Business HOT Business

Lessons To Learn From Madoff and Lehman Brothers Scandals?

noreply@blogger.com (Danari Brothers) — Sun, 04 Oct 2009 13:52:00 +0000

The scandal around the so called investment guru Madoff is the second big case in this year as masses of people have lost their fortune. The first case was the bankruptcy of Lehman Brothers. Many people are lured to invest their money in financial market instruments that promise attractive yields. These instruments are, however, as opaque as black boxes.
Hedge funds as black holes
Hedge funds bet with complex structures of derivatives. Most of them lack the transparency. The common investors do not understand how they work. Institutional investors usually invest in funds of hedge funds. Their managers claim to be capable of picking the promising funds. Funds of funds absorb a cascade of fees that have to be subtracted from the yield.
There is a wide variety of investment styles among the hedge funds. It seems that the general lack of transparency of the hedge funds industry has made it possible that the Madoff Ponzi could remain undetected for such a long time. The Madoff scandal demonstrates also a failure of the SEC as well as of the involved audit firms.
Hedge funds should correlate with other asset classes, e.g. stocks or bonds, according to the theory. The fact is: Hedge funds have badly performed during the actual financial crisis. The global hedge-fund industry lost $64 billion of assets in November 2008 says Bloomberg.
Structured products as another black hole
Masses of people have lost their savings with structured products that have been issued by the bankrupt Lehman Brothers. People who have been badly advised to invest their money in a Lehman Brothers productS. They were persuaded to invest in products that they did not really understand. Structured products are a combination of a traditional investment (e.g. shares, bonds, foreign currency, commodities) and a derivative financial instrument.
There are several types of structured products. The most popular ones are those that promise full or partial protection of the capital. The people trust the word “capital protection” on the label, but they forget the issuer as a risk factor. Lehman Brother was an issuer that went bankrupt and thus was not able to fulfill its obligation.
Keep It Smart and Simple
What is the lesson learned from Lehman Brother bankruptcy and the Madoff scandal? Structured products and hedge funds are complex and difficult to understand. They can behave like black holes and absorb the investors’ fortune. Even professional and institutional investors did or could not look through it in the case of the Madoff scandal.
The best way to protect the money is to invest in assets that are transparent and easily understandable for everybody. People are well off who live in their own flat or house. Residential buildings are the best and safest investment for individuals and institutional investors. Another safe investment class are investments in government bonds. Gold is a volatile asset, but gold performs well during times of crisis and war. Other kinds of investments should be scrutinized cautiously by individuals. The thumb of rule is: high yield – high risk.
Posted by Robin Bal under Investing , MoneyMatters - www.fortunewatch.com

Former boss of Sinopec given death sentence for bribery

noreply@blogger.com (Danari Brothers) — Thu, 16 Jul 2009 01:47:00 +0000

Chen Tonghai, the former boss of the China's state-owned oil refiner, Sinopec Corp., who was sentenced to death for accepting $29,012,087 in bribes, has been granted a reprieve, essentially converting his sentence to life in prison, Times Online reports. The original death sentence was seen as the harshest state action against corruption in recent years, but, according to the court, his demonstration of remorse was sufficient to reduce the penalty: "Chen took an extremely large amount of bribes; severe enough for a death sentence... But as he confessed and repented, provided tips about other people's criminal acts, and returned all the bribes, a reprieve was granted."
The court said the sentence should serve as a warning to other officials tempted to abuse their power and position for profit. An unidentified official said: "The criminal case of Chen Tonghai is one that concerns one of the highest and most powerful people, involving one of the largest sums. The influence of the case is deep, wide and shocking... and should be a profound warning to the leaders of state-owned enterprises."

Senior officials in state firms have many opportunities to ask for bribes in a system that lacks checks and balances and in which money has become the driving force in society.
Widening income gaps, corrupt local administrations and policies that seem to favor the well-connected few over the disadvantaged many are fueling spasms of violence that spring up in cities across China.
In the most recent case, more than 180 people died in ethnic violence that convulsed a Muslim area of western China last week. The spark for the unrest in Xinjiang was a brawl between majority Han Chinese and Muslim Uighur factory workers 1,800 miles away.

Over the past decade, the distribution of wealth has grown increasingly uneven. The U.N. Development Program puts China on a par with Mexico, a jarring change for a society that preached egalitarianism as recently as the 1970s. (www.huffingtonpost.com-chinanewswrap.com-cache.daylife.com)

Humbled GM files for bankruptcy protection

noreply@blogger.com (Danari Brothers) — Tue, 02 Jun 2009 13:34:00 +0000

U.S.-led restructuring largest industrial bankruptcy in U.S. history.

WASHINGTON - General Motors filed for Chapter 11 bankruptcy protection Monday as part of the Obama administration’s plan to shrink the automaker to a sustainable size and give a majority ownership stake to the federal government.
GM’s bankruptcy filing is the fourth-largest in U.S. history and the largest for an industrial company. The company said it has $172.81 billion in debt and $82.29 billion in assets.
“The General Motors board of directors authorized the filing of a Chapter 11 case with regret that this path proved necessary despite the best efforts of so many,” GM Chairman Kent Kresa said in a written statement. “Today marks a new beginning for General Motors. ... The board is confident that this New GM can operate successfully in the intensely competitive U.S. market and around the world.”

As it reorganizes, the fallen icon of American industry will rely on $30 billion of additional financial assistance from the Treasury Department and $9.5 billion from Canada. That’s on top of about $20 billion in taxpayer money GM already has received in the form of low-interest loans.
Late Monday, U.S. bankruptcy court judge Robert Gerber gave interim approval for the Detroit-based automaker’s use of a total of $33.3 billion in bankruptcy financing, with $15 billion available for use over the next three weeks. He will rule on final approval of the financing on June 25. Gerber also approved GM’s sale procedures, setting a sale approval hearing for June 30.
“Our agreement with the U.S. Treasury and the governments of Canada and Ontario will create a leaner, quicker more customer and completely product-focused company, one that’s more cost competitive and has a competitive balance sheet,” CEO Fritz Henderson said at a news conference in New York. “This new GM will be built from the strongest parts of our business, including our best brands and products.”
The Detroit automaker said warranty coverage, service and customer support will continue uninterrupted, plants will continue to make cars and trucks, and essential suppliers and GM’s 235,000 employees worldwide will continue to be paid. GMAC Financial Services said in a statement that it will continues to provide automotive financing to GM and Chrysler dealers and customers, and the federal Pension Benefit Guaranty Corp. said workers’ pension plans remain safe.
GM will follow a similar course taken by smaller rival Chrysler LLC, which filed for Chapter 11 protection April 30. A judge on Sunday gave Chrysler approval to sell most of its assets to Italy’s Fiat, moving the U.S. automaker closer to a quick exit from court protection, possibly this week.
The plan is for the federal government to take a 60 percent ownership stake in the new GM. The Canadian government would take 12.5 percent, with the United Auto Workers getting a 17.5 percent share and unsecured bondholders receiving 10 percent. Existing GM shareholders are expected to be wiped out.
GM shares fell as low as 27 cents in Monday morning trading, their lowest price in the company’s 100-year history, but rebounded to rise 10 cents from Friday’s close to 85 cents in afternoon trading. On June 8, Cisco Systems Inc. will replace GM in the Dow Jones industrial average, which excludes companies that have filed for bankruptcy. Standard & Poor’s also will remove GM from its S&P 500 index Tuesday, with secondary education provider DeVry Inc. taking the automaker’s place.
The government’s partial stake in GM comes on top of a far smaller ownership of Chrysler, as well as significant federal equity in banks, the AIG insurance giant and two mortgage industry titans — all victims of an economic crisis unrivaled since the Great Depression.
But the president said the actions were part of a “viable, achievable plan that will give this iconic company a chance to rise again.”
The president said the government would refrain from playing a management role in all but the most critical areas.
“Our goal is to help GM get back on its feet ... and get out quickly,” he said.
Henderson declined to offer a firm timeline for how long it would take the government to sell its stake in GM, but he indicated it could take some time.
“These are a substantial block of shares,” Henderson said. “This is a question of years, not months.”
GM said it expects the bankruptcy court process to last 60 to 90 days. If successful, GM will emerge as a leaner company with a smaller work force, fewer plants and a trimmed dealership network.

“We’re confident that we will move fast,” Henderson said. “Not with a sense of urgency. We’re talking about pure unadulterated speed.”
GM said Monday that it will permanently close nine more plants and idle three others.
The Pontiac, Mich., and Wilmington, Del., assembly plants will close this year, while plants in Spring Hill, Tenn., and Orion, Mich., will shut down production but remain on standby. One of the idled plants, or GM’s Janesville, Wis., plant that closed in April, will be retooled to build a small car that GM had originally planned to build in China.
Seven powertrain and parts stamping plants will be closed starting in June 2010, while an additional stamping plant will be idled but remain in a standby capacity.
GM will move forward with four core brands — Chevrolet, Cadillac, Buick and GMC — and cut four others. The company plans to cut 21,000 employees, about 34 percent of its work force, and reduce its 6,100 dealers by 2,600. GM said it was finalizing a deal to sell Hummer, and plans for Saturn are expected to be announced within weeks.
The third of the one-time Big Three, Ford Motor Co., has also been stung hard by plunging sales of cars and trucks, but it avoided bankruptcy by mortgaging all of its assets in 2006 to borrow roughly $25 billion, giving it a financial cushion GM and Chrysler lacked.
Ford issued a statement Monday saying it “remains absolutely committed to continuing to make progress on our transformation plan without accessing emergency taxpayer assistance from the U.S. government.”
The bankruptcy filing represents a dramatic downfall for GM, which was founded in 1908 by William C. Durant, who brought several car companies under one roof and developed a strategy of “a car for every purse and purpose.” Longtime leader Alfred P. Sloan built the global automaker into a corporate icon. (www.msnbc.msn.com - img.worldcarfans.com - www.marktalk.com)

Obama, Biden, Hillary and top cabinet members resort to drastic measures to deal with the AIG problem

noreply@blogger.com (Danari Brothers) — Wed, 20 May 2009 00:01:00 +0000

Ballad of Bernie Madoff

noreply@blogger.com (Danari Brothers) — Sun, 29 Mar 2009 23:48:00 +0000

How not be Madoff?

noreply@blogger.com (Danari Brothers) — Thu, 19 Mar 2009 01:04:00 +0000

Bernard Lawrence "Bernie" Madoff (born April 29, 1938, in New York City) is a former American businessman and former chairman of the NASDAQ stock exchange, who operated the largest investor fraud ever committed by a single person. On March 12, 2009, Madoff pled guilty to an 11-count criminal complaint admitting to defrauding thousands of investors through a massive Ponzi scheme. Federal prosecutors estimated client losses, which included fabricated gains, of almost $65 billion. He had been confined to his Manhattan penthouse apartment during the investigation, and was subsequently incarcerated after his guilty plea. There was no plea deal with prosecutors. He faces spending the rest of his life in prison, and up to $170 billion in restitution.

Madoff founded the Wall Street firm Bernard L. Madoff Investment Securities LLC in 1960, and was its chairman until his arrest on December 11, 2008. Over the years, he built up a golden reputation. Investors, including Jewish charities, entrusted him with billions. Madoff's firm was one of the top market maker businesses on Wall Street, (the sixth-largest in 2008), often functioning as a "third-market" provider which bypassed "specialist" firms, directly executed orders over the counter from retail brokers. The firm also had an investment management and advisory division that was the focus of the fraud investigation.

According to the original federal complaint, Madoff claimed his firm had "liabilities of approximately US$50 billion." Prosecutors increased their estimate of the size of the fraud from $50 billion to $64.8 billion, based on the amounts in the accounts of Madoff's 4,800 clients in November 30, 2008. On December 10, 2008, he confessed to his sons that the asset management arm of his firm was a giant Ponzi scheme — as he put it, "one big lie." They then passed this information to authorities. The following day, Federal Bureau of Investigation agents arrested Madoff and charged him with one count of securities fraud. Five days after his arrest, Madoff's assets and those of the firm were frozen, and a receiver was appointed to handle the case. Some investors, journalists, and economists have questioned Madoff's statement that he acted alone without assistance. Law enforcement continues to investigate if others were involved in Madoff's fraud. The SEC conducted several investigations into Madoff's business practices since 1999, which critics contend were incompetently handled.

Madoff was a philanthropist who served on boards of nonprofit institutions, many of which entrusted his firm with their endowments. He is a former National Treasurer of the American Jewish Congress. The collapse and freeze of his personal assets and that of his firm's have had repercussions on businesses, charities and foundations around-the-world, including the Robert I. Lappin Charitable Foundation, the Picower Foundation, and the JEHT Foundation which were forced to close as a consequence.
(wikipedia - www.bittenandbound.com - www.roibal.net - gothamist.com - nymag.com)

Madoff investment scandal

noreply@blogger.com (Danari Brothers) — Thu, 19 Mar 2009 00:56:00 +0000

Concerns about Madoff's business had surfaced as early as 1999, when financial analyst-whistleblower Harry Markopolos informed the SEC that he felt it was legally and mathematically impossible to achieve the gains Madoff claimed to deliver. Others felt it was inconceivable that his growing volume of accounts could be competently serviced by his documented accounting/auditing firm, a three-person firm with only one active accountant.
However, no serious inquiries were made into his business practices until December 2008, when the financial crisis created a rising demand of cash withdrawals. On December 10, Madoff informed his sons that he decided to pay several million dollars in bonuses two months earlier than scheduled.

According to federal investigators, Mark and Andrew demanded to know how their father could pay bonuses if he couldn't afford to pay investors. Madoff then admitted the asset management arm of his firm was an elaborate Ponzi scheme. Through their attorney, Madoff's sons reported their father to federal authorities. On December 11, he was arrested and charged with securities fraud.
On March 12, 2009, Madoff pled guilty to 11 felonies, including securities fraud, wire fraud, mail fraud, money laundering, perjury and making false filings with the SEC. The plea came in response to a criminal complaint filed two days earlier, which stated Madoff had defrauded his clients of almost $65 billion. The complaint spelled out the largest Ponzi scheme in history, as well as the largest investor fraud committed by a single person. Despite the scale of the fraud, Madoff insists that he was solely responsible for the Ponzi scheme. Madoff did not reach a plea bargain with the government, opting instead to simply plead guilty to all charges. It has been reported that he did so because he refused to cooperate and name any accomplices. He faces a maximum sentence of 150 years in prison, plus mandatory restitution of up to twice the gross gain or loss from his crimes. If the government's estimate of $65 billion is correct, Madoff faces a maximum of $170 billion in restitution.
In his pleading allocution, Madoff stated that had begun his Ponzi scheme sometime in the early 1990s. He wanted to continue to satisfy the expectations of high returns promised to his clients, in spite of an economic recession. He admitted that he had never invested any of his clients' money since the inception of his scheme. Instead, he simply deposited the money into his business account at Chase Manhattan Bank. He admitted to false trading activities masked by foreign transfers and false SEC returns. He used the Chase business account to pay clients who requested withdrawals, claiming the "profits" were the result of his own unique "split-strike conversion strategy". He declared that he had every intention of resuming legitimate activities in his asset management division, but it proved "difficult, and ultimately impossible" to catch up to the paper profits. Madoff admitted he knew his day of reckoning was inevitable.
Sister project Wikinews has related news: Madoff prosecutors want assets from wife and children

Madoff had been under 24-hour monitoring and house arrest in his Upper East Side penthouse apartment since December, 2008. However, after accepting Madoff's plea, Judge Denny Chin immediately revoked his $10 million bail and remanded him to the Metropolitan Correctional Center pending sentencing. Chin said that in light of Madoff's age, wealth, and the possibility of spending the rest of his life in prison, Madoff was a substantial flight risk. Madoff's lawyers have appealed Chin's order.
Some involved in the case as well as other unrelated observers have opined that the actual loss to investors could be far less than reported. Former SEC Chairman Harvey Pitt estimated the actual net fraud to be between $10 and $17 billion, because it does not include the fictional returns credited to the Madoff's customer accounts.
In February, 2009, Madoff reached an agreement with the SEC, banning him from the securities industry for life. About 120 class action suits have been filed against him.

The SEC came under fire for not investigating Madoff sooner, despite complaints from Markopolos and others. In testimony before Congress after the scandal broke, Markopolos claimed it was very easy to prove mathematically that Madoff was running a scam. He said it took him five minutes to make an initial assessment of the fraudulent nature of Madoff's purported high investment returns and about four hours to work the detailed math calculations.
(wikipedia - media.kiiitv.com - gothamist.com - www.nypost.com)