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Call me insensitive, but I have a hard time empathizing with the alleged “victims” of the Madoff investment ponzi scheme scandal.  This is not to say that I’m not disgusted by Madoff and the lack of SEC oversight that allowed his crimes to go on for so long.  I’m just tired of reading, listening and watching news coverage that refers to his client list as “victims”.  On the contrary, I classify this as a case of “They came, they gambled, and they lost“.  There was fraud, so I’ll support their rights to a day in court, and the right to sue Madoff, but nothing more.

Clusterstock provides a good summary of the Madoff victims client list here.  Let’s look at a few from Clusterstock’s list:

• HSBC - has exposure of $1 billion.  But according to the HSBC website, “HSBC North America Holdings Inc. is one of the top 10 financial services organizations in the United States“.  That hardly qualifies them as a “victim”.  I can understand how government officials at the SEC were asleep at the wheel, but a private financial instituion of that caliber and size should have known better! And if they claim otherwise, then I would advise every HSBC customer in America to withdraw their funds and close their HSBC account immediately.
• Other financial firms – Access International ($1.4 billion), Fortis Bank ($1.4 million), Fairfield Greenwich corp ($7.3 billion), and others.  Ditto my HSBC comments – should have known better, and if not, close up shop immediately because you don’t deserve to serve your customers!
• Maxam Capital Management LLC – Sandra Manzke, Maxam’s founder, said she is wiped out and her “fund of hedge funds” will have to close as a result of the Madoff losses.  Are you F#*&$#@ing kidding me, Sandra??? You really have a hedge fund where you charge customers enormous fees for your investing and trading expertise, and then you simply take their money and dump it into a Madoff fund?!?!?!  And let me guess, you simply couldn’t be bothered to ask any questions as to why Madoff’s fund had consistent outsized returns and near zero volatility?!?!?!
• Ira Roth family – $1 million in potential Madoff losses.   I’m a bit more sympathetic to them than HSBC, but on the other hand, if the case of Enron didn’t teach you the lesson on diversification, then I’m afraid nothing will! Well if Bernie doesn’t pay up, be thankful that the taxpayers are now on the hook for a portion of your losses.  That’s right, the Securities Investor Protection Corporation (SIPC), will likely compensate all Madoff victims gamblers clients for up to  $500,000 of their losses.
• Richard Spring – this Boca Raton resident, *AND* former securities analyst claimed to lose 95% of his networth, or $11 million in the Madoff scandal, stating “That’s how much I believed in him”.  Let me guess Richard, you were a securities analyst for the SEC?!?!?!  To paraphrase my response to Sandra from above, Are you F#*&$#@ing kidding me, Richard???
• Elie Wiesel’s Foundation For Humanity – Let me be frank, it’s a well known and reputable organization.  But I maintain my minimal sympathy view for them as well. Charitable organizations operate by taking in donations, and then putting those donations to good use.  When there is more cash on hand than they can efficiently put to use, then they need to temporarily safeguard that cash.  Instead, they chose to gamble that cash away on Madoff’s promise of “risk free *AND* outsized returns”.   According to a statement from their website, they lost $15.2 million from the Madoff scandal, representing “substantially all” of the foundations assets.  Hopefully they have learned their lesson, and will diversify their next horde of unused cash.  That next horde of cash may be the taxpayer funded $500,000 SIPC reimbursement.

Summary – Diversify, diversify, and diversify!  Diversify your investments, your investment classes, and most importantly your investment financial instituions!

Sorry for your losses…

Direct from the Charles Schwab website,

The Schwab YieldPlus Fund® is designed with your income needs in mind. The fund’s objective is to seek high current income with minimal changes in share price.

I have personally owned the Schwab Yield Plus fund many, many years ago – when I had more faith in financial institutions.  The Schwab representative at the time persuaded me to buy the yield plus   fund because it was safe, and it would return slightly better than the money market fund for any residual cash.  Luckily, I closed my Schwab account and the Yield Plus garbage that was part of it years ahead of the financial crisis of 2008.

How is the Schwab Yield “Plus” doing today?  Take a look for yourself.

The Schwab Yield Plus did so well this year (sarcasm!) that there is now a class action lawsuit against Schwab.  From the link,

Specifically, the complaint claims Charles Schwab Corporation headquartered in San Francisco, CA, the funds’ underwriter, investment advisers and officers and directors issued untrue statements regarding the lack of diversification of these funds and the extent of investments assigned to sub-prime mortgage backed and related securities.

The investors in yield plus were not complaining due to losses alone, but due to the misrepresentation regarding the fund holdings.  Apparently Schwab also agreed, because according to this link, they did offer small settlement payouts to the fund holders.

Warning to investors – be careful of any bond fund offering both safety and “extra” income!  That combination does not exist.

Related articles:

• Fidelity “Government Bond” funds – Not all “government bond” funds are created equal

By some accounts, the Seattle housing market has held up very well during the last few years.  Talk to any real estate agent or loan officer in Seattle, and they still seem completely oblivious to the reality of the collapsing bubble.  But measuring objectively with actual data points tells a different story.  The Case Shiller housing value index is one widely available objective method.  The index values are measured off of the base of January 2000 prices, where all cities are given a value of 100.

According to the index, Seattle housing peaked in July 2007, with a value of 192.30.  This means that housing prices were 92% more expensive in July 2007 than they were in January 2000.  The latest available index reading is from September 2008, with Seattle showing a value of 172.84.  This corresponds to a greater than 10% housing price depreciation in Seattle in just over a year.  April 2006 showed a Case Shiller index reading of 172.28, the closest point to the September 2008 data point.  This means that that nearly everyone that purchased a Seattle home after April 2006 is now underwater.

In California, we saw that many underwater home “owners” opted to just walk away.  And by one account in Seattle, that walk away trend has already started.  The Geldpress team recently interviewed one highly paid Microsoft employee who just made his last and final mortgage payment in November.   “Mr Microsoft” (identity protected) purchased a condominium near his Microsoft employer in December 2007 for just under $350,000.

He was a first time home “buyer”, and like many first time “buyers” he didn’t put a single penny down.  His particular mortgage was a 30 year fixed with an interest rate of 6.125%.  His initial total payments, including mortgage and property taxes were $2,600.  This was a condominium, so he also paid almost $300 in association fees, bringing his total monthly outlay to about $2,900.   But several months after the purchase, he witnessed two payment hikes.  The first hike was in his monthly association fees, which were jacked up by nearly $100, as is very common with new condominium conversions.  The second hike was from the lien holding bank, who insisted he spend an additional $400 per month in mandatory flood insurance.  This brought his total monthly outlay to nearly $3,400.  For comparison, “Mr Microsoft” estimates that he can rent an equivalent size and quality apartment for only $1,500.  He now regrets his “purchase” decision, but he does not regret abandoning his mortgage payments.  He expects to live rent free for at least 6 months before eviction, and possibly up to a year.

Although Seattle housing values have held up reasonably well so far in comparison to other major cities, the recent and upcoming job losses may accelerate the down trend.  According to the data reported by the Seattle PI, Washington Mutual is shedding 3,400 jobs in the Seattle area.  The PI also reports numerous other double and triple digit layoffs in 2008, with an increasing trend inherent in the figures.  And if the rumors are correct from the Mini-Microsoft blog, thousands of high paying Microsoft job losses will be announced in January, equating to roughly 10% of its workforce.   That’s hardly the ideal condition to buck the trend of crashing home prices in the Seattle area.  Seattle may soon take over California cities for monopolizing the mortgage walk away headline news.

Just a few weeks ago, I outlined how the $700 billion advertised price tag of the bailout was only a drop in the bucket.  In actuality, the Fed has used over $3.2 trillion of taxpayer money to bailout incompetent financial institutions.  But even the $3.2 trillion figure doesn’t explain it all.

To date, the Fed has spent only half of the advertised $700 billion bailout fund.  But it is absolutely certain that the other half, $375 billion, will be spent soon after Obama takes office, if not sooner.    The reason it has not been spent yet is because there are 23 other underreported bailout programs to tap into totaling $8.5 trillion!   $3.2 trillion has been pissed away to executive bonuses wasted spent so far.  That number will increase quickly to $3.5 trillion after Obama takes office. And it is virtually certain that 100% of the approved $8.5 trillion bailout will be wasted away spent before this financial crisis is over.

Rather than reinvent the wheel, I will refer you to the Bloomberg chart below that outlines the total cost of the bailout.  But just a few notes on how and why we will likely hit the $8.5 trillion mark:

• Commercial paper program – These are the “loans” made to destitute financial institutions, who in turn use the absolute worthless, shittiest mortgage loans they have as “collateral”.  There are slim chances of the government getting paid back.  And there are even slimmer chances that the government will get more than 5 cents on the dollar for the worthless assets posed as “collateral”.  Only $271 billion has been wasted so far, but give it some time, and the $1.8 trillion mark will be hit, and likely raised!
• Money market guarantees – $540 billion approved to guarantee the money markets, which in my opinion, are very likely to fail.
• Loan guarantees – $1.4 trillion posted by the Fed to guarantee bank to bank lending.  Now the banks have no fears about transacting with other insolvent banks because they will turn to the government to guarantee their losses.  And those losses WILL occur as the rate of bank failures does not seem to be slowing.  You can expect the full amount of that $1.4 trillion guarantee to be spent.

The line of incompetent CEO beggers is getting longer by the day.  The Wall Street Journal reported this morning that big commercial developers are now banging on the government’s door, waiting for new taxpayer funded bailouts of their ailing industry.  The developers are naturally blaming the credit crisis instead of their own greed, short sighted thinking, and overbuilding of underrented and unsold properties.

They’re warning policymakers that thousands of office complexes, hotels, shopping centers and other commercial buildings are headed into defaults, foreclosures and bankruptcies. The reason: according to research firm Foresight Analytics LCC, $530 billion of commercial mortgages will be coming due for refinancing in the next three years — with about $160 billion maturing in the next year. Credit, meanwhile, is practically nonexistent and cash flows from commercial property are siphoning off.

…As part of their begging lobbying efforts, some industry representatives have asked lawmakers to explore the idea of setting up a separate program aimed at boosting lending to commercial real estate only….Among those who have been active in the begging lobbying effort:  William Rudin, whose family is a large Manhattan office-building owner, Stephen Ross, chief executive of The Related Cos Cos., a major U.S. developer, and Steven Roth, chief executive of office and retail landlord Vornado Realty Trust.

Surprisingly, the Wall Street Journal left out several key people and groups that are sweating bullets from their own commercial property refinancing difficulties.  Take the MGM Mirage suite of casino hotels, and now a major overbuilder of unsold and overpriced condos in Las Vegas.  The online casino sphere publication recently stated “MGM Mirage was singled out as a company in jeopardy. Even though it recently sold off a major asset in the Treasure Island Casino, refinancing of current debt may swallow its new liquidity whole.”

MGM may not have been explicitly listed in the Wall Street Journal article, but you can be sure that they will quickly sign their name to any new bailout begging attempts.

Volatility (VIX) is still extremely high, but it is coming down quite a bit.  The OptionMonster brothers from Fast Money were advocating selling straddles into this environment.  Selling straddles has infinite risk, and a small potential reward.  For a good analogy on infinite risk, just think of AIG, and all the insurance they sold on credit default swaps.  Look where they are now.

Back to volatility.  Despite the fact that it is deflating, and possibly coming back down to more normal levels, it’s still considered very high by historical standards.  And its still a great time to take advantage of premium selling techniques afforded by a high VIX reading.  But rather than take on infinite risk by selling straddles, the safer way to play with VIX is one of the following:

• Selling covered calls on quality stocks
• Selling naked puts on quality stocks you are comfortable buying at a lower price
• Use the hidden jewel in the shorts strategy, but hedge both sides with covered calls
• Butterfly spreads can be very lucrative in declining volatility markets.
• Iron condors may come back into favor.  Unlike selling straddles, they do have a limited risk, but depending on the number of contracts, that risk can be very significant.  If you don’t have a plan for adjustment ahead of time, don’t trade iron condors.

If none of the above made any sense to you, then stick with this other view of VIX, and the swim wear fashion show.

And for other Geldpress reading, check out:

• Time for cover – the covered call
• Selling Puts For Income, Or As a Cheaper Investment
• Sector rotation and industry ranking information free for everyone
• Hit jackpot returns with a Russell 2000 butterfly spread
• butterfly spreads part 2 and free excel option calculator
• Preparing for and playing the dollar recovery – bye bye euro

With Christmas even just four days away, Santa Clause is the latest CEO to come begging to congress for taxpayer funded bailouts.  Excerpt below, or read the entire article here:

WASHINGTON – Flanked by officials from the United Elf Toytinkerers union, SantaCorp CEO Kris Kringle today told the House Ways and Means Committee that without immediate government financial help, his firm would be forced to declare bankruptcy, lay off thousands of elves and reindeer, and potentially cancel its annual worldwide Christmas Eve toy delivery.

…A full House vote on the SantaCorp is scheduled Friday morning, where it is expected to pass by a comfortable margin. President Bush has pledged to sign any and all bailout request from Congress until the end of his term, “no queshnions ast.”

The Troubled Asset Relief Program (TARP) may have only approved $700 billion of taxpayer funds to kick start the economy, but the total of taxpayer funded bailouts is $3.5 trillion and growing!

The breakdown goes as follows:

• $700 billion in approved TARP funds
• $300 billion for Hope Now (new mortgage workout deals)
• $110 billion in AIG loans that it may never pay back
• $200 billion for Fannie Mae and Freddie Mac
• $140 billion in new tax breaks for banks.  See the Washingtonpost article for details.
• $2 trillion in emergency Fed loans (so far!)

On top of that nearly $3.5 trillion, there are also significant and unquantifiable taxpayer incurred costs for government funded FDIC insured account bailouts, the Bear Sterns rescue guarantees, the government money market guarantees, and likely many more line items on the way.  And let’s not forget that the government is now on the hook for all the bad debt obligations for Fannie and Freddie, aka Phony and Fraudy!

And to top it all off, president elect Obama-san is now calling for a new $850 billion unfunded (new debt funded) stimulus plan.  And the 2009 budget deficit may even hit a whopping $2 trillion.

Congratulations, Obama-san.  You are on track to accomplish the impossible by making Bush’s near doubling of the national debt look insignificant!

Barrack Obama was “accidentally” referred to as Barrack Osama on some 300 absentee ballots mailed out in early October to voters in Rensselaer County near New York.  That was a mistake that some say was an intentional racial crack to his Muslim background.

Now that Obama has been elected, the latest ethnic remarks are referring to him as Japanese.  The Wall Street Journal referred to the president elect as Obama-san, not for his dna or facial features, but for his insistence on following through with every policy mistake Japan made during its own real estate collapse a decade ago.

In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa’s Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a “lifestyle superpower.” The country embarked on a great Keynesian experiment:

August 1992: 10.7 trillion yen ($85 billion). Japan passed its largest-ever stimulus package to that time, with 8.6 trillion yen earmarked for public works, 1.2 trillion to expand loan quotas for small- and medium-sized businesses and 900 billion for the Japan Development Bank. The package passed in December, but investment kept falling and unemployment rose. By the end of the year, Japan’s debt-to-GDP ratio was 68.6%.

The Wall Street Journal goes on to summarize Japan’s fiscal recklessness and exploding government debt from 1992 through 1999.  Despite clear evidence of Japan’s failed policies, Obama is insistent on abandoning his earlier call for fiscal discipline, and now embraces reckless deficit spending that far eclipses even Japan’s attempts.

The WSJ article breaks down Japan’s failed stimulus programs as follows:

• 1993 – 13.2 trillion yen and 6.2 trillion yen stimulus, and debt to gdp 74.7%
• 1994 – 15.3 trillion yen stimulus, and debt to GDP ratio of 80.2%
• 1995 – 14.2 trillion yen stimulus, and debt to GDP ratio of 87.6%
• 1998 – 16.7 trillion yen and 23.9 trillion stimulus, and debt to GDP ratio of 114.3%
• 1999 – 18.0 trillion yen, and debt to GDP ratio of 128.3%

According to Bloomberg, the Japanese total government debt to GDP ratio is expected to hit 180% this year.

So I ask you, Mr. Obama-san, do you really want to be Japanese?!?!?!

Also see:

• Obama Flip Flops On Fiscal Discipline And National Debt

The New York Times has an excellent article on how fraudulent financial institution profits yielded real bonuses for executives and staff.  Bonuses were paid out based on faked valuations and appreciations in asset prices.  And the bonuses were paid out prior to reclassifying asset values to their real values, and prior to Wall Street firms begging for and receiving taxpayer funded bailouts.

In all, Merrill handed out $5 billion to $6 billion in bonuses that year. A 20-something analyst with a base salary of $130,000 collected a bonus of $250,000. And a 30-something trader with a $180,000 salary got $5 million.  But Merrill’s record earnings in 2006 — $7.5 billion — turned out to be a mirage. The company has since lost three times that amount, largely because the mortgage investments that supposedly had powered some of those profits plunged in value.  Unlike the earnings, however, the bonuses have not been reversed..

Critics say bonuses never should have been so big in the first place, because they were based on ephemeral earnings. These people contend that Wall Street’s pay structure, in which bonuses are based on short-term profits, encouraged employees to act like gamblers at a casino — and let them collect their winnings while the roulette wheel was still spinning…

…Traders across Wall Street were reluctant to admit what now seems so obvious: Their mortgage investments were worth far less than they had thought.  “What happened to their investments was of no interest to them, because they would already be paid,” said Paul Hodgson, senior research associate at the Corporate Library, a shareholder activist group.