Author Archive

  • Tips on Spotting Financial Fraud
    , August 17th, 2012 at 7:50 am

    For those of you who never got around to taking ancient Greek in college, the word of the day is hubris.

    Webster’s dictionary, 8th ed.: “Excessive pride or self-confidence, often entailing a loss of contact with reality and an overestimation of one’s own capabilities, especially on the part of those in positions of power.”

    That pretty much sums up the psychology behind the ongoing debacle that is Peregrine Financial, whose founder and CEO, Russell Wasendorf, Sr., was indicted in Cedar Rapids, Iowa, on Monday on 31 counts of lying to U.S. financial regulators.

    By his own admission, Wasendorf bilked investors out of nearly $100 million over the course of nearly two decades (just days before his arrest, the National Futures Association reported a deficit of more than $200 million in funds that Peregrine Financial had claimed to be on deposit at U.S. Bank). To hide the theft, he cooked up fake bank statements using Photoshop, Microsoft Excel, and high-quality printers. These he then handed over to Peregrine’s CFO, who appears to have adopted an “OK, you’re the boss” attitude after Wasendorf used what he called “blunt authority” to cow him into submission. Wasendorf seems to have taken special pride in his forger’s art, bragging of how adept he eventually became at falsifying not just hard copies, but online statements as well, none of which the financial regulators appear to have questioned.

    Then, this summer, Peregrine hit the wall. Wasendorf couldn’t keep all the balls bouncing. On July 9, he tried to kill himself by inhaling fumes from a hose hooked up to his car’s tailpipe. Needless to say, the firm had been run into the ground. Wasendorf’s son was devastated at finding the company he was supposed to inherit was now a mound of useless paper—and that his father was a crook. Peregrine’s workers were out of a job. And of course, thousands of investors were left holding the bag.

    Excessive self-confidence? Check. Grotesque overestimation of one’s abilities? Check. Loss of contact with reality? Check. (Sooner or later someone had to notice that there was no actual money in those U.S. Bank accounts.)

    But the hubris didn’t stop there. It was also abundantly on display in Wasendorf’s suicide note, in which, far from showing any remorse, he actually seemed to thumb his nose at financial regulators. Evidently even his would-be last moments were ego-driven:

    Where executives [like Wasendorf] have committed crimes, “it is not remorse that motivates” them to kill themselves, said Dr. Alan Berman, executive director of the American Association of Suicidology, a suicide education and prevention group. “Rather it’s a refusal to accept a changed public persona.”

    As he prepared to take his life, Wasendorf confessed to massive fraud in a document whose tone often sounded more boastful than ashamed. He explained in detail how he had used “careful concealment and blunt authority” to steal hundreds of millions of dollars over two decades from clients of his brokerage firm. His scheme to falsify bank statements and balance sheets started 20 years ago, he wrote, because “my ego was too big to admit failure.”

    In the cases of executive criminals, Berman said that “the suicide dies having preserved in his mind that the world’s view of him will remain that of before his death. Death is preferred to losing face, suffering media coverage of the felonious behavior, prison and other consequences.”

    Incredible, an ego that massive. But seeing as how egotistical delusions are the enemies of realistic risk assessment pretty much 100% of the time, investors would do well to take a cold shower before forking over money to any proposal that appears too good to be true. Specifically, they should learn to recognize Ponzi schemes, of both the Waserdorf and the Bernie Madoff variety. These schemes have several tell-tale traits:

    • They promise minimum or steady returns;
    • They claim their opportunities are exclusive, available only to a select few;
    • Their means of making money is too complicated or secret to explain;
    • They make it difficult to withdraw your money, saying that funds have been frozen;
    • They issue statements that lack detail, or that frequently show discrepancies that cannot be explained;
    • They are frequently run by a single individual whose charm and charisma allow him maximum leverage over investors’ fears—and greed.

    Con artists like Wasendorf prey upon the egotistical hopes and equally egotistical anxieties that come out in just about all of us whenever money is involved. Knowledge and financial realism are their enemies. That’s why, whenever you’re about to embark on a new financial venture, it pays to check your ego at the door.

  • Morning News: August 17, 2012
    , August 17th, 2012 at 7:48 am

    Euro-Area Exports Rose 2.4% in June, Led by Germany

    London Firings Seen Surging as Finance Firms Add NY Jobs

    India Lost $33 Billion Giving Away Coal Mines, Auditor Says

    U.S. Reliance on Saudi Oil Heads Back Up

    Scorched Corn Belt Still Reaps Top Dollar

    Treasury to Amend Terms of Fannie, Freddie Bailout

    Why the N.Y. Fed’s Empire State Survey Still Matters

    Facebook Second-Worst IPO Performer After Share Lock-Up

    Verizon Wireless Clears Hurdles In Cable Spectrum Deal

    IBM Plans More Storage Acquisitions After Texas Memory Purchase

    Cisco Jumps On Dividend Hike, Props Up Network Gear Makers

    Gap Quarterly Profit Rises 29% To Beat Analyst Estimates

    Sina Shares Up As 2Q Earnings Triple

    Jeff Carter: Corzine Will Not Be Prosecuted

    Cullen Roche: The Economy Is Stronger Than You Think

    Be sure to follow me on Twitter.

  • Progressive Comes Tumbl-ing Down
    , August 16th, 2012 at 11:22 am

    In case you still had some faith remaining, post-2008, that big financial institutions have your best interests at heart, or that insurance companies are motivated first and foremost by a desire to serve their policyholders, or that they will even honor their contractual obligations, Matt Fisher is here to set you straight.

    Matt is a New York-based comedian and blogger. He had the great misfortune, two years ago, to lose his younger sister Katie in a car accident. And now he’s been subjected to a legal ordeal that would make even Franz Kafka’s head swim.

    To all appearances, the case involving Katie’s death was pretty much open-and-shut. She was driving on a Baltimore street and had stopped at a red light. When the light turned green, she proceeded to cross the intersection. Another car ran the light and slammed into her. The driver’s insurance company, Nationwide, tacitly admitted fault and agreed to settle right away. For most people, this is the very definition of a no-brainer.

    For most people. But then most people aren’t lawyers for huge insurance firms.

    The difficulty arises from the fact that the other driver was underinsured, and that Katie had taken out a policy with Progressive ($PGR) that protected her against the possibility of an accident with an underinsured motorist. When Matt’s family tried to get the insurance giant to make up the difference in the value of his sister’s policy—i.e. to make good on the contract for which Katie had been spending her hard-earned money, i.e. to obey the law—Progressive said no way.

    Now this in itself is perhaps not surprising, especially for many Americans who have had the misfortune to find themselves obligated to squeeze money out of the stone that is the heart of a large insurance company. What is surprising, or rather horrifying, is the series of barriers that Matt’s family then found between themselves and justice.

    First off, they found that Maryland law prohibits clients from suing an insurance firm for non-payment on a policy. This probably comes as no shock in a post-AIG world. Second, they found that if they wanted some semblance of fairness, they’d have to bring a civil suit against the other driver (which they really didn’t want to do) as a way of gaining legal leverage and so hopefully getting Progressive to pay up. Third, they found that Progressive was willing to stoop to anything, anything, to avoid doing the right thing.

    What does “anything” mean? Well, ordinarily, insurance companies pay their lawyers to crucify those who are on the opposing team, which is to say, those who have caused accidents that the companies’ clients are not responsible for. But this wasn’t what Progressive did. Instead, they actually took sides against their own client and offered legal counsel to their opponent, namely the underinsured driver. As Matt puts it:

    At the trial, the guy who killed my sister was defended by Progressive’s legal team.

    At the beginning of the trial on Monday, August 6th, an attorney identified himself as Jeffrey R. Moffat and stated that he worked for Progressive Advanced Insurance Company. He then sat next to the defendant. During the trial, both in and out of the courtroom, he conferred with the defendant. He gave an opening statement to the jury, in which he proposed the idea that the defendant should not be found negligent in the case. He cross-examined the plaintiff’s witnesses. On direct examination, he questioned all of the defense’s witnesses. He made objections on behalf of the defendant, and he was a party to the argument of all of the objections heard in the case. After all of the witnesses had been called, he stood before the jury and gave a closing argument, in which he argued that my sister was responsible for the accident that killed her, and that the jury should not decide that the defendant was negligent.

    I am comfortable characterizing this as a legal defense.

    Aside from the baroque legal issues this “defense” raises—if Katie was in fact responsible for the accident, then wouldn’t the underinsured motorist have the right to sue Progressive for his damages?—it really adds another twist of the knife for Matt’s family. But even then, Progressive wasn’t done with the Fishers.

    The jury, in a moment of sanity, found for Matt’s family, awarding them some $760,000. As yet, the Fishers haven’t seen a penny. But when Matt decided to make public the whole ordeal on his blog—which then proceeded to be picked up far and wide by the chatterati, Twitted and Tumbl-ed ad infinitum—Progressive made the mistake of trying to do damage control. With predictable results. After thousands of people went on the company’s Facebook page, threatening to cancel their policies, Progressive’s PR people issued via Twitter what has to be the single lamest apology ever penned:

    This is a tragic case, and our sympathies go out to Mr. Fisher and his family for the pain they’ve had to endure. We fully investigated this claim and relevant background, and feel we properly handled the claim within our contractual obligations.

    Yep, that’s right, “within our contractual obligations.” And to make matters worse, in the face of growing public outrage, Progressive simply continued to Tweet the same robotic post. It’s been all downhill from there. Gawker has picked up the story, excoriating the insurance firm for its handling of the whole affair. Meanwhile, for the tens of thousands of other online readers who have chimed in, Progressive’s ass-covering has come to epitomize the soullessness and dehumanization, the lack of even the most rudimentary human decency, that seem to characterize so much of modern corporate behavior.

    How will this affect the company’s bottom line? That remains to be seen, but some fallout is probably inevitable. Progressive is a solid company, but it’s going through a rocky period right now, and this can only make it rockier. Last quarter, rising health expenses led to higher claims costs, which in turn led to falling profits. Net income and operating profits have also fallen short. To top it all off, there’s even talk of the company’s retiring Flo, the bizarrely bubbly counter girl in its highly successful ad campaign, whose grin has suddenly come to seem a liability, even disturbing. The upshot? A glaring sign above the stock’s ticker: DO NOT BUY.

    Progressive seems not to have learned one of the key lessons of the social-media age. There is no privacy anymore. Every move a company makes can, and given the public’s endless need for stimulation, inevitably will, be broadcast on the huge Jumbotron that is the internet. Corporate decision-makers would be well-advised to behave as though their every move were being played before a capacity crowd at the Rose Bowl. The distance between in-house and viral is exactly two mouse clicks, the time it takes to send an angry blog post into the cybersphere. Caveat venditor: let the seller beware.

  • Morning News: August 16, 2012
    , August 16th, 2012 at 9:00 am

    Euro-Area Inflation Held Steady in July After Economy Contracted

    Merkel Cites Canada as Debt-Deficit Model in Europe’s Crisis

    China Stocks Fall to Two-Week Low After Foreign Investment Drops

    Nikkei Hits 6-Week High As Soft Yen Puts Focus on Exporters

    Gold Runs Out in Lisbon as Price Drop Compounds Money Misery

    Risk Builds as Junk Bonds Boom

    Treasury Yields Rise to Three-Month High Before Housing Report

    HSBC, Credit Suisse Sacrifice Employees to U.S., Lawyers Say

    Facebook Freeing 60% More Shares Seen Weighing on Its Stock

    Sears’s Loss Narrows, but Sales Keep Declining

    Deere Third-Quarter Net Up 11% But Cuts Profit, Sales Outlooks

    Cisco Still Pessimistic on Europe, Hikes Dividend

    China Mobile First-Half Core Profit Slips, Shares Down 5 Percent

    Roger Nusbaum: Stocks Will Not Make You Rich

    Joshua Brown: Groupoem

    Be sure to follow me on Twitter.

  • Industrial Production Jumps 0.6% in July
    , August 15th, 2012 at 2:01 pm

    The government released the industrial production report for July and the news was mixed. The good news is that industrial production rose 0.6% in July which beat economists’ forecasts by 0.1%. The downside is that industrial production for June was revised down to an increase of 0.1%.

    The pickup in industrial production, the most in three months, may ease concerns that the industry that’s powered the expansion is faltering. At the same time, recessions in parts of Europe and the prospect of fiscal tightening in the U.S. are hurdles for American factories.

    “There are still strong trends in the auto industry and a number of other sectors which will keep industrial production from dipping into the negative this year,” Guy LeBas, fixed- income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the report.

    I’m still a QE3 doubter and I think is more evidence that it’s not on its way. The crucial piece of the puzzle is jobs and that’s still not doing well.

    I like to follow the industrial production report because it has a very strong correlation with recessions and expansions. Check out the chart below.

  • Industrial Production Jumps 0.6% in July
    , August 15th, 2012 at 2:01 pm

    The government released the industrial production report for July and the news was mixed. The good news is that industrial production rose 0.6% in July which beat economists’ forecasts by 0.1%. The downside is that industrial production for June was revised down to an increase of 0.1%.

    The pickup in industrial production, the most in three months, may ease concerns that the industry that’s powered the expansion is faltering. At the same time, recessions in parts of Europe and the prospect of fiscal tightening in the U.S. are hurdles for American factories.

    “There are still strong trends in the auto industry and a number of other sectors which will keep industrial production from dipping into the negative this year,” Guy LeBas, fixed- income strategist at Janney Montgomery Scott LLC in Philadelphia, said before the report.

    I’m still a QE3 doubter and I think is more evidence that it’s not on its way. The crucial piece of the puzzle is jobs and that’s still not doing well.

    I like to follow the industrial production report because it has a very strong correlation with recessions and expansions. Check out the chart below.

  • Morning News: August 15, 2012
    , August 15th, 2012 at 7:39 am

    EU Banking Plans Asks ECB to Share Power, Documents Show

    No Longer Stagnating, Euro Zone Contracts

    China’s Wen Says Economy Still Under Pressure

    Retail Sales in U.S. Jumped More Than Forecast

    British Bank in $340 Million Settlement for Laundering

    Standard Chartered Faces Fed Probes After N.Y. Deal

    Lloyds Sells $1.6 Billion Private-Equity Assets to Coller

    Paulson Steps Up Gold Bet to 44% of Firm’s Equity Assets

    Carlyle Group to Buy Getty Images For $3.3 Billion

    Home Depot Net Rises 12% Despite Sales Pressure

    270 Million Facebook Shares About To Be Set Free

    Staples 2Q Profit Falls, Sales Slow In N. America

    Wells Fargo Settles Mortgage-Crisis Case for $6.5 Million

    Jeff Carter: Mayor Bloomberg, Money and Politics

    Gary Shilling: We Are Either In Or Entering A Recession

    Be sure to follow me on Twitter.

  • A Housing Boom?
    , August 14th, 2012 at 10:51 am

    Is there a housing boom afoot? Well, the simple answer is no. But there has been some modestly good news, and combined with some very cheap prices in housing-related stocks, that’s added up to a nice rally in the sector.

    Check out this chart:

    Lennar ($LEN, red line) has added some impressive gains. Our Bed Bath & Beyond ($BBBY, orange line) has also been a strong performer. I also included Lowe’s ($LOW, black line) in order to contrast it with Home Depot ($HD, blue line). Just because two companies appear similar doesn’t mean the stocks will perform the same way.

  • A Housing Boom?
    , August 14th, 2012 at 10:51 am

    Is there a housing boom afoot? Well, the simple answer is no. But there has been some modestly good news, and combined with some very cheap prices in housing-related stocks, that’s added up to a nice rally in the sector.

    Check out this chart:

    Lennar ($LEN, red line) has added some impressive gains. Our Bed Bath & Beyond ($BBBY, orange line) has also been a strong performer. I also included Lowe’s ($LOW, black line) in order to contrast it with Home Depot ($HD, blue line). Just because two companies appear similar doesn’t mean the stocks will perform the same way.

  • A Housing Boom?
    , August 14th, 2012 at 10:51 am

    Is there a housing boom afoot? Well, the simple answer is no. But there has been some modestly good news, and combined with some very cheap prices in housing-related stocks, that’s added up to a nice rally in the sector.

    Check out this chart:

    Lennar ($LEN, red line) has added some impressive gains. Our Bed Bath & Beyond ($BBBY, orange line) has also been a strong performer. I also included Lowe’s ($LOW, black line) in order to contrast it with Home Depot ($HD, blue line). Just because two companies appear similar doesn’t mean the stocks will perform the same way.