Investor. Any references to securities are not recommendations or solicitations to buy or sell anything. I may have positions in securities mentioned.
Sunday, January 27, 2013
Greg Smith: On Wall Street and Goldman Sachs
Greg Smith is a former executive director and vice president of investing banking firm Goldman Sachs.
In March 2012, he resigned from the firm in an op-ed in The New York Times decrying the firm’s change in culture and loss of client focus.
He has since written “Why I Left Goldman Sachs: A Wall Street Story.”
Smith spoke to The Stanford Daily about his time at the firm, Stanford students on Wall Street and the difference between Wall Street and Silicon Valley.
Q. We read in your op-ed that you decided to leave Goldman Sachs after an experience while doing student orientation. Was there a specific instance that you encountered while working at Goldman Sachs that made your decision final?
Integrity and doing the right thing is something that Goldman as a firm always espoused to do. Certainly I think that’s one of the reasons that it survived for 140 years … I think that the problems came up in the early 2000′s when I joined the firm.
There was a whole host of regulations that were overturned by Congress, which allowed it to be a lot easier to make money by using your client’s information to place your own bets, as opposed to helping your clients.
This didn’t happen overnight, but from what I saw through my career from when I left Stanford [in 2001] to when I left Goldman [in 2012]…was an erosion of that duty to the client, and a maximization of the firm’s own interest over the client.
I think what got to me was the hypocrisy of publicly saying, “Yes, our clients’ interests come first,
”… whereas privately doing something completely different and often using your client’s information to bet against them, which is something that jived against my ethical beliefs.
Q. You worked at Goldman Sachs for over 12 years. What was it that attracted you there right out of college?
It was the idea of Goldman Sachs being the absolute best in the world, having the highest standards. It was really the reputation.
If you flash back to 1999 to 2000, when I was interviewing for Goldman, it had an absolutely golden reputation.
I saw a real erosion of that reputation as people tried to make profits more and more quickly – you had to have the right attitude towards clients.
I saw that mindset change at Goldman, and I hoped that it would change back to the way it was.
Q. Do you think that some of the things that you heard or said or experienced at Stanford affected your decision to leave Goldman Sachs eventually?
That’s an interesting question. I think that Stanford is an interesting place because it teaches students to cut through the noise and see the truth.
Certainly I credit Stanford for giving me my education, but I also credit it for giving me my value set and my perception of the world.
I’m very proud of Stanford; one of the reasons I loved recruiting was visiting Stanford. I always found the East Coast kids, the Harvards [sic], the Whartons [sic], of the world, as being really cutthroat. Stanford students have a reputation on Wall Street of being collaborative, easygoing but still very acutely commercial. We want to be entrepreneurial and create a product which will contribute to society. That’s what I think the biggest difference is in the way business is done in Silicon Valley and on Wall Street.
Q. Did you make an attempt to change some of the [practices you criticize] while at Goldman?
I did. I used to do a lot of recruiting, and I was one of the captains of Stanford recruiting… Within the firm, I certainly was a big proponent of the culture.
Once I saw things go as they did during the financial crisis, Goldman Sachs had a big SEC [U.S. Securities and Exchange Commission] lawsuit and the firm ultimately settled a $500 million suit with the government…
I actually saw some wrongdoing, and the firm did a yearlong study… I found the survey to be lip service…
After speaking to my colleagues and nine different Goldman partners, everyone agreed that there were these lapses … we had no competition.
Q. What advice would you have to give to the 15 percent of Stanford undergraduates who ultimately will work in finance?
I’m not certainly going to be the person to tell students to go or not to go into finance.
There are certainly a lot of positive aspects to finance.
Unfortunately, actual finance on Wall Street is only 20 percent of the pie. So, what I would say to people is that if you are going into finance, go into it for the right reasons. Don’t go into it because you think that it’s the easiest career or because you think that it’s the path you should take.
Q. One of the up-and-coming fields that Stanford students are interested in is venture capital. What would you say about that, being someone who did investment banking on Wall Street?
I think that it’s a great profession. I think that the level of innovation going on in Silicon Valley is a level not seen anywhere else in the world.
When I was at Stanford, Google was being invented, and I remember going to Chicago in the 1990′s and telling them to use Google. When I graduated, I felt that that era had come to a close.
What we see clearly with the … whole host of innovations is that we’re still pretty early in the cycle. What I would say to Stanford students is that we’re incredibly lucky to be going here.
Embrace the spirit of innovation while you’re here.
Q. If a Stanford student came up to you today with a job offer from Goldman Sachs or another reputable financial institution on Wall Street, what advice would you give them?
Examine the reasons why this attractive to you.
By that what I mean is, “What are you really interested in?”
The longer I’ve been in business and the longer I’ve been away from Stanford is that it’s more important to follow your interests and your heart than what you think you should be going.
I would encourage them to not lose track of their own ethical framework and to stay true to themselves no matter how long they stay in business.
I would not encourage someone to go into something because it looks flashy, or that they’re supposed to do it, or that society thinks it’s the right thing to do.
Q. Do you think that the culture on Wall Street will be changing anytime soon?
I don’t see it changing anytime soon… I think that the overriding message I’m trying to get across is to highlight to, especially non-financial people, that politicians are still being funded by the banks they’re trying to regulate.
I would take away this misaligned incentive – that Wall Street is incentivized to swing for the fences… If things go really bad, the worst that will happen is that taxpayers will have to hold the bag and bail out the bank.
I feel that you need to make an even playing field.
People need to be tied to their performance over, say, five years.
There needs to be a changed fiduciary standard where conflicts of interest disappear – you need to change some of the laws.
By Nitish Kulkarni
Source:
Stanford Daily | Greg Smith: On Wall Street, Goldman Sachs and students entering finance
http://www.stanforddaily.com/2013/01/21/1074203/
Just Start: Take Action, Embrace Uncertainty, Create the Future by Leonard A. Schlesinger
Book Description
Publication Date: Mar 20 2012
How to succeed at work and life—in an increasingly unpredictable world
In a world where you can no longer plan or predict your way to success, how can you achieve your most important goals?
It’s a daunting question. But in today’s environment, where change is the only constant, it’s a question everyone must answer.
This is true whether you are an innovator or an entrepreneur, a manager or a newly minted graduate.
The first step, say the authors of this book, is this: "Just start.” In other words, take action now and learn as you go.
Written by a trio of seasoned business leaders, Just Start combines fascinating research with proven practices to deliver a reliable method for helping you advance toward your goals—despite the uncertainty that is all too common today.
Babson College President Leonard Schlesinger, organizational learning expert Charles Kiefer, and veteran journalist Paul B. Brown share their own deep and varied experiences and draw from a source where striving amid constant uncertainty actually works:
the world of serial entrepreneurship.
In this world, people don’t just think differently—they act differently, as well.
Using this novel approach, Just Start will help you:
1) Determine the best strategy and tactics when the future is uncertain
2) Minimize financial risk in every decision you make
3) Attract like-minded people to what you want to do (and learn why this is important)
Understand why. Act. Learn. Build (so you can) Act again” is the best course of action when facing the unknown
So throw out your forecasting tools and shrug off that nagging frustration that comes with constant uncertainty.
Just Start distills for you the very essence of what makes people successful in today’s volatile environment.
This book is your guide to achieving your goals—whether your project is professional or personal, or somewhere in between.
Source:
Just Start: Take Action, Embrace Uncertainty, Create the Future by Leonard A. Schlesinger - Reviews, Discussion, Bookclubs, Lists
http://www.goodreads.com/book/show/13235913-just-start
Wednesday, January 23, 2013
Secret Ingredients for Success
Excuse making is not the answer to moving your business forward and making a success of your efforts - working harder is not the answer; you need to change a losing game.
Work differently like the successful people in this article did:
they subjected themselves to fairly merciless self-examination that prompted reinvention of their goals and the methods by which they endeavored to achieve them.
They looked inward and subjected themselves to brutal self-assessment.
In interviews with high achievers for a book, the authors expected to hear that talent, persistence, dedication and luck played crucial roles in their success.
Surprisingly, however, self-awareness played an equally strong role.
The authors learned that challenging our assumptions, objectives, at times even our goals, may sometimes push us further than we thought possible.
This is the cognitive approach that Professor Argyris called double-loop learning wherein we are advised to question every aspect of our approach, including our methodology, biases and deeply held assumptions.
..........
Secret Ingredient for Success
By CAMILLE SWEENEY and JOSH GOSFIELD
WHAT does self-awareness have to do with a restaurant empire? A tennis championship? Or a rock star’s dream?
David Chang’s experience is instructive.
Mr. Chang is an internationally renowned, award-winning Korean-American chef, restaurateur and owner of the Momofuku restaurant group with eight restaurants from Toronto to Sydney, and other thriving enterprises, including bakeries and bars, a PBS TV show, guest spots on HBO’s “Treme” and a foodie magazine, Lucky Peach.
He says he worked himself to the bone to realize his dream — to own a humble noodle bar.
He spent years cooking in some of New York City’s best restaurants, apprenticed in different noodle shops in Japan and then, finally, worked 18-hour days in his tiny restaurant, Momofuku Noodle Bar.
Mr. Chang could barely pay himself a salary. He had trouble keeping staff. And he was miserably stressed.
He recalls a low moment when he went with his staff on a night off to eat burgers at a restaurant that was everything his wasn’t — packed, critically acclaimed and financially successful.
He could cook better than they did, he thought, so why was his restaurant failing? “I couldn’t figure out what the hell we were doing wrong,” he told us.
Mr. Chang could have blamed someone else for his troubles, or worked harder (though available evidence suggests that might not have been possible) or he could have made minor tweaks to the menu.
Instead he looked inward and subjected himself to brutal self-assessment.
Was the humble noodle bar of his dreams economically viable?
Sure, a traditional noodle dish had its charm but wouldn’t work as the mainstay of a restaurant if he hoped to pay his bills.
Mr. Chang changed course.
Rather than worry about what a noodle bar should serve, he and his cooks stalked the produce at the greenmarket for inspiration.
Then they went back to the kitchen and cooked as if it was their last meal, crowding the menu with wild combinations of dishes they’d want to eat — tripe and sweetbreads, headcheese and flavor-packed culinary mashups like a Korean-style burrito.
What happened next Mr. Chang still considers “kind of ridiculous” — the crowds came, rave reviews piled up, awards followed and unimaginable opportunities presented themselves.
During the 1970s, Chris Argyris, a business theorist at Harvard Business School (and now, at 89, a professor emeritus) began to research what happens to organizations and people, like Mr. Chang, when they find obstacles in their paths.
Professor Argyris called the most common response single loop learning — an insular mental process in which we consider possible external or technical reasons for obstacles.
LESS common but vastly more effective is the cognitive approach that Professor Argyris called double-loop learning.
In this mode we — like Mr. Chang — question every aspect of our approach, including our methodology, biases and deeply held assumptions.
This more psychologically nuanced self-examination requires that we honestly challenge our beliefs and summon the courage to act on that information, which may lead to fresh ways of thinking about our lives and our goals.
In interviews we did with high achievers for a book, we expected to hear that talent, persistence, dedication and luck played crucial roles in their success.
Surprisingly, however, self-awareness played an equally strong role.
The successful people we spoke with — in business, entertainment, sports and the arts — all had similar responses when faced with obstacles: they subjected themselves to fairly merciless self-examination that prompted reinvention of their goals and the methods by which they endeavored to achieve them.
The tennis champion Martina Navratilova, for example, told us that after a galling loss to Chris Evert in 1981, she questioned her assumption that she could get by on talent and instinct alone.
She began a long exploration of every aspect of her game.
She adopted a rigorous cross-training practice (common today but essentially unheard of at the time), revamped her diet and her mental and tactical game and ultimately transformed herself into the most successful women’s tennis player of her era.
The indie rock band OK Go described how it once operated under the business model of the 20th-century rock band.
But when industry record sales collapsed and the band members found themselves creatively hamstrung by their recording company, they questioned their tactics.
Rather than depend on their label, they made wildly unconventional music videos, which went viral, and collaborative art projects with companies like Google, State Farm and Range Rover, which financed future creative endeavors. The band now releases albums on its own label.
No one’s idea of a good time is to take a brutal assessment of their animating assumptions and to acknowledge that those may have contributed to their failure.
It’s easy to find pat ways to explain why the world has not adequately rewarded our efforts.
But what we learned from conversation with high achievers is that:
challenging our assumptions, objectives, at times even our goals, may sometimes push us further than we thought possible.
Camille Sweeney and Josh Gosfield are the authors of the forthcoming book “The Art of Doing: How Superachievers Do What They Do and How They Do It So Well.”
Source:
Secret Ingredient for Success - NYTimes.com
http://www.nytimes.com/2013/01/20/opinion/sunday/secret-ingredient-for-success.html?_r=0
Work differently like the successful people in this article did:
they subjected themselves to fairly merciless self-examination that prompted reinvention of their goals and the methods by which they endeavored to achieve them.
They looked inward and subjected themselves to brutal self-assessment.
In interviews with high achievers for a book, the authors expected to hear that talent, persistence, dedication and luck played crucial roles in their success.
Surprisingly, however, self-awareness played an equally strong role.
The authors learned that challenging our assumptions, objectives, at times even our goals, may sometimes push us further than we thought possible.
This is the cognitive approach that Professor Argyris called double-loop learning wherein we are advised to question every aspect of our approach, including our methodology, biases and deeply held assumptions.
..........
Secret Ingredient for Success
By CAMILLE SWEENEY and JOSH GOSFIELD
WHAT does self-awareness have to do with a restaurant empire? A tennis championship? Or a rock star’s dream?
David Chang’s experience is instructive.
Mr. Chang is an internationally renowned, award-winning Korean-American chef, restaurateur and owner of the Momofuku restaurant group with eight restaurants from Toronto to Sydney, and other thriving enterprises, including bakeries and bars, a PBS TV show, guest spots on HBO’s “Treme” and a foodie magazine, Lucky Peach.
He says he worked himself to the bone to realize his dream — to own a humble noodle bar.
He spent years cooking in some of New York City’s best restaurants, apprenticed in different noodle shops in Japan and then, finally, worked 18-hour days in his tiny restaurant, Momofuku Noodle Bar.
Mr. Chang could barely pay himself a salary. He had trouble keeping staff. And he was miserably stressed.
He recalls a low moment when he went with his staff on a night off to eat burgers at a restaurant that was everything his wasn’t — packed, critically acclaimed and financially successful.
He could cook better than they did, he thought, so why was his restaurant failing? “I couldn’t figure out what the hell we were doing wrong,” he told us.
Mr. Chang could have blamed someone else for his troubles, or worked harder (though available evidence suggests that might not have been possible) or he could have made minor tweaks to the menu.
Instead he looked inward and subjected himself to brutal self-assessment.
Was the humble noodle bar of his dreams economically viable?
Sure, a traditional noodle dish had its charm but wouldn’t work as the mainstay of a restaurant if he hoped to pay his bills.
Mr. Chang changed course.
Rather than worry about what a noodle bar should serve, he and his cooks stalked the produce at the greenmarket for inspiration.
Then they went back to the kitchen and cooked as if it was their last meal, crowding the menu with wild combinations of dishes they’d want to eat — tripe and sweetbreads, headcheese and flavor-packed culinary mashups like a Korean-style burrito.
What happened next Mr. Chang still considers “kind of ridiculous” — the crowds came, rave reviews piled up, awards followed and unimaginable opportunities presented themselves.
During the 1970s, Chris Argyris, a business theorist at Harvard Business School (and now, at 89, a professor emeritus) began to research what happens to organizations and people, like Mr. Chang, when they find obstacles in their paths.
Professor Argyris called the most common response single loop learning — an insular mental process in which we consider possible external or technical reasons for obstacles.
LESS common but vastly more effective is the cognitive approach that Professor Argyris called double-loop learning.
In this mode we — like Mr. Chang — question every aspect of our approach, including our methodology, biases and deeply held assumptions.
This more psychologically nuanced self-examination requires that we honestly challenge our beliefs and summon the courage to act on that information, which may lead to fresh ways of thinking about our lives and our goals.
In interviews we did with high achievers for a book, we expected to hear that talent, persistence, dedication and luck played crucial roles in their success.
Surprisingly, however, self-awareness played an equally strong role.
The successful people we spoke with — in business, entertainment, sports and the arts — all had similar responses when faced with obstacles: they subjected themselves to fairly merciless self-examination that prompted reinvention of their goals and the methods by which they endeavored to achieve them.
The tennis champion Martina Navratilova, for example, told us that after a galling loss to Chris Evert in 1981, she questioned her assumption that she could get by on talent and instinct alone.
She began a long exploration of every aspect of her game.
She adopted a rigorous cross-training practice (common today but essentially unheard of at the time), revamped her diet and her mental and tactical game and ultimately transformed herself into the most successful women’s tennis player of her era.
The indie rock band OK Go described how it once operated under the business model of the 20th-century rock band.
But when industry record sales collapsed and the band members found themselves creatively hamstrung by their recording company, they questioned their tactics.
Rather than depend on their label, they made wildly unconventional music videos, which went viral, and collaborative art projects with companies like Google, State Farm and Range Rover, which financed future creative endeavors. The band now releases albums on its own label.
No one’s idea of a good time is to take a brutal assessment of their animating assumptions and to acknowledge that those may have contributed to their failure.
It’s easy to find pat ways to explain why the world has not adequately rewarded our efforts.
But what we learned from conversation with high achievers is that:
challenging our assumptions, objectives, at times even our goals, may sometimes push us further than we thought possible.
Camille Sweeney and Josh Gosfield are the authors of the forthcoming book “The Art of Doing: How Superachievers Do What They Do and How They Do It So Well.”
Source:
Secret Ingredient for Success - NYTimes.com
http://www.nytimes.com/2013/01/20/opinion/sunday/secret-ingredient-for-success.html?_r=0
Tuesday, January 22, 2013
Vanguard's $130 Billion Year
Investing
Vanguard's $130 Billion YearBy Roben Farzad on December 11, 2012
The $5 footlong. The $340 laptop. Free two-day shipping. All hallmarks of our economic times.
Vanguard, the 38-year-old low-cost investing pioneer, brings you the Great Deflation.
The fund company is not just having its best year ever. (It shattered that record in September.) The $130.4 billion in deposits in mutual funds and exchange-traded funds that Vanguard has taken in through November is the most ever for the industry, according to data from Strategic Insight. That beats the $129.6 billion that JPMorgan (JPM) clocked, mostly for money market funds, in 2008. This year’s not over.
You’ve no doubt heard of the “Wal-Mart (WMT)effect.” Now the market is watching—with equal parts gratitude and trepidation—the rapid escalation of the “Vanguard effect.” It’s asymmetric warfare, as Vanguard’s sole ownership and constituency is its fundholders, the savings it wrings from its buying power are passed on to them, not to shareholders or partners. BlackRock (BLK), Charles Schwab (SCHW), Fidelity, and State Street cannot say the same.
“No one should be shocked,” says Josh Brown, the Manhattan investment adviser who blogs as the Reformed Broker. He says that Vanguard is selling the lowest-cost bond funds in an environment in which every basis point counts, as well as “the plainest-vanilla indexes” in an era whose most expensive stock-pickers, he says, have been “rendered impotent.”
The average equity mutual fund investor pays $1.24 for every $100 invested, compared with just under 36¢ for equity ETFs, according to Lipper. Vanguard ups (lowers?) that ante by offering a firm-wide average expense of 20¢ per $100 invested. Since the market bottomed in March 2009, equity mutual funds have experienced a cumulative net outflow of $242 billion, compared with a net inflow of $270 billion to equity ETFs, according to Birinyi Associates. ETFs seem to be in a chronic state of boom (PDF). “Don’t fall out of your chair if this continues for a while longer,” says Brown.
Go back to that $130.4 billion that Vanguard has taken in so far this year. Bridgewater Associates, the planet’s largest hedge fund, is $130 billion large. In 2008, the country’s largest stock mutual fund was American Funds’ $117 billion Growth Fund of America; going into August of this year, it sustained $63 billion in net withdrawals.
The world of fund management is in generational upheaval. In 2000, when the Cult of Equity was still going strong, brokers, banks, and insurers dominated global asset-management, representing six of the top 10 spots based on assets, according to Pensions & Investments. Today they hold four of those slots. The four banks and insurance houses on the list sport a total of $5.5 trillion in assets, compared with more than $11 trillion for the rest, including Vanguard and BlackRock.
And those insurgents are knifing one another over fees. In October, Vanguard took drastic action to keep cutting costs on 22 offerings. It announced that starting in January, it will ditch MSCI (MSCI) as its benchmark provider, shifting to a lower-cost framework under FTSE. “Licensing costs for indexes have consumed a greater portion of our costs,” says Vanguard spokesman John Woerth. “So we’ve taken a stand and used our position in the market.”
That’s been short-term costly while money managers who are jittery about the impending switch bail out. Last month, Vanguard’s $57 billion MSCI Emerging Markets ETF lost $887 million to redemptions while its nemesis, BlackRock’s $41 billion IShares MSCI Emerging Markets Index ETF, took in $2.34 billion, according to data compiled by BlackRock. This despite the Vanguard ETF having less than a third of its competitor’s expense ratio. Since the start of 2009, it has outdrawn its BlackRock counterpart in deposits by more than seven-to-one.
“We believe the vast majority of our investors have embraced the change,” says Woerth, “and understand that we’re trying to pass the savings on to them.”
While Vanguard is the world’s largest mutual fund company, it is only the No. 3 ETF player, after BlackRock and State Street. With so many fund dollars now up for grabs—and tons of it sluicing to Vanguard—that’s probably not for long. Farzad is a Bloomberg Businessweek contributor.
Source:
Vanguard's $130 Billion Year - Businessweek
http://www.businessweek.com/articles/2012-12-11/the-year-of-the-vanguard-effect
Thursday, January 17, 2013
10 Rules for Dealing with the Sharks on Wall Street
Back in 2001, a very curious deal was struck between the government of Greece and Goldman Sachs. It was an exotic dollar/yen swap for euros. What possessed Greece to do such an unusual — and expensive — financial transaction? It needed help to hide its large and rapidly growing debt in order to maintain its status as a euro-zone member in good standing.
Both parties had something to gain.
1. Greece created the false appearance of being in compliance with the Maastricht Treaty. This mandates that European Union member states with high debt levels must reduce their debt-to-gross-domestic-product ratio.
2. And Goldman Sachs scooped up a ridiculously large 600 million euro fee. According to Bloomberg News, this accounted for “about 12 percent of the $6.35 billion in revenue Goldman Sachs reported for trading and principal investments in 2001.”
Once again, a new group of rubes got rolled by The Street.
Before you begin tsk-tsking the Greeks, allow me to point you to the latest group of suckers to get taken in by The Street’s three-card monte: the Poway Unified School District in San Diego. It took a page from the Greek school of bad finance, agreeing to an exotic and costly bit of Wall Street shenanigans. Despite the district’s strong tax base and good credit rating, its officials bought a complex Wall Street-originated exotic loan offering.
Reminiscent of the bubble days of exotic mortgages, this debt deal makes no payments for 20 years.
Over the course of the 40-year financing, it pays a very rich tax-exempt interest of 6.8 percent. Had the district done a straight-up school bond offering, it would have paid 4.1 percent. Over the course of 40 years, this interest rate differential is enormous. Poway borrowed $105 million. Instead of paying $300 million for a normal bond offering, the townspeople are going to pony up nearly $1 billion.
I learned of this festering financial debacle courtesy of the investigative reporting of Will Carless at the Voice of San Diego.
It appears there are no good actors here. What motivated this absurdity appears to be an attempt to avoid increasing real estate taxes on the school district residents. Rather than live within their budget, the district is trying its level best to become the next Detroit.
The worst part of all is that by the time the bill comes due, everyone associated with this awful deal will be long gone.
It’s a classic case of “I’ll be gone, you’ll be gone” financing.
It is astonishing to think that anyone involved in this mess thought that the big investment firms would help them come up with “creative financing” to resolve their budget issues.
If only they’d had a helpful guideline, a set of rules for dealing with the sharks on Wall Street.
So presented here:
“The Inviolable Rules for Dealing with Wall Street”:
1. Reward is always relative to risk: If any product or investment sounds as if it has lots of upside, it also has lots of risk. If you can disprove this, there is a Nobel Prize waiting for you. On the buy side, chasing yield can expose you to shaky credits, like junk bonds that have inherent high risk for bankruptcy. If you are selling bonds to raise long-term capital, and your underwriter suggests
2. Asymmetrical information: In all negotiated sales, one party has far more information, knowledge and experience about the product being bought and sold. One party knows its undisclosed warts and risks better than the other. Which party are you? There is always one sucker at the Poker Table...
3. Good advice is priceless: I know, easier said than done. The Street buys the best legal talent, mathematicians and strategists that money can buy. Make sure you have expert advisers and lawyers working for you as well.
Or get a second opinion from the competition, as in, pit Goldman against Solomon.
4. Motivation:Always ask, what is the motivation of the outfit selling me this product? Is it the long-term stability and financial health of my organization — or their own fees and commissions? What's in it for us?
5. Legal documents are created to protect the preparer (and its firm), not you or yours: In the history of modern finance, no large legal document has worked against its drafters.
Private placement memorandums, sales agreement,arbitration clauses — firms use these to protect themselves, not you. Listen to your own lawyer!
6. Performance: How significantly do the fees, interest rates commissions, etc., have an impact on the performance of this investment vehicle over time?
Determining for yourself:
what is the actual cost of money to avoid more heartache in the future.
7. Shareholder obligation: All publicly traded firms (including investment banks and bond underwriters) have a fiduciary obligation to their shareholders to maximize profits. This is far greater than any duty owed of care to you, the client. Always ask yourself whether this new product benefits the shareholders or your organization. (This is acutely important for untested products.) Who is the winner in this deal? Us or them?
8. Reputational risk: Who suffers if this investment goes down the drain? Who gets fired or voted out of office if this blows up? Who suffers reputational risk? Where does the buck stop?
9. Keep it simple, stupid (KISS): It’s easy to make things complicated, but it’s very challenging to make them simple. The more complexity brought to a problem, the greater the potential for things to go awry — not just astray, but very, very wrong.
10. There is no free lunch: Repeat after me: There is no free money, no riskless trade, no way to turn lead into gold. If you remember no other rule, this is the one that will save your hide time and again.
If you wondered why the biggest financial firms are fighting tooth and nail
to avoid having to maintain a “fiduciary standard,”
just look at the fees and expenses in deals like this.
There is always big money in the ongoing attempts to turn lead into gold.
The never ending parade of stock scandals continues unabated. As history has shown us — from Mexico to Orange County to analyst banking crisis to derivatives — when the Street comes a-knockin’, best you hide your wallets.
------
Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, The Big Picture. On Twitter: @Ritholtz.
PERMALINK
Source:
10 Rules for Dealing with the Sharks on Wall Street | The Big Picture
Link: http://www.ritholtz.com/blog/2012/09/10-inviolable-rules/
Original article:
http://www.nytimes.com/2012/08/17/business/schools-pass-debt-to-the-next-generation.html?_r=0
Wednesday, January 16, 2013
For the Love of Money
If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace. We ask not your counsels or arms. Crouch down and lick the hands which feed you. May your chains set lightly upon you, and may posterity forget that ye were our countrymen."
-- Samuel Adams
Authors@Google: Burton Malkiel - YouTube
Uploaded on Jun 1, 2010
Dr. Burton G. Malkiel, the Chemical Bank Chairman's Professor of Economics at Princeton University, is the author of the widely read investment book, A Random Walk Down Wall Street. He has also authored several other books, including the recently published The Elements of Investing.
Dr. Malkiel has long held professorships in economics at Princeton, where he was also chairman of the Economics Department. He also served as the dean of the Yale School of Management and William S. Beinecke Professor of Management Studies. Dr. Malkiel is a past president of the American Finance Association and the International Atlantic Economic Association, and a past appointee to the President's Council of Economic Advisors. He continues to serve on several corporate and investment management boards.
Dr. Malkiel has long held professorships in economics at Princeton, where he was also chairman of the Economics Department. He also served as the dean of the Yale School of Management and William S. Beinecke Professor of Management Studies. Dr. Malkiel is a past president of the American Finance Association and the International Atlantic Economic Association, and a past appointee to the President's Council of Economic Advisors. He continues to serve on several corporate and investment management boards.
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License
Standard YouTube License
Source:
Authors@Google: Burton Malkiel - YouTube
http://www.youtube.com/watch?v=wnCxlIQjT-s
Tuesday, January 15, 2013
State Street Global Advisors (SSgA) --- About
Fiduciary Heritage of State Street Corporation
State Street Global Advisors (SSgA) is the asset management business of State Street Corporation, one of the world's leading providers of financial services to institutional investors1, with a heritage dating back over two centuries. Backed by the strength and stability of the State Street organization, SSgA makes continual investments in our asset management and client service platform, resulting in a client-focused, solutions-driven orientation. Our investment culture is built on experience and skill that each of our more than 450 investment professionals and over 2400 employees2 around the world bring to every client relationship.1Pensions & Investments, 27 June 2011 2 State Street Global Advisors, as of 31 March 2012
State Street Global Advisors (SSgA) --- About
http://www.ssga.com/webapp/glp/about.jsp?tab=1
SIPC - Securities Investor Protection Corporation
Why Was SIPC Created?
SIPC is an important part of the overall system of investor protection in the United States.While a number of federal, self-regulatory and state securities agencies deal with cases of investment fraud,
SIPC's focus is both different and narrow:
Restoring funds to investors with assets in the hands of bankrupt and otherwise financially troubled brokerage firms.
The Securities Investor Protection Corporation was not chartered by Congress to combat fraud.
The SIPC Mission
When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers' cash, stock and other securities, and other customer property.Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court.
Although not every investor is protected by SIPC, no fewer than 99 percent of persons who are eligible get their investments back from SIPC.
From its creation by Congress in 1970 through December 2011, SIPC advanced $1.8 billion in order to make possible the recovery of $117.5 billion in assets for an estimated 767,000 investors.
Learn More:
Source:
SIPC - Securities Investor Protection Corporation > Who > SIPC Mission
http://www.sipc.org/Home.aspx
FINRA - Financial Industry Regulatory Authority
About the Financial Industry Regulatory Authority
The Financial Industry Regulatory Authority (FINRA) is the largest independent regulator for all securities firms doing business in the United States. FINRA's mission is to protect America's investors by making sure the securities industry operates fairly and honestly. All told, FINRA oversees about 4,290 brokerage firms, about 161,265 branch offices and approximately 630,390 registered securities representatives.FINRA has approximately 3,440 employees and operates from Washington, DC, and New York, NY, with 20 regional offices around the country.
Learn more about who we serve and what we do.
Mission Statement
FINRA is dedicated to investor protection and market integrity through effective and efficient regulation of the securities industry.
Chairman's Message
For more than 70 years, FINRA has played a critical role in America's financial system, working to protect investors. Today, nearly 53 million American investing households count on us to make sure the securities markets operate fairly and honestly.
... an organization that plays a role in regulating nearly every aspect of the securities business.
FINRA, protect investors by registering and educating all brokers, examining securities firms, writing the rules they must follow and enforcing those rules and federal securities laws.
... monitor trading in the U.S. stock markets and administer the largest securities-related dispute resolution forum in the world.
Given the pace of change in the marketplace, it's more important than ever that regulators be prepared to act quickly.
... ability to identify high-risk firms, brokers, activities and products
...regulatory programs in order to focus on the greatest risks to investors.
When the rules are broken, FINRA takes action.
... strong and vigorous enforcement program brings discipline where investors have been harmed.
In 2012, FINRA barred 294 individuals and suspended 549 brokers from association with FINRA-regulated firms, levied fines totaling more than $68 million and ordered $34 million in restitution to harmed investors.
.... increased our efforts to fight fraud, and to that end, have established several programs to help us root out bad actors and help consumers protect themselves.
In early 2009, created the Office of the Whistleblower, and established the Office of Fraud Detection and Market Intelligence.
Through this office, staff with expertise in fraud detection and investigation can provide a heightened review of potentially serious frauds.
FINRA believes that investor education is a critical component of investor protection.
Over the last decade, we have worked hard to develop a strong investor education outreach program.
- produce alerts, interactive tools and educational content to help investors make wise financial decisions.
- BrokerCheck tool, for example, provides investors with a quick way to check a broker's disciplinary and professional background.
Encouraging people to take this simple step before doing business—or continuing to do business—with a broker is part of our greater commitment to protecting investors.
- offer information and tools to help investors stay on top of what's happening in the markets.
- Market Data Center, investors can find information and data on equities, options, bonds, mutual funds and more.
- Trade Reporting and Compliance Engine (TRACE) system helps investors better monitor their bond investments by providing them with timely and accurate pricing information for corporate and agency bonds.
In addition to FINRA's work to educate the general public, the FINRA
Investor Education Foundation—the largest foundation in the United States dedicated to investor education—also plays a key role in serving the unique financial education needs of certain under-served populations, such as military service members and older investors.
These efforts are just part of what they do each day to support our important mission of protecting investors.
Get to know FINRA:
FINRA is the Financial Industry Regulatory Authority.
We’re an independent, not-for-profit organization
with a public mission: to protect America’s investors
by making sure the securities industry operates fairly
and honestly.
We do that by writing and enforcing rules
governing the activities of nearly 4,400 securities firms
with approximately 630,000 brokers. By examining
firms for compliance with those rules. By fostering
market transparency. And by educating investors.
Our independent regulation plays a critical role
in America’s financial system—by enforcing high
ethical standards, bringing the necessary resources
and expertise to regulation and enhancing investor
safeguards and market integrity—all at no cost to
taxpayers.
FINRA continues that tradition today with a
commitment to protect investors through strong
enforcement and effective investor education. Because
in an often unpredictable marketplace, investors need
to know someone is looking out for them.
Contents
who we serve 1
what we do 2
why our role matters 4
how we make a difference 6
where you can find us 8
https://www.finra.org/web/groups/corporate/@corp/@about/documents/corporate/p118667.pdf
Source:
FINRA - Home Page
https://www.finra.org/
Graham and Dodd quotes
Graham and Dodd quotes
From Security Analysis, 1940 edition.
“If the analyst is convinced that a stock is worth more than he pays for it, and if he is reasonably optimistic as to the company’s future, he would regard the issue as a suitable component of a group investment in common stocks. This attack on the problem lends itself to two possible techniques. One is to buy at times when the general market is low, measured by quantitative standards of value. Presumably the purchases would then be confined to representative and fairly active issues. The other technique would be employed to discover undervalued individual common stocks, which presumably are available even when the general market is not particularly low. In either case the “margin of safety” resides in the discount at which the stock is selling below its minimum intrinsic value, as measured by the analyst. But with respect to the hazards and the psychological factors involved, the two approaches differ considerably.”
…..
“We incline strongly to the belief that this last criterion—a price far less than value to a private owner—will constitute a sound touchstone for the discovery of true investment opportunities in common stocks. This view runs counter to the convictions and practice of most people seeking to invest in equities, including practically all the investment trusts. Their emphasis is mainly on long-term growth, prospects for the next year, or the indicated trend of the stock market itself. Undoubtedly any of these three viewpoints may be followed successfully by those especially well equipped by experience and native ability to exploit them. But we are not so sure that any of these approaches can be developed into a system or technique that can be confidently followed by everyone of sound intelligence who has studied it with care. Hence we must raise our solitary voice against the use of the term investment to characterize these methods of operating in common stocks, however profitable they may be to the truly skillful. Trading in the market, forecasting next year’s results for various businesses, selecting the best media for long-term expansion—all these have a useful place in Wall Street. But we think that the interests of investors and of Wall Street as an institution would be better served if operations based primarily on these factors were called by some other name than investment.”
Source:
Value Investing World: Graham and Dodd quotes
Thursday, January 10, 2013
Opinion, at best, drives buy and sell decisions.
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute."
- William Feather
The Essential Rules for Beating the Market
There are sure to be a lot of ‘what-ifs’ and recriminations once the current market and economic turmoil level out. Investors—many who have seen more than 50% of their 401(k) savings fly out the window—will be asking their financial advisors some tough questions.
And who can blame them? After years of working and scrimping and following one ‘surefire’ investment plan after another, trying to latch onto the one that will assure a golden retirement, many investors are left absolutely stunned at the carnage of the last few months. Once the calm after the storm arrives, they will be wondering how they can restore their savings, and for that, they will need a solid plan.
Don’t worry—I’m sure that—right now—book publishers are being inundated with a host of new manuscripts that will be ready to fly off the shelves as soon as it appears the market has bottomed.
But I caution you to be choosy. This market crisis is the perfect time to reassess your financial goals and strategies. And to realize a couple of market truths: 1) There is no certain system guaranteed to make money in stocks all the time, and 2) If it sounds too easy—as well as too good to be true—it probably is.
That’s why I was happy to see Mike Turner’s latest book cross my desk. I’ve followed Turner’s work for several years now, have interviewed him a time or two, and know that he is a disciplined investor and money manager, who doesn’t hawk ‘foolproof’ systems to conquer the market.
His approach to investing doesn’t require an expensive software program that tells you when to buy and sell based on some internal calculation that would be impossible for most of us to understand. Nor does it require hours of study and elbow grease. However, it is not without effort.
Turner’s strategy is simply a combination of fundamental and technical analysis, with the fundamental portion telling you ‘what’ to buy and the technical work giving you a ‘when’ to buy or sell indicator. And he employs both schools of analysis to meet his goal: “Making consistent profits in the stock market by using a well-defined set of trading rules and discipline to follow them in good, bad, up, down or flat markets”. Now, I can’t vouch for his returns, but his strategy makes sense.
As primarily a fundamentalist, I can use ratios to find the best-run companies in the world. But if the technicals don’t indicate the time is right to buy a particular stock, I may be holding onto the shares of a wonderful company whose stock is going nowhere fast.
In his book, Turner takes a comprehensive approach to selecting and explaining what he calls his ‘demand’ fundamentals, including certain revenue, earnings and dividend ratios. He then moves onto the technical charts that are key to his strategy.
He spends several chapters discussing how to refine your investment decisions by setting stop losses and how to use insider buying and institutional holding criteria to siphon off the best potential stocks from the crowd.
One of the mistakes that investors often make is inadequately diversifying their portfolios, and Turner goes into great detail to illustrate just how diversification—as well as its sidekick, asset allocation—looks in a properly-structured portfolio.
The conclusion of the book focuses on using technical patterns to time the purchases and sales of your stocks, and includes Turner’s five favorite timing charts.
As a former civil engineer and owner of a software company, it stands to reason that Turner’s approach to investing would rely heavily on the numbers. And it does.
On the plus side, the majority of his 10 steps are fairly easy to implement, using an Excel spreadsheet to score all the indicators to determine which stocks to buy and when. It seems to make a lot of sense, but I fear the mechanics of the process may be just a little too much work for many investors who are easily daunted by spreadsheets and mathematics.
However, even if you never intend to follow the spreadsheet strategy as it is laid out, the book offers keen insight into the very fundamental and technical indicators that are of significant importance in determining the fate of a stock. And in my book, anything that helps us understand the workings of the market will come in very handy as we ready our minds, emotions, and pocketbooks to embark upon a new cycle that may be very different than any we’ve seen before.
Source:
10: The Essential Rules for Beating the Market - MoneyShow.com
http://www.moneyshow.com/investing/article/12/BOM-II-08-15572/10:-The-Essential-Rules-for-Beating-the-Market/
Wednesday, January 9, 2013
Why Wall Street Alwaays Wins
The great
mystery story in American politics these days is why, over the course
of two presidential administrations (one from each party), there’s been
no serious federal criminal investigation of Wall Street during a
period of what appears to be epic corruption.
One of those rare inside accounts about Why the Government Won't Fight Wall Street:
"The Payoff: Why Wall Street Always Wins", a new book by Jeff Connaughton, the former aide to Senators Ted Kaufman and Joe Biden.
He shared this quality with his boss Kaufman, the Delaware Senator who took over Biden's seat and instantly became an irritating (to Wall Street) political force by announcing he wasn’t going to run for re-election.
"I later learned from reporters that Wall Street was frustrated that they couldn’t find a way to harness Ted or pull in his reins," Jeff writes. "There was no obvious way to pressure Ted because he wasn’t running for re-election."
Kaufman for some time was a go-to guy in the Senate for reform activists and reporters who wanted to find out what was really going on with corruption issues.
He was a leader in a number of areas, attempting to push through (often simple) fixes to issues like high-frequency trading (his advocacy here looked prescient after the "flash crash" of 2010), naked short-selling, and, perhaps most importantly, the Too-Big-To-Fail issue.
What’s fascinating about Connaughton’s book is that we now get to hear a behind-the-scenes account of who exactly was knocking down simple reform ideas, how they were knocked down, and in some cases we even find out why good ideas were rejected, although some element of mystery certainly remains here.
There are some damning revelations in this book, and overall it’s not a flattering portrait of key Obama administration officials like SEC enforcement chief Robert Khuzami, Department of Justice honchos Eric Holder (who once worked at the same law firm, Covington and Burling, as Connaughton) and Lanny Breuer, and Treasury Secretary Tim Geithner.
Most damningly, Connaughton writes about something he calls "The Blob," a kind of catchall term describing an oozy pile of Hill insiders who are all incestuously interconnected, sometimes by financial or political ties, sometimes by marriage, sometimes by all three.
And what Connaughton and Kaufman found is that taking on Wall Street even with the aim of imposing simple, logical fixes often inspired immediate hostile responses from The Blob; you’d never know where it was coming from.
In one amazing example described in the book, Kaufman decided he wanted to try to re-instate the so-called "uptick rule," which had existed for seventy years before being rescinded by the SEC in 2007.
The rule prevents investors from shorting a stock until the stock had ticked up in price. "Forcing short sellers to wait for the price to tick up before they sell more shares gives a breather to a stock in decline and helps prevent bear raids," Connaughton writes.
The uptick rule is controversial on Wall Street – I’ve had some people literally scream at me that it doesn’t do anything, while others have told me that it does help prevent bear attacks of the sort that appeared to help finally topple already-mortally-wounded companies like Bear Stearns and Lehman Brothers – but what’s inarguable is that Wall Street hates the rule.
Hedge fund types or employees of really any company that engages in short-selling will tend to be most venomous in their opinions of the uptick rule.
Anyway, Connaughton and Kaufman were under the impression that new SEC chief Mary Schapiro would re-instate the uptick rule after taking office.
When she didn’t, Kaufman wrote her a letter, asking her to take action. When that didn't do the trick, he co-sponsored (with Republican Johnny Isakson) a bill that would have required the SEC to take action.
Nothing happened, and months later, Kaufman gave a grumbling interview to Politico about the issue. One June 30, the paper’s headline read: "Ted Kaufman to SEC; Do Your Job."
The next day, the Blob bit back. Connaughton was in the basement of the Russell building when a Senate staffer whose wife worked for Shapiro shouted at him. From the book:
Similarly, when Kaufman tried to advocate for rules that would have prevented naked short-selling, Connaughton was warned by a lobbyist that it would be "bad for my career" if he went after the issue and that "Ted and I looked like deranged conspiracy theorists" for asking if naked short-selling had played a role in the final collapse of Lehman Brothers.
Naked short-selling is another controversial practice. Essentially, when you short a stock, you're supposed to locate shares of that stock before you go out and sell it short.
But what hedge funds and banks have discovered is that the rules provide "leeway" – you can go out and sell shares in a stock without actually having it, provided you have a "reasonable belief" that you can locate the shares.
This leads to the obvious possibility of companies creating false supply in a stock by selling shares they don't have.
Without getting too much into the weeds here, there is an obvious solution to the problem, which essentially would be forcing companies to actually locate shares before selling them.
In their attempt to change the system,Kaufman and Connaughton discovered that the Depository Trust Clearing Corporation, the massive quasi-private organization that clears most all stock trades in America, had come up with just such a fix on their own.
Kaufman recruited some other senators to endorse the idea, and as late as 2009, Connaughton and Kaufman were convinced they were going to get the form.
But before the change could be made, Goldman, Sachs issued "data" showing that there was "no correlation" between naked short selling and price movements.
When Connaughton asked an Isakson staffer what the data said, the staffer, intimidated by Goldman, replied, "The data proves we're full of _it."
Connaughton looked at the data and realized instantly that---
it was a bunch of irrelevant gobbledygook,
even firing off an angry letter to Goldman telling them the tactic was beneath even them.
But Goldman’s tactic worked.
A roundtable to discuss the idea was scheduled by the SEC on September 24, 2009.
Of the nine invited participants, "all but one" were for the status quo.
Connaughton expected the DTCC representatives to unveil their reform idea, but they didn’t:
Essentially the same thing happened in Kaufman’s biggest reform attempt, the amendment to the Dodd-Frank bill he co-sponsored with Ohio’s Sherrod Brown, which would have broken up the Too-Big-To-Fail banks.
But the Brown-Kaufman amendment, which was really the meatiest thing in the original Dodd-Frank bill, the one reform that really would have made a difference if it had passed, just died in the suffocating mass of the Blob.
The key Democrats one after another failed to line up behind it, and in the end it was defeated soundly, with Dick Durbin, the number two man in the Democratic leadership, giving it this epitaph: "a bridge too far."
Again, those interested in understanding the mindset of the people who should be leading the anti-corruption charge ought to read this book.
It's the weird lack of concern that shines through, like Khuzami’s comment that he’s "not losing sleep" over judges reprimanding his soft-touch settlements with banks, or then Southern District of New York U.S. Attorney Ray Lohier’s comment that the thing that most concerned him –was "cyber crime."
this is the period of 2008-2009,in the middle of an
On the outside we can only deduce the mindset from actions and non-actions...
Read more: http://www.rollingstone.com/politics/blogs/taibblog/a-rare-look-at-why-the-government-wont-fight-wall-street-20120918#ixzz27YfQPUZa
Source:
A Rare Look at Why the Government Won't Fight Wall Street | Matt Taibbi | Rolling Stone
http://www.rollingstone.com/politics/blogs/taibblog/a-rare-look-at-why-the-government-wont-fight-wall-street-20120918#ixzz27YfQPUZa
One of those rare inside accounts about Why the Government Won't Fight Wall Street:
"The Payoff: Why Wall Street Always Wins", a new book by Jeff Connaughton, the former aide to Senators Ted Kaufman and Joe Biden.
He shared this quality with his boss Kaufman, the Delaware Senator who took over Biden's seat and instantly became an irritating (to Wall Street) political force by announcing he wasn’t going to run for re-election.
"I later learned from reporters that Wall Street was frustrated that they couldn’t find a way to harness Ted or pull in his reins," Jeff writes. "There was no obvious way to pressure Ted because he wasn’t running for re-election."
Kaufman for some time was a go-to guy in the Senate for reform activists and reporters who wanted to find out what was really going on with corruption issues.
He was a leader in a number of areas, attempting to push through (often simple) fixes to issues like high-frequency trading (his advocacy here looked prescient after the "flash crash" of 2010), naked short-selling, and, perhaps most importantly, the Too-Big-To-Fail issue.
What’s fascinating about Connaughton’s book is that we now get to hear a behind-the-scenes account of who exactly was knocking down simple reform ideas, how they were knocked down, and in some cases we even find out why good ideas were rejected, although some element of mystery certainly remains here.
There are some damning revelations in this book, and overall it’s not a flattering portrait of key Obama administration officials like SEC enforcement chief Robert Khuzami, Department of Justice honchos Eric Holder (who once worked at the same law firm, Covington and Burling, as Connaughton) and Lanny Breuer, and Treasury Secretary Tim Geithner.
Most damningly, Connaughton writes about something he calls "The Blob," a kind of catchall term describing an oozy pile of Hill insiders who are all incestuously interconnected, sometimes by financial or political ties, sometimes by marriage, sometimes by all three.
And what Connaughton and Kaufman found is that taking on Wall Street even with the aim of imposing simple, logical fixes often inspired immediate hostile responses from The Blob; you’d never know where it was coming from.
In one amazing example described in the book, Kaufman decided he wanted to try to re-instate the so-called "uptick rule," which had existed for seventy years before being rescinded by the SEC in 2007.
The rule prevents investors from shorting a stock until the stock had ticked up in price. "Forcing short sellers to wait for the price to tick up before they sell more shares gives a breather to a stock in decline and helps prevent bear raids," Connaughton writes.
The uptick rule is controversial on Wall Street – I’ve had some people literally scream at me that it doesn’t do anything, while others have told me that it does help prevent bear attacks of the sort that appeared to help finally topple already-mortally-wounded companies like Bear Stearns and Lehman Brothers – but what’s inarguable is that Wall Street hates the rule.
Hedge fund types or employees of really any company that engages in short-selling will tend to be most venomous in their opinions of the uptick rule.
Anyway, Connaughton and Kaufman were under the impression that new SEC chief Mary Schapiro would re-instate the uptick rule after taking office.
When she didn’t, Kaufman wrote her a letter, asking her to take action. When that didn't do the trick, he co-sponsored (with Republican Johnny Isakson) a bill that would have required the SEC to take action.
Nothing happened, and months later, Kaufman gave a grumbling interview to Politico about the issue. One June 30, the paper’s headline read: "Ted Kaufman to SEC; Do Your Job."
The next day, the Blob bit back. Connaughton was in the basement of the Russell building when a Senate staffer whose wife worked for Shapiro shouted at him. From the book:
"Hey, Jeff, you’re in the doghouse." He meant: with his wife's boss -SEC chief Mary Schapiro.
"Why?" I asked.
"That Politico piece by your boss."
I was taken aback but tried to downplay the matter.
"We just want the SEC to get its work done."When Connaughton told Kaufman over the phone what the staffer said, Kaufman exploded. "You call him back right now and tell him I said to go fuck himself in his ear," Kaufman said.
"Remember," he said. "We all wear blue jerseys and play for the Blue Team. I just don’t think that helps."
Similarly, when Kaufman tried to advocate for rules that would have prevented naked short-selling, Connaughton was warned by a lobbyist that it would be "bad for my career" if he went after the issue and that "Ted and I looked like deranged conspiracy theorists" for asking if naked short-selling had played a role in the final collapse of Lehman Brothers.
Naked short-selling is another controversial practice. Essentially, when you short a stock, you're supposed to locate shares of that stock before you go out and sell it short.
But what hedge funds and banks have discovered is that the rules provide "leeway" – you can go out and sell shares in a stock without actually having it, provided you have a "reasonable belief" that you can locate the shares.
This leads to the obvious possibility of companies creating false supply in a stock by selling shares they don't have.
Without getting too much into the weeds here, there is an obvious solution to the problem, which essentially would be forcing companies to actually locate shares before selling them.
In their attempt to change the system,Kaufman and Connaughton discovered that the Depository Trust Clearing Corporation, the massive quasi-private organization that clears most all stock trades in America, had come up with just such a fix on their own.
Kaufman recruited some other senators to endorse the idea, and as late as 2009, Connaughton and Kaufman were convinced they were going to get the form.
But before the change could be made, Goldman, Sachs issued "data" showing that there was "no correlation" between naked short selling and price movements.
When Connaughton asked an Isakson staffer what the data said, the staffer, intimidated by Goldman, replied, "The data proves we're full of _it."
Connaughton looked at the data and realized instantly that---
it was a bunch of irrelevant gobbledygook,
even firing off an angry letter to Goldman telling them the tactic was beneath even them.
But Goldman’s tactic worked.
A roundtable to discuss the idea was scheduled by the SEC on September 24, 2009.
Of the nine invited participants, "all but one" were for the status quo.
Connaughton expected the DTCC representatives to unveil their reform idea, but they didn’t:
Afterwards, I went over to [the DTCC representatives] and asked,
"What happened?"
Sheepishly, and to their credit, they admitted:
"We got pulled back." They meant: by their board, by the
Wall Street powers-that-be.
Essentially the same thing happened in Kaufman’s biggest reform attempt, the amendment to the Dodd-Frank bill he co-sponsored with Ohio’s Sherrod Brown, which would have broken up the Too-Big-To-Fail banks.
But the Brown-Kaufman amendment, which was really the meatiest thing in the original Dodd-Frank bill, the one reform that really would have made a difference if it had passed, just died in the suffocating mass of the Blob.
The key Democrats one after another failed to line up behind it, and in the end it was defeated soundly, with Dick Durbin, the number two man in the Democratic leadership, giving it this epitaph: "a bridge too far."
Again, those interested in understanding the mindset of the people who should be leading the anti-corruption charge ought to read this book.
It's the weird lack of concern that shines through, like Khuzami’s comment that he’s "not losing sleep" over judges reprimanding his soft-touch settlements with banks, or then Southern District of New York U.S. Attorney Ray Lohier’s comment that the thing that most concerned him –was "cyber crime."
this is the period of 2008-2009,in the middle of an
historic crime-wave on Wall Street.
On the outside we can only deduce the mindset from actions and non-actions...
Read more: http://www.rollingstone.com/politics/blogs/taibblog/a-rare-look-at-why-the-government-wont-fight-wall-street-20120918#ixzz27YfQPUZa
Source:
A Rare Look at Why the Government Won't Fight Wall Street | Matt Taibbi | Rolling Stone
http://www.rollingstone.com/politics/blogs/taibblog/a-rare-look-at-why-the-government-wont-fight-wall-street-20120918#ixzz27YfQPUZa
Facebook Is Worth $15 - Barrons.com
Today:
Facebook Inc
NASDAQ: FB - 9 Jan 7:59pm ET
30.59+1.53 (5.26%)
The original article contained this sentence about a potential flood of shares not for sale for a year... should new buyers keep September 24, 2013 in mind when making any share purchases in this company????
"Zuckerberg's recent decision not to sell any of his 504 million shares for at
"Zuckerberg's recent decision not to sell any of his 504 million shares for at
OLD ARTICLE:
MONDAY, SEPTEMBER 24, 2012
Still Too Pricey
Facebook's 40% plunge from its initial-public-offering price of $38 in May has millions of investors asking a single question: Is the stock a buy? The short answer is "No." After a recent rally, to $23 from a low of $17.55, the stock trades at high multiples of both sales and earnings, even as uncertainty about the outlook for its business grows.
The rapid shift in Facebook's user base to mobile platforms—more than half of users now access the site on smartphones and tablets—appears to have caught the company by surprise. Facebook (ticker: FB) founder and CEO Mark Zuckerberg must find a way to monetize its mobile traffic because usage on traditional PCs, where the company makes virtually all of its money, is declining in its large and established markets. That trend isn't likely to change.
Success in mobile is no sure thing. The small screens on these devices don't give Facebook much room to configure ads without alienating users. And the way that mobile users access Facebook, through applications on iPhones, iPads, and Android devices, may diminish the time users spend at the Website while handing greater power to Apple (AAPL) and Google (GOOG), which dominate the apps business.
AT ITS CURRENT QUOTE, Facebook trades at 47 times projected 2012 profit of 48 cents a share and 36 times estimated 2013 earnings of 63 cents. Compa
Compare that with Google and Apple, two proven technology growth stories, which both trade for about 16 times estimated 2012 earnings. Facebook is valued at $61 billion, or $53 billion excluding its estimated $8 billion in cash. That's more than 10 times estimated 2012 revenue of $5 billion. Google trades for half that valuation.
Barron's Associate Editor Andrew Bary says to stay away from Facebook's stock, which is headed toward $15. The transition to mobile and a generational shift in users has had an effect on the social network's advertising revenue. (Photo: AP)
What are the shares worth? Perhaps only $15. That would be roughly 24 times projected 2013 profit and six times estimated 2013 revenue of $6 billion, still no bargain price. Wall Street's consensus estimate for 2013 shows earnings rising 31%, to 63 cents a share.
That pro forma number is generous because it ignores Facebook's very significant stock-based compensation. The company has been issuing gobs of restricted stock to engineers and other key employees in the hot Silicon Valley job market to prevent them from being lured away to the next hot tech start-up—the next Facebook.
Facebook issued $1.4 billion of restricted stock in 2011, or nearly $500,000 per employee. So far this year, the company has doled out $1 billion of restricted stock. Facebook's reported stock-based compensation expense—based on the amortization of several years of stock grants—could total 20 cents a share next year. Subtract that from the 2013 consensus earnings number, and the shares trade at 50 times earnings. At $15 they would still be valued at a rich 35 times earnings.
TECHNOLOGY IS THE ONLY MAJOR industry where companies routinely encourage analysts to ignore stock-based compensation expense—and most comply. This dubious approach to calculating profits is based on the idea that only cash expenses matter. That's a fiction, pure and simple. As Warren Buffett has said, companies could take this to the extreme, pay all their expenses in stock and claim to have no costs.
Facebook's restricted-stock grant was so large last year that it may have exceeded its cash compensation costs. CEO Mark Zuckerberg seems to have a cavalier attitude, saying in a recent interview that "the way we do compensation is that we translate the amount of cash that we want to give you into shares" and give more stock to employees as the price declines.
Barron's, it bears noting, never bought into the pre-IPO hype. We published two skeptical stories on Facebook, first when it filed for its IPO in February, and again right before it went public in May ("Mad About Facebook!" May 14).
Our take was that the stock looked very richly priced at $35 to $40 and that investors should consider Apple and Google instead. (Both are up about 25% since then.) "Connect with your friends on Facebook. Stay away from the stock," is how we concluded the article.
THE BULL CASE FOR Facebook is that Zuckerberg & Co. will find creative ways to generate huge revenue from its 955 million monthly active users, be it from mobile and desktop advertising, e-commerce, search, online-game payments, or sources that have yet to emerge. Pay no attention to depressed current earnings, the argument goes. Facebook is just getting started.
Facebook now gets $5 annually in revenue per user. That could easily double or triple in the next five years, bulls say. In a recent interview at the TechCrunch Disrupt conference, Zuckerberg said, "It's easy to underestimate how fundamentally good mobile is for us." His argument, coming after Facebook's brand-damaging IPO fiasco and a halving of the stock, was something only a mother, or a true believer, could love. This year Facebook is expected to get 5% of its revenue from mobile. "Literally six months ago we didn't run a single ad on mobile," Zuckerberg said. Facebook executives declined to speak with Barron's.
"Anyone who owns Facebook should be exceptionally troubled that they're still trying to 'figure out' mobile monetization and had to lay out $1 billion for Instagram because some start-up had figured out mobile pictures better than Facebook," says one institutional investor, referring to Facebook's April deal for two-year-old Instagram, whose smartphone app for mobile photo-sharing became a big hit (and at the time had yet to generate a nickel in revenue).
Facebook's initial profit report in July didn't cheer Wall Street, as second-quarter revenue rose 32% to $1.18 billion while expenses, excluding stock-based compensation, were up 60%. The company projected similarly large expense gains in the final two quarters of the year, as it ramps up infrastructure and other undisclosed spending.
That surprised many investors who figured Facebook's business model was so powerful that it would generate operating leverage, meaning revenue growth would outpace expense growth. The Street now projects that Facebook may not hit $1 a share in profit until 2015. And that doesn't reflect heavy stock-based compensation. And who knows if that $1 a share estimate, which may require a doubling of revenue, is even achievable.
"I don't understand management teams that don't explain how they are going to spend shareholder money," says Michael Pachter, an analyst at Wedbush and a Facebook bull. "Facebook is saying, 'Trust us.' Investors don't need to know about every pencil, but they want to know the strategy." So far, Facebook has said little, and the company lacks the credibility and track record of Google, Apple and Amazon.com (AMZN).
FACEBOOK GENERATES almost 85% of its revenue from advertisements, much of it from ads on the right side of the screen when users visit the site on PCs. Ads are likely to remain its mainstay for some time to come. But in a troubling sign, last week online research firm eMarketer, after cutting its estimate of Facebook's revenue, projected that Google would top Facebook in online display-ad revenue this year.
Facebook conceivably could charge modest subscription fees to its users of, say, $1 a month and generate $5 billion or more of annual revenue, even with significant user attrition, but the company has ruled that out. "It's free and always will be," the Facebook log-in page says.
Facebook's chief operating officer, Sheryl Sandberg, has acknowledged the company's ad "challenge." On the July earnings conference call, she said, "That's mainly because we're a completely new kind of marketing. We're not TV. We're not search. We're a third medium."
It's not easy to measure the effectiveness of this third medium because its ads are often more about brand building than transactional. "Facebook's jumble of activity centers on communications with a roster of friends, a core activity where commercial intervention may be less welcome," writes Paul Sagawa of Sector & Sovereign Research.
As Facebook was trying to win over sometimes skeptical advertisers with desktop ads, its users were moving to mobile devices. Facebook's response has been advertisements that it euphemistically calls "sponsored stories" based on products or services recommended by a user's Facebook friends. Yet these ads, which appear in the user's "news feed"—comments, pictures, and videos from friends—may be alienating users and driving them away from the Website. Some appear again and again, stating that a particular friend "likes" Wal-Mart or Target. A recent lawsuit actually challenges this practice, arguing users ought to be compensated as paid spokesmen or allowed to opt out and not have their names attached to sponsored stories.
"If the mobile ads were well targeted and creative, that would be a good thing, or at least not an annoying thing. But the ads seem untargeted and not very creative," says Rich Greenfield, an analyst at BTIG in New York. "Facebook seems to be proud to have the biggest and most disruptive ads on mobile devices. I struggle with the idea that bigger is better. It's not a great user experience. If consumers are upset with this, it could result in a reverse spiral down."
Greenfield, who now has a Neutral rating on the stock after urging investors to avoid it at the IPO, says Facebook's mobile strategy has him "getting more concerned, not less" about its outlook. He points out that 11% of Facebook users accessed the site only through their mobile devices in June, up from 9% in March. That percentage is likely to grow.
Most of those mobile-only users probably are under 25, and it's within that group that Facebook is seeing reduced usage on PCs. Evercore Partners analyst Ken Sena estimates that domestic PC users spent 12% less time in August on Facebook than they did in the same month a year earlier. His estimate is based on data from comScore, which measures U.S. Internet traffic. Sena's analysis shows that the declines were sharpest among users aged 12 to 17 and 18 to 24, which saw drops of 42% and 25%, respectively. Time spent on Facebook by PC users aged 55 and older was up sharply.
An aging demographic isn't good with a youth-focused ad industry. Will young people continue to be attracted to a social networking site frequented by their mothers and grandmothers? Some of the decline in desktop usage is being offset by mobile access, but it's not easy to assess the combined impact.
Paul Sagawa says Facebook's mobile problems go beyond the small screen size. "The paradigm shift to the app model is unequivocally bad for Facebook," he wrote in a recent report. "Facebook is designed to be open all the time, to be visited in the gaps of the day or as a platform in its own right, bridging to a variety of activities related to the social network."
The app model, he says, disrupts this approach. Users open a mobile app for a reason and close it as soon as they are finished. "Why use Facebook to play a game, read an article, manage your photos, stream music, or shop," he wrote, "when you can select a specialized app directly." Moreover, Apple and Google, which control most mobile operating systems, siphon away some of the revenue from Facebook apps.
The app model may favor more specialized sites like Twitter, Pinterest, Yelp (YELP), LinkedIn (LNKD), and Trulia (TRLA), the real-estate Website that had a hot IPO last week. Facebook, Sagawa says, ought to create more specialized apps, like Instagram by Facebook, Facebook chat, or Facebook messaging tied together by a common user name and password.
IN COMING MONTHS, FACEBOOK'S share price could be depressed by significant sales by holders subject to expiring lock-up restrictions established at the time of the IPO. Already, co-founder Dustin Moskovitz has sold 7.5 million shares, or 5% of his stake, and early investor and director Peter Thiel has sold 20.1 million shares, or 80% of his holding (see table, Major Insider Sales Since IPO).
Some 234 million shares (including options and restricted stock) become available for sale on Oct. 29, followed by another 777 million on Nov. 14. That's a lot relative to the current float of as much as 692 million shares, representing the 421 million sold at the IPO and another 271 million shares on which lock-up restrictions already have expired.
For a total overhang:
The total share count is 2.65 billion.
Zuckerberg's recent decision not to sell any of his 504 million shares for at least a year reduced the potential flood of shares, but his decision shouldn't have been seen as a surprise.
As CEO and controlling shareholder, Zuckerberg would have had a hard time selling any stock without a serious negative market reaction.
Source:
Facebook Is Worth $15 - Barrons.com
Link: http://online.barrons.com/article/SB50001424053111904706204578002652028814658.html#articleTabs_article%3D0
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