God's Word

Hey All,

Hope you're all doing well..

Here's an article Tiff Cheung found on Urbana's website. Great reading if you have time.

A Call to Radical Holiness

Microfinance Chinese Students

Another interesting place to put your money:

NYTimes Article

The actual site

Growing your savings account

I remember Dan mentioned a while ago about putting money in a savings account and which banks offer the best rates. Well, I found this article on a blog talking about this exact subject.

It is a fairly informative post on savings accounts. Here's the link if you care to read it.

Investment Bankers vs. Consultants

In light of the fall of investment banks, I wanted to give you a glimpse of how it was during their glory days.

Here's a video about investment bankers and their heated rivalry with consultants.

http://www.youtube.com/watch?v=ROlDmux7Tk4

The only investment banks left standing are Goldman Sachs and Morgan Stanley. Although there's a lot of uncertainty about their role in the future, Goldman doesn't seem very concerned. It is the only investment bank that was able to withstand the storm and actually turn in a profit for the year as whole - although it did post its FIRST ever loss this past quarter (They're the cream of the crop of investment banks recruiting all the top MBA grads from Harvard, Pennsylvania, MIT, etc). As such, Goldman is paying its employees an average of $400,000 this year.

p.s. I work in consulting now. Good thing I didn't go into banking. Although I could probably never get in anyway.

- Sean

PONZI SCHEME! …or shall we now call it MADOFF scheme

If you don’t know who Madoff is, watch these videos:

http://www.youtube.com/watch?v=oNYCw3rK1m0

http://www.youtube.com/watch?v=JOjC7zTOIJA

Bernard Madoff was a well-respected, and well-liked man that ran a giant ponzi scheme through his investment firm Bernard L. Madoff Investment Securities LLC. The scam he committed was of epic proportions - estimates right now say it was around $50-55 billion dollars in lost investments.

I think, in this day and age, for a scam this big to not get exposed is really unacceptable. There were certain due diligence groups that discovered multiple red flags regarding Madoff’s investment practices (click link to see interview about one firm that discovered some red flags). They notified the primary regulator, the Securities and Exchange Commission regarding such matters but the agency never dug deep enough to discover the truth. Also, one of the main reasons he stayed under the radar was because of his reputation and career accolades. Before becoming a money manager several decades ago, he was the chairman of the NASDAQ, the US’ electronic stock exchange. Madoff was also part of a 25-member advisory committee for the SEC itself. I guess working with the regulatory agency helped him build the rapport and trust necessary to go through with this.

How did he get exposed?
In the end, what ultimately doomed him was the financial crisis. Essentially, he ran his investment group like a hedge fund. Naturally, all investments funds were doing bad this year so a lot of people wanted to pull their money out of investments funds. (Ironically, it goes against the adage of “buy low, sell high” huh?) So when investors want to pull out money, they usually have to inform him beforehand and he has some time before he has to provide them that money. The request is called a redemption and usually hedge funds and more risky firms are given more leeway in terms of the time-frame in which they have to give the money to the investor. Ultimately, Madoff had $7 billion in redemption requests and he didn’t have enough money to meet them so he basically gave up and told his sons that it was just a big giant lie, a Ponzi scheme.

Sadly, if the financial crisis did not happen, this scam would probably not have been exposed for a while.

Surprisingly, it appears as though he ran this whole scam operation by himself. Supposedly, neither his sons, family, friends, business partners nor auditors knew about this scam. As this story unfolds, we'll find out if it was really just him.

Who is affected by this scandal?
The list of victims is growing by the minute and it includes charities, hedge funds, fund of funds (“FOFs”), banks, rich investors and regular people like you and I.

Here's a list of who is exposed and the amount they invested:
Madoff's Victims

Will they get their money back?

Madoff said he’s broke, and selling his investment firm won't begin to cover any significant part of the losses. They'll most likely go after his property and all his other assets.

Unfortunately, a lot of the victims will not get a lot of money back. In fact, the people who cashed in and got out are not out of the woods either. They are probably going to have to return the profits they earned because the profits were not really realized and were part of a fraud.

This case will be intensely disputed in the court of law for years and the most likely candidates to give up some money are the FOFs right now. The FOFs are basically mutual funds that invest in hedge funds. What makes this ridiculous is that they charge fixed fees (usually 2%) to manage the fund and they also charge performance fees (usually 10%). This is crazy because they invest in hedge funds which already charge fixed and performance fees (usually 2% and 20% respectively). Therefore, people who invest in FOFs are getting charged double. Anyway, FOFs can be held accountable if they determine that the FOFs didn’t do their due diligence before they invested in hedge funds - FOFs are held to a higher standard and are supposed to research and make sure the hedge funds they invest in are good investments.

Well, luckily, ordinary investors that don’t have billions invested in Madoff may have some hope. We have this agency called the Securities Investor Protection Corporation (“SPIC”) that will cover up to a maximum of $500,000 for each customer in this case.

So How did he do it? How did he fool people?
It all comes down to human psychology.

Excerpt from WSJ Article:

"Robert Cialdini, a psychology professor at Arizona State University and author of "Influence: Science and Practice," calls this strategy "a triple-threat combination."

The "murkiness" of a hedge fund, he says, makes investors feel that it is "the inherent domain of people who know more than we do." This uncertainty leads us to look for social proof: evidence that other people we trust have already decided to invest. And by playing up how exclusive his funds were, Mr. Madoff shifted investors' fears from the risk that they might lose money to the risk they might lose out on making money.

If you did get invited in, then you were anointed a member of this particular club of "sophisticated investors." Once someone you respect went out of his way to grant you access, says Prof. Cialdini, it would seem almost an "insult" to do any further investigation. Mr. Madoff also was known to throw investors out of his funds for asking too many questions, so no one wanted to rock the boat.

This members-only feeling blinded many buyers of Mr. Madoff's funds to the numerous red flags fluttering around his operation. When you are in an exclusive private club, you do not go rummaging around in the kitchen to make sure that the health code is being followed.

Here we have the biggest dirty secret of the "sophisticated investor": Due diligence often goes undone. For a brief window in 2006, the Securities and Exchange Commission required hedge funds to file standardized disclosure forms. William Goetzmann, a finance professor at Yale School of Management, found that hedge funds disclosing legal or regulatory problems and conflicts of interest ended up with lower future performance. But the disclosure of these risks had no impact at all on how much money flowed into the hedge funds.

In other words, investors were getting useful information -- and paying no attention to it. Amaranth Advisors LLC, the commodity hedge fund that collapsed in 2006 with $6 billion in losses, did not even file the required SEC form at the beginning of that year, a clear signal that something might be wrong. Instead of standing pat or pulling money out, investors poured more money in.

Last year, the Greenwich Roundtable, a nonprofit that researches alternative investments, conducted a survey of consultants, pension plans, "family offices," funds of funds and other large investors who shop for hedge funds. It's hard to imagine a more sophisticated crowd.

Yet one out of five investors in the survey reported that they "always follow" not a formal checklist or analytical procedure, but rather "an informal process" of due diligence.

That's for sure. One out of four investors surveyed will write a check without having studied the financial statements of the fund. Nearly one in three will not always run a background check on fund managers; 6% may not even read the prospectus before ever committing money.

"Due diligence," says Stephen McMenamin of the Greenwich Roundtable, "is the art of asking good questions." It's also the art of not taking answers on faith.

If you invest with anyone who claims never to lose money, reports amazingly smooth returns, will not explain his strategy, refuses to disclose basic information or discuss potential risks, you're not sophisticated. You're an oxymoron."

- Sean