Trust Me, Invest in TARP

Some investors are really dumb. Others, as Gordon B. Grigg, a "financial planner" of Nashville, discovered, seem still to be striving to ascend to that level. I'm sure Mr. Grigg enjoyed taking their money.

Want Inflation Now?

Comments on the the utility of inflation as a solution to our overleveraged economy. It amounts to advocacy of slow expropriate of wealth from the lenders. But we are likely to see more this.

Maybe things aren't so bad?

Despite the financial market chaos, the Economix Blog at the New York Times reports that 2008: A Banner Year? Real GDP in the U.S. reached $14 trillion last year, or $46,000 per American, the highest in the nation's history.

As surprising as that factoid is, I am most surprised that I read it in the NY Times. I may have to grudgingly agree with JLM that the Times is improving its business reporting.

Estate Planning or Intestacy?

See Estate Planning: What You Need to Know for an efficient summary, plus the link to a cool site where you can find out which relatives would get how much, depending on which state you live in, should you fail to leave a will.

The article includes this plug for trusts:

[T]rusts are no longer the province of the very rich. They have morphed over the years into useful and straightforward vehicles to protect assets in life from creditors and lawsuits and to pass them to heirs on your own terms.

How to Tell a Billion From a Million

John Lanchester, in his review of "Lords of Finance" in The New Yorker:

Try the following thought experiment, suggested by the mathematician John Allen Paulos, in his book “Innumeracy”: Without doing the calculation, guess how long a million seconds is. Now try to guess the same for a billion seconds. Ready? A million seconds is less than twelve days; a billion is almost thirty-two years.

Revenge of the Trust Fund Teenagers

The Deal tipped me off to this story in the Palm Beach Post. Take that, Bernie!

Dead More Generous Than The Living

Seven out of the ten largest gifts to charity last year came from estates, Robert Frank notes in The Wealth Report. The largest came from the estate of "Trouble's" best friend, Leona Helmsley.

Needed: Research Risk Ratings

As watchers of the Australian Open tennis know, January 26 is Australia Day. (At this writing, it's already January 27th down under; the celebrants are presumably back at work.) Seemed like a good time to visit the Aussie version of Yahoo finance, from whence comes this column by stockbroker Marcus Padley, calling for a new sort of risk ratings:

CEOs don't understand their own companies, so how can an analyst with limited time and selective exposure to the company do any better.

The last year has taught us that we will never know everything about some companies let alone be able to predict their futures. It has also made it clear that we have been making a heck of a lot of more assumptions and taking a heck of a lot more risk in the investment game than we knew.

We complain that the broker research has served us badly, especially in the last year, but as unimaginable disasters unfold it is becoming clear why. Because researchers have no chance. Large complex companies don't even know what they're doing so no manner of "in depth" research is ever going to be better than a best guess. The inadequacy of research is excusable because it is understandable and inevitable. What has cost us is our assumption that some of it is more credible than it is.

What we need is a Research Risk Rating (RRR) for each stock. An investment bank for instance would have a "High" RRR. It is almost impossible to know what they are doing.

Photo via Wikimedia Commons

A British view of the recession.

There's no new motor to drive the economy | Matthew Parris - Times Online. Key observations:

This recession is not a failure of market economics. It is a reassertion of market economics after a decade in which we paid ourselves more than we were producing, and funded it precariously and temporarily by complicated credit instruments that it took a while for the market to rumble. Now a prosperity that always baffled ordinary citizens has collapsed. The collapse of confidence is not irrational; it's the correction to a long run of irrational confidence. All that stuff about the emerging Asian giants wasn't just phrasemaking for party conference speeches. It was true. We're falling behind. We face a mountain of debt: the difference between the life we are able to sustain and the life we were enjoying.

When Wall Street Really Was The Street

Figuratively speaking, mighty Wall Street is disappearing. Today Merrill Lynch moved another step closer to the history books with the resignation of its ex-CEO from BofA. A year ago, NYSE Euronext's acquisition of The American Stock Exchange removed another segment of Wall Street history – a reminder of the days when much of The Street's business was conducted…in the street.

Until 1953, the American Exchange was known as the Curb Exchange, and that's what most Wall Streeters continued to call it. To learn why, drop by the current exhibit at the Museum of American Finance. Or check out their slide show.

The kerbstone brokers didn't move indoors until 1921. This photo from the Library of Congress was probably taken shortly before the move.

"What If Your Bank Collapses?"

Talk about signs of the times! This Wall Street Journal Q&A examines What if Uncle Sam Takes Over Your Bank?

The picture painted isn't rosy. For instance:

How will private-banking and brokerage-account customers be affected?

That depends on whether the government takes a short- or long-term view. If it intends to be a long-term owner, then it will probably sell off the brokerage, investment-banking and other auxiliary operations as nonessential to the core banking business. If, however, the government sees its step as a short-term fix to shore up the system temporarily, then it may hang on to such operations.

What other products and services might be affected?

If the government takes over a bank, management will be under even more pressure to cut costs. Expect more branch closings and poorer customer service. "Think of the bank as the DMV of the future, run by government employees who have little upward mobility," says [Dave Kaytes, managing director at Novantas].

For a preview of what could lie ahead, The New York Times suggests, we should keep an eye on financial developments in the U.K.

Good Time to Trim Estates

Tough Times Are Good Times to Trim Estates, The Wall Street Journal points out.

[S]harply lower prices, combined with rock-bottom interest rates, make this an unusually attractive time for many people to transfer wealth to the next generation.

Among the tax-smart strategies advisers are recommending are low-interest loans to other family members and "grantor-retained annuity trusts," or GRATs -- which are designed to transfer assets to family members while minimizing gift and estate taxes. These and other interest-rate sensitive techniques are likely to look even more attractive next month, thanks to even lower rates.

Wealth-holders considering GRATs may want to get a move on. Reform is in the air. In the current Estate Planning Studies, Louis A. Mezzullo writes: "Future legislation…could require that the minimum value of the remainder interest in a GRAT must be at least 10% of the fair market value of the transferred assets."

A New Day

Dawn on the New England coast, January 20, 2009

Is it better to not plan?

Consumer Reports surveyed 19,000 subscribers ages 55 to 75 about their retirement finances. Their findings are not pretty.

However, pre-retirees who had done more planning reported worse losses, on average, than those who hadn’t planned. Retirement planning strategies encourage investors to diversify beyond safe vehicles such as bonds and CDs. Respondents who had planned were less conservative, in general than those who didn’t. Before the meltdown, this strategy was much more beneficial according to Consumer Reports’ 2007 Retirement Survey. But it proved punishing during the unusually severe market downturn of recent months.

What's more, those who used financial planners did no better than those who managed on their own.

How to disguise a Ponzi scheme

According to the New York Times, exploring the roots of the Madoff mess, it helps if you don't keep records.

Frank Avellino allegedly was running a Ponzi scheme of his own, and was caught in 1992. He had been guaranteeing returns of 13.5% to 20.0%. When asked how this was possible, he replied that the money was managed by Madoff, and if their was any shortfall his firm was obligated to make it up.

His firm was ordered liquidated, money returned to investors, and an audit was required. Price Waterhouse had some trouble doing the audit, due to the absence of ordinary financial records. Responded Avellino:

My experience has taught me to not commit any figures to scrutiny when, as in this case, it can be construed as ‘bible’ and subject to criticism. In this present instance, quite severely. I explained how the profit and loss can be computed from the records you now hold in your possession that Bernard L. Madoff and I supplied.

Despite this gross irregularity, the investigation essentially petered out and a settlement was reached. Avellino went back to funneling money to Madoff, according the Times. Interesting conincidence: Avellino's lawyer in 1992 was Ira Sorkin, Madoff's lawyer today.

Madoff's Feeding Chain

While "feeders" were funneling money to Bernard Madoff, others – including a golf caddie – were feeding the feeders. Business Week reports on the Layers and Layers of Players.

For background on funds of funds and an introduction to Arpad Busson, one of field's pioneers, see this Bloomberg story.

Broker? Private Banker? Hard to Tell

Citigroup is spinning off its full-service brokerage, Smith Barney, into a joint venture with Morgan Stanley. Sounds fairly straightforward. Yet as this post on Seeking Alpha suggests, the line between private banker and full-service broker isn't exactly clear:

Citi’s private bank (focused on people with net worth of $10 million and up) and brokers who are housed within Citibank branches will not be part of the joint venture. Morgan Stanley’s (MS) franchise focusing on high net worth individuals, analogous to the Citi Private Bank, will indeed be part of the joint venture.

* * *

Citi…complicates its own dismantling with respect to the Smith Barney transaction because, well, it’s not easy to answer the question, “Which advisers are part of Smith Barney?” For years Smith Barney has been hiring away brokers who focus on high net worth individuals but didn’t want to be part of the private bank–these teams had a structure and style all their own. These teams also use the private bank’s platform and infrastructure. Where do these brokers go? With the joint venture or to the private bank?

A Cancer on the Investment World

Yale's David Swensen, interviewed by The Wall Street Journal:

Fund of funds are a cancer on the institutional-investor world. They facilitate the flow of ignorant capital. If an investor can't make an intelligent decision about picking [hedge fund] managers, how can he make an intelligent decision about picking a fund-of-funds manager who will be selecting hedge funds?

Investors who were "Madoffed" by their fund of funds are already pondering that question.

High Net Worth Investors Rethink Risk

If the multimillionaires of Tiger 21 are alarmed, the global financial crisis must be bad. "One of the biggest surprises was how complex the world of finance is," says the group's founder.

In recent months (only in recent months?) wealthy investors have really focused on risk, one private banker tells the Financial Times. Another private banker observes that some clients wish they hadn't spent so much time at the liquidity punch bowl: “The markets have created unexpected outcomes for investors who were well accustomed…to living with substantial leverage.”

Investment risk may become even less popular among the wealthy if Niall Ferguson's imaginary retrospective of 2009 is anywhere near the mark. Private bankers and other investment advisers will need to do heaps more handholding.

• • •

Niall Ferguson, a Scot who now teaches at Harvard, must be among the most popular of historians. Each of his books seems to come with a TV program attached. The program appended to his latest, "The Ascent of Money," airs on many PBS stations this evening.

Keeping the Death Tax Alive

The Democratic Congress plans prompt action to prevent the federal estate tax from expiring next year, The Wall Street Journal reports. Independent Street blogs that semi-rich business and farm owners will again mobilize to support repeal. Question is, how many of the semi-rich are still semi-rich? How many are starting to worry more about bankruptcy than estate liquidity?

Josiah Wedgwood, Master Marketer

Waterford Wedgwood might not be in bankruptcy if Wedgwood's founder were still around. Even Merrill Anderson's newsletters may owe Josiah Wedgwood a debt.

Wedgwood, seen here as portrayed by Sir Joshua Reynolds, was a marketing genius. In a NY Times op-ed piece, Judith Flanders writes, "Most, if not all, of the common techniques in 20th-century sales — direct mail, money-back guarantees, traveling salesmen, self-service, free delivery, buy one get one free, illustrated catalogues — came from Josiah Wedgwood."

Scott Adams, Skeptical Investor

Last month Jim Gust admired the poke Scott Adams took, in his Dilbert strip, at that hoary investment concept, diversification. Barron's feature on Adams reports that the episode, published last December 13, was one of the most popular in the strip's history.

If your investment adviser put you into Enron, you probably don't love investment advisers. Neither does Adams as quoted by Barrons:

"Most of the investments I made in individual stocks went bad because managements were lying. They are the source of the information for the markets." His conclusion: "It is even dumber to pay an expert to talk to the liar for you and charge you 1% of your portfolio."

Tax Relief for Madoff's Investors?

For Victims of Schemes, the I.R.S. Can Be Flexible, reports The New York Times. Those who invested with Madoff in recent years may be able to file amended returns. Madoff's long-time investors and really big losers may do better claiming a theft-loss deduction.

Wall Street Post-Mortems

Were you too busy transitioning back to business from year-end festivities to read the Sunday NY Times? Here are two long articles you should know about:

Risk Mismanagement. I thought Rollover IRAs and charitable remainder annuity trusts were tough to write about. Imagine trying to explain Wall Street's quants and their magic mathematical models – e.g., VaR or Value at Risk. That's the task Joe Nocera tackles here, at length. You'll encounter dragons and, of course, black swans.

The End of the Financial World as We Know It. Michael Lewis ("Liar's Poker") and David Einhorn (president of Greenlight Capital, a hedge fund) examine the imbalances and misaligned interests that allowed Madoff to flourish and giant financial firms to fail.

The common denominator evident in these and other recent post-mortems? Short-sightedness. Quants, focused on trading, saw no need to take a longer view of risk. Wall Street CEOs, feeling obliged to dance to a quarterly-earnings tune, forgot to worry about the likelihood of losing billions when the music stopped. And "long-term" investors failed to notice that the stock-market crash of 1987 was atypical, far from the worst that has happened before or can happen again.

• • •

Interesting, isn't it? As Rupert Murdoch reshapes The Wall Street Journal into more of a generalized national newspaper, The New York Times responds by upping its financial coverage.

Buddy, Can You Spare a Trillion?

Found this World War I poster online. Maybe the President-Elect's transition team can recycle it!

Tulips, Perpetually Positive Returns and Other Manias

From Wikimedia Commons comes this image of an allegorical painting of the Dutch tulip mania, c. 1640. Flora, goddess of flowers, rides on a wind-blown wagon with a two-faced woman, drunks and money-changers, followed by other low-lifes, all headed for ruin in the sea.


In a WSJ column, Why We Fall for Financial Scams, psychologist Stephen Greenspan cites "the tendency of humans to model their actions -- especially when dealing with matters they don't fully understand -- on the behavior of other humans." Greenspan touches upon a number of financial crazes through the ages, including an inheritance fraud from the 1920s involving the supposed will of Sir Francis Drake.

Professor Greenspan has written a book, Annals of Gullibility. More recently he inadvertently invested some of his life savings with, yes, Bernard Madoff!