Someone sent me this … hilarious.

Enjoy and have a great 4th of July.   Im off until Monday.

http://www.youtube.com/watch?v=ekKk4SkiC-w&feature=related

The 150 year jail sentence of Bernard Madoff is meant to be a statement to scam artists in training: don’t even think about committing financial fraud.    But will Madoff’s life sentence and the government’s rush to create new regulation help prevent economic fraud in the future?    History, American behavior and even wine tell us it won’t.

Frank Partnoy’s excellent book “The Match King“‘ outlines the true story of Swedish financier and fraudster Ivar Kreuger.  Kreuger was an introverted, quiet and enigmatic Swede who for years in the 1920s and 1930s ran a legitimate match business.    He would sign long-term, exclusive match contracts with various governments and securitize the cash flow, paying huge dividends.    Investors clamored for these investments, and soon Kreuger, who kept paying 20-plus percent dividends year after year, was perceived as a financial genius.    Even as the financial markets began to collapse with the Great Depression, Kreuger continued to convince his American investment bank to sell more and more preferred stocks and debt.    Few questioned him or his companies, despite shockingly little auditing.  In the end, the depression and Kreuger’s greed exposed the fraud and thousands of investors lost hundreds of millions of dollars.

It is wine, not financial instruments, that drives the story in another terrific book.    Ben Wallace’s “The Billionaire’s Vinegar” details how many wealthy and experienced wine investors were duped into buying pricey bottles of wine that ostensibly belonged to Thomas Jefferson.    Even as doubts about their origin grew, more bottles were sold, and the entire old wine market witnessed prices driven to frenzied levels.    Throughout Wallace’s page turner one gets a clear sense that the buyers of these expensive wines refused to heed the warning signs.   Many seemed to rely on belief and blind optimism alone, even as modern science began to debunk some of the claims.

Charles Ponzi became the namesake of scams, even though he wasn’t the first major fraudster in America.   In 1899 William “520%” Miller took investors for more than a million dollars by claiming to have inside stock information.    In fact, in the grand scheme of schemes the diminutive Ponzi was a small fry of fraud.   Consider these other scams, all occurring post-Miller, Ponzi and Kreuger:

Daniel Heath was sentenced to 127 years in prison for running an investment scam in Southern California that bilked 1,800 people out of $187 million in the early 1990s.   Prosecutors said he preyed on the elderly in a scheme that involved money-losing real estate and small-business projects.

James Paul Lewis Jr. told investors he made money by buying and selling distressed businesses, leasing equipment to medical offices and financing medical insurance premiums.  He was sentenced to 30 years in prison for a scheme that ran from 1985 to 2003 and cost nearly 3,300 investors around $70 million.

Reed Slatkin, co-founder of Earthlink Inc. and once a Scientology minister, was sentenced in 2003 to 14 years in prison for swindling investors out of about $240 million over 15 years.

Lou Pearlman, the mastermind behind the Backstreet Boys and ‘N Sync, operated a $300 million stock and investment scam. He was sentenced earlier this year to 25 years behind bars.

Ponzi followed Miller,  Kreuger followed Ponzi, and Madoff followed everyone above.   History repeats itself, despite many of these frauds occurring close enough in time that investors may still have had memory of the previous one even as the new one began.

Those cases are just a smattering of the fraud in America each year.   They grab headlines because of their size.   Each year though countless other scams occur, smaller in scale but no less devastating to those they impact.    In many of these frauds the man (and it almost always is a man) behind the fraud didn’t even have to do much selling.   Instead it is often victims who unwittingly do the selling for them, touting their spectacular returns.   In Kreuger’s case, it wasn’t just other investors but also a respected investment bank selling his stock.   Rather than sell on his own, Madoff used wealthy, connected individuals and so-called ‘feeder’ hedge funds to find new investors.    This kind of selling makes it easier for potential investors and victims to believe the story.

Even non-frauds often bring investors in by using others just like them to make the sell.  How often during the peak of the housing bubble did we see lengthy infomercials touting the ability to make millions flipping homes, usually with no money down?   Many of those were also filled with the “testimonial sell” of others who followed the model.    They can do it, so can you.    Although some home speculators did make money in the early part of the housing game, it was the ones holding the homes when the walls came down who were burned.     And this was, let’s remember, a housing bubble that inflated even as many began to sound the alarm that price increases were unsustainable.   It also inflated just a short time after the Nasdaq bust reminded the world nothing is infallible.

The government wants to create a new agency to better protect consumers and investors.   The SEC is making promises about tightening its investigative priorities.   Lawmakers are holding press conferences and making big promises.    History will be judge of whether any real change will come from the Madoff scam, or whether we will be better protected by those in power.    Let’s hope so.   But history also screams that whether it is stocks, bonds, postal note or wine, there will always be those out to scam and defraud us.   Ultimately we have to be our own best line of defense.    Stay vigilant.   Know that no stock, fund or other investment goes up every year.  Entrust people with your money, but trust yourself as the ultimate policer of that money.   Ask tough questions and don’t hesitate to just show up every once in a while.    History demands it.

Stories I’m reading this Wednesday:

• OECD says the U.S. will lead the world out of recession
• New home sales still not recovering
• Durable goods numbers though surprised to the upside
• Big oil ready for big gamble in Iraq
• Citigroup raising salaries to offset lower bonuses
• Red Roof Inn defaults on debt .. most of it owned by Citigroup
• Pickup trucks from India making their way to a showroom near you
• Paying teenagers not to get pregnant
• Can’t really describe this .. but it’s just cool
• Monorail!  Or not.

Despite the negative new home sales data, some of the home builder stocks are looking more positive.

Notice this chart on homebuilder Pulte Homes (PHM).    It’s not soaring, but notice how the lows of the stock are higher than each of the recent previous lows … generally a positive sign

The Fed makes its interest rate decision tomorrow.   I put decision in quotes above because the Fed is expected to do absolutely zilch with rates.    The rate is set at 0-0.25% right now and absolutely no one sees this going higher.

Still, as always its the brief statement accompanying the decision at 2:15pm ET that really matters.  Fox Business will cover it.

Below is a chart of the rate and how quickly it was dropped as we entered recession.

You’re late.    You’re over-billed.   You’re not in the system.    But it’s okay because they “apologize for the inconvenience”.

I’ve heard those five words - “we apologize for the inconvenience” way too much lately and ill bet you have too.

I’m not sure what’s going on with customer service lately but its taken a steep drop down from an already precipitous decline the last few years.  And it seems to be every industry from travel to banks to towns.
A few highlights from my own recent experiences:

New jersey transit seems to have major delays nearly every week.   Trains runs late, or not at all, and as anxious commuters furiously send blackberry emails to tell their customers or colleagues they’ll be late for that important meeting, there come the words over the garbled loudspeaker: “we appreciate your patience and we apologize for the inconvenience.”.  As my buddy who also commutes jokes, apparently they’re still trying to work out the kinks in the new field of train travel.

The skies are worse.   Most of my recent flights have experienced multi-hour delays in and out of New York.   Its the usual excuses: weather was too bad, weather was too good, the plane didn’t arrive, the plane did arrive but the pilot didn’t, blah blah blah.  Maybe the travelers made the mistake of relying on the actual schedule and missed an important event.  It’s okay.  The airlines appreciate our patience and, of course, “apologize for the inconvenience.”  Tell that to the client left waiting.

Its not much better once you finally arrive at the destination.  I was double billed for a recent hotel stay, and only after numerous calls was the error corrected (not until I had already paid the outsize credit card bill - god forbid I’m late in my payment and have my interest rate doubled).   The hotel was, of course, “sorry for the inconvienence” while I waited to get paid back.

To cap it off (I’m batting .1000 for customer service lately), my town made an error on my property tax bill last year.  I was overcharged, of course, (why isn’t there ever an undercharging problem??) and it was picked up by my mortgage company.  While I know the mortgage company wasn’t responsible for the initial error, they also apparently can’t correct it until the new tax bill comes out.  In December.  So for months I’ve had to pay more than my proper escrow amount because no one seems to be able to resolve it.   I keep calling, they keep billing, and I keep paying more than I should owe.  The mistake was made by others, but I’m the one writing the check.   Maybe they know I’m going to pay my mortgage on time, even the wrong amount.  The consequence of paying late is too great a threat.

Our show starts at 10am sharp.  It’s live television and its prompt.  I’ve learned to make no customer service calls before the show because I know I’m going to sit on hold waiting to explain my problem, again, to the 15th different “customer service expert” for an hour or more.   Somehow I have a feeling that if I missed the show, my boss wouldn’t take “I apologize for the inconvenience” as an excuse.

Why are we accepting this from companies we deal with daily?

We need a customer service bailout.

Shots of the Plastic Logic e-Reader.    CEO said should come to market in early 2010.    Tiny, and very thin.

Every day it seems we discuss another government effort to meddle in the private sector.

Whether it’s bailing out the banks, taking over car companies or the desire by the government to run our health care system, the government has a very poor record of doing anything well.

If you think government-run health care is a good idea, read the following article from author John Steele Gordon and then ask yourself - do you want to go to a hospital that is operated with the same skill as Amtrak or the local DMV office?

——————————————————————————

Why Government Can’t Run a Business

Politicians need headlines. Executives need profits.

By JOHN STEELE GORDON
The Obama administration is bent on becoming a major player in — if not taking over entirely — America’s health-care, automobile and banking industries. Before that happens, it might be a good idea to look at the government’s track record in running economic enterprises. It is terrible.

In 1913, for instance, thinking it was being overcharged by the steel companies for armor plate for warships, the federal government decided to build its own plant. It estimated that a plant with a 10,000-ton annual capacity could produce armor plate for only 70% of what the steel companies charged.

When the plant was finally finished, however — three years after World War I had ended — it was millions over budget and able to produce armor plate only at twice what the steel companies charged. It produced one batch and then shut down, never to reopen.
Or take Medicare. Other than the source of its premiums, Medicare is no different, economically, than a regular health-insurance company. But unlike, say, UnitedHealthcare, it is a bureaucracy-beclotted nightmare, riven with waste and fraud. Last year the Government Accountability Office estimated that no less than one-third of all Medicare disbursements for durable medical equipment, such as wheelchairs and hospital beds, were improper or fraudulent. Medicare was so lax in its oversight that it was approving orthopedic shoes for amputees.

These examples are not aberrations; they are typical of how governments run enterprises. There are a number of reasons why this is inherently so. Among them are:

1) Governments are run by politicians, not businessmen. Politicians can only make political decisions, not economic ones. They are, after all, first and foremost in the re-election business. Because of the need to be re-elected, politicians are always likely to have a short-term bias. What looks good right now is more important to politicians than long-term consequences even when those consequences can be easily foreseen. The gathering disaster of Social Security has been obvious for years, but politics has prevented needed reforms.

And politicians tend to favor parochial interests over sound economic sense. Consider a thought experiment. There is a national widget crisis and Sen. Wiley Snoot is chairman of the Senate Widget Committee. There are two technologies that are possible solutions to the problem, with Technology A widely thought to be the more promising of the two. But the company that has been developing Technology B is headquartered in Sen. Snoot’s state and employs 40,000 workers there. Which technology is Sen. Snoot going to use his vast legislative influence to push?

2) Politicians need headlines. And this means they have a deep need to do something (”Sen. Snoot Moves on Widget Crisis!”), even when doing nothing would be the better option. Markets will always deal efficiently with gluts and shortages, but letting the market work doesn’t produce favorable headlines and, indeed, often produces the opposite (”Sen. Snoot Fails to Move on Widget Crisis!”).
3) Governments use other people’s money. Corporations play with their own money. They are wealth-creating machines in which various people (investors, managers and labor) come together under a defined set of rules in hopes of creating more wealth collectively than they can create separately.

So a labor negotiation in a corporation is a negotiation over how to divide the wealth that is created between stockholders and workers. Each side knows that if they drive too hard a bargain they risk killing the goose that lays golden eggs for both sides. Just ask General Motors and the United Auto Workers.

But when, say, a school board sits down to negotiate with a teachers union or decide how many administrators are needed, the goose is the taxpayer. That’s why public-service employees now often have much more generous benefits than their private-sector counterparts. And that’s why the New York City public school system had an administrator-to-student ratio 10 times as high as the city’s Catholic school system, at least until Mayor Michael Bloomberg (a more than competent businessman before he entered politics) took charge of the system.

4) Government does not tolerate competition. The Obama administration is talking about creating a “public option” that would compete in the health-insurance marketplace with profit-seeking companies. But has a government entity ever competed successfully on a level playing field with private companies? I don’t know of one.

5) Government enterprises are almost always monopolies and thus do not face competition at all. But competition is exactly what makes capitalism so successful an economic system. The lack of it has always doomed socialist economies.

When the federal government nationalized the phone system in 1917, justifying it as a wartime measure that would lower costs, it turned it over to the Post Office to run. (The process was called “postalization,” a word that should send shivers down the back of any believer in free markets.) But despite the promise of lower prices, practically the first thing the Post Office did when it took over was . . . raise prices.

Cost cutting is alien to the culture of all bureaucracies. Indeed, when cost cutting is inescapable, bureaucracies often make cuts that will produce maximum public inconvenience, generating political pressure to reverse the cuts.

6) Successful corporations are run by benevolent despots. The CEO of a corporation has the power to manage effectively. He decides company policy, organizes the corporate structure, and allocates resources pretty much as he thinks best. The board of directors ordinarily does nothing more than ratify his moves (or, of course, fire him). This allows a company to act quickly when needed.

But American government was designed by the Founding Fathers to be inefficient, and inefficient it most certainly is. The president is the government’s CEO, but except for trivial matters he can’t do anything without the permission of two separate, very large committees (the House and Senate) whose members have their own political agendas. Government always has many cooks, which is why the government’s broth is so often spoiled.

7) Government is regulated by government. When “postalization” of the nation’s phone system appeared imminent in 1917, Theodore Vail, the president of AT&T, admitted that his company was, effectively, a monopoly. But he noted that “all monopolies should be regulated. Government ownership would be an unregulated monopoly.”

It is government’s job to make and enforce the rules that allow a civilized society to flourish. But it has a dismal record of regulating itself. Imagine, for instance, if a corporation, seeking to make its bottom line look better, transferred employee contributions from the company pension fund to its own accounts, replaced the money with general obligation corporate bonds, and called the money it expropriated income. We all know what would happen: The company accountants would refuse to certify the books and management would likely — and rightly — end up in jail.

But that is exactly what the federal government (which, unlike corporations, decides how to keep its own books) does with Social Security. In the late 1990s, the government was running what it — and a largely unquestioning Washington press corps — called budget “surpluses.” But the national debt still increased in every single one of those years because the government was borrowing money to create the “surpluses.”

Capitalism isn’t perfect. Indeed, to paraphrase Winston Churchill’s famous description of democracy, it’s the worst economic system except for all the others. But the inescapable fact is that only the profit motive and competition keep enterprises lean, efficient, innovative and customer-oriented.

Mr. Gordon is the author of “An Empire of Wealth: The Epic History of American Economic Power” (HarperCollins, 2004).

Readings this Wednesday:

• Votes nix tax hikes in California as it teeters on the brink
• Citizens in Massachusetts don’t get to vote directly so of course the tax hikes pass
• Does GM = “Government Motors?“
• Another government agency?
• GM doesn’t see deal with UAW before bondholder deadline, either
• “Terrorizing” the bankers
• Senate tries to curb credit card fees
• End of the Yahoo! search as we know it
• This is the best news I’ve heard all week
• Really, Kimmel?

The President wants to raise fuel economy standards for vehicles in America.   His proposal would also help resolve differences between the states and Federal government.

It is a noble goal, and much will be made of it.   But we’ve seen this movie before.   Since the CAFE (corporate average fuel economy) standards were created more than 30 years ago, there have been many attempts to raise them (see below).  Most of those attempts were unsuccessful for a variety of reasons, not the least of which was opposition by the auto industry.    Back in 1990 a few on the Hill tried to push a 40mpg average fuel economy standard.     That went about as far as I can throw a keg.

So here we are again … and there are new questions this time:

1. Will the single party control of Washington enable Congress to truly pass tough standards?

2. Will Detroit’s weakened condition remove some of their opposition ability?

3. Cars can already get 40mpg (Prius, some othe hybrids, etc) so why wait until 2016?

Lots of questions that remain to be answered.

Thanks to my team here for putting a history together of the CAFE standards…
(MY = model year)

1975 - The “Energy Policy Conservation Act,” enacted into law by Congress established CAFE standards for passenger cars and light trucks (The Act was passed in response to the 1973-74 Arab oil embargo) The near-term goal was to double new car fuel economy by model year 1985.

Passenger car standards were established for:

MY 1978 (18 mpg)

MY 1979 (19 mpg)

MY 1980 (20 mpg)

MY 1985 and thereafter (27.5 mpg)

1979-1981 - Light trucks are designated by either 2WD or 4WD

1982-1991 - Light trucks can use 2WD, 4WD or combined designations

1992-2003 - Light trucks only use a combined designation (20.2 to 20.7 mpg)

1990-2001 - CAFE Standards were frozen in place as car manufacturers began producing larger, less fuel-efficient vehicles like minivans and SUVs that greatly appealed to consumers and need to abide only by the more lenient fuel economy standards of light trucks

Fall of 1995 - Congress approved “freeze” legislation that ordered the DOT not to impose any CAFE increases during the 1996 fiscal year, which covered the 1998 model year for vehicles (they renewed this each year through 2000)

2000 - Toyota and Honda launched their new gasoline-electric hybrid models - the Toyota Prius and the Honda Insight

2001 - Freeze on CAFE standards was finally lifted by Congress as part of Bush’s overall national energy policy.

March 2002 - NHTSA issued an NPRM proposing to extend the availability of the CAFE credit incentive for dual-fueled vehicles for four years, through the end of the 2008 model year

March 2002 - Senate passed an amendment sponsored by Sens. Carl Levin (D, Mich.) and Christopher Bond (R, Mo.) that ordered the DOT to study the issue and propose new CAFE standards in two years

March 31, 2003 - NHTSA issued new light truck standards, setting a standard of 21.0 mpg for MY 2005, 21.6 mpg for MY 2006, and 22.2 mpg for MY 2007

April 2007 - the Supreme Court granted the EPA sweeping authority to regulate tailpipe emissions as a danger to human health

December 2007 - The mandates in the Energy Independence and Security Act of 2007 (EISA) switch to “attribute-based standards.” This switch will help to ensure that increased fuel efficiency does not come at the expense of automotive safety. It will require that the fleet of all new passenger cars and light trucks sold in the United States during MY 2020 is at least 35 mpg.

May 2008 -  NHTSA published a proposal to begin implementing EISA by establishing CAFE standards for MYs 2011-2015. A draft final rule for those model years was completed, but not issued.

January 26, 2009 - Obama issued a memorandum requesting that these prposals be issued and that the NHTSA divide its rulemaking into two parts
March 23, 2009 - The Energy Independence and Security Act (EISA) amended EPCA by mandating that the model year (MY) 2011-2020 CAFE standards be set sufficiently high to ensure that the industry-wide average of all new passenger cars and light trucks, combined, is not less than 35 miles per gallon by MY 2020.

May 19, 2009 - Obama administration will unveil national tailpipe emissions standards and mileage requirements Tuesday, which will force automakers to dramatically boost the efficiency of vehicles by 2016 (4 years ahead of the current deadline) to a fleet-wide average of 35.5 miles per gallon, but also give them a single national standard.

(Source: Department of Transportation, CAFE Overview - Frequently Asked Questions, http://www.nhtsa.dot.gov/CARS/rules/CAFE/overview.htm)
(Source: National Highway Travel Safety Administration, http://www.nhtsa.dot.gov/portal/site/nhtsa/menuitem.43ac99aefa80569eea57529cdba046a0/)
(Source: Detroit News, “White House to require 35.5 mpg by 2016″ by David Shepardson, May 18, 2009)
(Source: Facts on File, Fuel Economy Standards, http://www.2facts.com/ICOF/temp/27488tempi0800140.asp?DBType=ICOF)

Today the government announced changes and updates to the Making Home Affordable program.    In the press conference, Tim Geithner and the head of HUD, Shaun Donovan, brought up a gentleman who was having his mortgage modified from a 6.5% interest rate down to a government-sponsored 2%, which will over time rise to 4.85% and lock in at that level.

A few quick thoughts/questions:

The government needs to make this open to everyone, not just those who took on more mortgage than they could afford.    The program is much harder to sell to the American people (if the government even cares to ’sell’ it instead of just ramming it through) by helping only select groups who many in America feel may have gotten themselves into their own mess.   Remember, most of the people helped by this program have jobs.   In fact, the MHP program requires you to show proof of income to obtain a modification.   If you lost your job it probably doesn’t make a difference what your interest rate is.

No bank can make money lending at 2%.    If all these mortgages are going to be reworked down, even temporarily, who eats that loss?

Do programs like this encourage risky behavior in the future, knowing there may be bailout around the corner?

Just wondering…let me know what you think.   Should all Americans be eligible for this kind of mortgage “relief,” even those who bought homes they can afford?