Weakonomi¢s » weaky

Jon Corzine Is Smarter Than You

The Weakonomist — Mon, 14 Nov 2011 13:49:50 +0000

Hopefully by now you’ve heard of the meltdown and bankruptcy of MF Global. MF Global was a commodity and futures broker (if you don’t know what that is don’t worry it’s not important) that Corzine ran from March of last year until last week.

If you don’t know of Jon Corzine he’s well known amongst the Wall Street crowd for running Goldman Sachs back in the good ole days of the 1990s. He left after a power struggle with Hank Paulson, the now former Treasury Secretary the brokered most of the bank bailouts. Corzine went on to become a governor and senator from New Jersey. Being rich, and powerful, Wall Street and K Street, Corzine was popular amongst the media crowd for interviews about financial regulation.

Corzine was welcoming to the idea of increased regulation, mostly because he didn’t believe that the Wall Street companies could regulate themselves. He’s living proof of that.

Corzine rejoined the private sector in March of 2010 by taking the CEO job of MF Global. In just over a year and a half he ran it into the ground doing everything he said should be regulated. He borrowed more than Lehman Brothers ever did to make bets on European debt. Yeah, that stuff that’s always in the news. And when an agency tried to regulate him, he used his connections in Washington to circumvent the very same rules he said should be in place on TV just months before.

The Daily Show with Jon Stewart has a really good segment about the whole mess in plain English:

Why did he do it? Because he was paid to. Everything of course comes back to incentives, you know that by now. And that’s why Jon Corzine should get the award for “Smartest Man of 2011″. Jon knew full and well how people on Wall Street behaved. He knew they would do anything to get around the rules and take too much risk to make what would have been too much money. Though I can’t find any record of him saying it, if you asked Jon if he would behave the same way as Lehman Brothers or Bear Stearns without regulation, he’d probably say yes he would.

You can’t hate a man for going back into the private sector to try and take advantage of all the things he’d warned against. He tried to get people to listen by making it clear how people on Wall Street should be regulated. He went out and lived the words he breathed. I don’t recall any time when he said he would behave differently, just that he welcomed the regulation. He made it pretty clear that you had to out-regulate Wall Street. Which meant you had to out-regulate him. That didn’t happen.

Sadly, Jon had to run a company into the ground to prove how right he was. But, unlike Jon Stewart and most media reactions to the story, I don’t see Corzine as incompetent or a hypocrite. I see him as clairvoyant. He’s not a good man, but he is a smart man.

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Weaky #27: Nope, I Didn’t Leave My Baby In The Car

The Weakonomist — Mon, 28 Feb 2011 15:50:03 +0000

All too often we hear of stories of parents leaving their children in cars. Sometimes it’s tragic, sometimes all escape unharmed. But what if it wasn’t enough to just leave your baby in the car? What could be worse than that kind of oversight?

What about leaving your baby in a bank?

A bank vault.

That’s right. At a Wells Fargo branch outside of Atlanta a 14 month old child somehow got trapped inside a bank vault. An employee had their daughter and her baby at the bank as they were closing up shop for the day. The baby wandered off and after searching for the child concluded it must be in the bank vault.

My favorite part is that someone would have had to close the vault door. So they closed it with the baby inside. No conspiracy, just stupidity. Because these vaults have timed locks it took first responders three hours to get the vault open again. They pumped in fresh air and could hear the baby crying. A spokesman said the kid was safe the whole time.

I think what he meant to say was the kid was IN the safe the whole time.

Photo: Lance Fisher

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Weaky #26: MMR You Crazy?

The Weakonomist — Thu, 06 Jan 2011 15:33:32 +0000

Dr. Andrew Wakefield’s story is a classic example of bad incentives.

Back in 1998, he published a landmark study that linked children’s vaccines to autism. The study was of 12 children and was considered groundbreaking. It sparked a huge drop in the use of childhood vaccinations. Celebrities like Jenny McCarthy have for years endorsed this idea. McCarthy has served as a spokesperson for autism organizations and even written books. I’d have to read more on the matter, but it is unclear if even her own kid has autism, but I won’t go there.

Dr. Wakefield’s study was considered big enough to make headlines, and baby crazy parents all other the modern world immediately stopped doing vaccinations. Naturally, there was an increase in measles (which can be fatal) and cholera due to the reduced use of vaccines. Since that study came out, researchers around the world have tried to repeat the results of the study and could not.

Now we know why. Wakefield is a fraud.

Wakefield allegedly altered the study’s results to make them fit the theory. Why would someone do that? Fame? A Nobel Prize? Money? Money.

As it turns out,a law firm paid him hundreds of thousands of dollars. An in depth review of the study showed a number of the 12 children were already showing signs of autism before they even got vaccinations. What was the law firm’s angle? They planned to sue vaccination companies.

I’m no protector of corporations, but it is simply awful to commission research with the intention to sue based on the results. And for any research to actually do the research and not disclose the conflict, well they should be thrown in jail.

Wakefield has done irreperable harm to the medical community. Most people that avoided vaccinating their children are not going to stop believing it now. McCarthy is unlikely to feel any different. As much as I hate to say this, she’s made a career out of this study.

But how do we prevent this in the future? Can we stop people from taking a headline about a tiny study and converting it into a religion? No. But we can take ownership of our own education. It’s been well-documented that this study’s results could not be replicated. I doubt their are many doctors out there that actually recommended against vaccines based on the study either.

In other words, we can’t prevent this in the future. People are stupid and will believe anything without veryfiying it themselves. I’m not saying to blindly trust your doctor, but use a combination of self-education and physician recommendations.

Wakefield’s incentives were not aligned at all to serve the medical community, or humanity. But he could have easily been ignored if people educated themselves, instead of following a couple of headlines and a celebrity endorsement of bad science.

Photo: eyeliam

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Weaky #25: The Foreclosure Fail

The Weakonomist — Tue, 12 Oct 2010 14:45:31 +0000

I love me a good fail, hence the whole Weaky Award system. I used to award Weakies for surprising acts, but after 25 awards these events no longer surprise me.

By now you should be aware of the newly dubbed “foreclosure crisis” that has emerged from a banker’s testimony. What basically happened was a guy from GMAC (now Ally Bank) testified that he approved thousands of foreclosures without ever looking at the paperwork. Other banks announced similar problems and now it seems half of the foreclosure industry has shut itself down. Here are just a few things that have happened:

Thousands of foreclosures processed without proper review
Guy who paid cash for his home somehow got “foreclosed”
Someone else thought their home was being robbed as people tampered with the locks and called the police
Some banks are having trouble proving they have the right to the home they’re foreclosing

This is simply hilarious, but again not surprising. Foreclosure organizations within banks have been swamped. Amidst TARP bailouts, layoffs, and nearly going under themselves, the banks have hardly had the resources to grow these groups to handle everything. The banks want to foreclose quickly because they want to get the bad loan off their books. These foreclosure departments were probably a 100th of the size they are today 5 years ago.

And if you think you don’t care about this think again. We’re all in this together. Over the short term the housing market will be in a panic. Sellers may want to get into the market as foreclosures are pulled out (inflating prices to a degree) and buyers will be scared to get into a home if the banks don’t have their stuff together. Long term we’re looking at the delaying of the foreclosure flood that continues to plague the housing market. For example, if it takes 6 months to clear this up then the market will be held back that much longer.

The housing market remains a big detriment to the overall economy. These foreclosures will happen and the sooner they do the better. This bandaid is already taking too long to rip off, now it’s just going to have more hair stuck in it and the wound a bit more infected. This is a side-effect of the economic recovery, one of many in fact. The others being high unemployment, poor access to loans, and a rich got richer mentality.

John Carney of CNBC has a thorough summary of “foreclosure-gate” or whatever else you want to call it.

Photo: respres

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Weaky #24: Mini-Madoff to the Stars

The Weakonomist — Tue, 01 Jun 2010 15:01:29 +0000

Remember Kenneth Starr? No, not that Kenneth Starr. Before a few days ago I didn’t know there was another Kenneth Starr either. Apparently, this Kenneth Starr was a financial advisor to the stars and apparently, that’s such a thing. Some of the clients listed were Sylvester Stalone, Uma Thurman, Wesley Snipes, and Martin Scorcese. Kenneth Starr was arrested for what else but running a ponzi scheme.

Starr has already been dubbed “mini-madoff” not only because of his scheme but how he got clients, by rubbing shoulders with his potential new customers at events he knew he could find them. Like any other dirtbag, he used the money to finance an extravagant lifestyle, not much different than the type his clients enjoyed. But he also took it a step further. Somehow, he managed to convince some of these people to open accounts with his name on it. There are so many no-nos being crossed here that it’s too easy to talk about them.

I’m not at all surprised that celebrities and other people with more money than they know what to do with end up getting screwed by Madoff like people. They don’t understand the value of money and everywhere they go they’re overpaying for products and services. In other words, there’s no shortage of people ready and willing to take advantage of them. Mini-Madoff Ken Starr is on the extreme end, but he’s still just a dude that took advantage of rich people.

If you’ve got too much money to manage yourself and you’ve got not enough motivation to learn anything about money, you have a simple way out: go to the big companies to manage your money. Everyone from Wells Fargo to Goldman Sachs has specialized divisions that exist simply to serve clients with more money than brains. You’ll pay out the yin-yang in fees, but you’re already doing that at some boutique place that your co-star recommended in between lines of blow. The benefit of going to these big firms is you’ll be dealing with someone that probably couldn’t squander all your money even if they wanted to. And if they somehow managed to do it, you can at least sue the crap out of the firm to get your money back.

But just in case you want to learn something about money I’ve taken the liberty of giving you a list of desirable traits of your financial advisor to get you started:

Middle-upper middle class (but not loaded)
Have no legal claim to your money
Have a CFP
Should not be your friend

So that’s what your financial advisor should be, and that’s seriously sufficient. The Reformed Broker has a list of what your financial advisor should not be; the hilarious post gives special emphasis to stars and is such a must-read it was the whole inspiration for this post.

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Weaky 22: Rangel Me Up Some Controversy

The Weakonomist — Mon, 08 Mar 2010 15:39:04 +0000

Who is Charles Rangel? He’s just one of a series of controversial New-York politicians to make it into the media. Chuckie is being featured today for one reason only, to reinforce the notion that the career politician is an awful abomination that should be destroyed. Allow me to present you: Fat Bastard Congressman Charles Rangel of the 15th district of New-York, AKA Harlem.

Normally, I like to phrase my Weakies with a good backstory and build everything up, but Chuckie has been way too busy to do that. I will tell you he’s an NYU educated man, lawyer, and Korean War vet with a Purple Heart. He’s a hero, and he’s no moron. Which leads me to believe everything I list below was done deliberately.

He used Congressional letterhead to arrange meetings with potential donors to a center named after him at the City College of New-York. An ethics “no-no”.

Rangel rents 4 apartments in Harlem at below market rates. He paid $3894 per month for all 4 in 2007. The going rate was closer to $8125 per month. 3 are used for his “home” in Harlem while the 4th is used as a campaign office. City law requires that apartments of this type be used for living, not business. The building is owned by a company with one of the owners being a regular contributer to Rangel’s campaigns. The savings add up $50,000 a year, which far exceeds the $100 gift limit established by the House. Quid pro quo? Perhaps. Sketchy? You bet.

He owns some vacation property in the Dominican Republic which during the busy season rents for as much as $1100 per night. He bought the place in 1988 but mortgaged part of it. He was one of a few investors that had interest payments forgiven. In 2008, it was discovered that he had failed to report $75,000 worth of income on the property. Either our tax code is too complicated for a Congressman to figure out, or he was hiding it. Either is disgraceful considering he’s the chair of the House Ways and Means Committee, the House comittee that DESIGNS THE TAX CODE. Only last week did he take a temporary leave of absence amid all the scandals.

In January of 2009, another Congressman introduced legislation for the “Rangel Rule” a joke of a bill designed to forgive taxpayers on interest and penalties for unpaid taxes.

Discrepancies were found in the listed value of a property he owns in Florida. Values vary from $50,000 to $500,000. Not sure what this means, but do YOU have this problem?

Chuckie also uses a parking garage just for Congressmen as personal storage for his old Mercedes Benz. House rules forbid the use for any period longer than 45 days. It’s been there so long the plates are gone, at least a few years. The spaces are valued at $290 a month and could be considered income that would need to be taxed. The doesn’t even have the necessary permits to be in the garage.

He’s taken a homestead tax break on his house in DC, despite maintaining a residence in New-York. Again, no expert but it’s said this potentially violates laws in both areas.

There is a tax loophole that has allowed a corporation to save tens of millions of dollars by operating “in Bermuda”. The corporation has donated $1 million to a City College of New-York center, named after Rangel. Rangel promised to oppose closing the loophole after a meeting with the company’s CEO. 5 days earlier the company donated an additional $100,000 to the City College of New-York. This company is one of only 4 that benefits from the tax break.

In 2008, Rangel paid $80k in campaign funds to a company to develop his a website. The company he paid is run by his son. Sites like this are regularly designed for about $100. A representative of the Campaign Legal Center, a non-profit watchdog said “this is probably legal but definitely wrong.”

Rangel again teetered on the edge of ethics by taking trips to the Caribbean funded by a non-profit in NY, funded by a number of large corporations with lots of lobbying interests.

In 2009, Rangel amended his 2007 financial disclosure form to double his reported net worth. This included properties in NJ (again with back taxes), investment, and checking accounts.

Also in 2009, Rangel opposed legislation that would have stopped $2.9 billion (yes billion) in tax money that would go to bailout a rum company in the US Virgin Islands. Naturally, he received campaign monies related to the deal.

And that’s just the stuff we know about. This man is the perfect example of everything that is wrong in Washington. He’s been in office since the 70s, it’s time for him to go.

Wikipedia has more about all his bad deeds.

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Weaky #20: Oniomaniac Embezzles 1/3 Of Company’s Value

The Weakonomist — Tue, 16 Feb 2010 15:48:54 +0000

You’ve probably never heard of Koss. They are an American company that makes headphones, usually of the low end variety. For the most part, they’re just a company trying to make their way in the American dream. They’ve have their successes and failures over the years, including a bankruptcy in the 1980s, but for the last few years they’ve managed to turn a tiny profit.

But sometimes cozy little American companies hire themselves an idiot. Case in point: Sujata Sachdeva. Ms. Sachdeva is the former VP of Finance at Koss. She started there many many years ago and worked her way up to the respectable position within the company. On Christmas Eve of 2009 she was fired because Koss had learned she was embezzling money.

I always find it sad when someone steals money from their employer. I’m under the belief that it should be near impossible to do if the company does proper auditing and cash-flow tracking. But it does happen.

What doesn’t happen, ever, is someone embezzling 1/3 of a company’s value. Koss has a market capitalization of $63 million (remember it’s a small company). Sachdeva has been accused of embezzling as much as $20 million from the company over 4 years. They are certain of a few million, the rest of which is still pending. That’s a third of the company’s value! I cannot stress this enough.

Normally I’d give a Weaky Award to someone for being dumb enough to steal from a company thinking they wouldn’t get caught. But not this time, no. This goes to Koss for not noticing. In order for someone to embezzle 1/3 of Google they’d have to take $57 billion (that’s BILLION). I think someone would notice that!

Another way to look at this is she is accused of embezzling more in 4 years than the company made in profits. How do they not notice this? Who is running the show at Koss?

Would you notice if over 4 years someone stole all your money? Probably. Koss is planning to restate their earnings for the last 4 years, an embarrassing thing for any firm to do. Honestly, I wish we had the legal system in place in this country to just shut down firms that are clearly incapable of running a business.

Ranting aside, Sachdeva admits to embezzlement claiming to be an oniomaniac (shopaholic for those of you that hadn’t looked up the work yet). It was later discovered that much of what she purchased was never used (clothes) which corroborates her story. Even someone at the legal edge of “crazy” wouldn’t buy $2 million worth of clothes.

Sachdeva clearly has a case to argue in court for being crazy. But honestly the shame goes down on the management of Koss for not noticing this sooner. The company has 73 full time employees and was incapable of noticing millions of dollars being embezzled. Seriously, anyone could have figured this out in an afternoon. Read more about Sachdeva and her antics here, here, and here.

Photo: Pal Berge

PS: Some of you may have noticed I published Weaky 21 before 20, it’s because I wrote this a while ago and for some reason forgot about it.

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Weaky #21: The Mortgage Bankers Association’s Underwater Mortgage

The Weakonomist — Tue, 09 Feb 2010 15:21:40 +0000

Back in 2007, we all thought there might be a real estate bubble about to pop. But most of America was still stupid and buying up real estate thinking prices would go up forever. Home ownership was the American dream, and we all wanted to own our own home. Even I was looking at properties (casually) and checking out interest rates in my area.

The Mortgage Bankers Association (MBA), which is the trade group for scuba divers mortgage bankers, would have been perhaps the most optimistic about the future of real estate. They very much had a vested interest in you buying a home with a loan, and having you pay your bills on time. John Courson is the CEO of the MBA. The WSJ highlights the MBA’s stance on paying your mortgage:

(Courson) said he believed mortgage borrowers should keep paying their loans even if that no longer seemed to be in their economic interest. He said paying off a mortgage isn’t only a matter of personal interest. Defaults hurt neighborhoods by lowering property values, Mr. Courson said. “What about the message they will send to their family and their kids and their friends?” he asked.

Ouch. No questioning how he feels. But that’s how he feels about you, not how he feels about the MBA. See, in 2007, the MBA got into real estate themselves. They bought a $79 million building in Washington DC. They put just $4 million down, or 5% of the value, and financed the rest using a 30 year variable rate.

They planned to occupy 40% of the space and lease out the rest to businesses. Turns out real estate isn’t as easy as HGTV made it out to be. They only ever got to 50% capacity, including their office space. That just doesn’t pay the bills. So even though Courson told YOU to pay your mortgage even if it doesn’t make sense so as to keep property values up, the MBA will not be doing that.

They are hardcore underwater on this property. It’s so bad they had to sell for just over half the price they payed, $41.3 million. So much for keeping property values up right Courson?

A commercial real estate data house has purchased the building from the MBA. The MBA meanwhile has decided their interests would be best served by leasing. That’s right, the Mortgage Bankers Association can’t afford, and plans to avoid, getting a mortgage.

I really wish this development received more attention than it has. It’s perhaps the ultimate irony of the recession. Please pass this along, share it with loved ones. It’s a civic duty.

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Weaky #19: What You Lose In Vegas, Stays In Vegas

The Weakonomist — Mon, 07 Dec 2009 15:30:01 +0000

Go to Vegas and drop some money. As soon as you’re losing money the casino will start treating you like a valued customer. This is because, by losing money on gambling, you’re basically paying the casino to entertain you. As a thank-you for your business you may be offered “comps,” which are complimentary items as a thank-you for you business. Depending on how much money you burn, the comps could be anything from a free drink to a night in one of their hotel rooms.

It’s great getting treated link royalty. Though I cannot speak from experience, Vegas hotels have the customer service thing figured out. But as a smart customer, you should always keep in mind in the back of your head exactly why the casino is being so nice to you. Is it because they really want to be your friend? Is it because they live and die to please customers? Or is it because you’re blowing through money faster than MC Hammer?

Always keep in mind that the free stuff you’re getting isn’t really free. MBAs with spreadsheets calculate how much you need to lose to qualify for this stuff, and the house always wins. Apparently, Terrance Watanabe does not understand how Vegas works. Mr. Watanabe may have the biggest gambling problem on the planet. In 2007, he burned through $127 million at two casinos. Watanabe is known as a whale in the casino business. They are high rollers lured into luxury and extravagance; the goal is to bring them in, treat them like royalty, and milk them like crazy. Both casinos are owned by the same company, Harrah’s, and they derived 5.6% of their revenue in 2007 from him alone. Ahab got his Moby Dick.

But this whale is fighting back. He’s suing Harrahs’ claiming some of his losses were promised to be returned to him. He was also promised a stipend for airfare to Vegas, Rolling Stones tickets, and other odds and ends. It would seem Harrah’s backed out of these promises.

Watanabe is in some trouble with the law as well. The casino loaned him almost $15 million to gamble with (fairly standard practice if you’re rich and your assets aren’t immediately liquid). Watanabe hasn’t paid them back and faces prison time if convicted.

The Wall Street Journal has a good article about the guy, which includes how he became so wealthy (you’d never guess). He’s awarded the 19th Weaky Award for being so stupid as to think the casinos were being his friend, so stupid as to burn through money because he was bored, and really friggin stupid for handing out stacks of $100 pretending to be some high roller who really deserves such treatment. Regardless of how the criminal and civil suits turn out, I hope he loses and is thrown in prison for being such a moron with money.

Photo: lisa brewster

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Weaky #18 Saudi Reparations

The Weakonomist — Thu, 15 Oct 2009 13:58:06 +0000

I hate to cite Apple for examples, but they do a pretty good job of running a business and so here we go. Imagine you’re Apple, you’re making boatloads of money on iPods. Your cash situation is great. As a company you sit on so much cash you can buy whatever you want. Smartly, you decide to hold some of that cash for emergencies and use the rest to reinvest in the company. The iPhone is born, and you get even more cash.

Now imagine you’re Saudi Arabia. Your cash cow is not iPods, but oil. You love for Americans and Chinese to drive gas guzzlers. Over the years you’ve milked that teat for almost all its worth. You have lots of cash, are you going to use it to reinvest in the country so that you may thrive further down into the future? Nope. You’re going to subsidize oil for your people, build castles made of gold, and form cartels to protect your dying industry.

Which brings me to today. Oil consumption is down due to a global recession and increasing awareness of greenhouse emissions and fuel efficiency. Saudi Arabia knows that oil is their cash cow, and every barrel we don’t buy is lost revenue for them.

Enter what can only be called “stragegery”. The Saudis are trying to bring oil producers together (presumably OPEC) to confront wealthy nations regarding their reduction in oil consumption. Here’s how it works, if the United States reduces their oil consumption by one barrel, we must compensate the oil producers for that one barrel. It’s like going to the grocery store, and buying a half-gallon of milk instead of your full gallon. If you don’t buy the full gallon, you should still compensate the store for reduced purchase. This is their actual suggestion!

Stupid doesn’t begin to describe this idea, but I can’t help but congratulate them for having the cojones to propose such a radical idea. Even better, this isn’t the first time they’ve done it. No, going all the way back to the early 90s with the first green movements the Saudis quickly recognized what it meant and made these proposals then.

Thankfully, as dumb as the United States and other wealthy countries sometimes are, they aren’t dumb enough to fall for this. From an economics perspective it doesn’t even make sense. If we don’t buy the oil, someone else will. So hell no you fools.

I don’t give a Weaky to Saudi Arabia for their proposals to protect their cash cow. Everyone company, government, and individual will always do similar things to protect their primary revenue stream. Saudi Arabia gets a Weaky for not thinking ahead and developing industry that doesn’t rely on oil. In 50 years, they’ll be a nothing state with a bunch of holes in the ground.

Photo: photocapy

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