Wednesday, December 31, 2008

Connecticut Bank Drawn Into Madoff Scandal

According to lawyers in Florida, reports The New York Times, Westport National Bank may have played a role in steering money to Bernard Madoff:
According to the lawyers, their clients believed for more than a decade that they had an account at the Westport National Bank, a division of Connecticut Community Bank in Westport, from which they had received statements for many years. Early last week, they learned their money had actually been entrusted to Mr. Madoff, the lawyers said.
The lawyers' clients are said to have received statements from the bank showing charges for custodial and record-keeping fees of 4 percent a year.

A related press release from the lawyers is here.

Jan.3 update: From a Stamford Advocate article:
In 1999, at the request of an unidentified local company, Westport National Bank replaced another financial institution as the custodian for a number of individuals and entities that were investing with Bernard L. Madoff Securities, [Richard Cummings, president of Westport National Bank] said.

"Nearly all of these individuals and entities had been investing with Madoff long before the Bank was founded in 1998," Cummings said.

The custodial agreement "reflected the fact that each custodial client directed the Bank to give Madoff 'full discretionary authority' to invest the custodial client's funds," he said.

"Each custodial client specifically acknowledged in writing that the client had not relied on the Bank in choosing to invest with Madoff," he said.

Tuesday, December 30, 2008

Chief Risk Officer Named

The Ragged Neck Division of the Trust and Wealth Management Marketing blog is pleased to announce the appointment of P. S. Oliver Storm as Chief Risk Officer.

Though still a young kitten, Storm explored every inch of the perimeter of our kitchen and dining areas the other evening. Commendable due diligence.

As for risk assessment, Storm demonstrated extraordinary skill. When a human tapped her finger on the kitchen counter above him, Storm instantly understood the invitation. He crouched, tensed his muscles, crouched even lower, then . . .

"I'm still a little kitten. No way can I jump all the way to that counter top. And when I fall back down, I might not even land on my feet." Storm straightened up, flicked his tail and walked away.

Don't you wish the chief risk officers of our leading financial institutions had possessed Storm's skill at risk analysis?
• • •

We humans lack Storm's finely-tuned instincts. Still, we have a rough idea of physical risks and limitations. Financial risk is what does us in.

To weigh financial risk requires the gathering of facts and figures, the computing of various potential outcomes and then the judging of whether the better potential outcomes are worth risking the bad outcomes. And we humans, most of us, aren't up to the task.

Peter Applebome in the NY Times contemplates what boobs we are:
Can anyone doubt that the demands on people to make reasonably intelligent choices with their money has so far exceeded their wisdom to do it, that maybe we should at least try to figure out some way to close the gap? If many presumably sophisticated Madoff investors were ruined, what chance do the rest of us have?
"One lesson of this year," Applebome concludes, "is that these days, no one, even the most financially secure, can afford to be stupid." True enough. But from the times of Tulip Mania and The South Sea Bubble, human stupidity and investing have gone hand in hand.

Isn't that why trust officers had to be invented?

Monday, December 29, 2008

After the Madoff Mess, What?

In the Wealth Report, Robert Frank sees a post-Madoff flight to big-bank investment services. But he says the fleeing investors won't be happy about it:
Big banks call it “flight to quality.” But it is more like flight to a lesser evil. You can go to “your guy” and risk losing everything. Or you can go to a big name and risk losing just part of it.

Some choice.
What's more, some of the big names may have themselves led clients into Madoff's clutches. Ben Stein in the NY Times tells how a wealth-management team from "a major investment bank" tried to get him to move his money to Madoff two years ago. Was the team naive or greedy?

Jim Gust suggests
that the trust and investment pros at community and midsize banks should be well positioned to gain new clients. New and persuasive marking strategies will be needed. Let's look for worthy ideas in the new year.

Laughing Stocks (and Bonds and CDOs)

“Financial Planner Advises Shorter Lifespans.”

Judging from that sample, today's financial humor won't have you rolling in the aisles, but it is plentiful.

Sunday, December 28, 2008

Vaiva Vebra

In Terminal event, below, Jim Gust told of the impending death of his wife, Vaiva, on December 13. Vaiva was one of the leading Lithuanian-Americans of her generation, most recently serving as Counselor for Education Matters to Lithuania's President. Her obituary is here. You should also read Jim's addendum, Six degrees of separation.

Friday, December 26, 2008

We Need a Little Stardust

The year ends, for too many of us, in loss and disappointment. We need a little stardust, right this very minute. . . .

Artless angels spreading cheer have arrived in our mailbox for many a Christmas – each handcrafted and made special by the person who created it.

Louise Cuddihy was the founder's young secretary when I joined The Merrill Anderson Company. She was among the legion of gals who entered advertising and other areas of the New York business world after World War II via the only jobs available to them. Each was determined to type her way up. Most didn't.

Louise did. After work she went to school to study art and design, got her degree, then got another. Merrill gave her a job in the art department. In time Louise became assistant art director, a gal you could rely on for a practical solution to any graphics problem.

When Earl Bergendahl, the art director who created the Mondrian-esque signature format for U.S. Trust's ads, retired, Louise became Merrill Anderson's art director.

Personal note: In 1981, when my wife volunteered us to create and publish a history of the Norwalk Youth Symphony, Louise chipped in with all the layout work.

Louise has been retired for many years. She's enlivened quite a few of them with travel, but I'm glad she hasn't given up art. Her card arrived in today's mail.

Have a little stardust, folks. This year we need it.

Saturday, December 20, 2008

The Madoff mess goes global

Madoff Scheme Kept Rippling Outward, Across Borders the New York Times reports. It's like an onion, just keep peeling off layer after layer, except there is nothing in the center.

Another great argument for trust departments? How should we make the case?

Friday, December 19, 2008

Oh, so now taxes do influence taxpayer behavior?

Whenever changes to the tax code are "scored" for their impact on federal revenue, estimates are based upon static economic models. Although everyone concedes that tax changes influence taxpayer behavior, no one can agree on how to estimate that change. Tax cuts boost the economy and, ultimately, tax revenue, a vindication of the Reagan vision that those who promote more government spending are unwilling to acknowledge. So, for example, cuts to the capital gains tax rate are always scored as losing revenue, when in fact they have always generated revenue increases as more investors become willing to unlock their gains.

Now one of the long-time opponents of lower taxes and dynamic tax scoring, the New York Times, is asking Did ’97 Tax Break Worsen Housing Bubble? It turns out that when you lower taxes on something, you get more of it, and when you raise taxes on something you get less of it. I wonder who said that first?

Wednesday, December 17, 2008

Creative Destruction?

In The Wall Street Journal. John Steele Gordon recalls an earlier Ponzi scheme that led to financial ruin . . . and to "the finest work of military history of the 19th century."

Tuesday, December 16, 2008

Even Yale's Endowment Falters

Like Harvard, Yale has found the investment climate chilly since last June. Estimated shrinkage of Yale's endowment: 25%.

Could have been worse. Neither the Cantabs nor the Bulldogs turned their money over to Madoff.

Update: Geraldine Fabrikant theorizes that Yale may have fared somewhat better than Harvard because David Swenson allocated less to liquid commodities and may have hedged his positions. Also, a lesser portion of Yale's endowment was in foreign equities, and the Bulldogs used no leverage.

Sunday, December 14, 2008

Can limits on charitable gifts be enforced?

The New York Times reports on a settlement between Princeton and the heirs of the Robertson family. The heirs had claimed that Princeton stopped following the requirements attached to a $35 million endowment made in 1961. The fund was intended to promote education for those going into government service, and had grown as large as $900 million.

In the settlement, Princeton agreed to pay the heir's legal fees of $40 million, interest of $11 million, and they returned $50 million to the heirs to set up a new foundation. The school keeps the balance ($500 million or more) to use as it pleases, free of the restrictions of the original gift.

Both sides claim victory here, but it seems to me Princeton is really ahead. The message to donors seems to be, stipulations attached to the usage of your charitable gifts will only be advisory. If you really want to control how your money is spent, don't give it away.

Saturday, December 13, 2008

Terminal event

No, it's not something that happens in an airport, it's the phrase that the Surgical PA (which I presume means "surgical physician's assistant") uses to lay the psychological foundation before telling you that you must decide if your beloved wife is going to die.

The management of breaking the bad news would be interesting to study and reflect upon if it wasn't happening to me. They used a committee approach, consisting of the surgeon, his PA, the oncologist, and a social worker. The latter was a woman, to add a dash of estrogen to deliberation. They were pretty efficient and practiced without being too cold or detached. They needed to put rational and emotional into synch, while not appropriating decisional authority to themselves. Not a trivial achievement, especially on regular basis.

The financial crisis explained

Scott Adams captures perfectly the logic that drove the subprime mortgage mania.

(I originally embedded the strip, but couldn't figure out how to adjust the margins.)

I hope Dogbert the Financial Advisor becomes a regular.

Thursday, December 11, 2008

No panic, yet

In contrast with this item below, InvestmentNews reports on a survey suggesting that Investors are keeping faith with advisers. No one likes losses, but a majority of those working with advisors believe that their asset allocation planning "held up as well or better than expected" during the market downturn.

At least so far.

Wednesday, December 10, 2008

Coping With Scary Times

Whether or not it's a Great Recession, it's scary – for investors and for investment advisers.

How to cope? You might consult a shaman, like the spiritual-healer/wealth-manager The Washington Post magazine profiles in Voodoo Economics. (Read the Editor's Note, too.)

For those seeking a more scientific approach, neuroeconomist Gregory Berns explains how fear impairs decision-making. We're up against what Berns calls "the 'endowment effect,' the innate tendency to value things you own more highly than everyone else does."
The cause and effect have not been fully sorted out, but the implication is that when our brains sense pain, or anticipate loss, we tend to hold onto what we have. When everyone does this at once, the result is a downward economic spiral.
To help their clients cope, investment advisers should avoid undue pessimism and help clients tune out "media that fan the emotional flames." For clients in their 40s and 50s, times when stocks are marked down 40% should logically be greeted as a rare opportunity, not cause for panic. Do they really believe the stock market is Going Out of Business?

Berns advises against waiting for the economy to get back to normal:
I don't care what your business is, but if you think it will eventually come back to what it was — your brain is in the grips of the fear-based endowment effect. What I am doing is looking for new opportunities.
What opportunities should corporate fiduciaries be exploring? The answer may involve finding ways to bring fiduciary-standard investment service to more people or different organizations. Or maybe it means becoming a provider of education and insight rather than mere portfolio management. Or . . . [you fill in the blank].

Grantor Retained Annuity Trusts

In Get It While You can, Martin Shenkman discusses leveraging family gifts via GRATs, including rolling GRATs.

Monday, December 08, 2008

The History of Money-Market Funds, Condensed

All but the most senior Boomers probably assume money-market funds have been around forever. Not so. Bruce Bent co-founded the first one in 1972.

In the long life and messy death of Bent's flagship Reserve Primary Fund, as recounted in The Wall Street Journal, young wealth managers can read just about all the money-market history they need to know.

Sunday, December 07, 2008

The best source for trust referrals

Merrill Anderson is surveying the users of its Investment and Trust Newsletter to develop the calendar and editorial direction for the coming year. We ask about conditions in the industry as well, and share the results with our clients.

We asked what the best sources of trust referrals are. 100% of the respondents so far have checked off centers of influence (attorneys and accountants), while 36% mention internal referrals and 18% get good referrals from existing clients.

Trust departments are well positioned to gain market share from the current financial mess. 90% agreed that Clients are now looking for traditional values, such as ours.

The survey remains open this week. Click here to take the survey and get a preview of our newsletter program.

This makes too much sense

Via TaxProf Blog: Gingrich Backs Two-Month Tax Holiday to Replace Further Wall Street Bailout.

Remember last year's tax rebate checks? Congress passed the law early in the year, but IRS had to handle the tax filing season first, so no checks could be cut before May. Then we had all sorts of complications, and tremendous IRS resources wasted just answering taxpayer questions. Ultimately the "stimulus" fell short of the promises made for it.

A tax holiday is simpler, and it's immediate. No IRS overhead in implementation. It would inject real stimulus into the economy, but there' s no chance for Congress to manipulate who gets what. I expect the proposal therefore to be DOA.

At the taxprof link is a collection of additional links on the topic.

“A Financial Falcon and Virtuouso Flimflammer”

In Lost and Found New York, James Stevenson sketches Charles Wyman Morse, who started business in shipping and ice and emerged as a prominent figure in various banks and trust companies at the start of the 20th century. Morse triggered, or at least helped trigger, the Panic of 1907. See How J. P. Morgan Tamed the Trust Companies.

In 1908 Charles W. Morse was sent to jail for his escapades, but he didn't stay long. One of his fellow prisoners would raise flimflamming to new heights: Charles Ponzi.

Why Investors Should Stay the Course

From an article in the WSJ Sunday Journal:
History shows that the best way to rebuild portfolios is to stay in the stock market. Over the past nine recessions, the Standard & Poor's 500-stock index has gained 13%, on average, during the second half of a downturn and another 13% the year after it ended.

Thursday, December 04, 2008

The Bigger They Are . . .

Harvard's investment return for the twelve months ending last June exceeded Yale's. Now the owner of the largest university endowment is preparing to tighten its belt because of a 22% loss in the subsequent four months. Also, Harvard and less wealthy universities are striving to divest themselves of various alternative assets.

Can Yale escape a similar fate? No word as yet.

Do You Know the Top Tax Rate on Long-Term Gain?

Careful! It's a tricky question.

Last year, when the family needed to add to its cash reserves, we sold shares of Apple. The shares had been purchased for under $10 per share (split adjusted) back in the bust, so the capital gain was humongous.

We had little in the way of investment losses to offset the gain (remember those days?). Still, the federal income tax on long-term gain is no more than 15%. Could be worse.

It was worse. At tax time we discovered that, except for people with exceptionally large incomes, long-term gain is not truly exempt from the Alternative Minimum Tax. The result, as explained here, was to boost the tax on our Apple gain to around 22%.

Oh, well. It could have been worse.

And it is. As senior citizens, my wife and I recently received polite notes from a Social Security computer, announcing a boost in our retirement benefits to offset inflation, negated by a significant cut in the benefits we would actually receive in 2009.

The cut results from a surcharge – the SS computer calls it "an income-related monthly adjustment amount" – on the premium we pay for Medicare Part B. The surcharge is based on MAGI:
We ask the Internal Revenue Service (IRS) for your tax [sic] income. We then add your adjusted gross income together with your tax-exempt interest income to get an amount that we call modified adjusted gross income (MAGI) . . . .

MAGI may include one-time only income, such as capital gains . . . . One-time income will effect your Medicare Part B premium for only one year.
Thanks to the humongous capital gain, our MAGI results in surcharges for 2009 equal to another two-percent tax on the gain. That brings the overall tax rate to 24%.

During the election campaign, weren't the Democrats talking about a 20% capital-gains tax? Sounds good to me!

Monday, December 01, 2008

Christmas Price Index Up 8%

Forget deflation. PNC's Christmas Price Index, based on the cost of partridges, pear trees, French hens, etc., jumped 8% this year.

Biggest increase: a whopping 33% rise for Seven Swans a-Swimming.

Old Sayings for a New Recession

Gosh, the recession turns out to be a year old already. Can we declare a recovery starting New Year's Eve?

Meanwhile, Ben Schott has gathered some sayings to see us through. A sampling: