Debtenomics

Well, you could hardly say it was a surprise that UK has come out with a disastrous budget today. What did catch people's attention is the amount of new gilt issuance - an incredible £175bln.

In spite of some politically rewarding token tax measures on the rich, a glance at the so-called "red-book" behind the speech shows that forecasts remain insanely at odds with reality. 3.5% growth within 2 years? Absolute fantasy.

The surprising thing is that sterling hasn't dropped even further, or the gilt/stock market for that matter. Perhaps everyone is looking away?

Citi spin - part II

With the help of the US Government, Citi stumbles on! Having finally finished reading their Q1 earnings announcement, I'm slightly shaken. OK, I got the timing on their demise wrong...they're stills tumbling on. Yet I remain convinced that they will need yet another helping of aid (unless they get Lehmaned).

Anyway, when you take out some of the tricks that Vikram and his chums in their plush (newly refurbished!) executive office, it starts to get scary. From that $1.6Bln headline "profit", I've so far taken out nearly $1.1Bln, mostly one-off gains and rather flagrant accounting tricks. Considering the decimation of some of their opponents, the profit suddenly looks thin. Also, those credit loss prediction levels seem woefully low.

Citi is running on (government funded) fumes, so watch the upcoming quarters with interest (the academic type...you don't get much interest from a Citi deposit these days!).

Circular capital

What goes around comes around. A few years ago, eBay was congratulating itself on buying Skype for a whopping $2.6Bln. At the time, even analysts (!) were saying that they had greatly overpaid. The transaction was eBay at its worse levels of hubris and misguided manifest destiny. A capstone to the awful leadership of Meg Whitmann, who know seeks to wreak political damage in California.

Now the news is out that Skype is back on the block. The rationale for flogging it is that there are "limited synergies" - a shame eBay didn't think of that a few years ago. Due diligence anyone?

Treasury Iceberg

I know I've been raving on about the bubble in US treasuries (add UK Gilts to the mix). Once Bernanke and his merry men break the printing presses, expect a severe shift upwards in yield. Although I wouldn't quite go as far as the Mad Trader just yet, all the signals are pointing to a government rapidly running out of options and ammunition. Hard to tell when this will snap, but I'd run a mile from government bonds.

Liquid hope

I'm not a huge fan of "chart of the day" on Bloomberg, as you run the risk of people data mining the past to fit a novel idea. Yet today's post highlights an interesting side effect of the large amount of cash sitting on the sidelines.

According to the article, this large amount of liquidity is a foundation to sustain the recent stock market rallies. Well, theoretically perhaps - but let's remember why that cash appeared in the first place. A greater cause for concern is that the fact that earnings season will soon be upon us, and it's a fair bet that results will be, in many cases, totally ghastly.

Still, I think there might be a bit of froth left to go in the market (with the caveat that my short timing is far from perfect). Yet at some point the realisation will dawn on investors that we're in for a painful and slow crawl, not a "snapback" recovery. Wells Fargo was a blip, not a green shoot of recovery. Come on, in this market, any bank left standing SHOULD be announcing great earnings - after all, any loans being written will be at very healthy margins (shame about the 2006-2007 loan book though!).

Shamwreck Banks

Ireland's banking woes are now well known, even though fairly little scrutiny has taken place so far on the extent of their property lending operations. For example, if you want to see a grandiose example of that hubris, head to the north of England, where dozens of half-finished apartment blocks are starting to fray. The speculative developments that the Irish banks got themselves into (no doubt to partner with their friends the property developers) are a sight to behold.

Now the scale of the damage is forcing the Irish government to drastic measures. Strange that such a mid-sized country is the first to go full throttle on the toxic bank road - in this case, the toxic bank is the government, as it will buy up debt from their ailing banks.

Granted, rating agencies are hardly the sharpest market participants, but even they smell trouble down the road, hence the first (of many?) downgrades today.

Double up or quits!

Like an alcoholic with someone else's bar tab, Colony Capital is going after more gaming resort assets with their intent to provide a loan to MGM Mirage. MGM was recently sued by its partner Dubai World, and faces covenant waivers expirations next week. Just to show how crazy the situation is, MGM has hired Morgan Stanley to advise (!) it on bids for some of its non-Vegas casinos.

Yes, that's the same Colony whose recently home runs have included Stations Casino (RIP). You can't fault Tom Barrack's hubris, but talk about not learning the lesson first time round. Still, every one who has touched this situation seem to be financial morons - would you have Morgan Stanley advise you on real estate, after their recent disasters with MSREF VI?

Taxing Havens

With all the financial and industrial mayhem underway, it is a bit surprising that the G-20 communique harps on about cracking down on tax havens. Yes, the summit named and "shamed" four jurisdictions that were deemed uncooperative by tax authorities fishing for details. Bet you can name them...

Drumroll - the list of shame is...the Philippines, Uruguay, Costa Rica and Labuan? Eh? Perhaps the places where second rate arms dealers bank, but hardly a hotbed of tax sophistication. Rather than focus on marginal tax avoidance, perhaps the G-20 governments should clean up their balance sheets, before they start to look like the failed firms they have been bailing out.

Civil stupidity

It would be charitable to call it eccentric, but the UK government's latest pay action is simply crazy. In the midst of the downturn, and with the ghastly state (and worsening) state of their finances, they still decide to award their public sector workers a pay rise of 1.5% next year. Deflation? Schmeflation, says Gordon Brown.

Devalued, discredited and delusional. Jim Rogers might be a tad hyperbolic at times, but it's hard not to view the UK as "finished". At the very least, it's on the floor and gasping.

Brace for default impact

GM bondholders have been bracing themselves with the increasing likelihood of a default. What has caught them off-guard is the speed of the decline, which government intervention has failed to arrest. They are now facing up to even lower recovery rates, possibly in the 20 cent on the dollar range.

The above recovery rate explains why this business is spent - when the assets of the business are worth such a small fraction of its debt, any further cash to fund GM is simply money down the drain. Other commentators have been hammering this away since the crisis began, but Washington blinked in the face of the political dead-weight of bankruptcy.

I think there is no longer an "if" on bankruptcy proceedings, merely a discussion on the form of these proceedings. It is hard to be optimistic that GM can suddenly face up to its 20 year lag behind its Asian and German rivals and make cars that a) work, b) have style and c) incorporate 21st century manufacturing processes.

Sadly, it's best to admit that it's over. Wind this spent force down as soon as possible. If something can be salvaged from the wreck of GM, so much the better. But General Motors' time has passed - prolonging the agony is quite cruel in the long run.

The commercial property (falling) clog

News that a local landmark in my former home of Boston is going for a fire sale price didn't come as a surprise. The Hancock Tower is (apparently) the tallest skyscraper in New England, and is about to go on the block as its current owner Broadway goes under.

Just to add spice to the equation, the lenders to this deal (purchased from Beacon Hill Partners) were Lehman Brothers and Royal Bank of Scotland. I'm slightly annoyed that my usual technique (just find where Merrill is doing deals - that's where trouble will come) has been jinxed by this one.

Some of the side comments around this auction are interesting. Apparently, Broadway felt that some reduction in vacancy rate (it was 99% at purchase) would be good, as it would allow the option to re-lease space at higher rates. The Hancock Tower wasn't the only thing that was high...

Dunfermline the crumbling building society

In the great scheme of things, the collapse of the Dunfermline building society in Scotland (a UK version of the mutual bank/credit union) is a relatively small ticket item. What is interesting is the apparent laziness of civil servants to push through a rescue deal in time.

It's slightly alarming that after all the previous (and far larger) rescues that have taken place, the response from the UK continues to stumble. Although the irony is that this bust firm is based in the backyard of Gordon Brown's constituency. Quite appropriate, on reflection.

Core Concept 3 - Inflation noise

Coming back to my "Core Concept" series, I thought I'd spend a little time looking at the implications for inflation on your investment decisions. With the near-constant mention of the term, I thought I would be useful to look at this in a bit more detail.

Inflation seems to make sense intuitively. After all, when prices change it's hard not to notice it. Recent talk has been about the spectre of "deflation", where prices spiral down a la Japan lost decade. The behaviour of the Japanese makes sense - if you know prices are going to fall, you'll wait a week or so expecting the price to fall. When that takes place, you decide to wait a little longer for another price cut. And so on, until you enter a deflation spiral.

This fear has haunted the Fed and other central banks, as well as governments, and is behind the recent stimulus packages to kick spending up.

What people don't always appreciate is that "inflation" figures are a very coarse approximation. They are based on a basket of goods that are deemed representative of the population, but your personal inflation rate might be very different from (say) the CPI. This is because the split of your expenses (say % on food, energy) may vary a lot from the average.

From an investment perspective, inflation can be very destructive. After all, if a dollar suddenly buys you less, you need your investments to earn more to make up the shortfall. Too much inflation destroys your purchasing power. Too little, and the economy may start to slow.

So how do you defend yourself from inflation? Stocks have long been touted (and I use the term deliberately) as a way of hedging inflation. But it's not strictly true. Take a single company as an example. If it can pass 100% of a rise in inflation to its customers without hitting the bottom line, then you are effectively hedged. However in reality, to stay competitive, firms can't always up their prices, so the rise in costs into their profits, hence earnings, hence your stock value.

Bonds are normally poor at inflation control, as they are fixed return instruments. The exceptions are inflation-linked bonds, such as TIPS and Index-Linked Gilts. However don't expect a perfect hedge, as their payments are keyed off an official rate (CPI) that might not be your personal inflation rate.

Over a long term, real assets such as property do tend to track inflation, but again you can't take it as a given that it will be a perfect correlation. So in summary, inflation is something you have to factor into your portfolio decisions, but don't assume that simply buying inflation-linked instruments alone will work. It makes sense to have some exposure to them, but it ain't a panacea.

State of Hypo-action

The headlines have focused largely on US and UK banks recently, but a slow-motion car crash is taking place in the banking sector across Germany, Austria and Eastern Europe. A graphic example of this decline is the state of Hypo Real Estate, which is going through the motions of handing the keys to the German Federal government.

To add a bit of context, Hypo used to have a relatively (if dull) business of public sector and infrastructure financing. Over time, their commercial lending practice started to balloon, offering everything from mezzanine financing to RMBS/CMBS. Their favoured hunting grounds included eastern Europe, where they funded many an over-leveraged deal where the equity now been wiped out (and some of the junior debt holders too).

I actually went to see them at the high of their (shaky) business in London. A shiny new office in the Swiss Re building in the City (pretty expensive for a mid-sized wannabe investment bank), and a frighteningly gung-ho attitude. I was taken aback, as the only prudence there was in a dictionary.

A 93% fall in market value speaks for itself - this business is a dead bank walking. What interests me is that we haven't yet seen too much newsflow of this type from Austria, whose banking system has equally worse exposure to this mess. Stay tuned!

The Browning (Drowning?) Version

I was going to write a post about the insane spending plans being touted by the UK Prime Minister Gordon Brown, but this rapidly spreading youtube video of British MEP Daniel Hannan does a far more eloquent job. He does have the luxury of having Gordon Brown in front him though.

To get an example of how things should be done, take Chile. Sure, they enjoyed their revenue windfall from the boom in copper prices. The difference versus their "developed" peers is that they saved the money. As the Chilean President put it, her country is in a better place "because of our decision during the good times to save some of the money for the bad times."

It's a sad reflection on the state we're in that such basic financial sense seems to have evaporated. The fact that most financial blogs (including my own) have to spend so much time commenting on political statements is, I confess, a depressing development.

Gilt-edged swords

The failure of the latest UK Gilt auction today could be down to several factors. Aside from the odd maturity date (40 years), it didn't help that the Bank of England governor came out with some negative comments on stimulus packages the day before.

Having said that, the inevitable front-runner is investment sentiment. With tax receipts about to fall through the floor, the Treasury's forecasts are not optimistic - they are fantasy. In that situation, you can understand the caution of buyers.

One swallow doesn't make spring, but the UK government needs to take heed that selling Gilts is not a free ride. But to put things into context, the recent fall in Gilts pretty much erases the recent "pop" in the market following the quantitative easing announcements. The real danger is that policymakers are deploying quantitative easing with little understanding of its negative effects.

Dead air stock market bounce

It's amazing what a government initiative can do for short-term sentiment. Witness the rocket-fuelled rise of major indices today, driven up by the US Treasury's announcement of its latest (greatest?) plan to get private capital to co-invest into its toxic debt rescue plans.

Whilst the administration is (slowly!) starting to move towards action, I fear that the plans are still vague and far from solid. In this case, it will be a while before we find out if private investors are playing the game. To a large extent it depends on the Treasury's rules, which they are still tweaking.

Why am I so bearish on stocks? This rally simply doesn't have any strength behind it, aside from fumes. Corporate earnings are going to be awful for a while yet, with a rising unemployment trend. Not a healthy brew for an equity market.

Eurozonked output

Absolutely dreadful figures from the Eurozone on industrial production this week. Year to year, the drop was a staggering 18%, with a 3.5% decline from January levels. The damage was particularly severe in the manufacturing powerhouses of Germany and France.

It has to be said that the strength of the Euro has been causing carnage for these export-led sectors. Given the relatively heavy weight of the Eurozone to manufacturing, it makes the ECB's hard stance of holding up rates (thus the Euro exchange rate) all the more perplexing.

With production spiralling down, I don't think inflation is a big concern over the coming once. The potential bankruptcy of swathes of Europe's manufacturing (and intellectual capital) base is.

Lehman Brothers - calling former employees, clients

I've been gathering information on Lehman Brothers' demise over the past few months. The more I learn, the stranger the tale becomes. Whilst it may take a while yet for official documents to surface, I firmly believe that the "official" sequence of events misses many points.

Several colleagues and friends have finally convinced me to start writing a book about these events. I don't intend it to be a "screaming and raving" attack on individuals (unless I find out it's warranted, of course).

But I would be very interested to hear about any experiences from former Lehman employees (or clients) about those eventful few weeks. If you are in those categories, I am sure you have some valuable stories and points to share, whatever your role at that time.

Please feel free to write in (or email me if you would prefer to keep the communication private from public eyes). Confidentiality and anonymity will be honoured in all cases.

Office nomads

I don't normally comment too much on individual company trading updates, but recent comments from Regus, a UK office rental firm, opens up some interesting points on the asset management business and the office property market.

In case you haven't come across them, Regus effectively allows companies (or individuals) to hire out meeting rooms or offices on shorter-term leases. In many cases you can also hire some IT support and catering (all for a fee, of course). Taking London as an example, they have several sites dotted around the city, particularly in the the major financial hubs of the West End and the Square Mile (Canary Wharf is dead right now, fyi).

When it works, it is a high profit margin business, since the rates being charged are sky high. And you get charged for EVERYTHING, including sugar for tea or coffee (I kid you not!). They provide fairly lacklustre business support, as they know you are dependent on them - after all, it does a firm no good to its reputation to keep moving addresses.

The more subtle point is that these buildings are a good barometer of the fortunes of financial firms, particularly small and mid size ones. Whenever I have to attend a meeting in one of these places, I wander about a bit to see what sort of firms are there. Trust me, the names on the board at reception change every week! And up until recently an alarming number of them were one room affairs...not exactly confidence-boosting. Yet a Regus office in (say) Mayfair offers a veneer of respectability - a nice postcode to have.

Needless to say, many firms are disappearing in the current climate. And as the nearby office blocks (with ever increasingly large "to let" signs) are not filling up, it either means landlords haven't started to lower their rent demands, or many firms are simply going bust. In all sincerity, I think it's a combination of both right now.

The bottom line is that if you are looking to rent offices in London, hold out - the yields have far to widen.

Long and Weavering road

That a few hedge funds are turning out to be fraudulent is not a great surprise. The moment the good times cease, there's no more momentum to keep the deceit running. In the case of Weavering, which crashed and burned today, it appears to be a fairly straightforward con.

What is surprising is that anyone would have invested in that product in the first place, if they'd done some basic due diligence. After all, isn't it a bit odd for this type of strategy to have such a large trading volume with a Cayman entity, rather than with its brokers?

Amazingly, the auditors of the fund (Ernst and Young) signed off the accounts - including a statement there were no related parties able to exercise significant influence. And yet two swaps were on the books with a notional in excess of 75% of the entire fund.

You'd have thought that after the demise of Arthur Andersen (RIP) in the Enron debacle, the remaining auditor firms would have learnt the lesson.

Federal Unreserved

Apocalyptically insane, as one of my colleagues would say - the Federal Reserve has thrown all caution to the wind and decided to roll into the last chance saloon. In addition to buying an additional $850Bln in mortgage bonds, Bernanke's crew are also going to buy $300Bln in Treasuries.

Sure, we duly got a pop in the Treasury market today as the Fed put its foot on the quantitative easing accelerator. Equity markets also got a kick up as a result.

It is a real shame that the US is following in the misguided footsteps of the Bank of England down the quantitative easing route. The structural changes that the economy needs to right itself cannot be absorbed by monetary policy. There is an inconvenient point of view that all these bailouts are merely postponing the necessary corrections - the final reckoning may yet prove higher.

That being said, PIMCO's Bill Gross proved to be right on the money - they suggested buying what the government will buy ahead of them. I admit to regretting not following that advice to a sufficient level. On the other hand, I take some comfort from the fact that even in these turbulent times there are ways to make money - one of which is simply not to watch the ghastly and naive CNBC.

Spin Citi

The never-ending hesitation on the Citi case has been rattling the market, in spite of Bernanke's "no nationalisation" statements today. I don't want to cause further anguish, but those assurances remind me of the answer a chief executive of a soon-to-fail Icelandic bank when asked whether deposits were safe - you guessed it, the response was a cheery "Of course!".

Now, I'm not saying that depositors should pull their cash out of Citi (unless they are above the government guarantee limits, of course). But the assumption that the banks are even close to being out of the woods is simply pie in the sky.

The bane of Thain

It just doesn't stop - now we find out that Bank of America and their (sorely missed?) former employee John Thain have been interfering with an investigation by the New York attorney general.

You'd think that with everything else going (including Citi doing an ever more convincing "dead bank walking" routine), cooperation with the government might be a smart move. Trust Merrill/Bank of America to miss that. Then again, coming back to my "chercher le Merrill" theorem, perhaps I shouldn't be surprised

The Banker's bonus problem...solved!

Rest assured, I have found a way of sorting out the banker's bonus debate in a way that satisfies all parties. Rather than get paid in cash, why not pay them in CDOs, CLOs and leveraged loans - preferably the ones they advised on! If the deals are as sound as they say, surely they'd be happy to have a slice of their own action? Freescale debt anyone?

Where Madoff leads, others follow

Just when you thought all the rats had left the sinking financial ship, along comes another (at time of writing unconfirmed) fraud. That being said, this case is truly amateurish in scale compared to Herr Madoff, at a mere $8Bln. Why, that's a rounding error on Turbotax Tim's never-ending wave of bailout plans.

Step forward Sir (!) Allen Stanford, who is alleged by the SEC to have committed a multi-billion dollar investment scheme fraud. The US marshalls swooped in on Stanford Financial Group, and assets are being frozen.

Strange, as Stanford himself was relatively low profile until he decided to splash some cash in world cricket. A couple of english players were hired for million dollar rates - I hope they took it in advance.

Real escape

In spite of the many train wrecks in the financial sector, today's news from Morgan Stanley's fund management wing takes some beating. The revelation that someone in their real estate division was bribing Chinese officials is a clanger - particularly as this falls into the Foreign Crimes laws. That call to the DoJ must have been great fun!

Bankers have taken much of the limelight till now. Yet the press hasn't really talked about the catastrophe taking place in the large leveraged real estate funds (be it Morgan Stanley or others). Crazy gearing, lax property analysis and flaky deal makers - a toxic brew.

One can only hope that this crisis will finally sweep away these asset managers. They grew on the coat tails of an investment banking parent, fed by easy debt. Even if they didn't break the letter of their mandates, they've clearly broken the spirit behind them.

Fixed Incoming

An increasingly well-trodden path in the investment press is the suggestion that corporate bonds (particularly investment grade) offer "historical value". This rests on the fact that the yield spread of investment grade bonds is wide enough to represent a good risk-adjusted option.

A few comments on that. First, the spread was much wider in Q4'08, as the credit crunch and financial sector implosion accelerated. So some of that potential return is gone. That doesn't mean that there isn't value there - but bear in mind another "catastrophe" would spike the yields back up again.

Second, you have to recognise that a large part of the investment grade fixed income market is based on debt issued by financials (banks, insurers etc). Granted, government is unlikely to let a major bank fail, but there's always the risk they could wipe out holders of junior bonds (they can certainly do it for shareholders!).

So how do you take a position in investment grade credit? The quickest route (and cheapest) is still an ETF. The issue with those is that they are based on indices that are, you guessed it, dominated by financials. If you're happy with some exposure to financials, why not though.

I'm very cautious on active managers, as they tend to be expensive and average bond pickers. Whether you go down the ETF or active fund route, please make sure you download the fact sheet of the fund, and look up the index information (it should show a sector breakdown of what the fund holds).

In these troubled times, it's really worth investing that extra half hour to read the ingredients of what you're actually buying. Happy bond hunting!

Sorry is the hardest word....

....not anymore, at least over in the UK! Today was a true pardon-fest, with the great (and recently rescued) bankers from RBS and HBOS testifying before a Treasury select committee. Every other sentence seemed to be an apology - although it was always a "collective" one.

However the more interesting revelation is that someone in HBOS (in risk management, believe it or not) raised the alarm about balance sheet risks as early as 2005. After a brief inquiry (or witch hunt, to be more precise), the person in question was duly sacked. The chief executive at the time, who dealt with this minor problem, is now one of the most senior members of the UK financial regulator. Keeping it within the family, clearly.

Amazing - and you thought the SEC had problems!

Las Vagrants

Talk about a neon car-crash. It's been general knowledge for a while that the Las Vegas real estate market was heading for a hard landing. Yet today's announcement that house prices in that area have collapsed by 41% since their 2006 peak is quite stunning.

Into this mix of falling prices and soaring unemployment steps Station Casinos, which is announcing a proposed pre-packaged bankruptcy today. For information, this crazily leveraged deal was backed by Colony Capital, and unsuccessfully tried to do a debt for equity swap back in December.

Still, I don't think Colony needs to feel alone. The informal newsflow trickling into my firm about various private equity real estate funds is pretty horrifying. Talk of debt facilities maturing in the next few weeks which are not being refinanced, falling occupancy rates and rising capital expenditure requirements are joining the deleveraging party.

Of course, these real estate funds wouldn't be in this mess if they'd have a modicum of common sense in their deal underwriting. Even today, a fund updated me with a 50% drop in equity values. And yet they still think that by 2012, prices will have not only recovered, but doubled from their purchase price in the boom years of 2006-2007. Proof that people can always dream in Vegas...

Federal Depress

Like an addict getting its fix, the Federal Reserve has decided to extend its liquidity facilities and foreign exchange swaps by another six months. Whilst I don't have an issue with the FX swap lines, the "liquidity facilities" include a morass of relief packages to impaired entities (including Wall Street).

Given all the news flow, a more measured approach would be to extend the FX swap lines, and start reeling in some of that precious liquidity propping up the commercial bank's toxic loan books. We all know those loans are worth a few cents on the dollar - having the Fed prop up valuations is of no help to anyone at this point.

Money for almost nothing

As the new US administration prepares its "big bang" financial rescue plan (a description they might come to regret), opinion is increasingly divided on the creation of a so-called "bad bank".

Perhaps it would help to outline what this actually entails. The assumption is that lending can only return to "normal" if banks have some stability in their capital base. As a result of their recent recklessness, banks currently have over a trillion dollars (a conservative estimate) in loans and related securities that no one can price - in many cases they are worthless in all but name.

The argument for a "bad bank" is to create a government sponsored entity (with taxpayer funds) to buy up these assets from these banks, in effect cleansing their balance sheet. The risk that these assets go to zero transfers from the banks to the government. So banks can happily lend again, as the logic goes.

The perma-optimists (no doubt including that awful Anatole Kaletsky) would argue that the government may make a profit, assuming that the "bad bank" buys up the assets cheaply enough. A pretty heroic assumption - after all, if these assets were of some value, wouldn't a bank want to keep hold of them?

The end game is unfortunately likely to be as follows: the banks get a clean balance sheet, and go right back to their bad old habits. Meanwhile, the taxpayer "bad bank" gradually accumulates those losses. As a result, taxes will have to rise, and in a few years time the banks' balance sheets will be just as toxic as before this crisis started.

An afterthought - why are so many politicians pressing for banks to return to "pre-2006" lending standards. Come on, that is what got us into the mess. If this plan goes ahead, China's criticism of the western model will sadly be fully justified. This is not a political point (I broadly support the Obama administration) - however this "toxic bank" idea is just asking for trouble.

Scoot capital

So much for fund regulation. Although a rounding error in these Madoff times, the recent fraud at Scoop Capital is yet another indictment of the current regulatory regime. As the fund manager does a disappearing act, the SEC has revealed that assets were overstated by $300m, and the fund in question has actual assets of less than $100k.

Astonishing - it shows how ineffective the reporting requirements actually are. Florida seems to be a hotbed of investment fraud. Madoff, Nagel, the land scams of the 1920s...at least it's consistent.

Sound as pound heading for the ground

In a piece in today's Financial Times, Jim Rogers makes the case that the United Kingdom is out of options. Its currency has no floor, London's status as a serious financial centre is a joke, and the public finances a disaster. Apart from the currency point, the same could be said of most developed nations, I have to say (the US being the exception, as it operates the world reserve currency).

I was surprised that Rogers didn't harp on about his usual hobby horse of investing in commodities. Talk about a broken record. If you'd taken his advice (unchanged since time immemorial) to buy commodities last year, you'd be nursing some nasty losses. Still, he has a point about the UK. Granted they don't have the same level of difficulties (yet) as the Citis and BoAs of this world, but the relative slackness of their government (compared to the momentum of the Obama administration) is a cause for real concern.

Citigroup shareholders never sleep

Lost amidst the jumble of commentary on the Citigroup situation, one point that seems to have escaped scrutiny is management. Specifically, why is all the talk about replacing the current chairman (Bischoff) with a fellow board member (Parsons).

Yes, that Dick Parsons - the former Time Warner executive (and we all know the many successes of that entreprise!). Isn't it about time that someone from the outside (with no vested interest in Citi's awful internal politics) to come in and cut this monster down to size?

Nationalisation is inching ever closer, and shuffling the deck chairs in the boardroom won't cut it. The company badly needs a group of new managers unbeholden to Citi's internal factions - it's the only way to turn this listing ship around.

Anglo Irish Jig

Just when people thought that the financial system was seeing some sort of stabilisation, along comes another full-scale nationalisation - this time at Anglo Irish Bank. Granted, it's not a huge dent in the system compared to Citigroup, but nevertheless an unwelcome development.

The Irish government was left with little choice. After guaranteeing all deposits (a somewhat rash and expensive move), the recapitalisation of AIB was always going to be problematic. In this case the market just wouldn't play ball, leading to a binary choice between a bank failure and full nationalisation. AIB did not help its case with a controversial loan transaction by its chairman.

The full scale of the folly of relying too much on wholesale funding is now plain to see. As an aside, Volcker's action group failed to quash a potential return of some sort of successor to the Glass-Steagall Act (unwisely dismantled in the 1990s). I think such a sequel would be no bad thing.

Emerging issues

One misdeed can undo years of hard work. Such is the case of the Satyam fraud, which has knocked the Indian business world sideways. Other firms in the outsourcing business (e.g. Wipro, Infosys) are now being tarred with the Satyam brush.

Corruption and fraud risk is everywhere, and as the Madoff case proves, it doesn't matter whether the country concerned is "developed" or "emerging". It is a great shame for India though, as it struggles to put some sort of order into its infrastructure.

Since English is one of its mainstay languages, India should have benefited far more in recent years from global trade. Unfortunately their Chinese neighbours simply pushed (sometimes brutally) ahead with big infrastructure investments that are now paying off.

Satyam is a corporate fraud, pure and simple. But in these stressed times it only takes one accident for capital to start flying back to government bonds (another bubble waiting to pop).

Arise Sir Anatole Kaletsky, Intellectual Bankrupt

Simply incredible. Economists are hardly the most credible or popular commentators at the moment, given the dire straits we're in. Their case isn't helped by the fact that their quaint theories are at least part of the reason markets have headed south.

Yet the sheer arrogance and lunacy of some of them is astounding. It's a crowded field, but the award for Intellectual Bankruptcy has to go to one of my favourite villains, Anatole Kaletsky. In his latest piece of sanctimonious claptrap, he puts out the idea of taxing savers in order to force them into spending mode. Truly a master of the facile school of economic thought.

Whilst Kaletsky belatedly admits that he has made many poor calls recently (try all of them, Anatole), this latest idea is simply crazy. Aside from punishing the people who kept their heads as others leveraged up, forced consumption would be a disastrous idea, funnelling precious capital into panic-driven investment decisions. Hardly a recipe for long-term value creation.

As government prepares to issue a huge amount of new debt to fund hastily-crafted vanity projects, Kaletsky's idiotic idea would, if implemented, destroy the deposit base of the banking system, forcing a further round of bailouts. Those bailouts would be funded by (you guessed it) even more government borrowing, with the taxpayer on the hook.

No amount of academic puff can disguise the stupidity of this move. It's morally reprehensible to be scaring savers and pensioners at such a time. This moronic action plan (if you can call it that) would cut down the last consumers standing. Ironic, isn't it?

At events where Kaletsky was a speaker (a generous description), myself and others were consistently underwhelmed. The man is a peddler of twaddle, and hawks his mediocre research services to the investment community like an estate agent - but with less class. Anyone following Kaletsky's arrant nonsense has at least one certainty - plenty of capital losses.

REIT for the skies?

I happened to bump into one of my acquaintances in the fund placement business - in essence estate agents to the investment world. The "hot story" of the day where "smart investors" are putting their money to work is in real estate investment trusts (REITs).

Naturally curious, I pressed him as to why that's the case. "Because of the tasty dividend yields, you moron!". "That's it?" I queried. All I got was a shrug, as if there's no point in further discussion if I don't get it.

Heaven help anyone taking action based on such threadbare reasoning. Sure, some REITs may look compelling on a dividend yield basis, but these are based on projected future dividends. Whilst a REIT is obliged by legislation to maintain very large payout ratios (typically 80+ %), there is nothing to stop them not paying a dividend (for example if interest payments rise).

This is a problem for several REITs at the moment trying to "rollover" their financing. Assuming a bank will lend in the first place, the terms will be much dearer, thus cutting funds available for dividends. I don't exclude some REITs being great buys, but a blanket purchase would be crazy without some careful analysis. It's safe to say some familiar REIT names will disappear by the time this recession is done.

New Year, same old Detroit

Proof that not all traditions are welcome, the gruesome threesome delivered some awful sales figures today. Having said that, they were joined by the Japanese carmakers this time round, as the downturn takes hold. Still, Chrysler can take cold comfort that it is the largest mover - sadly in the wrong direction at -52%.

Pundits praying for a quick recovery are forgetting a problem. Given that people were buying shiny new cars through to the start of this crisis, why would anyone in their right mind buy a new one in the current climate? Unless the thing falls apart, there's no need to. So the sight of those production lines still churning out volume is simply insane. The only people making money from this situation are the parking lot owners renting space to park the unsold inventory.