PRIVATE PLANE FORECLOSURES

Here is an interesting and somewhat entertaining short NY Times article on a guy who flies around the country tracking down planes that banks are foreclosing on. It gives an inside look at what banks are doing with just one class of loans.

I have a story about how it works from the other side. A number of years ago I advised a private equity investor who had two planes. I asked him how many people from his firm used the planes. He answered that only he used the planes. So I asked, "Why do you need two planes?" To which he replied, "Sometimes, one of the planes is in for maintenance. So I need a backup plane."

A couple of weeks later I called the bank that leased the planes to my client. "Jim, it is Mike. I have some good news and bad news for you." Jim replied, "Give me the good news first. I am swamped by bad news."

"The good news is that we are voluntarily returning your two planes." Jim happily replied, "That is great! What could the bad news possible be?"

"Well, the Falcon 100 is at Morristown Airport ready to go. But the Hawker 1000, well, to tell the truth, I don't really understand the science behind how planes fly."

"Mike what does that have to do with the Hawker?" I replied, "Well Jim, the Hawker fuselage is in Delaware, but the engines are in Kansas City. And I am pretty sure they need to be together. Oh, and the bank owes $110,000 for the engines and past maintenance bills. I gotta go."

This is playing out everyday at banks throughout the world in every asset class; homes, planes, yachts, commercial real estate, companies etc.

Cheers, Mike

FRIENDSHIPS, NETWORKS AND CORPORATE CULTURES

Last night was so much FUN!

About 80 of my friends and former colleagues got together for a reunion. They were all from the New York office of Arthur Andersen's business, systems integration and risk consulting businesses. The event was hosted by Deltek (www.deltek.com).

For those of you too young to remember, Arthur Andersen was the largest global professional services firm in 2001 and it was brought down in 2002 by the Enron scandal. We laughed, told many stories that were oldies but goodies, drank lots of alcohol(Diet Coke for me), found out what people are doing now, and just had a great time!

So why do you care? Why is this worth posting on the blog?

Because during and after all the laughs, many of us made several observations worth sharing on the following topics:

FRIENDSHIPS:
Life is about family, friends and community. Careers and jobs are how we earn a living to fund our pursuit of activities with family and friends. Yet somehow we get so caught up in the career that we often lose sight of this fact. But this group last night and many similar ex-Andersen groups around the world were fortunate to be able to integrate lifelong friendships with work and career.

While we all suffer through this global economic crisis, it is a good time to remind ourselves and keep repeating the mantra "life is about family, friends and community". What was even more special about last night is that we were with old friends. Those with which we share a very special history.

NETWORKS:
Amidst the din of laughter and clinking glasses, everyone was networking. Business cards were being passed around; someone was explaining to a friend how to twitter; another guy was giving someone advice on their website; and a few business deals were initiated. My friends from Deltek, a software company serving the consulting space, were working the room and becoming part of this powerful network.

We all know that some good can come out of even the worst situations. Well one positive that has come from the demise of Andersen, is that all 150,000 ex-employees, from around the world, share a very powerful and widespread professional network. I was at a similar event last week in Chicago and the same thing occurred that night.

The other positive that came from the tragic end of the firm is that all of us have not only survived but thrived. This was a room of powerful, successful people. Yes, we all went through hard times but we came out the other end just fine.

Now a few last night have been affected by the latest disaster known as the global economic mess, but they know they survived one mess so they will do it again. Not the way we would have wanted to learn, but learn we did. We are all seasoned business people today who have been up, down and out, yet thrived through it all.

CORPORATE CULTURES:
Throughout the night I heard over and over again, how special our Arthur Andersen days were to us. How much we all learned. How loyal we all were to the firm and still are to one another.
It was a very special place.

Remember, this company came apart in 2002. That was seven years ago! Yet people are still ready to get together in large numbers in cities all over the world. When they get together, like last night, the energy in the room is palpable!

What are the unique ingredients that create that type of corporate culture that can live on even after the company is gone for so long? The companies that replicate that cultural strength and loyalty will have a great asset.

What went wrong? Open invitation to my ex-Andersen colleagues: Share your comments to this post and are you willing to be interviewed so I can delve deeper into these questions? Open invitation to our other followers: Share your comments as we need outside perspective. Are you willing to be interviewed?

Until next time,
Gail

PENSION LIABILITIES

There have been so many other issues out there, that there has been little in depth analysis of the pension liabilities that many companies carry. But in the near future, the financial press is going to look at companies obligations versus the assets available and find a huge negative gap.

I am assuming that most pension plans used around a 7% return on investments in their actuarial calculations for 2008. I also assume that most pension plans actually incurred a loss of 20% - 50% on their portfolios. The huge gap has to be filled somehow. Unfortunately, it will primarily come out of the employees covered by those plans and the taxpayers who will have to make up the difference through PBGC claims and perhaps, another color of a bailout.

ENGLAND AND ITS BAILOUTS

As bad as the US financial picture is, the UK financial picture may be worse. Unbeknown to most, prior to 2008, the consumer debt per capita in the UK was higher than the US. The real estate bubble, especially in London, was greater than US trouble spots in California and Florida.

Further, London has been challenging NY for the finance capital of the world this decade and as a result the banks were growing quickly through mergers and acquisitions. Well as of today, the bailout money that the British government has extended to the banking system is 16% of the UK's GDP.

You know how bad the US problem is, but for all the bailout money given out so far, it amounts to only 6% of GDP. And although neither government is done extending bailout funds, the UK problem may be a bigger problem relatively than the US problem. This argues for the British pound to continue to fall against the dollar and the euro. The only thing that keeps the pound up against those currencies is that the euro and the dollar are in so much trouble themselves.

Cheers, Mike

GREENSPAN, "IT WASN'T THE FED?"

There is an opinion piece by Greenspan in the WSJ today. He makes the case that the Federal Reserve didn't cause the housing bubble. Well, check out this article from the NY Times 1999. You can see for yourself what happened at the time of the article, September 1999. In hindsight, it was the fuel that fed the housing bubble fire. It is very interesting and one can squarely put the initial blame on Clinton Administration.

It is also very interesting in hindsight, to read the quotes of people at the time, that Fannie Mae's easing of credit and lending standards would lead to a housing bubble that would be disastrous. Read it, it is only one page.

And thank you Dennis, for sending a copy of the article my way.

Cheers, Mike

BERNIE PROMISED OVER 40% RETURNS?

If Bernie started to promise people 40%+ returns, it must have happened toward the end when he desperately needed money and the markets were generating 20%+ returns for a couple of years. If this is true, he was speeding towards his demise at the end.

A 40% return doubles the principle in TWO years! Even for Bernie it was going to be impossible to bring in enough new money if some of it was supposed to double in two years. This further explains the enormous level of false profits in the size of the fraud.

It should be interesting to see what the prosecutors and the trustee have uncovered to explain all that happened over the past years.

Cheers, Mike

COMING ATTRACTIONS FROM BOOK THREE

HE SAID WHAT?

We attended a meeting with the lenders to Sunbeam, whom we were advising, and with the crisis managers advising the company.

I said to the crisis manager, who was a name partner of the firm, “What are you going to do about the Chinese vendors?”

He replied, “We are going to tell them that if they don’t play ball, they will be off the reservation.”

“Hmmm, and how well do you think that will translate into Chinese?”

IS THE SEC READING BEN STEIN?

According CNBC, the SEC is contemplating putting the uptick rule back into effect. This will help out. On the other hand, CNBC reports that the SEC does not look like it would back changing the mark-to-market rules.

One of our followers commented offline that the SEC also should not have allowed ETFs that double and triple short the market without any margin requirements. Seems like a good point to me.

Gail and I are back this afternoon from London and ready to blog on.

Cheers, Mike

BEN STEIN ON STOP THE NEGATIVE SPIRAL

I always enjoy reading Ben Stein. Maybe it is because I can hear his deadpan voice and see his face when I read his articles. Today's NYTimes has a very good piece on three steps that can be taken to stop the negative financial feeding frenzy.

First, SFAS 157 which sets forth the rules for mark to mark accounting must be changed to make it less stringent. I agree totally with this and post as such back in December and January. The current rules exacerbate the problem because too many financial assets have to be marked to market to the current market value which is defined as what the last sale price was or what someone will pay today.

The problem is that many of the sales are being made by forced sellers to bottom feeder buyers. It should be based on a willing seller to a willing buyer and today there are very few willing sellers. Some say, no that will lead to market values based on a model. I say, 'bullocks', ( I am in London). The current market values are more liquidation values than market values.

The SEC studied mark to market accounting in the fourth quarter of 2008 and concluded no change was required. Thank you Christopher Cox for your unending efforts to help the situation. The SEC was very proud that it issued the report a couple of days early. Perhaps they should have taken the extra time to come up with something useful.

Second, Ben says, put the uptick rule back in and get rid of naked shorting. The uptick rule requires an uptick in the share price before a short sale can occur. And naked shorting allows one to short a stock before owning/borrowing the shares. These measures put enormous downward pressure on equities and should have been fixed in September 2008 when the short-term ban on shorting financials went into place. This uptick rule was suspended a couple of years ago by the SEC. Thank you Christopher Cox, again.

Third, Ben says stop the practice of allowing the issuance of credit default swaps to parties that don't hold the underlying debt and therefore do not have a direct insurable interest. I wrote about this practice last week under the AIG post. Had this been in place AIG would have had much fewer credit default swaps and would be in better financial condition today. I am not famaliar with the SEC stance on this one.

Fourth, Ben didn't say this because it is too late, but the SEC in 2004, or there abouts, relaxed the requirement that the investments have 12 to 1 or less leverage. The investment banks then moved to 25-35:1 leverage in the past few years and so, here we are.


Cheers, Mike

BLOGGING FROM LONDON

Gail and I are in London for a few days to present a couple of Leadership Sessions. We will be posting from here on Euro issues.

Cheers, Mike

THE AIG COUNTERPARTIES DISCLOSED, WHY IS THIS A SURPRISE?

The WSJ reports today on the list of institutions that benefited from the first few AIG "bailouts". I guess some politicians are expressing shock over this. Why? Ironically, I posted on this on Wednesday and said, in answer to Jim Rogers saying AIG should be allowed to fail, that many of the counterparties to AIG were the same institutions that received TARP money.

Now according to this article politicians are upset. Hello, have your staff do some research and not a lot was needed. It was always obvious that the Credit Default Swaps entered into by AIG's London office were the root cause of AIG's problem. Given that, anyone who knows what CDS means knows, that means very large institutions were on the other side of the swaps and if they were entered into by the London office, that would suggest that many of them were foreign institutions.

Was it that hard to figure out? AIG was always a bailout of the financial system not of AIG itself. Isn't that why in a three period in September that Paulson and Bernake decided to let Lehman fail and not to let AIG fail? Fact is, they should have dealt with Lehman differently but I suspect that parties around the table had their own narrow self-interest in mind as opposed to the broader picture. And they got that wrong also.

Cheers, Mike

MADOFF'S $50 BILLION MADE UP?

Check out this article in the NY Times suggesting that Bernie's $50 billion is much lower in reality as I laid out on the Wednesday. The article didn't attempt to explain where the cash may have gone other than ficticious profits.

Cheers, Mike

TRADING CREDIT DEFAULT SWAPS

According to a report in Bloomberg, there are increasing examples of traders almost pushing companies toward bankruptcy in order to benefit from credit default swap trades. The way it works if as follows. You buy a $1000 bond for $200 because the borrowing company is in such financial trouble. You then by insurance on the $1000 bond for $700, known as a credit default swap (CDS), which will pay you a $1000 if the company defaults on your loan.

The trader now would prefer bankruptcy over a restructuring because if there is a bankruptcy the trader gives the bond to the 'insurer' and receives $1000. So the trader gets $1000 and only spent $200 for the bond and $700 for the insurance. That's $100 profit. Multiply it be the number of bonds purchased and it is almost a no brainer for the trader. Unless of course the 'insurer' is a Lehman Brothers and fails to pay making the trader's CDS insurance an unsecured claim in the bankruptcy of the insurer.

As a side note, to make matters worse the 'insurers' also wrote CDS for traders who didn't own the underlying bond. Very similar to insuring a house for your benefit that you don't own. Think you would care if something happen to the house from a selfish financial standpoint?

Selling such insurance to traders that didn't own the underlying bond is how AIG was able to make large profits, pay large bonuses and then incur large losses and may continue to incur such losses. The press has been quiet about the looming CDS problem only because the other problems are too large and too immediate.

Cheers, Mike

BERNIE, IRVING, IRA, WHERE DID THE $$$ GO?

(The Madoff Palm Beach Home)
One of our followers posed the question, 'Where did the money go?' Back in January I speculated on where the money went, but that was before Irving Picard, the SPIC trustee, disclosed that Madoff didn't purchase any securities for his fund for 13 years.

I haven't seen any analysis to answer the question at hand. So I will try to speculate again. However, I am going to need help. Please comment or email me with suggestions, serious suggestions only Univac, as to where the cash may have been gone.

Here are my latest thoughts. First, it wasn't $50 billion, Bernie rounded to the nearest $50 billion. After all why would we believe the figure he said? It is probably lower. So let's say that the accounts totaled $43 billion at December 15, 2009.

Second, the figure was inflated by false profits for, let's say 30 years. At a 12% fake rate of return, the principal would double every SIX years. So for example, if Bernie was running $100 million in 1979, that be $3.2 billion in 2009! So that is $3.1 billion of fake profits or said another way, of the $3.2 billion in those investors accounts, 97% was from fake profits. Another example is one of the educational institutions that originally said it had lost $125 million and later said it only invested $14 million.

Additionally, say Fairfield/Greenwich, one of the feeder funds which allegedly had $7 billion invested with Madoff, put the money in on average in 2003. Therefore its hypothetical $3.5 billion investment would be worth on paper $7 billion at a 12% rate of return. Some $3.5 billion of fake profits. And if the rate of return was 20%, the initial investment may have only been $2.3 billion which would have tripled to $7 billion or fake profits of $4.7 billion!!!

Third, the compounding of returns from 12-20% over 30 years requires an enormous amount of cash coming in every year to fund redemptions and withdrawals.

Fourth, there still were investments that were made over 20+ years that lost value or at least didn't keep up with the fraudulent rate of return.

Fifth, and a minor number in this fraud, is the money that used to fund the operations and the extended Madoff family's lifestyle for 30 years. That may included the $70 million Ruth is trying to keep. Throw in the Palm Beach house, the Hampton house, the French Riviera house, a plane, the kids homes and spending for 20 years each since they worked at the fund. Then throw in all the donations made by the extended Madoff family.

So a hypothetical summary, with no empirical data to support it, may be as follows:

Fraud $50 billion

Rounding $ 7 billion
Fake profits 30 billion
Investment losses 5 billion
Withdrawals 6 billion
Madoff take 1 billion
Found by Trustee 1 billion

These number are submitted for illustrative purposes only. I made them all up without a shred of evidence. Let me know what you think.

Cheers, Mike

JIM ROGERS, 'LET AIG FAIL'

Jim Rogers is a very bright and entertaining fellow. I have read two of his books which I highly recommend. The first one is I read was Investment Biker. The second book I read was Adventure Capitalist: The Ultimate Road Trip. They are great reads, both informative and entertaining. I highly recommend them with a new map of the world from Barnes & Noble. This way you can follow him around the world to new countries you have never heard of before. Most of them end in 'stan'.

Anyway, Jim Rogers made the case on CNBC yesterday that AIG should be allowed to fail rather than it and other failing financial institutions take down the US. I haven't studied the issue, but my visceral thought is that AIG should not be allowed to fail like Lehman. The unplanned bankruptcy resulted in a greater dissipation of value. Many of Lehman's profitable financial contracts (many of them credit default swaps) lost much of their value by giving the counterparties leverage they wouldn't have had if Lehman was allowed to orderly winddown much of its portfolios. And, of course, Lehman's negative positions rendered those counterparties unpaid creditors.

Letting AIG fail at this time will likely result in even greater destruction of value than is occurring. So the question is, 'who is currently getting the benefit of this value?' Interestingly, many of the AIG counterparties who are owed money by AIG are benefiting from the Government's stream of capital infusions. Many of these counterparties are the same financial institutions that are receiving TARP funds at least according to Hank Greenberg the former Chairman of AIG. It all makes for interesting bedfellows and cascading unintended consequences.

If I had to have an answer by noon today, I would suggest splitting AIG into its various core businesses. Some of those businesses are presumable profitable and being tainted by the credit default swap portfolio. I would separate out the CDS portfolio and put in a new team to work it down. And then I would indicate what funds are going where so as to make the issues as transparent as possible.

It does make you wonder why it isn't so transparent.

Cheers, Mike

CANDID FEEDBACK AND COACHING- ESPECIALLY FOR WOMEN

Calling all leaders! You can not develop talent without candid feedback and coaching.

An anonymous but wise individual once said, "Good management is not only the gift of identifying talent, but the art of selective recognition of strengths and weaknesses, and the proper encouragement of the best in any man or woman."

One of the stories in our book is Spend More Time with Your Stars, Not Your Duds. This entire post is about the time you spend with your stars. You can help them develop and be even better then they thought possible, if you give them candid feedback and coaching.

Let's start with the feedback:

• Feedback must be VERY candid and honest. Do not sugar coat. Be straight forward.
• Feedback should be timely. On your way back from the sales call, not 3 months later.
• Informal and formal feedback are both required and should be consistent.
• Tell them what YOU think, don't pass the buck by saying this is what others are saying.
• Be specific. 'You were great' is just as useless as 'you were awful'. Instead, you were great can be followed by- when you answered the client's question because you were confident and spelled out the three things we would do for them that was different from our competitor. 'You were awful' can be followed by, 'I was so surprised when you hesitated when the client asked that question. You knew the answers, why were you so hesitant? It made us seem unsure of our action plan'.
• Provide positive feedback as well as constructive criticisms
  

Now, let's move on to coaching:

The best feedback still needs to be backed up by coaching. So now, I know what I did wrong but how can I fix it? Or, thanks for the positive feedback. How can my strengths be leveraged for even better results? How can I advance my career?

• Candidness is required here as well. What do they need to do to improve? How can they leverage their strengths to continue to succeed? What else do they need in their skills portfolio to achieve their goals?
• Make sure you know what are THEIR goals- not yours projected on to them.
• Make a specific plan of action
• What are you as the leader willing to do to help?

There is an article on the subject How to Provide Feedback That Has an Impact.

Leaders need to provide candid feedback and coaching to ALL employees.

Leaders need to provide more feedback and coaching to their stars. The ROI is better then when done with under performers.

Now, why is this especially true for women as the title of this post asserts? In my experience, this is often one of the unintentional disservices done to women in business. The feedback is sugar coated. The coaching is often superficial.

Over the years, when I was the leader reviewing the overall ratings and promotion recommendations, I noticed that sometimes the verbal comments I was told did not coincide with the written evaluations. The written was more positive then the verbal. As I asked more questions and eventually asked why didn't you tell them that, the answer was "I didn't want to be too hard on them". I also noted that while not done exclusively to women it was done more often to them.

On coaching I noticed that too often the women were not given some of the casual and informal feedback that the men were given simply because they were not driving to and from the golf course or softball field together. Again, not a plot against women, but still unfortunate.

So we need candid feedback and quality coaching for all employees. If my experience is indicative of the business world, then we need to be even more careful to make sure we do this for the women on our teams.

What can we all do?

Be great leaders and give candid feedback and coaching to all your employees.

Women, demand candid feedback and coaching! Keep pushing until you get it. Tell your boss you can handle it and want to hear every little thing and then, act on the feedback.

Until next time,
Gail

BERNIE, SUCH CHUTZPAH!!

Bernie, Bernie, Bernie. Seriously, you just bilked thousands of people and charitable & educational organizations. Your wife moved $10 million out of your Fund the day before you 'randomly' decided to 'confess' to your sons.

Now you want your wife Ruthie to keep her $70 million? Of course, none of this $70 million came from you Bernie or from your ill gotten gains. And, of course, she had no knowledge of your 30 year Ponzi scheme.

I don't know about you, well actually I do, we are all rooting for the prosecuters to take everything and send the whole bunch to jail. Incidently, what is taking so long? Cheers, Mike

(courtesy of AP)

GEITHNER, AIG AND LEADERSHIP

The Secretary of the Treasury needs to act as a Crisis Leader during 2009. He needs to get in front of the issues so that he is looking back from the finish line. He then can speak to the issues, the plan and the process to emerge from these dark days.

He also needs his own PR person to constantly make sure his message is properly delivered to the right audiences. For example, his office should stop using the term "bailout". Look at the AIG term sheet from this WSJ article. The Treasury clearly lays out the reasons for the approach they are taking. Steps like these need to be clearly and concisely laid out in order for people to understand that there is a sound basis for the steps being implemented.

Also, people can't see 'good' until they see what 'bad' looks like. The AIG plan may look bad, but the alternative is really bad. Once you look at the alternative, the AIG plan appears better. But it has to be properly presented and explained.

To this point, there needs to be a crisis plan articulated by the Treasury so people can believe that the leadership is on top of the situation, even if the final answer is not apparent. The overall crisis plan needs to lay out a well thought out process than gives people confidence. And it needs to be presented NOW!

NORTHERN TRUST, GOLF AND THE VELOCITY OF MONEY

There has been quite an uproar about Northern Trust "lavishly" entertaining clients at the PGA event at Riveria CC last week. John Paul Newport addressed this situation in his weekly article in the Wall Street Journal on Saturday.

It really is an interesting situation. NT received $1.6 billion of TARP funds last fall. The politicians, the media and many taxpayers are saying, "why is our money being used to throw parties?" On the other hand, NT says, "hey, we made record profits in 2008, our balance sheet is fine and we only took the TARP money because the government asked us to." NT is doing business as usual, entertaining clients.

This is certainly not a black and white issue. There are also unintended consequences. Companies throughout the world are cutting back on spending, especially for outings. What about all the companies and people who depend on such outings for their livelihoods?

What about all the people who work at the Cloister in Sea Island which has seen numerous cancellations? Or those at Turnberry Isle in Aventura, Florida who saw companies like Goldman Sachs cancel a big three-day conference? Or the Greenbriar which has seen occupancy plummet?

My humble view is that the criteria should not be whether an institution took TARP money or not. It is whether the institution is profitable. If a bank was profitable in 2008 (no small feat) and then it is spending its profits. If it was unprofitable, sorry, you can't spend like that until you become profitable. Why punish an institution that is profitable? And then punish a whole industry that supports numerous jobs?

We must remember the economic theory of the velocity of cash. Those who have excess cash above their current and future needs actually need to spend cash. Profitable companies need to spend cash. This cash goes to companies that pay workers who spend that cash to live to other companies that pay other employees that pay cash to live to other companies and so on.

Imagine if every single person stopped spending anything except the most basic of necessities. More and more locations and companies would close, more jobs would be lost, more government spending would be required, more debt would be incurred and it would get even worse.

The political leaders, the TARP recipient leaders and the media must look at the impact on ALL the stakeholders in any given situation before reacting.

Cheers, Mike

BUFFETT'S ANNUAL LETTER

Warren Buffet's Annual Report letter is always a good read on a rainy, snowy Sunday. Check it out. If nothing else it is entertaining and the world's greatest investor wasn't able to get missed by the carnage of the 2008 markets either.

Cheers, Mike