Tag: finance

The World’s Largest Hedge Fund Is A Fraud

Category : Political Science & Economics
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That is the title of a report compiled by Harry Markopolos in 2005 about Bernie Madoff’s fraudulent hedge fund.  He lists 30 red flags and ways for the SEC to verify if these red flags were true.  His report seems to have been almost completely ignored for almost four years.  He states that pretty much everyone knew that Madoff was a fraud, but did not want to risk their careers.  It shows the sad state of Wall Street that I talked about in my post about The Business School Way of Life.  Take the easy money, don’t rock the boat, look the other way, cash your check.

I won’t go into more detail, but the report is truly amazing.  Read it here.

This is why we should have let the banks fail

Category : Entrepreneurship
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Steven Pearlstein writes in today’s Washington Post about how the President of one of the smaller banks used some entrepreneurial skills to put some TARP money to good use.

Kim Price, the President of Citizen’s South Bank, located across the river in Charlotte from Bank of American and Wachovia, did not need TARP money because his bank was failing.  In fact, his bank was conservative and planned for a $3 million loss this year, but ended up with a $3 million profit.  Here’s what he did:

Like many healthy banks, Citizens late last year figured it was in for a tough couple of years with the national recession and the continued turmoil in financial services, which anchors the regional economy. So it applied and won $20.5 million in bailout funds from the Treasury Department on the usual terms requiring a 5 percent annual dividend payment to the government. A few weeks ago, while reading a newspaper article, Price came up with an ingenious plan for how to use it.

The article was about the reluctance of people to buy a house in the current market, and what kinds of incentives had been used successfully by builders and bankers to get them to close a deal. Two stood out: lower rates and the waiving of closing costs. And that got Price to thinking: What if Citizens were to use its federal bailout money to offer below-market mortgage rates with no closing costs to consumers who would buy a house, or a house lot, from builders and developers who had borrowed money from Citizens?

Price asked some of his loan officers to check with the builders and developers, who not surprisingly were excited enough about the project to be willing to chip in some money to help cover a portion of the forgone closing costs. So last week, Citizens launched its marketing campaign for the $20.5 million program, in collaboration with its builder-developer customers, offering 30-year loans with an initial teaser rate of 3.5 percent for the first two years, rising to a fixed 5.5 percent rate (the current market rate) for the balance of the loan.

Its great to see smaller banks succeeding while the big ones are failing.  Its unfortunate that an executive like Price who makes under $500,000 is not rewarded more for his success.  I would love to see someone with his talents have the ability to rise up in the banking industry during the current upheaval.  Instead, by bailing out the big banks, the same execs who got us into this mess continue to run their companies, huge salaries and all.  It’s crazy to me.  I understand that rationale behind the bailouts, but one would think at a bare minimum, the money could have been used in more interesting and worthwhile ways.

Pearlstein ends with this:

So here’s a question the House Financial Services Committee might put to the Titans of Finance: How is it that Kim Price, a community banker with an undergraduate degree from Appalachian State University, a tiny executive staff and a pay package that you would consider insulting, somehow managed to come up with a more creative use for his government bailout money than any of you?

Besides for the subtle dig at Appalachian State, which I would assume he would use for any banker who has a degree from any non-ivy, I would love to hear how these CEOs would respond.

Business School Way of Life…Revisited

Category : Entrepreneurship
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My previous post from Saturday generated the most feedback of any of my posts so far.  I received tons of emails from some people who agreed and others who thought I was full of it.  I’ll try to clarify and expand further with this post.

I don’t think its wrong to be rich or wrong to want to get rich.  Where it becomes a problem is when the main or only goal is to get rich.  In situations like this, people cut corners and look the other way to make a quick buck.  They do not do the right thing or build for the long term.  As my friend Joe, an Indiana business school grad said, “its becomes poker to them.”  As in all get rich quick schemes, at some point, someone ends up holding the bag.
My problem with the Business School Way of Life is that, for many, the main and only goal is to get rich.  Getting rich should be the byproduct of doing something that is useful and that you like to do.  If you create something worthwhile that people want, odds are, society will compensate you for your efforts.  
Business school is not the only area of the American economy that is prone to this disease.  During the tech boom, people started companies with the express goal of getting rich, rather than building a useful product.  In the end, the bubble burst and the people who were in it solely for the money ended up failing.  Athletes who are in it only for the money don’t seem to do as well as those who love the game.  Construction workers who cut corners to make a quick buck fall victim to the same disease. 
At least in previous bubbles, the people who tried to “get rich quick” left behind lasting infrastructure.  The railroad tycoons connected America.  Oil barons found new resources to lead the world into the automobile age.  The fiber optics companies paved the way for the Internet.  What has the finance industries’ boom and bust left us with?
My previous post was more a critique of American culture as a whole, using the business school way of life as a lens to focus on the problem.  It seems to me that many people my age now expect to love their jobs AND get rich without putting in full effort.  It seems to me that people in previous generations expected to have to grind away in jobs that they did not necessarily love in order to succeed.  I am not suggesting that everyone should go to work in a big company and grind away in corporate America.  On the contrary, I think it would be great if more people took the risk of joining smaller companies out of college or even started their own.  This way, they would be more focused on building something lasting, rather than “playing poker” with other people’s money.
I may have been too harsh on business schools and the people who attend them, but I truly believe that the world would be a better place if more people decided to go into other, more productive careers.  If more people would stop trying to get rich quick and instead tried to build something new and interesting, maybe we wouldn’t be in this mess that we are in now.  I think that if current college students and recent grads got back to the basics of trying to solve problems and build interesting and worthwhile things, they, along with us, would be better off.

The Business School Way of Life

Category : Entrepreneurship
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John Talton’s recent article on britannica.com called “Business Schools & Financial Services: Oh The Harm They’ve Caused” is a great article on a subject that I have been meaning to write about for awhile now.  Talton’s main premise is that:

…for a generation or more…so many of our brightest college graduates have gone to Wall Street to get rich, rather than creating something useful or beautiful, rather than helping to strengthen and reinvent industries that actually produce something. Those with less talent, connections or family money have mimicked them, choosing to work in “financial services.”

Tellingly, they are enrolled in highly publicized “ethics” courses. And year after year, the top graduates go into finance. Most graduates move into settings where they continue their socialization into being an unquestioning cog in the matrix. The motivation is at once banal and uniform: I’ve talked to many classes where students say their main goal in life is to “get rich.”

As a Poli Sci major who started and ran businesses while in college, I became disillusioned with many of the students who took their classes in Grainger Hall and the courses that they were enrolled in.  By Sophomore year, it was clear to me that many, if not most, of these students were on the “get rich quick” plan and had no interest in building anything interesting or worthwhile.  They wanted to become cogs in investment banks or work in financial services.
Their goals were so completely different from mine, as were their values.  They valued name over actions and flair over substance.  They viewed business school as the next step to bonus millions, rather than a place to learn how to actually do something.  To be clear, not everyone who I met in the business school fits into this category.  I can think of many counter examples of smart people who were genuinely interested in the inner workings of finance, real estate or accounting but in my experience, the vast majority fit into the “get rich quick” group.
Michael Lewis’ great article from the December edition of Portfolio called “The End of Wall Street” visits many of the same themes.  He is hopeful that with the recent downturn, many of these smart people will be dispersed into other, more productive industries.
I wholeheartedly agree.  The best thing that could happen during this recession would be for the extremely smart people currently working in finance to move into other industries.  Imagine if these smart people were unleashed to tackle other problems like the future of the auto industry, green technology, education or any other huge problem.  I know many will take those last few sentence as sarcasm since these same people had their hands in the financial meltdown, but I am hopeful that they might be more successful in other industries.
It would be great if the best and the brightest college students just entering college now eschewed not only the business school, but what I’ll call “the business school way of life” and learned common sense life lessons.  Instead of doing “finance” they learned history and politics and how the world actually works.  These smart people would be poised to lead America’s next generation of companies that actually create, invent and innovate, rather than just move money around.  I believe that America, not to mention the world as a whole, would be much better off if these changes occur.