fund's demise in 2007.
The lawsuit, filed Wednesday afternoon, New York time, accuses Goldman of misrepresenting the value of the notorious Timberwolf collateralized debt obligation, which garnered a lot of attention during a recent congressional hearing.
Basis Yield Alpha Fund sued Goldman to recoup the $US56 million ($67.5 million) it lost on the CDO, said Eric Lewis, a Washington-based lawyer for the fund. The suit also seeks $US1 billion in punitive damages.
The litigation is the latest in a string of legal and public relations headaches for Goldman. In April, US securities regulators charged the powerful Wall Street bank with civil fraud in connection with the structuring and sale of another CDO called Abacus 2007.
The hedge fund decided to file suit after months of settlement talks with Goldman broke down. Reuters on Tuesday first reported on the likelihood of a lawsuit. The suit was filed in US District Court for the Southern District of New York.
The 36-page complaint opens with a rhetorical flourish that repeats a Goldman executive's description of the Timberwolf CDO as "one shitty deal."
The suit alleges that Goldman pitched the Timberwolf deal to Basis even as the bank's sales force and mortgage traders knew the market for CDOs could soon crumble. In June 2007, Basis paid $US78 million for two pieces of the CDO with a face value of $US100 million.
Basis, which financed the transaction with a loan from Goldman, said it lost more than $US50 million when the bank began making margin calls on the product just weeks after selling the deal. Basis said the margin calls quickly forced it into insolvency.
"You can't say you are basically selling a strong performing high-yielding security that you know is going to tank," said Lewis, a partner with the law firm Baach Robinson & Lewis.
'Misguided attempt'
Goldman called the suit "a misguided attempt by Basis ... to shift its investment losses to Goldman Sachs."
Michael DuVally, a Goldman spokesman, said, "Basis is now trying to recoup its losses based on false allegations that it was misled about aspects of the transaction and market conditions."
The $US1 billion Timberwolf CDO and the aggressive tactics Goldman employed to sell the deal were a focal point of an April hearing by the Senate Permanent Subcommittee on Investigations. One of the documents unearthed by the panel was an email in which former Goldman mortgage executive Thomas Montag called Timberwolf "one shitty deal," just days after the firm completed the sale to Basis.
The hedge fund's lawsuit, which draws on other documents introduced by the Senate panel, alleges that Goldman misrepresented the value of the Timberwolf securities and failed to disclose that Goldman's trading desk had a role in working with Greywolf Capital Management in picking Timberwolf's underlying securities.
Goldman coordination
During the Senate subcommittee hearing in April, Goldman Chief Executive Lloyd Blankfein said the bank's employees are often unaware of what strategies are being employed elsewhere at the firm.
"We have 35,000 people and thousands of traders making markets throughout our firm," Blankfein said in response to a question from Senator Carl Levin. "They might have an idea. But they might not have an idea."
But the Basis lawsuit raises new questions about the coordination between Goldman's trading desks and its sales staff.
David Lehman, who joined Goldman in 2004 and worked as a managing director in Goldman's mortgage trading operation, met with representatives of Basis to convince them that the prices Goldman was selling the Timberwolf deal at were fair and legitimate.
The lawsuit alleges that Goldman's sales and trading desks worked together to sell the deal, while Goldman itself was betting against the performance of the CDO.
"This is not a bad case for dealing with the whole issue of how Goldman was conducting its business," said Lewis. "They were selling bonds like they were used cars, in that you say what you need to get it done."
More lawsuits?
Other investors in Goldman's CDO products are likely to keep a close eye on the Basis case.
"If they can prove there is some smoke there, many investors could feel they have a right to say they were also harmed in some way," said Matt McCormick, a portfolio manager and banking analyst at Bahl & Gaynor Investment Counsel in Cincinnati.
Still, lawsuits against firms over the marketing of toxic CDOs have been rare.
Scott Berman, a partner with Friedman Kaplan Seiler & Adelman who frequently represents institutional investors, said it's a bit of mystery that the financial crisis hasn't spawned more private litigation over CDOs and other exotic investments.
"Some of it may be being dealt with in private arbitration rather than litigation," said Berman. "It's also possible that many institutions are simply wary of suing each other."
The case is Basis Yield Alpha Fund (Master) v. Goldman Sachs Group Inc, US District Court, Southern District of New York, No. 10-04537.
Reuters
BP shares slip to 14 year-low on oil spill
BP shares slip to 14 year-low on oil spill
June 10, 2010 - 8:20AM
British energy giant BP's stock price plunged to a 14-year low in US trading on Wednesday as the Obama administration threatened to impose new penalties on it over the worst oil spill in US history.
Turning up the heat on the beleagured company, a senior US Justice Department official said after the markets closed that the department was "planning to take action" to ensure BP had enough money on hand to cover damages from the Gulf of Mexico spill.
Earlier, BP depositary shares trading in New York fell nearly 16 percent to close at $US29.20, their lowest level since August 1996, on growing worries about the costs the company will have to assume.
US Interior Secretary Ken Salazar told a Senate hearing he would ask the British oil giant to repay the salaries of any workers laid off because of the six-month moratorium on deepwater exploratory drilling imposed by the US government after the spill.
BP's total bill so far, including cleanup costs, has reached $US1.25 billion ($1.5 billion) and the US government has already said it will have to pay billions more in penalties.
The White House echoed Salazar's comments.
"The moratorium is as a result of the accident that BP caused. It is an economic loss for those workers, and ... those are claims that BP should pay," White House spokesman Robert Gibbs told a briefing.
White House showdown
BP believes it may be heading for a showdown with the White House over widening demands on spill-related costs, a BP source said. While the company has said it will pay for the clean-up and direct damages to those affected by the spill, the moratorium was a government decision and costs related to it were a different matter, the source said.
Earlier, the company's stock closed down 4 percent in London on concerns the company might have to suspend its dividend payment. US politicians have been calling for this, saying the company should put its cash into paying for legal claims and environmental damage in the Gulf.
At a congressional hearing on Wednesday, one lawmaker asked US Associate Attorney General Thomas Perrelli whether the Justice Department had the ability to issue an injunction against BP to stop it paying its dividend.
"We are looking very closely at this and we are planning to take action," he said.
BP officials have said they have enough cash to handle the crisis. But the market has shown less confidence. With Wednesday's share price drop in New York, BP has given up more than half its market value since the crisis began.
"The confidence in BP being able to stop the oil leak and deal with the ecological aftermath has disappeared," said TD Ameritrade chief derivatives strategist Joe Kinahan.
Illustrating analysts' anxiety about BP's dividend, in the past two days alone, seven have cut their expectations on the likely payout.
The cost of protecting BP's debt against default hit new highs on Wednesday.
The spill began on April 20 after an oil rig exploded, killing 11 workers and rupturing the deep-sea well. It has caused environmental devastation along the US Gulf Coast and threatens lucrative fishing and tourist industries.
The Obama administration, facing growing voter discontent over its own handling of the crisis, has sought to distance itself from the company. President Barack Obama has also toughened his rhetoric in recent days and said in an interview this week he would fire BP CEO Tony Hayward if he worked for him.
In a further sign of the administration's pressure on BP, Coast Guard Admiral Thad Allen, who is leading the government relief effort, demanded that the company provide more information and transparency on how it was meeting damages claims by individuals and businesses affected by the spill.
"The federal government and the public expects BP's claims process to fully address the needs of impacted individuals and businesses," Allen said in a June 8 letter to BP.
BP has paid out close to $US50 million in damages claims so far along the Gulf Coast -- mostly to fishermen, shrimpers, oystermen and boat operators who say their livelihoods have been impacted by the spill.
Meanwhile, BP America President Lamar McKay, along with top executives from Exxon Mobil Corp, Chevron Corp, ConocoPhillips and Shell Oil Co, were called to testify at a June 15 congressional hearing that will look at the oil spill and America's energy future.
At the scene of the spill, BP continued to siphon off oil from its blown-out oil well in the Gulf of Mexico.
Allen told reporters that BP planned to move another rig to the spill site on June 14. This would enable the company to boost its capacity to collect oil from the well to 28,000 barrels (1.18 million gallons/4.45 million liters) a day, he said.
Allen did not indicate this meant the flow rate of the oil could be as high as 28,000 barrels a day, but his comments are likely to underscore that neither BP nor the government have yet managed to determine just how much oil is gushing out.
Government scientists have estimated that the leak spews 12,000-19,000 barrels a day, with one estimate as high as 25,000 barrels. They are due to present revised estimates later this week or early next week.
Fouled wildlife refuges
The spill has already fouled wildlife refuges in Louisiana and barrier islands in Mississippi and Alabama. It has also sent tar balls ashore on beaches in Florida. One-third of the Gulf's federal waters remains closed to fishing and the toll of dead and injured birds and marine animals is climbing.
BP's latest containment effort, which follows a series of earlier failed attempts, involved placing a containment cap with a seal on a deep-sea pipe from which the oil is gushing.
But the ultimate solution to the leak lies in the drilling of a relief well and that won't be completed before August.
Reuters
http://www.smh.com.au/business/world-business/bp-shares-slip-to-14-yearlow-on-oil-spill-20100610-xxep.html
June 10, 2010 - 8:20AM
British energy giant BP's stock price plunged to a 14-year low in US trading on Wednesday as the Obama administration threatened to impose new penalties on it over the worst oil spill in US history.
Turning up the heat on the beleagured company, a senior US Justice Department official said after the markets closed that the department was "planning to take action" to ensure BP had enough money on hand to cover damages from the Gulf of Mexico spill.
Earlier, BP depositary shares trading in New York fell nearly 16 percent to close at $US29.20, their lowest level since August 1996, on growing worries about the costs the company will have to assume.
US Interior Secretary Ken Salazar told a Senate hearing he would ask the British oil giant to repay the salaries of any workers laid off because of the six-month moratorium on deepwater exploratory drilling imposed by the US government after the spill.
BP's total bill so far, including cleanup costs, has reached $US1.25 billion ($1.5 billion) and the US government has already said it will have to pay billions more in penalties.
The White House echoed Salazar's comments.
"The moratorium is as a result of the accident that BP caused. It is an economic loss for those workers, and ... those are claims that BP should pay," White House spokesman Robert Gibbs told a briefing.
White House showdown
BP believes it may be heading for a showdown with the White House over widening demands on spill-related costs, a BP source said. While the company has said it will pay for the clean-up and direct damages to those affected by the spill, the moratorium was a government decision and costs related to it were a different matter, the source said.
Earlier, the company's stock closed down 4 percent in London on concerns the company might have to suspend its dividend payment. US politicians have been calling for this, saying the company should put its cash into paying for legal claims and environmental damage in the Gulf.
At a congressional hearing on Wednesday, one lawmaker asked US Associate Attorney General Thomas Perrelli whether the Justice Department had the ability to issue an injunction against BP to stop it paying its dividend.
"We are looking very closely at this and we are planning to take action," he said.
BP officials have said they have enough cash to handle the crisis. But the market has shown less confidence. With Wednesday's share price drop in New York, BP has given up more than half its market value since the crisis began.
"The confidence in BP being able to stop the oil leak and deal with the ecological aftermath has disappeared," said TD Ameritrade chief derivatives strategist Joe Kinahan.
Illustrating analysts' anxiety about BP's dividend, in the past two days alone, seven have cut their expectations on the likely payout.
The cost of protecting BP's debt against default hit new highs on Wednesday.
The spill began on April 20 after an oil rig exploded, killing 11 workers and rupturing the deep-sea well. It has caused environmental devastation along the US Gulf Coast and threatens lucrative fishing and tourist industries.
The Obama administration, facing growing voter discontent over its own handling of the crisis, has sought to distance itself from the company. President Barack Obama has also toughened his rhetoric in recent days and said in an interview this week he would fire BP CEO Tony Hayward if he worked for him.
In a further sign of the administration's pressure on BP, Coast Guard Admiral Thad Allen, who is leading the government relief effort, demanded that the company provide more information and transparency on how it was meeting damages claims by individuals and businesses affected by the spill.
"The federal government and the public expects BP's claims process to fully address the needs of impacted individuals and businesses," Allen said in a June 8 letter to BP.
BP has paid out close to $US50 million in damages claims so far along the Gulf Coast -- mostly to fishermen, shrimpers, oystermen and boat operators who say their livelihoods have been impacted by the spill.
Meanwhile, BP America President Lamar McKay, along with top executives from Exxon Mobil Corp, Chevron Corp, ConocoPhillips and Shell Oil Co, were called to testify at a June 15 congressional hearing that will look at the oil spill and America's energy future.
At the scene of the spill, BP continued to siphon off oil from its blown-out oil well in the Gulf of Mexico.
Allen told reporters that BP planned to move another rig to the spill site on June 14. This would enable the company to boost its capacity to collect oil from the well to 28,000 barrels (1.18 million gallons/4.45 million liters) a day, he said.
Allen did not indicate this meant the flow rate of the oil could be as high as 28,000 barrels a day, but his comments are likely to underscore that neither BP nor the government have yet managed to determine just how much oil is gushing out.
Government scientists have estimated that the leak spews 12,000-19,000 barrels a day, with one estimate as high as 25,000 barrels. They are due to present revised estimates later this week or early next week.
Fouled wildlife refuges
The spill has already fouled wildlife refuges in Louisiana and barrier islands in Mississippi and Alabama. It has also sent tar balls ashore on beaches in Florida. One-third of the Gulf's federal waters remains closed to fishing and the toll of dead and injured birds and marine animals is climbing.
BP's latest containment effort, which follows a series of earlier failed attempts, involved placing a containment cap with a seal on a deep-sea pipe from which the oil is gushing.
But the ultimate solution to the leak lies in the drilling of a relief well and that won't be completed before August.
Reuters
http://www.smh.com.au/business/world-business/bp-shares-slip-to-14-yearlow-on-oil-spill-20100610-xxep.html
My oath! What Wall Street's pledging
My oath! What Wall Street's pledging
MICHAEL LEWIS
June 10, 2010 - 7:15AM
A few weeks ago Bloomberg News reported that, in just the past year, hundreds of students at the Harvard Business School have taken something called the MBA Oath.
Endorsed by Harvard's dean, and replicated by other business schools, the oath comes in two sizes: an important sounding long version, and a punchy executive summary, consisting of seven crisp bullet points.
(Sample bullet point: ''I will refrain from corruption, unfair competition, or business practices harmful to society.'')
The gist of even the short version can be reduced further, to a single sentence: ''Wherever I face a choice between my self-interest, and the interests of the wider world, I pledge to act in the interests of the wider world.''
News of the oath naturally aroused the interest of cynics everywhere, and led them to raise hard questions: Isn't the underlying premise of free-market capitalism, and the typical business school education, that by doing well for oneself one is also doing well for the wider world?
Is the typical business school graduate actually capable of seeing any difference between his own interest and the world's? Does this sort of mushy, vague-sounding oath serve society or the oath taker, who hopes that society will be duped into thinking that he is acting in its interests rather than his own?
And anyway, if they are so keen to serve society instead of themselves, why do so many of these oath-takers wind up working on Wall Street, and, more specifically, for Goldman Sachs - a company whose CEO has been singled out by one of the oath's creators for its blindness to the social consequences of his firm's actions?
Passion for oaths
Lost in this orgy of nay-saying was the mounting evidence that the MBA Oath already has had one clear practical consequence. In the past year graduates of the Harvard Business School have flooded Wall Street, as graduates of Harvard Business School tend to do, and brought with them their new passion for oaths.
It's too early to say if oath-taking has attained a permanent new high, or we are living through some kind of ''oath bubble.'' What is clear is that many Wall Street firms, and Wall Street people, have found the need to have their own private oaths. In recent weeks several of these have leaked to Bloomberg News. We report them without further comment:
-- The Goldman Sachs Oath:
We pledge not to call what we do ''God's work,'' even though it is.
We pledge to meet and even get to know ordinary people who do not work for Goldman Sachs, so that we might better understand their irrational behavior, and exploit it only when necessary.
We pledge to create Wall Street's best-in-class oath.
-- The Morgan Stanley Oath:
We pledge to stop trying to do whatever Goldman Sachs is doing.
We, too, pledge to create Wall Street's best-in-class oath.
-- The Merrill Lynch Oath:
We're just grateful to be asked if we have an oath. We do!
We pledge to help the approximately 74,322 American dentists forget that we sold them auction-rate securities and equity tranches of subprime backed CDOs.
We also pledge that, the next time Wall Street plays crack the whip, we will decline Goldman Sachs's offer to play the role of the little fat kid who gets catapulted through the second- story window of the house across the street.
-- The Citigroup Oath:
In our continued quest to make peace with the US taxpayer, we pledge to sell our oath to the highest foreign bidder, the minute we decide what that oath should be.
-- The Oath of Hedge Fund Man:
I pledge to short the credit spreads of only those public corporations and great nations that truly are doomed.
I thus pledge to accelerate Darwinian forces that elevate the strong and destroy the weak.
And even though that should be enough goodness for one lifetime, I pledge to bid generously for the sexier items at the next Robin Hood auction.
-- The Warren Buffett Oath:
I pledge, even in the privacy of my own bedroom, to seem nothing like the abovementioned hedge fund manager.
I pledge to remain the go-to moral compass of the American money culture.
To that end I pledge to learn less than I typically do about the Wall Street businesses in which I invest, so that, after they are discovered to have lied, cheated or stolen, I can plausibly claim to have known nothing about it.
Specifically, I pledge to remain unable to find the corporate headquarters of Moody's Inc. on a New York City map. (Really, I have no idea where the place is!)
-- The Moody's Oath:
We pledge to do whatever we must to persuade Warren Buffett to hold on to at least some of his shares in our company.
Failing that, we pledge to just shoot ourselves.
-- The S&P Oath:
We pledge to do whatever Moody's does, without the pretension of being somehow ``upper crust.''
-- The AIG Oath:
Our deal to sell our oath to some Asian people having hit a snag, we pledge to continue to manage our oath to maximize its returns, assuming, of course, that our contracts are honored, and our bonuses are paid.
-- The SEC Oath:
We pledge to figure out who on Wall Street the American people most hate, and to sue them, even if we are sure to lose.
-- The Oath of the Financial Crisis Inquiry Commission:
We pledge to find out, by the year 2050, what exactly happened on Wall Street in the early part of this century.
We pledge to reform Wall Street. Or, failing that, to be taken seriously. Or, at a bare minimum, to attract a bit of media.
-- The Oath of the US Treasury:
We pledge to appear as if we have everything under control even when we actually have no idea what we are doing.
We pledge to dissuade newspaper reporters and magazine writers from describing our leader as ''elfin.''
We pledge, when he is arguing with foreign rulers, or Wall Street CEOs, that he will strive to seem a bit more powerful, perhaps even physically intimidating. At any rate, less of a wuss.
-- The Oath of the Federal Reserve:
We pledge to regulate these oaths to prevent others from doing so.
( Michael Lewis, most recently author of the best-selling ''The Big Short,'' is a columnist for Bloomberg News. The opinions expressed are his own.)
http://www.smh.com.au/business/world-business/my-oath-what-wall-streets-pledging-20100610-xx87.html
MICHAEL LEWIS
June 10, 2010 - 7:15AM
A few weeks ago Bloomberg News reported that, in just the past year, hundreds of students at the Harvard Business School have taken something called the MBA Oath.
Endorsed by Harvard's dean, and replicated by other business schools, the oath comes in two sizes: an important sounding long version, and a punchy executive summary, consisting of seven crisp bullet points.
(Sample bullet point: ''I will refrain from corruption, unfair competition, or business practices harmful to society.'')
The gist of even the short version can be reduced further, to a single sentence: ''Wherever I face a choice between my self-interest, and the interests of the wider world, I pledge to act in the interests of the wider world.''
News of the oath naturally aroused the interest of cynics everywhere, and led them to raise hard questions: Isn't the underlying premise of free-market capitalism, and the typical business school education, that by doing well for oneself one is also doing well for the wider world?
Is the typical business school graduate actually capable of seeing any difference between his own interest and the world's? Does this sort of mushy, vague-sounding oath serve society or the oath taker, who hopes that society will be duped into thinking that he is acting in its interests rather than his own?
And anyway, if they are so keen to serve society instead of themselves, why do so many of these oath-takers wind up working on Wall Street, and, more specifically, for Goldman Sachs - a company whose CEO has been singled out by one of the oath's creators for its blindness to the social consequences of his firm's actions?
Passion for oaths
Lost in this orgy of nay-saying was the mounting evidence that the MBA Oath already has had one clear practical consequence. In the past year graduates of the Harvard Business School have flooded Wall Street, as graduates of Harvard Business School tend to do, and brought with them their new passion for oaths.
It's too early to say if oath-taking has attained a permanent new high, or we are living through some kind of ''oath bubble.'' What is clear is that many Wall Street firms, and Wall Street people, have found the need to have their own private oaths. In recent weeks several of these have leaked to Bloomberg News. We report them without further comment:
-- The Goldman Sachs Oath:
We pledge not to call what we do ''God's work,'' even though it is.
We pledge to meet and even get to know ordinary people who do not work for Goldman Sachs, so that we might better understand their irrational behavior, and exploit it only when necessary.
We pledge to create Wall Street's best-in-class oath.
-- The Morgan Stanley Oath:
We pledge to stop trying to do whatever Goldman Sachs is doing.
We, too, pledge to create Wall Street's best-in-class oath.
-- The Merrill Lynch Oath:
We're just grateful to be asked if we have an oath. We do!
We pledge to help the approximately 74,322 American dentists forget that we sold them auction-rate securities and equity tranches of subprime backed CDOs.
We also pledge that, the next time Wall Street plays crack the whip, we will decline Goldman Sachs's offer to play the role of the little fat kid who gets catapulted through the second- story window of the house across the street.
-- The Citigroup Oath:
In our continued quest to make peace with the US taxpayer, we pledge to sell our oath to the highest foreign bidder, the minute we decide what that oath should be.
-- The Oath of Hedge Fund Man:
I pledge to short the credit spreads of only those public corporations and great nations that truly are doomed.
I thus pledge to accelerate Darwinian forces that elevate the strong and destroy the weak.
And even though that should be enough goodness for one lifetime, I pledge to bid generously for the sexier items at the next Robin Hood auction.
-- The Warren Buffett Oath:
I pledge, even in the privacy of my own bedroom, to seem nothing like the abovementioned hedge fund manager.
I pledge to remain the go-to moral compass of the American money culture.
To that end I pledge to learn less than I typically do about the Wall Street businesses in which I invest, so that, after they are discovered to have lied, cheated or stolen, I can plausibly claim to have known nothing about it.
Specifically, I pledge to remain unable to find the corporate headquarters of Moody's Inc. on a New York City map. (Really, I have no idea where the place is!)
-- The Moody's Oath:
We pledge to do whatever we must to persuade Warren Buffett to hold on to at least some of his shares in our company.
Failing that, we pledge to just shoot ourselves.
-- The S&P Oath:
We pledge to do whatever Moody's does, without the pretension of being somehow ``upper crust.''
-- The AIG Oath:
Our deal to sell our oath to some Asian people having hit a snag, we pledge to continue to manage our oath to maximize its returns, assuming, of course, that our contracts are honored, and our bonuses are paid.
-- The SEC Oath:
We pledge to figure out who on Wall Street the American people most hate, and to sue them, even if we are sure to lose.
-- The Oath of the Financial Crisis Inquiry Commission:
We pledge to find out, by the year 2050, what exactly happened on Wall Street in the early part of this century.
We pledge to reform Wall Street. Or, failing that, to be taken seriously. Or, at a bare minimum, to attract a bit of media.
-- The Oath of the US Treasury:
We pledge to appear as if we have everything under control even when we actually have no idea what we are doing.
We pledge to dissuade newspaper reporters and magazine writers from describing our leader as ''elfin.''
We pledge, when he is arguing with foreign rulers, or Wall Street CEOs, that he will strive to seem a bit more powerful, perhaps even physically intimidating. At any rate, less of a wuss.
-- The Oath of the Federal Reserve:
We pledge to regulate these oaths to prevent others from doing so.
( Michael Lewis, most recently author of the best-selling ''The Big Short,'' is a columnist for Bloomberg News. The opinions expressed are his own.)
http://www.smh.com.au/business/world-business/my-oath-what-wall-streets-pledging-20100610-xx87.html
Bernanke Warns of ‘Unsustainable’ Debt
Bernanke Warns of ‘Unsustainable’ Debt
Mark Wilson/Getty Images
Federal Reserve Board Chairman Ben S. Bernanke during a House Budget Committee hearing on
Wednesday in Washington.
By SEWELL CHAN
Published: June 9, 2010
Mark Wilson/Getty Images
Federal Reserve Board Chairman Ben S. Bernanke during a House Budget Committee hearing on
Wednesday in Washington.
By SEWELL CHAN
Published: June 9, 2010
WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, warned on Wednesday that “the federal budget appears to be on an unsustainable path,” but also recognized that the “exceptional increase” in the deficit had been necessary to ease therecession.
Mr. Bernanke’s comments, at a hearing of the House Budget Committee, reiterated his view that the economic recovery would most likely be slow and painful for many Americans. The Fed projects gross domestic product, the broadest measure of economic activity, to rise about 3.5 percent this year — a pace barely above that needed to keep pace with the growth in the labor force.
Mr. Bernanke noted some improvements in consumer spending, particularly on durable goods, and in business investments in software and equipment, but also cautioned that “underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit.”
The chairman offered a somewhat positive assessment of the debt crisis in Europe.
“If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest,” he said. “Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities.”
In response to a question, Mr. Bernanke said that he expected to the economy to grow at a “modest pace” this year .
But what is likely to be the most closely watched part of Mr. Bernanke’s testimony, on fiscal policy and his comments about the budget, will offer little comfort to either Democrats or Republicans.
“A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy,” Mr. Bernanke said, “show a structural budget gap that is both large relative to the size of the economy and increasing over time.”
During nearly two hours of questioning, Mr. Bernanke parried efforts by members of both parties to score political points, seeming to disappoint both sides. After saying “the budget deficit should narrow over the next few years,” he refused to make policy recommendations on how to do so, though he did caution against reacting hastily.
“This very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support,” Mr. Bernanke told Representative Bob Etheridge, Democrat of North Carolina.
To Representative Jim Jordan of Ohio, one of several Republicans who accused the Obama administration of being profligate, Mr. Bernanke said that “increased taxes, cuts in spending that are too large would be a negative, would be a drag on recovery.”
To Representative Gerald E. Connolly, a Virginia Democrat who tried to get Mr. Bernanke to criticize the huge 2001 tax cuts signed into law by President George W. Bush, Mr. Bernanke said, “It probably did strengthen the economy, but it also raised the deficit.”
While defending the extraordinary responses to the recession as necessary, Mr. Bernanke has also emphasized the risks associated with the aging of the population. This year, he said, there are about five Americans between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, he warned, there will be only three.
“In addition, government expenditures on health care for both retirees and nonretirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes,” Mr. Bernanke said. “To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.”
Mr. Bernanke did not disclose his views on either the timing or the composition of the steps to meet those challenges — in a question-and-answer session with the broadcast journalist, Sam Donaldson, on Monday night, Mr. Bernanke said he, like Congress, was awaiting the conclusions of a bipartisan fiscal commission appointed by President Obama.
http://www.nytimes.com/2010/06/10/business/economy/10fed.html?src=me&ref=business
http://www.nytimes.com/2010/06/10/business/economy/10fed.html?src=me&ref=business
When to Buy Your Child a Cellphone
When to Buy Your Child a Cellphone
Andrew Sullivan for The New York Times
Caroline LaGumina, 11, of New York, wanted a phone so she could text her friends. She got one last Christmas.
By STEFANIE OLSEN
Published: June 9, 2010
David Poger had planned to buy his daughter Maya a cellphone when she was 15 and in high school, but last year he and his wife caved when she was 11.
“There was a lot of nagging and pleading,” said Mr. Poger, who lives in St. Louis, Miss. But for his wife, Stephanie, and him, he said, “Safety was a big issue because she was walking downtown with her school friends, going to movies and roller skating without us.” He added, “I still think she’s too young.”
Many parents these days face the same struggle as the Pogers: at what age should you buy your child a cellphone? And when you do buy that first phone, what kind should it be?
About 75 percent of 12- to 17-year-olds in the United States own a mobile phone, up from 45 percent in 2004, according to an April study by the Pew Internet and American Life Project, part of the Pew Research Center. And children are getting their phones at earlier ages, industry experts say. The Pew study, for example, found that 58 percent of 12-year-olds now own a cellphone, up from 18 percent in 2004.
Parents generally say they buy their child a phone for safety reasons, because they want to be able to reach the child anytime. Cost also matters to parents, cellphone industry experts say; phones and family plans from carriers are both becoming more affordable. Also, as adults swap out their old devices for newer smartphones, it is easier to pass down a used phone.
But for children, it is all about social life and wanting to impress peers. The Pew study found that half of 12- to 17-year-olds sent 50 text messages a day and texted their friends more than they talked to them on the phone or even face to face.
Experts say the social pressure to text can get acute by the sixth grade, when most children are 11 years old. Just ask Caroline LaGumina, 11, of New York, who got her phone last Christmas. “I wanted to be able to text because my friends all text each other.”
So when is the right time to buy that first phone?
There is no age that suits all children, developmental psychologists and child safety experts say. It depends on the child’s maturity level and need for the phone, and the ability to be responsible for the device — for example, keeping it charged, keeping it on, not losing it, not lending it. Instead of giving in to the argument that “everyone else has one,” parents should ask why the child needs one, how it will be used and how well the child handles distraction and responsibility.
“You need to figure out, are your kids capable of following your rules?” about using the phone, said Parry Aftab, executive director of the child advocacy group Wired Safety.
Ruth Peters, a child psychologist in Clearwater, Fla., said most children were not ready for their own phones until age 11 to 14, when they were in middle school. Often, that is when they begin traveling alone to and from school, or to after-school activities, and may need to get in touch with a parent to change activities at the last minute or coordinate rides.
Patricia Greenfield, a psychology professor at the University of California, Los Angeles, who specializes in children’s use of digital media, cautioned that at younger ages, parents might miss out on what was going on with their children because of a cellphone.
“Kids want the phone so that they can have private communication with their peers,” she said. “You should wait as long as possible, to maintain parent-child communication.”
When choosing a phone for a child, experts say, a big consideration is whether to buy a feature phone or a smartphone. A feature phone generally has a camera, Web access and a slide-out qwerty keyboard, but not the operating system with the applications that can be downloaded on a smartphone. With some carriers, you can buy a feature phone and not get a data plan, but others, like Verizon, have started to eliminate this combination.
Parents should realize that buying any kind of phone with Web access essentially allows their children unsupervised access to content and tools, like social networking and videos, that they may forbid on the home computer.
“Most parents want to give a cellphone to keep them safe, but that ignores the great majority of uses that kids are using cellphones for,” said James P. Steyer, the chief executive of the nonprofit group Common Sense Media, which rates children’s media. He said that with those added features can come addictive behavior, cyberbullying, “sexting” (sending nude photos by text message), cheating in class and, for older teenagers, distracted driving.
Dr. Peters suggested that parents avoid buying children younger than 13 a phone with a camera and Internet access. “If they don’t have access to it, it’s just cleaner,” she said.
Parents who do not want to buy a feature phone or smartphone might consider an inexpensive prepaid phone — Nokia, LG and Samsung have models like this — that comes without a contract and is not part of a family plan. For as little as $10, parents can load the phone with 30 minutes of calls. The Pew study reported that 18 percent of teenagers used these plans and that teenagers who did were typically more tempered in their use.
If parents do choose a smartphone or feature phone, it is important to set use restrictions on Internet, texting and calls until age 15 or 16, when presumably the child will be more mature and also have greater autonomy.
The April Pew study estimated that nearly half of American parents limited their 12- to 17-year- old’s phone use. It said that restrictions on text messaging correlated to lower levels of sexting and impulsive behavior.
Parents have several ways to set use restrictions. One way is to buy a plan through the carrier. For example, for $4.99 monthly, AT&T’s Smart Limits or Verizon’s Use Controls let parents set limits on minutes, restrict time-of-day use and even dictate whom the child can call or text. Parents can also request that their carrier block content or prevent a child from texting photos.
Parents can also buy software from other vendors like My Mobile Watchdog that can be loaded onto the child’s phone and will, for example, send a copy of a child’s texts or photos to the parent’s phone.
Some phones are made specially for children and include free parental controls, like the Firefly and the Kajeet, available online. But generally, the major wireless retailers focus on smartphones and feature phones, saying that children’s phones have proved less popular.
Anyone with a teenager or preteenager knows that most children covet the kinds of phones adults have. “No kid wants a dumbed-down phone,” said Julie A. Ask, vice president at Forrester Research.
In a Verizon store in Berkeley, Calif., recently, store clerks pointed to several feature phones, some of which are referred to as 3G multimedia phones that they said were attractive to teenagers — like the $130 LG enV3 and the $150 Motorola Cliq.
Common Sense Media and CTIA, the cellphone industry trade group, both have sites with advice on children and cellphones.
Parents might also consider cellphone alternatives like the iPod Touch, which for $199 offers music, games and applications. Technically, it is not a phone, but through a Wi-Fi hot spot, children can download applications like TextFree ($5.99 or free in ad-supported version) and Skype, and then text or call their friends free.
Mr. Poger’s daughter Maya has an LG Rumor2 with a keyboard through his family’s Sprint plan. He asked the carrier to block downloads, and he and his wife have talked to Maya about responsible use. Now Maya’s sister, who is 6, wants one.
“She’s going to wait until she’s 11,” he said.
http://www.nytimes.com/2010/06/10/technology/personaltech/10basics.html?ref=business
Andrew Sullivan for The New York Times
Caroline LaGumina, 11, of New York, wanted a phone so she could text her friends. She got one last Christmas.
By STEFANIE OLSEN
Published: June 9, 2010
David Poger had planned to buy his daughter Maya a cellphone when she was 15 and in high school, but last year he and his wife caved when she was 11.
“There was a lot of nagging and pleading,” said Mr. Poger, who lives in St. Louis, Miss. But for his wife, Stephanie, and him, he said, “Safety was a big issue because she was walking downtown with her school friends, going to movies and roller skating without us.” He added, “I still think she’s too young.”
Many parents these days face the same struggle as the Pogers: at what age should you buy your child a cellphone? And when you do buy that first phone, what kind should it be?
About 75 percent of 12- to 17-year-olds in the United States own a mobile phone, up from 45 percent in 2004, according to an April study by the Pew Internet and American Life Project, part of the Pew Research Center. And children are getting their phones at earlier ages, industry experts say. The Pew study, for example, found that 58 percent of 12-year-olds now own a cellphone, up from 18 percent in 2004.
Parents generally say they buy their child a phone for safety reasons, because they want to be able to reach the child anytime. Cost also matters to parents, cellphone industry experts say; phones and family plans from carriers are both becoming more affordable. Also, as adults swap out their old devices for newer smartphones, it is easier to pass down a used phone.
But for children, it is all about social life and wanting to impress peers. The Pew study found that half of 12- to 17-year-olds sent 50 text messages a day and texted their friends more than they talked to them on the phone or even face to face.
Experts say the social pressure to text can get acute by the sixth grade, when most children are 11 years old. Just ask Caroline LaGumina, 11, of New York, who got her phone last Christmas. “I wanted to be able to text because my friends all text each other.”
So when is the right time to buy that first phone?
There is no age that suits all children, developmental psychologists and child safety experts say. It depends on the child’s maturity level and need for the phone, and the ability to be responsible for the device — for example, keeping it charged, keeping it on, not losing it, not lending it. Instead of giving in to the argument that “everyone else has one,” parents should ask why the child needs one, how it will be used and how well the child handles distraction and responsibility.
“You need to figure out, are your kids capable of following your rules?” about using the phone, said Parry Aftab, executive director of the child advocacy group Wired Safety.
Ruth Peters, a child psychologist in Clearwater, Fla., said most children were not ready for their own phones until age 11 to 14, when they were in middle school. Often, that is when they begin traveling alone to and from school, or to after-school activities, and may need to get in touch with a parent to change activities at the last minute or coordinate rides.
Patricia Greenfield, a psychology professor at the University of California, Los Angeles, who specializes in children’s use of digital media, cautioned that at younger ages, parents might miss out on what was going on with their children because of a cellphone.
“Kids want the phone so that they can have private communication with their peers,” she said. “You should wait as long as possible, to maintain parent-child communication.”
When choosing a phone for a child, experts say, a big consideration is whether to buy a feature phone or a smartphone. A feature phone generally has a camera, Web access and a slide-out qwerty keyboard, but not the operating system with the applications that can be downloaded on a smartphone. With some carriers, you can buy a feature phone and not get a data plan, but others, like Verizon, have started to eliminate this combination.
Parents should realize that buying any kind of phone with Web access essentially allows their children unsupervised access to content and tools, like social networking and videos, that they may forbid on the home computer.
“Most parents want to give a cellphone to keep them safe, but that ignores the great majority of uses that kids are using cellphones for,” said James P. Steyer, the chief executive of the nonprofit group Common Sense Media, which rates children’s media. He said that with those added features can come addictive behavior, cyberbullying, “sexting” (sending nude photos by text message), cheating in class and, for older teenagers, distracted driving.
Dr. Peters suggested that parents avoid buying children younger than 13 a phone with a camera and Internet access. “If they don’t have access to it, it’s just cleaner,” she said.
Parents who do not want to buy a feature phone or smartphone might consider an inexpensive prepaid phone — Nokia, LG and Samsung have models like this — that comes without a contract and is not part of a family plan. For as little as $10, parents can load the phone with 30 minutes of calls. The Pew study reported that 18 percent of teenagers used these plans and that teenagers who did were typically more tempered in their use.
If parents do choose a smartphone or feature phone, it is important to set use restrictions on Internet, texting and calls until age 15 or 16, when presumably the child will be more mature and also have greater autonomy.
The April Pew study estimated that nearly half of American parents limited their 12- to 17-year- old’s phone use. It said that restrictions on text messaging correlated to lower levels of sexting and impulsive behavior.
Parents have several ways to set use restrictions. One way is to buy a plan through the carrier. For example, for $4.99 monthly, AT&T’s Smart Limits or Verizon’s Use Controls let parents set limits on minutes, restrict time-of-day use and even dictate whom the child can call or text. Parents can also request that their carrier block content or prevent a child from texting photos.
Parents can also buy software from other vendors like My Mobile Watchdog that can be loaded onto the child’s phone and will, for example, send a copy of a child’s texts or photos to the parent’s phone.
Some phones are made specially for children and include free parental controls, like the Firefly and the Kajeet, available online. But generally, the major wireless retailers focus on smartphones and feature phones, saying that children’s phones have proved less popular.
Anyone with a teenager or preteenager knows that most children covet the kinds of phones adults have. “No kid wants a dumbed-down phone,” said Julie A. Ask, vice president at Forrester Research.
In a Verizon store in Berkeley, Calif., recently, store clerks pointed to several feature phones, some of which are referred to as 3G multimedia phones that they said were attractive to teenagers — like the $130 LG enV3 and the $150 Motorola Cliq.
Common Sense Media and CTIA, the cellphone industry trade group, both have sites with advice on children and cellphones.
Parents might also consider cellphone alternatives like the iPod Touch, which for $199 offers music, games and applications. Technically, it is not a phone, but through a Wi-Fi hot spot, children can download applications like TextFree ($5.99 or free in ad-supported version) and Skype, and then text or call their friends free.
Mr. Poger’s daughter Maya has an LG Rumor2 with a keyboard through his family’s Sprint plan. He asked the carrier to block downloads, and he and his wife have talked to Maya about responsible use. Now Maya’s sister, who is 6, wants one.
“She’s going to wait until she’s 11,” he said.
http://www.nytimes.com/2010/06/10/technology/personaltech/10basics.html?ref=business
Taking their medicine
Taking their medicine
June 10, 2010
Most of those responsible wreaking havoc on the global economy have not owned up to their failures, writes Joseph Stiglitz.
IT HAS taken almost two years since the collapse of Lehman Brothers and more than three years since the beginning of the global recession brought on by the misdeeds of the financial sector, for the United States and Europe finally to reform financial regulation.
Perhaps we should celebrate these regulatory victories. After all, there is almost universal agreement that the crisis the world is facing today - and is likely to continue to face for years - is as a result of the excesses of the deregulation movement begun under Margaret Thatcher and Ronald Reagan 30 years ago.
Unfettered markets are neither efficient nor stable.
But the battle, and even the victory, has left a bitter taste. Most of those responsible for the mistakes - whether at the US Federal Reserve, the US Treasury, Britain's Bank of England and Financial Services Authority, the European Commission and European Central Bank, or in individual banks - have not owned up to their failures.
Banks that wreaked havoc on the global economy have resisted doing what needs to be done. Worse still, they have received support from the Federal Reserve, which one might have expected to adopt a more cautious stance, given the scale of its past mistakes.
This is important not just as a matter of history and accountability, but because much is being left up to regulators. And that leaves open the question: can we trust them? To me, the answer is an unambiguous ''no'', which is why we need to hard-wire more of the regulatory framework. The usual approach - delegating responsibility to regulators to work out the details - will not suffice.
And that raises another question. Whom can we trust? On complex economic matters, trust had been vested in bankers (if they make so much money, they obviously know something!) and in regulators, who often (but not always) came from the markets. But the events of recent years have shown that bankers can make megabucks, even as they undermine the economy and impose massive losses on their own firms.
Bankers have also shown themselves to be ''ethically challenged''. A court of law will decide whether Goldman Sachs' behaviour - betting against products that it created - was illegal. But the court of public opinion has already rendered its verdict on the far more relevant question of the ethics of that behaviour. That Goldman's CEO saw himself as doing ''God's work'' as his firm sold short products that it created, or disseminated scurrilous rumours about a country where it was serving as an ''adviser'', suggests a parallel universe, with different mores and values.
As always, the financial-sector lobbyists have laboured hard to make sure that the new regulations work to their employers' benefit. As a result, it will likely be a long time before we can assess the success of whatever law the US Congress ultimately enacts.
The new law must curb the practices that jeopardised the entire global economy, and reorientate the financial system towards its proper tasks: managing risk, allocating capital, providing credit (especially to small and medium-sized enterprises), and operating an efficient payments system.
We should toast the likely successes. Some form of financial-product safety commission will be established, more derivative trading will move to exchanges and clearing houses from the shadows of the murky ''bespoke'' market, and some of the worst mortgage practices will be restricted.
It also looks likely that the outrageous fees charged for every debit transaction - a kind of tax that fills only the banks' coffers - will be curtailed.
But the likely failures are equally noteworthy. The problem of too-big-to-fail banks is now worse than it was before the crisis. In the last crisis, US government ''blinked'', failed to use the powers that it had, and needlessly bailed out shareholders and bondholders because it feared that doing otherwise would lead to economic trauma. As long as there are banks that are too big to fail, it will most likely ''blink'' again.
It is no surprise that the big banks have succeeded in stopping some essential reforms; what was a surprise was a provision in the US Senate's bill that banned government-insured entities from underwriting risky derivatives. Such underwriting distorts the market, giving big banks a competitive advantage, not necessarily because they are more efficient, but because they are ''too big to fail''.
The Fed's defence of the big banks - that it is important for borrowers to be able to hedge their risks - reveals the extent to which it has been captured.
There are many ways of curbing the excesses of the big banks. A strong version of the so-called Volcker Rule (designed to force government-insured banks to return to their core mission of lending) might work. But the US government would be remiss to leave things as they are.
The Senate bill's provision on derivatives is a good litmus test: the Obama administration and the Fed, in opposing these restrictions, have clearly lined up on the side of big banks. If effective restrictions on the derivatives business of government-insured banks (whether actually insured, or effectively insured because they are too big to fail) survive in the final version of the bill, the general interest might indeed prevail over special interests, and democratic forces over moneyed lobbyists.
But if, as most pundits predict, these restrictions are deleted, it will be a sad day for democracy - and a sadder day for the prospects of meaningful financial reform.
Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics.
Source: The Age
http://www.smh.com.au/business/taking-their-medicine-20100609-xwsq.html
June 10, 2010
Most of those responsible wreaking havoc on the global economy have not owned up to their failures, writes Joseph Stiglitz.
IT HAS taken almost two years since the collapse of Lehman Brothers and more than three years since the beginning of the global recession brought on by the misdeeds of the financial sector, for the United States and Europe finally to reform financial regulation.
Perhaps we should celebrate these regulatory victories. After all, there is almost universal agreement that the crisis the world is facing today - and is likely to continue to face for years - is as a result of the excesses of the deregulation movement begun under Margaret Thatcher and Ronald Reagan 30 years ago.
Unfettered markets are neither efficient nor stable.
But the battle, and even the victory, has left a bitter taste. Most of those responsible for the mistakes - whether at the US Federal Reserve, the US Treasury, Britain's Bank of England and Financial Services Authority, the European Commission and European Central Bank, or in individual banks - have not owned up to their failures.
Banks that wreaked havoc on the global economy have resisted doing what needs to be done. Worse still, they have received support from the Federal Reserve, which one might have expected to adopt a more cautious stance, given the scale of its past mistakes.
This is important not just as a matter of history and accountability, but because much is being left up to regulators. And that leaves open the question: can we trust them? To me, the answer is an unambiguous ''no'', which is why we need to hard-wire more of the regulatory framework. The usual approach - delegating responsibility to regulators to work out the details - will not suffice.
And that raises another question. Whom can we trust? On complex economic matters, trust had been vested in bankers (if they make so much money, they obviously know something!) and in regulators, who often (but not always) came from the markets. But the events of recent years have shown that bankers can make megabucks, even as they undermine the economy and impose massive losses on their own firms.
Bankers have also shown themselves to be ''ethically challenged''. A court of law will decide whether Goldman Sachs' behaviour - betting against products that it created - was illegal. But the court of public opinion has already rendered its verdict on the far more relevant question of the ethics of that behaviour. That Goldman's CEO saw himself as doing ''God's work'' as his firm sold short products that it created, or disseminated scurrilous rumours about a country where it was serving as an ''adviser'', suggests a parallel universe, with different mores and values.
As always, the financial-sector lobbyists have laboured hard to make sure that the new regulations work to their employers' benefit. As a result, it will likely be a long time before we can assess the success of whatever law the US Congress ultimately enacts.
The new law must curb the practices that jeopardised the entire global economy, and reorientate the financial system towards its proper tasks: managing risk, allocating capital, providing credit (especially to small and medium-sized enterprises), and operating an efficient payments system.
We should toast the likely successes. Some form of financial-product safety commission will be established, more derivative trading will move to exchanges and clearing houses from the shadows of the murky ''bespoke'' market, and some of the worst mortgage practices will be restricted.
It also looks likely that the outrageous fees charged for every debit transaction - a kind of tax that fills only the banks' coffers - will be curtailed.
But the likely failures are equally noteworthy. The problem of too-big-to-fail banks is now worse than it was before the crisis. In the last crisis, US government ''blinked'', failed to use the powers that it had, and needlessly bailed out shareholders and bondholders because it feared that doing otherwise would lead to economic trauma. As long as there are banks that are too big to fail, it will most likely ''blink'' again.
It is no surprise that the big banks have succeeded in stopping some essential reforms; what was a surprise was a provision in the US Senate's bill that banned government-insured entities from underwriting risky derivatives. Such underwriting distorts the market, giving big banks a competitive advantage, not necessarily because they are more efficient, but because they are ''too big to fail''.
The Fed's defence of the big banks - that it is important for borrowers to be able to hedge their risks - reveals the extent to which it has been captured.
There are many ways of curbing the excesses of the big banks. A strong version of the so-called Volcker Rule (designed to force government-insured banks to return to their core mission of lending) might work. But the US government would be remiss to leave things as they are.
The Senate bill's provision on derivatives is a good litmus test: the Obama administration and the Fed, in opposing these restrictions, have clearly lined up on the side of big banks. If effective restrictions on the derivatives business of government-insured banks (whether actually insured, or effectively insured because they are too big to fail) survive in the final version of the bill, the general interest might indeed prevail over special interests, and democratic forces over moneyed lobbyists.
But if, as most pundits predict, these restrictions are deleted, it will be a sad day for democracy - and a sadder day for the prospects of meaningful financial reform.
Joseph E. Stiglitz is University Professor at Columbia University and a Nobel laureate in Economics.
Source: The Age
http://www.smh.com.au/business/taking-their-medicine-20100609-xwsq.html
Wednesday, 9 June 2010
Core-satellite Portfolio Management
The core-satellite portfolio strategy is a relatively new concept that bridges the never-ending debate between the respective benefits of active and passive portfolio management.
The core-satellite portfolio approach optimises both passive and active management strategies.
The allocation mix between the core and the satellite components within the portfolio is flexible and it allows investors to select and optimal mix that would best represent their desired portfolio risk-return characteristics.
The core-satellite portfolio concept is very suitable for big investors who are often long-term investors.
The core-satellite portfolio approach optimises both passive and active management strategies.
- Such a portfolio approach is divided into a core component, which usually forms the majority of the portfolio that is passively managed.
- The rest of the portfolio is called the "satellite", which is an active component in an attempt to generate alpha returns, i.e. risk adjusted returns.
The allocation mix between the core and the satellite components within the portfolio is flexible and it allows investors to select and optimal mix that would best represent their desired portfolio risk-return characteristics.
The core-satellite portfolio concept is very suitable for big investors who are often long-term investors.
KL bourse out to woo retail investors
KL bourse out to woo retail investors
Published: 2010/06/09
Malaysia’s bourse said it’s seeking to lure individual investors who have shunned the market a decade after the Asian financial crisis.
Bursa Malaysia Bhd is working with brokerages and banks to “to reach out to retail investors in various towns and cities” to open up accounts and encourage online trading, chief executive officer Yusli Mohamed Yusoff said in an interview in Kuala Lumpur.
Trading by individuals fell to as low as 20 per cent of trading value from more than half before the start of the Asian financial crisis in 1997, when the benchmark index slumped by a record 52 per cent.
“A lot of retailers lost a substantial amount,” Yusli said yesterday. The result is that the market is now “dominated by the local institutions,” he said.
Most individual savings started shifting to mutual funds and unit trusts since Malaysia’s economy went into a recession in 1998, Yusli said. They haven’t returned to stock trading even as the economy expanded at an annual average of 5 per cent over the past decade and the benchmark index more than doubled.
The FTSE Bursa Malaysia KLCI Index has climbed 1.2 per cent so far this year, paring a gain of as much as 5.8 per cent amid concern austerity measures in Europe will reduce demand for the Malaysia’s technology and commodity exports.
Lagging Behind
The KLCI’s 45 per cent gain last year lagged behind Southeast Asian neighbors even after the government announced stimulus plans totaling RM67 billion to help pull Southeast Asia’s third-largest economy out of a recession.
Trading slumped by half to an average US$375 million a day over the six months ended May from the same period 13 years ago, right before the start of the regional financial crisis in July 1997, according to data compiled by Bloomberg. Neighboring Singapore’s figures have quadrupled to US$1.1 billion over that time, data from the city-state’s exchange show.
“People’s risk appetite is not there anymore, not like those days,” said Lye Thim Loong, who helps manage US$500 million at Avenue Invest Bhd in Kuala Lumpur. “Those who traded recklessly with no fundamental reasons got burnt.”
The slump in trading by individuals coincided with an exodus by foreigners from Southeast Asia’s second-biggest stock market, leaving Bursa more reliant on domestic institutional funds. Overseas investors have sold a net RM1.36 billion of Malaysia’s equities this year, adding to RM8.57 billion withdrawn in 2009 and RM38.6 billion ringgit that flowed out in 2008, according to exchange data. In 2007, they bought a net RM24.7 billion.
Foreigners
The exit left foreigners holding 20.6 per cent of local stocks at the end of April, down from 27.5 per cent in April 2007, according to stock exchange data. Overseas investors held 9.33 per cent of Tenaga Nasional Bhd at the end of April, compared with 27 per cent in April 2007, according to data from Malaysia’s biggest power producer.
The state-controlled Employees Provident Fund accounts for 50 per cent of daily trading volume in the equity and bond markets, Prime Minister Najib Razak said on March 30. More than half of the RM417.1 billion of market value in the benchmark stock index is owned by government-linked funds, according to calculations by Bloomberg.
“We’d rather see a more balanced distribution, so that one particular sector doesn’t dominate the market so much,” Yusli said.
Retail investors’ share of trading is low by comparison with at least one neighbor, Thailand, where individuals accounted for 56 per cent of turnover so far this year, according to data compiled by Bloomberg. Exchanges in neighboring Indonesia and Singapore don’t track the figures.
“There has been some increase in the total of retail account sign-ups recently, but the amount is negligible,” Alex Hwang, chief executive officer of HwangDBS Investment Bank Bhd in Kuala Lumpur, said in an e-mailed reply to questions. Investors are “more careful these days due to the volatile market,” he said. -- Bloomberg
Read more: KL bourse out to woo retail investors http://www.btimes.com.my/Current_News/BTIMES/articles/20100609084947/Article/index_html#ixzz0qLed7Wsg
Published: 2010/06/09
Malaysia’s bourse said it’s seeking to lure individual investors who have shunned the market a decade after the Asian financial crisis.
Bursa Malaysia Bhd is working with brokerages and banks to “to reach out to retail investors in various towns and cities” to open up accounts and encourage online trading, chief executive officer Yusli Mohamed Yusoff said in an interview in Kuala Lumpur.
Trading by individuals fell to as low as 20 per cent of trading value from more than half before the start of the Asian financial crisis in 1997, when the benchmark index slumped by a record 52 per cent.
“A lot of retailers lost a substantial amount,” Yusli said yesterday. The result is that the market is now “dominated by the local institutions,” he said.
Most individual savings started shifting to mutual funds and unit trusts since Malaysia’s economy went into a recession in 1998, Yusli said. They haven’t returned to stock trading even as the economy expanded at an annual average of 5 per cent over the past decade and the benchmark index more than doubled.
The FTSE Bursa Malaysia KLCI Index has climbed 1.2 per cent so far this year, paring a gain of as much as 5.8 per cent amid concern austerity measures in Europe will reduce demand for the Malaysia’s technology and commodity exports.
Lagging Behind
The KLCI’s 45 per cent gain last year lagged behind Southeast Asian neighbors even after the government announced stimulus plans totaling RM67 billion to help pull Southeast Asia’s third-largest economy out of a recession.
Trading slumped by half to an average US$375 million a day over the six months ended May from the same period 13 years ago, right before the start of the regional financial crisis in July 1997, according to data compiled by Bloomberg. Neighboring Singapore’s figures have quadrupled to US$1.1 billion over that time, data from the city-state’s exchange show.
“People’s risk appetite is not there anymore, not like those days,” said Lye Thim Loong, who helps manage US$500 million at Avenue Invest Bhd in Kuala Lumpur. “Those who traded recklessly with no fundamental reasons got burnt.”
The slump in trading by individuals coincided with an exodus by foreigners from Southeast Asia’s second-biggest stock market, leaving Bursa more reliant on domestic institutional funds. Overseas investors have sold a net RM1.36 billion of Malaysia’s equities this year, adding to RM8.57 billion withdrawn in 2009 and RM38.6 billion ringgit that flowed out in 2008, according to exchange data. In 2007, they bought a net RM24.7 billion.
Foreigners
The exit left foreigners holding 20.6 per cent of local stocks at the end of April, down from 27.5 per cent in April 2007, according to stock exchange data. Overseas investors held 9.33 per cent of Tenaga Nasional Bhd at the end of April, compared with 27 per cent in April 2007, according to data from Malaysia’s biggest power producer.
The state-controlled Employees Provident Fund accounts for 50 per cent of daily trading volume in the equity and bond markets, Prime Minister Najib Razak said on March 30. More than half of the RM417.1 billion of market value in the benchmark stock index is owned by government-linked funds, according to calculations by Bloomberg.
“We’d rather see a more balanced distribution, so that one particular sector doesn’t dominate the market so much,” Yusli said.
Retail investors’ share of trading is low by comparison with at least one neighbor, Thailand, where individuals accounted for 56 per cent of turnover so far this year, according to data compiled by Bloomberg. Exchanges in neighboring Indonesia and Singapore don’t track the figures.
“There has been some increase in the total of retail account sign-ups recently, but the amount is negligible,” Alex Hwang, chief executive officer of HwangDBS Investment Bank Bhd in Kuala Lumpur, said in an e-mailed reply to questions. Investors are “more careful these days due to the volatile market,” he said. -- Bloomberg
Read more: KL bourse out to woo retail investors http://www.btimes.com.my/Current_News/BTIMES/articles/20100609084947/Article/index_html#ixzz0qLed7Wsg
Tuesday, 8 June 2010
Historical Investment Data for Padini (8.6.2010)
Historical Investment Data for Padini (8.6.2010)
http://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdEdfYjM4Tk5sYXZreTczSGp2MVFib1E&output=html
http://spreadsheets.google.com/pub?key=0AuRRzs61sKqRdEdfYjM4Tk5sYXZreTczSGp2MVFib1E&output=html
Monday, 7 June 2010
Kenmark suffers RM137m pre-tax loss
Business Times
Kenmark suffers RM137m pre-tax loss
2010/06/07
Kenmark Industrial Co (M) Bhd posted a pre-tax loss of RM137.022 million for its full year ended March 31, 2010 from a pre-tax profit of RM4.066 million before.
Its revenue also dropped slightly to RM213.224 million from RM250.926 million previously. -- Bernama
Kenmark suffers RM137m pre-tax loss
2010/06/07
Kenmark Industrial Co (M) Bhd posted a pre-tax loss of RM137.022 million for its full year ended March 31, 2010 from a pre-tax profit of RM4.066 million before.
Its revenue also dropped slightly to RM213.224 million from RM250.926 million previously. -- Bernama
How are you allocating your money in this volatile period?
How has the recent turmoil on global markets affected how you allocate money in your fund?
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