Friday, January 30, 2009


Yes, Andy Policano, my esteemed uncle, is the Dean of the Paul Merage Business School at University of California at Irvine. Here is an article and video of an interview that Andy gave to OC Metro.
(courtesy of UCI)

He raises some good points, such as the "paradox of thrift". It must be in my blood. I didn't know that people all saving instead of spending was the "paradox of thrift", but I have been saying that people have to spend right now, not save. The people with money and secure jobs need to take advantage of the bargains on goods and services to help stop the downward spiral.

This is critical especially when you consider the words of my friend Dan Scouler, "don't underestimate the power of the negative trend."

As for the video, Andrew, great job! But the tie selection, you really shouldn't wear such a somber tie when there is a crisis of confidence.

Cheers, Mike

Thursday, January 29, 2009


My last entry discussed the interview with Jim Collins in Fortune magazine. He discussed at least three things that are required for companies to turn crisis into opportunity.

One of the items was the need to have enduring values. His point was that in stormy weather you need your moorings.

I agree and would add that the corporate culture is also critical and an outgrowth of the values.

The corporate culture and values that are established prior to a crisis will determine how well the organization can weather the storm.

Here are a few questions to ask yourself about your company:

Are employees taught from the day they join the organization that their objective is to enhance the value of the institution above the benefit of self?

How loyal are your employees?

Is teamwork valued and rewarded or is it every person for themselves?

Do leaders feel responsible for their team? Or will they only take care of themselves in a crisis?

Your answers to these questions will inform you about the strength of corporate culture and values, which will give you insight into how well your organization could weather a crisis.

I learned this first hand when Arthur Andersen was hit by the Enron scandal. At the time, I was the global managing partner of Andersen Business Consulting.

There is no doubt that the firms strong culture and values, that led to incredible loyalty of the employees and alums, enabled an orderly and successful dissolution of most of the organization.

Until next time,



If you start reading between the lines, more and more law firms are facing serious viability issues. In today's WSJ, there is an article on law firms asking its partners to make capital contributions to firms because of poor performance last year that is carrying over to this year.

Over the past 10 years, top law firms have been in a race to grow larger and larger. Much of the growth was fueled, by yes you guessed it, cheap credit. Add to the race to grow, the intense competition to attract top law students with ever increasing salaries and the seeds for disaster were planted. It looks like more and more law firms are facing issues and lenders, landlords and partners are staring at losses.

This piece from Bruce MacEwen lays out some good comments on the issues law firms are facing. It is worth the read.

Cheers, Mike

Wednesday, January 28, 2009


Throughout this economic crisis, I have wondered many times, where have all the leaders gone? I have noticed very little leadership being demonstrated to handle the crisis.

Oh, and how about the appalling lack of leadership that got us into this mess in the first place.

There is a good write up in Fortune magazine (Feb 2, 2009- 100 Best Companies to Work For edition) of an interview with author Jim Collins entitled Jim Collins: How great companies turn crisis into opportunity.
I recommend reading it.

In essence, his message is that in tough times you need at least three things:

1) Enduring values
2) The best talent
3) Leaders with the ability to "zoom out" and see past the chaos around them.

I completely agree with him and would add another item- communication. Over the next few days, I will comment on each point and then discuss the topic of leadership communication during a crisis.

Until next time,


The government is now speaking about implementing a good bank/bad bank plan. I actually worked on the first good bank/bad bank plan which the FDIC implemented for Continental Illinois National Bank (CINB) in 1984. CINB was a money center bank headquartered in Chicago. CINB was brought down by bad and fraudulent energy loans originated by Penn Square Bank, a strip shopping center bank in Oklahoma City.

The FDIC purchased $5 billion of bad loans from CINB for $3 billion. The FDIC then leased a group of about 150 employees from CINB to work down the portfolio of bad loans purchased. The largest portfolio concentrations were energy loans, shipping loans and real estate loans.
The shareholders were given warrants that would be in the money depending on the results of the purchased portfolio of bad loans.

A separate board of directors was set up to oversee the portfolio of bad loans. Zolfo Cooper was retained by that board to monitor the activities of the group leased from CINB. I was the Zolfo Cooper manager in charge of that engagement. I spent four years on the matter.

There is a great book on the whole situation called Belly Up. I HIGHLY recommend reading this book.

Oh, the result? CINB couldn't make it and was purchased by Bank of America. Follow the good bank bad bank proposal closely. It will be very difficult to devise a one size fits all plans that will work the first time out.

Cheers, Mike

Tuesday, January 27, 2009


What a great time to be blogging! Good thing I don't have a job because I don't have time for one. Check out this blog post from CNBC based on an article in London's Daily Mail. It is a classic.

The Bernie book is going to be great and the movie....... Now, who should play Bernie?

Cheers, Mike

Monday, January 26, 2009


Over the years, I have worked on a number of matters in which the CEO, owner of a significant number of shares in his/her public company, would borrow large sums and pledge their shares as collateral. This is primarily done for several reasons such as, monetizing some of their value without losing control of the company or to avoid spooking other public investors.

The problem is when the company runs into financial trouble. I first saw this happen in 1992 when Gitano, the jeans company, fell into financial distress. Although a public company, the family that had founded Gitano held a large share of the public stock. They didn't want to lessen their control over the company, so the various family members involved with the company borrowed against the stock. As you might imagine, as the company's fortune spiraled downward, the personal fortunes were even worse off.


The article in Bloomberg lays out a similiar story regarding the founders of Boston Scientific. I highly recommend reading this one because this scenario has been playing out for the past three months. I have been waiting for the right story to make this point.

As you can imagine, a number of executives of public companies are under this same pressure. In my MBA classes, I sometimes cover how financial frauds occur. When C-level executives are faced with an ever falling stock price and serial margin calls, the table is being set for "fudging" the numbers to mitigate the slide. The fudging often starts on the accounting "gray areas" but then goes too far to get back. I predict that we will see more disclosure of corporate accounting frauds over the next 12 months. The table has been set!

Cheers, Mike


I happened to be looking at The Ridgewood Country Club 100-year anniversary book, by William Quirin, issued in 1990. There is a brief section on The Depression. Given the current depressing times, I paused to read it over.

The current site of the Ridgewood CC was opened for play on May 30,1929, just five months before the onset of The Depression. Ridgewood was faced with some daunting problems at the start of its new A. W. Tillinghast golf course and its new clubhouse which was designed by Clifford Wendehack, a premier clubhouse architect of the 20's.
(picture courtesy of

Paraphrasing from the book, the 1930 balance sheet was not a pretty thing to look at nor were the problems presented easy to solve. The situation at the time was wholesale membership resignations, the decline of the price at which memberships could be sold, a large debt burden for the new facilities and an absolutely new property begging for its grow-in period.

The lion's share of the credit was given to Bob Strong who was the club President from 1931-1940. (Bob's brother was Rex Stout, author of the "Nero Wolfe" mystery novel series.) Bob, as the Leader, ran the club at a profit each year. He would undertake one new capital project each year that would enhance the club's facilities. So efficiently was the club run that the dues were actually reduced from $200 to $180 in 1936 (they are slightly higher now).

Bob himself wrote in the 50-year club history book issued in 1940, that the credit belonged to the Board of Directors for running a very tight ship, to the management for sticking to a very tight budget and to a small group of enthusiastic members who spent countless hours bringing in new members so that the membership rolls did not decline.

Bob was a true leader. During the most difficult of times, he persevered to bring the club through to the other side. Then after accomplishing his objectives, he humbly took no praise and graciously gave it to others. He is an example for all of us.

So, what new examples of leadership will emerge from these depressing times?

Cheers, Mike

Sunday, January 25, 2009


Please let me know if you have a topic you would like me to cover. So far I have received the following topics, Deflation, The New Treasury Secretary & China, Financial Problems of States, The Thain Situation, Madoff Investors & Taxes among others.

Cheers, Mike

Saturday, January 24, 2009


(courtesy of

Well it is good to see Bernie back in the news again. He took a backseat to the inauguration of President Obama and then Thain and Fiat took the news over. But Bernie is back. This NYTimes article is an extensive background piece and worth the read.

As I have been sending more time the Palm Beach area, I become aware of more and more people who were badly burned by Bernie. This includes two guys I have played golf with last year. More and more people are admitting they invested with Madoff. Larry King is one of the latest according to Fox News. And Zsa Zsa Gabor according to Reuters. It is really unbelievable. Should he really be at home?

Friday, January 23, 2009


I don't know about you, but I am fascinated by the incredible volatility in the US dollar vs the Euro and the UK pound. In July, the pound was at $2.00. Since then, it has been crazy. It is currently at $1.39! And many pundits think it is going lower.

While that is making London a desired location to visit again, it does give one pause as to where the dollar is going. Check out this article from the WSJ Europe.

The dollar has strengthened over the past 6 months due to fear. The world has flocked to the dollar for safety. If you ask me, it isn't because the US is strong, it is because there is no other currency large enough for everyone to hide. This means the dollar is a bubble. I fear it will be ugly when everyone piles out of it. And lately, the world moves in tandem.

Cheers, Mike

Thursday, January 22, 2009



This is quite funny. The CEO of Satyam allegedly made up the number of employees. He publicly stated the number of employees was 53,000. It now appears the real number of employees was closer to 40,000. How does that happen?

(courtesy of Business Week)

Further, Chairman and CEO Raju allegedly made up fictitious employees and collected their paychecks. He actually cashed paychecks up to $4 million per month from these fake employees (Financial Times).

This reminds me of a story. When I was an audit intern for Touche Ross & Co. when I was in college, I worked on the audit of a construction company. While performing an audit test on payroll, I noticed that week after week, certain payroll checks were signed by the same green pen in the same handwriting. I investigated further and we found out that it was a group of fake employees. After that, the audit senior made me sit near the window so the rest of the team wouldn't be exposed to any acts of retribution.

At least he is in custody. Why isn't Bernie? Perhaps tomorrow I will return to Madoff. Where has he been all week?

Wednesday, January 21, 2009


A quick thought on a huge and deep problem. Where is the due diligence? Should it be a surprise that Bank of America had a huge loss on its acquisition of Merrill Lynch? They went to a weekend meeting in DC to work to save Lehman Brothers and wound up buying Merrill. I did more due diligence on the last car I bought. (Mean Street)

Cheers, Mike

Tuesday, January 20, 2009



This is a guest post from one of my followers, Pat.

I'm sure you have seen headlines about the Gazprom Ukraine natural gas problem over the past few weeks. If you are like me (Mike, not Pat), you looked at them and said, "whatever". However Pat says at its core, it is a business problem not a political problem.

In short, Russia's Gazprom transmits gas to Europe via a pipeline that runs directly through the Ukraine. Until 2009, the Ukraine has had a sweetheart deal with Russia providing it with gas at rates less than 50% of the market rate. Further, the Ukraine was taking its time paying Russia for the gas. In addition, there is widespread belief that the Ukraine was using more gas than it reported. Russia apparently warned the Ukraine months ago that the old days were over and the Ukraine must pay the market rate. Further, Russia wanted the past due payables paid with late fees and penalties. No agreement was reached, so Russia stopped pumping.

Who's at fault? What should Russia do? What should the EU do considering they receive over 30% of its gas from this pipeline?

Pat says it is his view that the Ukraine is the party primarily at fault and is holding the EU hostage. It is time for the Ukraine to start paying Russia something close to a market rate and consider their past deal a blessing.

Check out this article about the deal the parties may have reached.

Courtesy of the Financial Times

It appears the gas is flowing as there is an agreement for the Ukraine to pay for its natural gas at a 20% discount off the market price. Now back to their remaining issues. The cost to insure its bonds against defaults through credit default swaps has jumped to record highs. It has $30 billion of debt due this year which must be rolled over. One of its biggest banks, Prominvest, ran out of money at the end of last year and its currency has depreciated by about 35 per cent since September.

We haven't heard the last of the Ukraine.

Special thanks to Pat

Cheers, Mike
Hey fans, check out Stevenson Jacobs article on hedge funds.

Stevenson writes about hedge fund returns and the number of hedge funds that may disappear in 2009. Please note that all of the hedge fund results have a survivorship bias. This means that only the funds still in business are included in the return results. So the return the percentages are overstated by some amount.

There was a related article in Sunday's business section in the NY Times.

Good morning bloggees! The blog test has moved to a test site. This is just temporary and part of the test. The real site will be hosted on our own website, perhaps. The next entry will be the first on this site.

Let me know if you made it here.

Cheers, Mike

It looks like Fiat is on the way to owning a large piece of Chrysler.

Sergio Marchionne, Fiat's CEO, has resurrected Fiat from the dead since 2004. He has overseen the development of exciting new Fiat and Alfa Romeo models and the improvement of quality. Serio has also initiated targeted joint ventures with Tata and Ford. Perhaps most ironically, he was able to extract a $2 billion payment from GM to get out of GM's commitment to put more money into Fiat.

This could be the entry into the US market that Fiat has been looking for over the past two years. They are eager to introduce their reincarnation of the Cinquecento- the 500- and to start to selling their remodeled Alfa Romeo's.

A couple of years ago, I was in Italy and I thought the new Alfa's were great looking. I think that the introduction of the new Alfa's in dealerships up and down the east and west coasts is a great idea. If they provide good lease terms and scheduled maintenance, I think these stylish cars will sell well to car buffs who like Italian styling. These leases could protect a buyer's downside of buying cars which didn't have a reliable reputation when they were last sold in the US 20 years ago.

Here are some current Alfa models:

One minor insignificant point though, Chrysler is in the midst of a massive restructuring of its capital structure, union contracts and ownership. This has to be accomplished by securing agreements with vendors, suppliers, bondholders, bank lenders, mortgage holders, Chrysler Finance, the unions, current employees, retirees, dealers, the Federal Government, Cerberus, Daimler Benz and the rest of its stakeholders.

How hard can that be?