Friday, February 20, 2009

Lessons From a Billionaire - Goldsmith's 'The Trap'.

Have you ever read the book 'The Trap' by Sir James Goldsmith? I read it when it first came out and the follow up 'The Response'. The books are a little hazy in my mind so I have ordered both from Amazon and will be scouring through them for prophetic nuggets relevant to our current times.

Goldsmith was as famous for his personal life as well as his business life. His first wife, whom he married when 20, was the Bolivian heiress Maria Isabel Patiño, 18-year-old daughter of tin magnate Antenor Patiño and the Duchess of Durcal, of the Spanish royal family.

When Goldsmith proposed the marriage to Antenor Patiño, Patiño is alleged to have said, "We are not in the habit of marrying Jews to which Goldsmith is reported to have replied, "Well, I am not in the habit of marrying [Red] Indians". This story if true is typical of Goldsmith's humour and his forthright views.

He was also attributed with the quote "When you marry your mistress, you create a job vacancy" although the French actor Sacha Guitry is believed to be the first to coin the phrase.

In business he was characterised as 'The Lucky Gambler' after predicting the 87 crash but his best years, in my opinion were those later in life.

It is easy for billionaires to criticise the very system that allowed them to be so wealthy, but Goldsmith, influenced by his brother Teddy, became an ardent environmentalist before turning his intellect on the problems with free trade and globalisation.

Mocked at the time for being 'old fashioned' and 'blinkered' some of his words now look prophetic and those who dismissed him look... well... pathetic.

On his dislike of the free trade agreements he pointed out that although consumers in the developed world will have access to cheaper imported goods, the real cost to them "will be that they will lose their jobs, get paid less for their work, and have to face higher taxes to cover the social cost of increased unemployment."

Does that ring any bells with anyone?

This 'transfer of wealth' was highlighted by a report of the US-based National Intelligence Council 2025 Project, published in December 2008, which foresees “the unprecedented transfer of wealth roughly from West to East:”

The whole international system, the report says, “as constructed following WWII – will be revolutionized,” according to the council. “Not only will new players – Brazil, Russia, India and China (BRICs) – have a seat at the international high table, they will bring new stakes and rules of the game.”

India and China have crossed the US$1 trillion-plus gross domestic product, the latter far exceeding the former. Indian GDP grew at 9.2 percent, close to double digits, during 2007 according to the IMF. China did even better at 11.4%. They lend money to the US government.

Both achieved all this with export-led growth, not by catering to their own population. India achieved high growth by exporting service sector products like IT and IT enabled services. China exported small-scale and large-scale industrial products – steel, garments, toys, milk products, electronic products, etc.

We all know why these economies were able to increase the wealth of their countries and experience it personally when we are routed to an Indian call center after calling our local bank.

As Goldsmith said in the second section of the book;

"The New Utopia GATT and Global Free Trade' is a powerful attack on... ..liberal/capitalist dogmas.

Goldsmith pointedly states "...forty-seven Vietnamese or forty-seven Filipinos can be employed for the cost of one person in a developed country like France".

"The adoption of global free trade would therefore be utterly disastrous for the middle- and working-classes of the West, as the transnational corporations simply move their production operations offshore. But the poor of the less-developed world would not benefit much, either.."

" of the characteristics of developing countries is that a small handful of people controls the overwhelming majority of the nation's resources. It is these people ... who assemble the cheap labour which is used to manufacture products for the developed world. Thus, it is the poor in the rich countries who will subsidize the rich in the poor countries".

Goldsmith's assertion of the 'transfer of wealth' is one which economists brush off. They tell us that the increased productivity of nations whose companies are taking advantage of the lower wages paid to emerging countries workforces increases the standard of living of people in that nation.

I must admit, over the last 10 years I have watched as all of Goldsmith’s assertions on free trade were swepped aside by increasing stock market, low unemployment and affordable quality goods. Unfortunately, we find out now, with the benefit of hindsight, that our economies were not enriched by free trade per se, but by the debt to fund it.

The best example of Goldsmith's views was the oil spike. Newspapers were happily quoting Bonne Pickens and his mantra of the US 'exporting' $750 billion a year from the purchase of oil. It is nothing new, of course, but it the easiest way of explaining the tramsport of cash from West to East.

I will say that I do not profess to be an economist, merely and observer of the current crisis. Goldsmith was not a learned scholar, nor a modern day Nostradamus, but a practiced businessman who made billions and therefore had certain, some would say skewed, views of the world. But the points that Goldsmith made, which at the time seemed backward looking, have come to haunt us as we look at the current crisis and should not be dismissed a the musings of a rich socialite.

It is said that a wise man profits by the experience of others, a man with common sense profits by his own experience, and a fool profits by neither.

Many in our industry are looking like fools right now and we must look to those who have criticised our system in the past to see how we can mend it for the future.

Wednesday, February 18, 2009

Open Letter From The Banking Establishment To The Taxpayer

The Naked Capitalism Blog posted a very funny article entitled 'An Open Letter To The Western Banking Establishment' (click the link to read it first).

It started:

Dear Western banking establishment,

I notice that your unauthorised credit facility from international lenders of last resort now totals approximately $10 trillion. As a taxpayer and therefore your largest shareholder I would be grateful if you could repay this facility at your earliest convenience. I have charged you an additional £30 for this letter and a monthly unauthorised overdraft fee of £28. If you do not repay this facility shortly I will have no choice but to become further massively impoverished along with legions of fellow taxpayers for multiple generations to come.....

No doubt this would be a response:

Worlwide Taxpayer

Re: Unauthorised overdraft facility

Thank you very much for your letter concerning our overdraft facility. We appreciate that it has gone over the allowed limit but we had to get bonuses paid to our top executives and star traders before any interference by governmental authorities.

This sorted, we can now assure you that we are working diligently to repay the debt owed and we would very much like to tell you how your funds are being put to use.

1. We have spent some of the money on consultants, and some other very clever people, to analyse our previous business plan to see if they can suggest any changes.

Unfortunately, as it turns out, lending money to people was, ultimately, a flawed plan and cost us lots of money so, in the spirit of improving cash flow and the ability to secure payment of our overdraft, we have suspended all lending.

It may be that this could complicate the financial system further, but we are very keen to make sure that we do not lose anymore money; bonus time is only 8 months away.

2. You will be happy to know that we have come down very hard on expenses. We have halved spending on water by limiting our offices to one water machine per floor instead of the two we had in our heyday. We are aware this is a sacrifice but I can tell you that all in our firm fully support it.

I personally now clean my own shoes having let my company paid valet go. He shall be missed, but we all have to pull together.

Our executives have also made many personal changes to their daily routine. The executive dining room, for example, is now only open between 12 and 6pm and we have all decided to eat our stakes rare to save on cooking bills. (Jenkins in compliance has gone the extra mile and only eats steak tartar, would you believe! He is such a team player.)

3. Reference your comments on strategists and economists, we have to agree, publishing unsolicited comments in the financial press is not helpful. We have canvassed all of our economists and have found that, although many have experience of brothels through Brother Spitzer, none play the piano.

We have set up a company wide working group with outside lawyers and consultants to assess the viability of having them all learn to tickle the ivories. Thank you very much for your input in this process.

4. Your views on there being 'no real need to have 18 different banks' on your high street is a radical idea which we feel deserves further investigations. Following your suggestion we have set up a company wide working group with outside lawyers and consultants to assess the viability of this impressive, if unorthodox idea.

5. The 'monstrous pile of credit' issue is one where we may have to disagree. The simple fact is, we are a bank, we do lots of complicated banking type things which I won't bore you with, and as a bank we pay our people big bonuses, without the 'monstrous funds' given to us, how would we pay these bonuses?

I think you have underestimated the affect on the wider economy if such bonuses are not paid. What, for example, would happen to Porsche, Lamborghini, Bentley, Aston Martin etc? Surely you are not suggesting in such bad times for the auto industry that you would cut off the very clients these poor companies depend upon.

Think of Crystal, Spargo's, the Ivy in London, Harrods, Moet & Chandon, Versace to name just a few. To underfund the banking industry could, I am afraid to say, cause these companies fatal financial hardship.

Also what would happen to the property market in areas like Seventh Arrondissement in Paris, TriBeCa in New York and London's Kensington Palace Gardens? Homes in these areas go for several million dollars, without the banking community to pick up these properties we could see a meltdown in the neighborhood with management consultants moving in all over the place. I mean would you want one living next to you?

6. I thank you for your quotes from Garet Garrett but I found it hard to understand what it meant. I mean 'panacea for debt is credit' who really knows what that means and it is relevant now that we don't lend? I think not.

7. The news on the UK government encouraging lending to buy homes is, quite frankly, a shock to myself and my colleagues. Suggesting the purchase of an asset that is falling at a rate of 17% per annum is outrageous and you are right to bring it to our attention. We have several securitised mortgage obligations that these people could be buying that have already fallen by far bigger amounts than that.

8. Your suggested slogan for our investment management departments is “When it comes to moral hazard, we’re Number One. We helped trigger the biggest financial and economic collapse in history through our imprudent lending and investment. Between 18 million and 30 million jobs throughout the world are almost certain to be lost. And more than 50 million jobs throughout the world are now in jeopardy. As a result of our investment expertise, we’ve lost billions, and those of us that still exist and aren’t owned by the taxpayer are technically insolvent. Now, how can we help you with your finances?”

This is genius. Honesty, integrity and some scary numbers, simply brilliant! We have set up a company wide working group with outside lawyers and consultants to assess the viability of putting this to jingly music, sung by a baby. We will then post this on YouTube and feel sure it will go viral.

I must say, when your letter arrived at my mansion I was a little worried that it was another gift from Bernie Madoff or even a letter from some awful riff raff saying cruel things about us. Your letter, however, was constructive and thoughtful.

I enclose a company check for £58 to cover your expenses and hope to be able to report how we are getting on with the repayment of our debt soon. As you will see, we are committed to making it work this time and you can rest assured your money is in good hands.

Charles Richard Oliver Olsen-Klarke
Merchant Banker

Regulators Catch Alleged Fraudster (Even a Blind Squirrel Gets The Ocassional Nut)

I am thinking of changing the name of this blog to 'Bang Up The Banker'. Back in 2007 (you remember the good old days, don't you?) we could write articles on the latest deals, stellar performing hedge funds, interesting IPO's etc. Now it seems that the only thing worth talking about is the latest implosion and subsequent arrest of some 'banker' somewhere.

Ever heard the saying 'Eventually even a blind squirel will find nuts in the forest' well today's edition of 'Bang Up The Banker' focuses on the SEC who have 'caught' an alleged dodgy banker , Sir Allen Stanford, who has been accused of a fraud of 'shocking magnitude'.

Stanford's companies include Antiguan-based Stanford International Bank (SIB), Houston-based broker-dealer and investment adviser Stanford Group Company (SGC), and investment adviser Stanford Capital Management. The SEC also charged SIB chief financial officer James Davis as well as Laura Pendergest-Holt, chief investment officer of Stanford Financial Group (SFG), in the enforcement action.

The SEC, reeling from a caning in Washington, 'seized' the opportunity (15 years after the alleged fraud began) to arrest the companies executives and freeze all their assets.

"As we allege in our complaint, Stanford and the close circle of family and friends with whom he runs his businesses perpetrated a massive fraud based on false promises and fabricated historical return data to prey on investors," said Linda Chatman Thomsen, Director of the SEC's Division of Enforcement. "We are moving quickly and decisively in this enforcement action to stop this fraudulent conduct and preserve assets for investors."

Apparently the scheme centered on the defendants misrepresenting to CD (Certificates Of Deposit) purchasers that their deposits are safe, falsely claiming that the bank re-invests client funds into 'liquid; investments. A team of 20 analysts was said to monitor the portfolio and was subject to audits by Antiguan regulators.

It also turns out that this multi-billion dollar portfolio is managed by Stanford; Stanford's father who resides in Mexia, Texas; another Mexia resident with business experience in cattle ranching and car sales; Pendergest-Holt, who prior to joining SFG had no financial services or securities industry experience; and Davis, who was Stanford's college roommate.

The words 'flag' and 'red' come to mind.

The SEC's complaint also alleges an additional scheme relating to $1.2 billion in sales by SGC advisers of a proprietary mutual fund wrap program, called Stanford Allocation Strategy (SAS), by using materially false historical performance data. According to the complaint, the false data helped SGC grow the SAS program from less than $10 million in 2004 to more than $1 billion, generating fees for SGC (and ultimately Stanford) of approximately $25 million in 2007 and 2008. The fraudulent SAS performance was used to recruit registered investment advisers with significant books of business, who were then heavily incentivized to reallocate their clients' assets to SIB's CD program.

I find this all a bit depressing for a number of reasons, however the one that is gnawing at me today is the realisation that for years I have been playing cards with others dealing from a crooked deck.

How, in the financial industry, are you supposed to believe that you can build a legitimate business when you are competing against the likes Madoff, Freeman and Stanford?

The banks haven't covered themselves in glory either. For years they have been making bogus profits, plowing these into advertising, sponsorship and manpower so much so that smaller companies just cannot compete.

You maybe sitting there in your guilded office at an investment bank (if there are any left) or a massive fund chortling at my naiveté but I wouldn't get too comfortable.

It is my opinion that the regulatory agencies and governments were very keen on large institutions, mammoth operations that could be relied upon to have massive compliance departments looking after Joe public. This would make the regulators job easier n'est pas? Then all you have to do is make it harder and harder (enter MiFid etc) for smaller companies to compete against their buddies in the banks and, Bob's your uncle, you have a utopian financial system.

Only problem is, it didn't work, did it.

Moving forward I believe that the big banks and huge financial institutions should be broken up... what is the point of their existence? We have already seen that they couldn't manage a piss up in a brewery. The only thing the masses relied upon them for was to be good shepherds of their money, and they couldn't even do that. If governments had not stepped in millions would have lost money and I fear we would have entered the dark ages.

Even now, anyone with any sense knows that most of these institutions are broken. Replacing the CEO is like moving deckchairs on the Titanic.

What is needed is a complete overhaul. Put someone in charge of the regulatory authority that is not some pussy who never got picked for the football team when he was kid and was not a Fag at public school for half the boards of the banks and institutions. Get someone in there with some gumption, for God's sake.

Did you see them getting grilled on The Hill? Seriously, would you want them to be fighting on your side? They were, frankly, pathetic. I know we hear of these top guys 'tough' reputation, but do you believe that? I certainly don't, they looked like a bunch of bean counters who worked their way up in a cushy admin job waiting for a call from a bank to employ them for millions.

I rabbit on, and I am just getting angry.... Here are my thoughts..feel free to comment..

1. Break up the banks into smaller operations

2. Ban banking mergers

3. Have a company select its mode of business and do not allow it to have any other operations. You sell stock, you trade stock, you advise on mergers, acquisitions etc, you manage a fund, you give financial advice, you take deposits and make loans (you get the picture).... pick one... and that is your lot. Want to do any other business... forget it.

4. Break up the regulators into specialist authorities (just like it was in the UK) Specialist regulator for fund managers, financial advisors, stockbrokers, banks etc. This will provide more concentrated focused regulation

5. Prosecute some regulators for their failings in Madoff, Stanford and Freeman. The authorities banged up some bankers, to teach the market a lesson, why not the people who were asleep at the wheel, would focus the minds of those to come would it not?

I have heard others like incentivising regulators etc, but shouldn't they be doing their job anyway?

Bottom line is that there needs to be a shake up, we have to admit that some have screwed it up for us all and now I want my bail out. I don't want money, I just want a level playing field.

Tuesday, February 17, 2009

Gary Ackerman Beats Up The Regulators.. Go Gary!

I have repeatedly talked about politicians being... well... useless. I do, however, have a new respect for Gary Ackerman. He kills the regulators over the Madoff thing. I have to say he was absolutely right here, and kicked ass. It really was a cock-up of mammoth proportions and the regulators deserve this beating and more. Don't see any remorse here do you? Wasters....

Investors Forced To Give Madoff 'Profits' Back?

Imagine this scenario; You are an honest fund manager who has returned pretty good profits to your investors and you are just beginning to think that you might scrape through the credit crunch with a fund, happy clients and a future. Then you get a letter from lawyers saying that one of the investments you made, and then withdrew from, wants the profits back.

Nightmare right?

Looks like this is what is befalling a number of investment managers and charities in the Bernie Madoff case.

The bottom line is that investors who withdrew funds in the last 4 years may be sued for those profits, and perhaps, some principal. The problem for the bankruptcy trustee, Irbing Picard, is that those who have to pay back withrawn funds will then have a claim for losses from the scandal. These claims have to be submitted before July 2nd, only issue is that the trustee hasn’t told investors how clawback claims would be handled.

This means that people who withdrew money before the firm imploded may be compelled to file documents before the July 2 deadline to preserve their claim. If they do, they may lose the right to a jury trial if Picard sues seeking return of the money.

Confused? Me too.

Picard said Feb. 4 he has recovered about $946.4 million in cash and securities for customers of the bankrupt New York company, allegedly at the center of a $50 billion Ponzi scheme. Picard, appointed as part of the Securities Investor Protection Corp.’s supervision of the advisory firm, declined to comment when asked by reporters.

Bernard Madoff was arrested by FBI agents in December and charged with securities fraud. Madoff, 70, hasn’t formally responded to the criminal charge, though on Feb. 9 he partially settled a parallel suit by the U.S. Securities and Exchange Commission. He said he wouldn’t challenge the SEC allegations when the judge in that case determines the penalty. Madoff didn’t admit or deny any wrongdoing in the settlement.

Creditors of his firm may file claims until July 2, though customers should submit their forms before March 4 to be paid “out of customer property,” according to Picard’s Web site.

Any way you look at it, the only certainties will be time, litigation -- and pain. "It's hard to have a rule of thumb on this," says Robb Evans of Robb Evans & Associates. Evans was the receiver -- the person appointed by authorities to oversee the company while it's in government control -- for the Bank of Credit and Commerce International after it collapsed in a multibillion-dollar fraud and has also served as receiver in dozens of Ponzi schemes. "But the longer the Ponzi scheme has run, the less money is going to be available. Because the only way a long-running Ponzi scheme can keep going is by paying off early investors."

As Evans puts it, "The sad part of it is that it usually works out that your primary source of recovery is innocent people who put in their money early and got their money out -- and are asked to return it."

This is the legal notion known as "fraudulent conveyance," and it's a concept whose interpretation has recently gotten much more onerous for investors.

The basic notion is ancient, says Philip Bentley of New York-based law firm Kramer, Levin, Naftalis & Frankel. "It's an old concept going all the way back to back to Elizabethan times," he says. "The first case involved a man who transferred all his sheep to his wife to keep them out of the hands of people who were suing him. Nowadays, the classic case of a fraudulent transfer is a man who is being sued who transfers his house or his investment assets to his wife."

According to Bentley, it is long-settled law that some investors might have to give back some or all of their investment gains. But what has changed as a result of a federal court ruling in 2007 -- stemming from the faked results and misappropriation by the now-convicted managers of the $450 million Bayou hedge funds -- is that some investors might have to return some of their principal, too.

In the abstract, there's some logic here. Here's how Bentley, who represented 70 clients who had invested in, and then exited, the Bayou fund before its collapse, explains it: "The court ruled that because there was clearly a fraud going on at Bayou, and because arguably the redemption payment to investors furthered the fraud by fostering the illusion of profitability, the investors who took out their money were liable if they knew of the fraud or if they should've known of the fraud."

As Bentley puts it, "the first part -- having to give money back if they knew of the fraud -- is uncontroversial. Because if they were in on the fraud or had inside information, not many people would quarrel with the view that they should give money back. But what's problematic about the Bayou decision is holding them liable if they should've known; in other words, if they saw enough red flags that they should've investigated further."

"There's going to be a very big policy issue at stake," Bentley argues. "You're penalizing the investors who were savvy enough to see the warning signs that others overlooked... And the question is, especially in today's world, when you've got a financial crisis caused by people being blind to risk, do you really want to put in place a legal rule that penalizes investors who were savvy about risk and did something about it?"

Apparently, this is going to take years to resolve and with all the convoluted legal issues here I doubt any investor will get back much. I do know one thing though, this is going to soften the recessionary blow for many a lawyer, and the trustee? He wants $28 million for salaries and expenses.
So investors have paid their taxes for the SEC to protect them, which they didn't and now they are going to pay money out of potential settlements to trsutees and lawyers to sort the mess out.
Is it just me, or is something very wrong here....

Friday, February 13, 2009

UK FX Trader Arrested In Alleged Ponzi Scheme Investigation

Having graduated from the University of Life with a First Class Honors Degree in Hindsight, I am not averse to having a little bout of 'told you so'. Today we hear of another chap being arrested for alleged dodgy dealings.

Our modern day Sun Tzu, Warren Buffet said "It is only when the tide goes out that you can see who has been swimming naked".

Like the Emperor in Hans Christian Anderson's 'The Emperors New Clothes' Bernie Madoff managed to convince all around him that if they didn't believe the performance and legitimacy of his business they were stupid or unworthy of their position. The regulators fell for it, as did a lot of other high powered people. The tide went out on Bernie several times but his nakedness was ignored. Unfortunately for him the tide receded again, big time, and there were plenty of people shouting "But he has nothing on!

Unfortunately for Terry Freeman, a director of GFX Capital in London, his 'invisible clothes' have been flagged and he has been arrested by police investigating a £40 million fraud.

The ironically named 'Freeman', a foreign exchange trader, was arrested at his home in Buckhurst Hill, Essex, on Monday by detectives from the City of London Police Economic Crime Department. His home and offices were searched and large quantities of documentation were taken away for analysis. Mr Freeman was released on police bail after questioning.

The City of London force has appealed to investors in the firm, which had offices in Leadenhall and Moorgate, to come forward if they had concerns. It is understood the company recently stopped trading.

A police spokesman said officers were investigating suspected money laundering and offences under the Financial Services and Markets Act.

One source said: "This is a very fast-moving inquiry and we don't expect the dust to settle for a few weeks. Only then will we have a clear picture of what has been going on."

Police sources said they were investigating claims that GFX was running a Ponzi fund — a scam that appears to be succeeding wildly by paying supposed returns out of victims' own capital.

Detective Chief Superintendent Steve Head, of City of London police, said that his force had detected a marked rise in financial crime as the recession deepened.

Mr Head said: "There is no doubt in my mind that the present economic situation has led to this rise in reporting [of fraud].

"Most fraud is discovered internally by businesses, but historically I believe only a fraction of those crimes have been reported to the police. Time will tell if we are experiencing two rare positive effects of the economic climate: not only are procedures to prevent and detect fraud being tightened, but victims have a greater confidence to report suspects to the police."

Mr Freeman had a blog which gave updates and allowed comments from investors, some of these comments are reminiscent of how people described their dealings with Madoff before things went bad:

"I can only speak for myself but I can say that I am ecstatic about what you are doing with my money and can only thank you for giving my husband and I the chance to take part. You have our full support whatever you do".

"I haven't posted before, but I would like to reiterate the praise given about Terry's brilliant work. This fx investment is the only shining light in the current mood of economic gloom and has yielded quite extraordinary returns".

"Having met you on a couple of occasions, we have come to the conclusion you are a man that we trust implicitly and that you obviously know exactly what you are doing with regards to the investments".

"I like most others trust you implicitly, and I also agree with everybody on the blog that your results and strategy are excellent."

I sincerely hope, for the people that posted the above comments, that this all turns out to be a mistake and that funds can be returned to clients of Mr Freeman, but the police having arrested Mr Freeman is not a good sign. There were also some issues from investors who were getting worried. Mr Freeman even looked to give comfort after the Madoff situation hit the news:

"I have phoned round and can confirm that this news does not affect GFX, its custodian bankers, or any of the Swiss Banks with whom we trade".

And, perhaps prophetically he said:

"The news is another glowing testament to our decision to base our trading operations in Switzerland, where the financial regulations are as tight as a well-wound Swiss watch!"

Many of the comments on the blog have been removed or redirected but the last post on the 9th January said:

"We must not allow the Diary to become a forum for individual grievances and negative comments, even in some cases abuse of our staff which can never be acceptable. That is not to say that we are not taking your comments seriously, but we view the Diary as a valuable communications tool".

Comments were beginning to be made on the lack of info coming from the company:

"Firstly why not give an indication of ballpark trading results good or bad with a clear indication that the figures are not final and could be subject to change. We are grown up and some information is better than none"

"...any sort of communication is better than none"

"I do not believe that it is being negative to ask for some honest communication from people when we have invested with you."

"Terry, Can you confirm if you are in fact trading? Admin has advised me not to fund my new account until further notice as they are too busy at the moment".

I post the above comments not as a judgment of Mr Freeman or his investment fund, in my book a man is innocent until proven guilty and I do not subscribe to the Kangaroo Court of the web. I post these comments because they are strikingly similar to those that I have seen in the Madoff case.

The most telling being "thank you for giving my husband and I the chance to take part". This was almost a word for word account from an investor in Madoff. He made it so that people were grateful to be just included.

Again we make no judgment on the issue and have seen, many times before, a storm of publicity surrounding an investment vehicle being some sort of scheme, when the issue turns out to be misreported very little press covers that point. If this turns out to be one of those times then we will happily report so but, as is so often the case, the mere reporting of impropriety causes the destruction of investor value.

Madoff was clearly a different case in that he admitted from the time he was arrested that it was a Ponzi scheme, for the sake of investors with GFX through Mr Freeman, I hope this turns out to be one of those occasions where all is not as it seems from the reports in the press.

Thursday, February 12, 2009

Sorry Is The Hardest Word

In the spirit of everyone in our industry saying sorry for something or another, you know global meltdown, greed, dodgy lending practices, that sort of thing, I was looking through some old posts written in 'the gold old days' to see what predictions I made that were total and utter... erm rubbish.

The one that hit me straight in the chops was my article on Arev the Icelandic private equity firm and how great they were. I made a joke about the fact that their private equity firm was called Kcaj and that Arev and Kcaj spelt backwards is 'Jack and Vera' the Coronation street stars. Emails abound on the fact that this was mere coincidence but having named another part of the firm Yrret it has to be confirmation. 'Terry' was Jack and Vera's wayward son in the soap.

Thing is that the situation that Icelandic firms find themselves in now is anything but funny. Our Corry loving friends have had a bad year, Hardy Amies, the UK Couture House, bought by the firm, collapsed in 2008 after Kcaj refused further funding. Kroll were appointed administrators but could not secure the sale of the company as a going concern causing the closure of all but the Saville Row head office. The lease on this building which is beautiful (I have been there and can personally attest to this) was bought by Hong Kong based fashion supplier Li & Fung.

Kroll administrator Peter Saville said: "We believe that the sale of the assets has achieved the best outcome for creditors in the current economic climate. Sadly, the closure of these stores and couture house has meant a number of redundancies have already been made, and we anticipate there will be further job losses as the wind-down progresses. This is yet another example of an iconic British company falling victim to the credit crunch."

The assets sold to Li & Fung's Fung Capital Europe include the Hardy Amies and Norman Hartnell brands, the lease to the Savile Row store in London, and all of the licensing agreements owned by the group.

In 2008 a string of investments have soured for Arev - fashion brand Ghost, has warned of the same fate as Hardy Amies. Maternity retailer Blooming Marvelous, which it bought last year, is thought to require more funds. Some management teams, including Aspinal of London founder Iain Burton, are understood to be preparing buyouts.

Hardy Amies was a classic case of being in the right business at the wrong time. Arev, in our opinion, had ploughed the right furrow by bringing licensing back into the company and opening stores to create a retail name for the iconic brand. Unfortunately the credit crunch killed it off before it really got going. Seeing a 60 year old brand, such as Hardy Amies, disappear is a testament to how bad things are in the world of private equity.

The private equity party may be over in its old form and a few people will be licking their wounds for years to come, but you can bet that in 18 months time we will be toasting those who took the risk to dive into some businesses during these dire times.

I for one, hope Arev are one of them, if only so we can see which Coronation Street characters appears on their list next.

Oh, and by the way, sorry.....

Tuesday, February 03, 2009

A Small Company Begs to Differ With Harvard as Report on Online Child Safety Goes to Print

One of the areas of investment that we have been very interested in is the online security sector. The reason for this is that we have a healthy suspicion of the web... ironic as this is on a blog, but follow my logic.

The web, as a tool, is mind blowing. We have become so used to being able to communicate at the speed of light, to being able to socialise on a world stage all from our laptop like some empowered super Jedi, that we have forgotten about the Dark Side of the Force.

In our online world millions of villains sit in the shadows. There are small timers who just sit and write rubbish about their enemies on chat rooms and bulletin boards, there are those who want to shoot down competitors so make sure lies can be seen as fact on anonymous chat rooms using multiple names to make it more sensational. There are robots combing the web for email addresses to deliver to their masters who control millions of zombie computers, ready to email you a lottery scam, a Nigerian scam or a manhood extension.

As adults, now veterans of the web, we can recognize these cynical ploys and even buy filters to wipe them out. I get at least 200 emails a day, offering everything from knock-off watches to Vicoden which are vaporized by my spam filter.

These tools, a healthy suspicion of everything that comes into my inbox and everything I read on the web, protect me from the worst of what the Dark Side has to offer. What worries me most though is not my inbox or what I read; it is my son's experience on the web.

My cynicism could be seen as being over protective, but in the real world I would not let my son wander around a porn shop, hang out with people significantly older than he is and let him be influenced by those whose views I don't approve of, so why should I do this with the web?

I for one would take a bullet for my boy and say 'thank you very much can I have another' before I would let any harm come to him. On the web I am handing that responsibility to companies such as MySpace, Facebook and the like and they don't know my son exists, never mind having the motivation to protect him like I would.

These sites say that they 'do what they can' for security, indeed, MySpace removed 29000 sex offenders from their site in 2007, that's great, but how did they get on there in the first place? The cynical would suggest that they only removed these profiles after law suits became overwhelming. To be fair they are looking into new security measures, but for us, it’s not fast enough.

That is why we are watching a company that has gone the whole hog in protecting our kids and, in an ironic twist of fate, it launches in beta tomorrow, the same day as a Harvard report on this issue is published.

The highly anticipated report -- results of a year-long study ordered by 49 state attorneys general -- found that "a combination of technologies, in concert with parental oversight, education, social services, law enforcement, and sound policies by social-network sites and service providers, may assist in addressing specific problems that minors face online," according to a draft of the report reviewed by The Wall Street Journal.

Task-force members included representatives of several top Internet and security companies, including News Corp.'s MySpace, Google Inc., Time Warner Inc.'s AOL and Facebook Inc. The conclusions, therefore, that "age and identity verification, filtering and auditing, text analysis and biometrics" were found to come up "short of a comprehensive way to protect children and teens", should be taken with this in mind. After all, these companies are not keen on spending the money to develop such technologies, nor want others to filter out their sites. As the report said "deploying these technologies would be costly and could create broader privacy and security problems" .

MySpace Chief Security Officer Hemanshu Nigam said in a statement that MySpace "fully supports the key conclusions of the report." One could be unkind and say 'they would say that, wouldn't they'.

As is the speed of development on the web, a year long study done by very important people and rich web companies is about to look old and out of date on the day of its publication because of a small company in Miami.

Dolphin Secure from Dolphin Digital Media (their blog is here) (OTCBB:DPDM) is a groundbreaking Internet security system that provides parents with the necessary tools to protect their children while they are using computers inside the home.

Specifically, Dolphin Secure provides parents the peace of mind of deciding which websites their children can view and whom their children can interact with online, safeguarding them from exposure to pornography, gambling and unsolicited chat requests from potential predators.

Children log in and authenticate their account with their fingerprint utilizing a reader that is either built into the computer or connected via a USB port. Once logged-on, the personal computer is completely protected from accessing unauthorized internet sites as directed by the parent.

The Dolphin Secure system lives as a system process on the computer (those icons by the clock on the computer) that can only be turned off with a parental password.

Children can open and close multiple browsers, turn the computer on and off or throw their laptop down the stairs! Unless directed by the parent, the child will be unable to disable the security settings. The computer will still be Dolphin-Secured.

To utilize the program there is no software to purchase as the system application is downloaded upon registration. Furthermore, members are restricted to Instant Messaging and communicating only with other members within Dolphin Secure.

The parental control panel is where the action is. If your child surfs to an unauthorized site but has heard from friends it is 'cool' they can press a button to request that it be added to the white list of 5000 sites. If the parent thinks it is appropriate and Dolphin has reviewed it, it will be added to the list of available sites. This creates an organically growing network of websites that are suitable for your child and are deemed to be safe, something that sites who do not place a value on security will not be happy with.

The instant chat facility is cool too. For example, parents of four daughters may determine their six year-old daughter is not allowed to chat at all, their nine year-old daughter is only allowed to chat with a select group of five friends, their thirteen year-old daughter is only allowed to chat with other girls her age or younger, and their sixteen year-old daughter is allowed to chat with boys and girls 18 years old and under.

Also when a child attempts to send a message to an unauthorized buddy, an error message will appear, at which time a notification will be sent to the parent indicating the request for a new buddy from the child.

For instance, if your nine year-old son’s chat settings were limited to boys within one year of his age and he wanted to add his twelve year-old female cousin to his buddy list, a notification will be sent to the parent account requesting approval to add the requested person. Furthermore, if a chat request to the child is attempted from a user outside the child’s settings, a notification of such attempt is given to the parents (and never to the children).

Email forwarding is included, so your kids can keep their email address, but it is filtered for chat requests and spam, porn etc.

And the charge for giving control back to where it should be? $59.00 per year. Personally I think that is a very small price to pay.

The technology was developed by Dolphin Digital Media Inc. The company was born out of Dolphin Entertainment who are producers of popular kids TV shows and movies for Nickelodeon such as Zoey101 and Roxy Hunter. They have a High School Musical type TV movie coming out called 'Spectacular' and a movie about Bethany Hamilton, the true story of a 13 year old shark attach victim who lost her arm and became a world class surfer on her come-back.

The marketing synergies are obvious for the two companies.

There are other products on the market that do similar things but none that we know of that combine the instant chat facilities and other add-ons. The interesting thing, from an investment point of view, is that the company is not looking to become a software provider, like the other companies in this space.

Dolphin Secure is more likely to be developed as a portal for children and teens. Two social networking sites will be launched this week. Unseen content from TV shows and movies, friendship contact with the stars of the movies and shows as well as teasers, deleted scenes and even walk on parts in upcoming movies will all be used to add to the excitement for kids to join the network.

The point, missed by the Harvard report, is that protection on the web is hard, but to create a network of safe sites within the web submitted by an army of kids and approved by their parents is a scalable solution to the problem. The big sites, who have not concentrated on safety issues, due to cost and the fact that any safety barriers reduce their user base (and therefore ad revenue), could get left out in the cold as parents reclaim the web for themselves and their families.

President Kennedy once said 'we do these thing not because they are easy, but because they are hard'. Wise words and ones that should be remembered when we put child security into the 'too hard' basket.

Billion Dollar English Wreck Found

As a 'child of Thatcher' I have looked with contempt at the various pathetic excuses for government that have dragged themselves through the House of Commons over the years, but have always seen my homeland as 'God's country'.

As if to cement this view further God decides that he will help out our Sceptered Isle in these current times with the discovery of a billion dollars worth of gold under the English Channel.

Like a 265 year old piggy bank it was uncovered by a US based treasure hunting firm, Odyssey Marine Exploration, going to show that the US and the UK still make a good team.

The Florida-based firm found the site 330ft under the English Channel, nearly 100km from where the ship was historically believed to have been wrecked, near the Channel Islands.

Jason Williams, executive producer of JMW Productions, which filmed the discovery, said: "Reports from the time say that the ship was carrying four tonnes of gold, around £400,000 sterling, which it picked up from Lisbon on its way to Gibraltar. Today this has a bullion value of £125 million, but that is just its raw weight. That means it is worth about a billion dollars."

The Ministry of Defence has given the company permission to go back down to the wreck to try to find the treasure. The British Government will legally own any gold that is recovered, but Greg Stemm, chief executive officer of Odyssey Marine Exploration, said he was in negotiations and would expect to be rewarded for the find.

Mr Stemm said: "The money is not as important as the cultural and historical significance of the discovery. It is a monumental event, not only for Odyssey but for the world.

"It is probably the most significant shipwreck find to date. HMS Victory was the mightiest vessel of the 18th century and the eclectic mix of guns we found on the site will prove essential in further refining our understanding of naval weaponry used during the era."

Having plundered our gold reserves and sold them for historically low prices, Gordon Brown will probably be thanking his own personal God for such an amazing discovery.

Could it help it in current times? Doubtful. In a sane world, any find from this ship would be auctioned off to the highest bidder and the money put towards helping out military veterans, or something similar. After all 1000 sailors are estimated to have perished in the storm that sank the Victory, it would be a fitting tribute.

Problem is the historical value of the find is so significant that any gold found on this ship will, no doubt, be plonked in a museum somewhere. Not such a bad thing if the money made from visitors is used for helping out veterans. You know as well as I do, that it won't be, it will just be pushed back into the Treasury for some hair brained governmental scheme.

I know this is all a bit cynical, but suffering years of incompetence will do that to you.

Looking on the positive side, maybe this is a sign, a sign that things are not so bad after all. A reminder of the once unrivalled greatness of England. Maybe it can stir the hearts of the English people to remember that we are a great people and we can get through anything that is thrown at us and still come out the other end as winners, the Prom King to the rest of the world's prom Queen.

I know US readers always believe that the US is the greatest nation on the planet (and as Americans they should believe that) but I would, as an Englishman, beg to differ.

Shakespeare said it best.

This royal throne of kings, this scepter'd isle. This earth of majesty, this seat of Mars. This other Eden, demi-paradise. This fortress built by Nature for herself against infection and the hand of war. This happy breed of men, this little world. This precious stone set in the silver sea which serves it in the office of a wall, or as a moat defensive to a house against the envy of less happier lands.

This blessed plot, this earth, this realm, this England.

Monday, February 02, 2009

House of Lords Sleazefest

Don't you just love the whole House of Lords scandal? I must admit I had to laugh... a lot. The socialists in New Labour were salivating at the thought of getting into power and socking it to the elitist Lords. "Currupt!" They said, "Undemocratic!" They said. All I can say in response is "What a collosal balls up!".

News is that recently enobled peers, mostly Labourites (you know, that Party of the working class, those against capitalism and the evil of self betterment), have been setting up consultancy companies and making a pretty penny from 'influencing' amendments on bills that affect their 'clients'. Didn't we see this coming?

In 1999, the Government completed a deal with the Lords to remove most of the hereditary Peers and passed the House of Lords Act 1999 leaving amongst the majority of appointed Peers a rump of 92 Hereditary Peers until the second phase of reform was complete. These 92 were elected from within those who had had a right to be members of the House of Lords as a result of their hereditary status. This arrangement was intended to be purely temporary until the second stage of reform was completed. This led to some claims (perhaps not all serious) that the elected Hereditary Lords were the only democratic members of the House.

Don't get me wrong here, I have no interest in supporting a bunch of silver spooners who's titles may have be earned by heroic deads of their forefathers (or not), but that are rarely are deserved by those who follow. One only has to look at how many country estates have disappeared to see how incompetent many of these peers are, I mean how difficult can it be to earn a substantial legitimate living having 'Lord' before your name? In my opinion you would have to be pretty dim to fall on hard times...

The thing that I do not like is the fact that Labour came to power on the basis of 'no sleaze'. Er... I don't mean to be funny but how many sleazefests have we had from Labour now?

There is a great article here from Iain Dale, who keeps a blog post up to date on Labour sleaze. (We are up to 70.. he says)

We then see some of this Labour government's appointed peers accussed of improprietary in the Lords. Hypocracy? You may say that... I couldn't possibly comment.

The thing we all know is that most politicians are in it for their own ends. Don't give me all that c**p about altruistic efforts to do their part, it is total and utter rubbish. If it was for social means you wouldn't need to be paid huge sums of cash; £63k Salary, £100,000 staffing allowance, £22,000 in 'incidental expenses',£3,000 London supplement, £24,000 'additional cost allowance', 47.2p per mile 'travel allowance', £10,400 'communication allowance'plus all computer equipment supplied and maintained.

Thats not a bad deal. Approximately £232,000 to run your business and pay yourself. You will also be interested to know that since labour got in the basic pay of an MP has risen by an average of £1666 per year. Nice

I would be very interested to see what percentage of MPs earn more money as an MP than they did in their previous jobs. Of course people will go on about the PM and senior ministers getting nowhere near what they woud have in Civvy Street. Gordon Brown only gets £194,000... boo...hoo. Never mind Gordon, it is estimated that Tony Blair has made £12mn since he got out, so don't fret too much. Having left us all in the worst economic situation we have faced Blair wanders off with his golden winnings. Why is no one complaining about that?

I know I have ranted on in this post and strayed off the point, but it gets right up my nose that Labour came in and messed with a system that has been working for 400 years. I am aware that most should not be there. Most titles in the old days were given out to cronies of the King or Queen, some for heroic deeds, but most for sucking up to whomever was in power at the time. Once enobled you could use your title to enrich yourself in support of the powers that be...

Wait a minute... perhaps things haven't changed all that much after all.