Risk Rap

Rapping About a World at Risk

The Black Knight

Sir Allen Stanford

Sir Larceny-A-Lot

Sir Allen Stanford turns out to be no knight in shining armor. He’s just another greedy creep who thought he was entitled to other peoples money.   Sir Allen might just be another garden variety Ponzi Schemer; but compared to Madoff this guy is a piker.   The theft of $8bn is petty larceny compared to Madoff’s massive $50bn swindle.

It is becoming startling clear that we can no longer view these types of events as isolated incidents. Sir Allen may be this weeks poster child for capitalists gone wild; but the shock and awe of audacious financial crime is becoming a consistent lead story on the nightly news.  Public trust in the financial markets is at stake.  If people cannot trust their financial fiduciary the whole system goes down.

The SEC’s reluctance to act on information concerning Madoff irregularities and the announcement that over 500 public firms are being reviewed for possible fraudulent business practices are raising a public outcry for more vigorous oversight and protection.  The swirling rumors of bank insolvencies, nationalizations and news of  their egregious failure to adhere to basic risk management precepts are turning the skeptical taxpayers  into vocal opponents of the TARP program and any future bank bailouts.

The allegations that UBS marketed a tax evasion scheme to attract over 50,000 US clients to their private banking business with the promise that it would shield them from onerous tax liabilities may be the straw that breaks the camels back.   US taxpayers are struggling from the burdensome pain of high taxes they dutifully pay.   They are confused and frightened by the orgy of government spending and how the financial industry bailouts will effect them.  The credit crisis and the stunning losses people incurred in their retirement and investment portfolios is casting widening doubt about the trustworthiness of the banking system.  Citizens are urging their elected representatives that all financial service providers must come under a microscope of  scrutiny and oversight.  Consumers want assurances that all fiduciaries are sound.  Taxpayers are demanding that regulators insist that financial institutions provide a level of transparency to assure consumers that they are in compliance with all regulatory mandates, have a program of risk management controls and offer proof of an ethical corporate governance program.

The US tax payer has made it clear that they can no longer shoulder an egregious tax burden that continues to finance insolvent financial institutions that failed miserably to manage risk or comply with the barest minimum standards of proper corporate governance.

The allegations that surfaced suggesting that Sanford Financial may be linked to money laundering for Latin American drug cartels through The Bank of Antigua and related banking enterprises in Venezuela and Ecuador is sure to usher in a new era of aggressive enforcement initiatives by regulators.   The practice of  selling worthless CDs to retail investors that promised high rates of interest is the tip of the spear in a sophisticated money laundering scheme.  This will create some added urgency for regulators to conduct an in depth reviews of financial institutions AML compliance programs.  Examiners will aggressively pursue fund managers  to determine that Know Your Customer (KYC), Customer Identification Procedures (CIP) and Politically Exposed People  (PEP) programs are meeting acceptable standards to detect and deter money laundering.  Of  particular concern will be hedge fund complexes with incorporated off shore structures.  To be sure, examiners will liberally interpret and claim jurisdictional nexus on all offshore structures linked to US domiciled funds.  The US Treasury coffers are bare and it will look to collect taxes on any revenue sources it deems as taxable.

Financial institutions need to demonstrate to counter parties,  regulators, SROs and most importantly investors; that they have a sound risk management program in place that protects the funds investors against all classes of operational risk.    Sum2 offers an AML audit program fund managers use to maintain compliance standards  that  demonstrate program excellence to regulators and investors.

You can believe the examiners are sharpening their spears.  Looking to bag a kill and make an example of wayward managers with lax compliance controls.  Be ready, be vigilant and be prepared.

You Tube Video: Moody Blues: Nights in White Satin

Risk: money laundering, regulatory, operations, reputation

February 23, 2009 Posted by | AML, hedge funds, Madoff, off shore, operations, regulatory, reputation | , , , , , , , , | Leave a comment

SRZ’s Maginot Line

maginot_line_19441Schulte Roth Zabel’s (SRZ) Annual Private Investment Funds Seminar is the kick off event of the year for the AIM industry. In years past it was an event that was full of bravado from an industry flush with great expectations and giddiness over compensation levels that rivaled a small country’s GDP. This years event had more circumspection then bluster and more reflection on how to fashion a considered response to industry challenges squarely in the vortex of the market meltdown.

The shocking transformation and radical reconfiguration of the capital markets industry is underway. In the wake of the Lehman bankruptcy, Bear Stearns merger, market crashes, credit crisis, bank insolvency, recession and lastly the coup de grace of the Madoff scandal put these intrepid wealth managers through a trying year.

Myriad challenges and crises tested many firms management acumen and forced managers to work extra hard to earn that 2 and 20.  With hedge fund closure rates expected to approximate 25%-45% this year, the industry is confronted with enormous challenges. The excess capacity in the industry, heightened regulatory oversight, liquidity constraints and elevated client risk aversion will foster market compression and a dramatic alteration in market dynamics. The well managed, well positioned, well focused and well capitalized funds will thrive on the volatility. Uncertainty is always the mother of invention and the best and brightest of the breed will no doubt find numerous opportunities amidst the massive market dislocations currently underway.

SRZ a leading legal firm servicing the industry effectively laid out an industry battle plan to address many of these acute challenges. In the Crisis Management breakout session the panel offered an interesting metaphor of a hedge fund as an intricate and complex ecosystem. The topology of a fund complex is comprised of many parts that at times may have contradictory and competing interests.

The Crisis Management session conducted a quarterly review of market events that occurred in 2008 as the capital markets deteriorated and the credit crisis deepened. The panels review was an instructive exercise on how managers need to constructively engage problems with an intentional risk management program and how it affects each stakeholder in the hedge fund ecosystem. The principle objective was determining the best course of action to either save the fund or effect an orderly liquidation of the investment partnership. In all instances the strategy needed to consider how to serve the greatest good for all fund stakeholders. SRZ offered attendees a brilliant crisis management game plan for fund managers. It was one of the better presentations on risk management that I have ever attended.

The general session was also very interesting and engaging. The central theme was that hedge funds are under extreme liquidity pressure. The drivers are distressed portfolio valuations, counter-party deleveraging, risk aversion in the markets, market liquidity and increased redemption pressures from investors. SRZ has developed a series of innovative redemption strategies it calls gates. The gates are designed to protect the level of assets under management by controlling an orderly outflow of capital so as not to endanger the overall liquidity and asset level of the fund. SRZ again shows why it is the leading player in the space by offering innovative solutions to industry needs. A great example of a market leader demonstrating leadership by offering innovative product development solutions.

The overall tenor of the conference reminded me of the construction of the Maginot Line. In years past investors were eagerly throwing money at hedge fund mangers to get a slice of the alpha pie. Today hedge fund managers need to build sophisticated battlements to keep the assets of the investment partnership under their control. In a sense the industry as moved from an offensive posture to a defensive one. SRZ is assisting its hedge fund clients to create a defensible business structure that will protect the long term sustainability of the fund and ultimately serve the greatest good of the funds partners and stakeholders.

During these times of extreme market duress tactics and strategies must be employed to protect the fund from excessive redemption runs that would ultimately serve to create a self fulfilling prophesy of liquidation.

Clients who have access to a war council of professionals like SRZ should be well suited to engage the battles they will encounter in the coming year and survive to enjoy the peace and spoils won during the next business cycle.

You Tube Video: Edith Piaf, Mon Legionnaire

Risk: market, credit, legal, reputation

January 15, 2009 Posted by | hedge funds, legal, Madoff, risk management | , , , , , , , , , , | Leave a comment

Killing Me Softly

Watch Your Step

During the last Great Market Crash it was said that you needed to take extra care as you made your way through the canyons of Wall Street. Apparently legions of bankrupt investors and brokers were jumping out of the windows from the precarious ledges of their skyscraper offices many stories above street level. I don’t believe that an instance of leaping from a building to commit suicide over failed investments was ever verified during the last Great Crash. Though I am certain that some did close out their positions with dramatic finality of self liquidation, the documentation on jumping is slim.

Yesterdays news on the self inflicted death of Adolph Merckle follows close on the heals of last months suicide of Rene-Thierry Magon de la Villehuchet. Mr. Merckle apparently amassed a large short position in the German auto manufacturer Volkswagen. He was engaged in a form of takeover arbitrage pitting his investment prowess against the elite German auto manufacturer Porsche. He was confident that the fortunes of the depressed industry segment would deteriorate dragging Volkswagen down with it. Porsche’s interest in Volkswagen buttressed its equity value in the face of the market meltdown. This generated a loss of over 400 Mn euro’s for Mr. Merckle. He decided to walk into the front of a train near his home to close out his position in life.

If the high profile deaths of Mr. Merckle and Rene-Thierry cast an added depressive pall to the market crash, the disappearance of Sonja Kohn adds an element of intrigue and danger. Mrs. Kohn has dropped out of sight, leaving the firm she founded, Bank Medici, in the hands of Austrian regulators, who took it over last week. Mrs. Kohn was a key marketer of Bernard Madoff’s investment fund. She purportedly raised lots of money from the world’s well to do and power elites. According to reports, she had some clients among the Russian Oligarchs. These are the types of people that you try not to disappoint let alone swindle. They have a way of settling scores with people who don’t live up to their end of the bargain.

My has the worm turned. Last year at this time the wealthy and powerful were reveling in their decade long run of good fortune the kind markets bestowed upon them. This year evaporating wealth, financial ruin and death silently stalks them. Their salons, country clubs, penthouses and boardrooms offer them no protection from the aggrieved people of their making and a tortured conscience.

You Tube Video: Prokofiev, Romeo and Juliet

Risk: reputation, fraud,

January 7, 2009 Posted by | classic, credit crisis, hedge funds, Madoff, reputational risk | , , , , , , | Leave a comment

For Where Your Treasure Is

The Death of Marat
Atheism is aristocratic; the idea of a great Being that watches over
oppressed innocence and punishes triumphant crime is altogether popular.

History has is own way of keeping score. The celestial ledgers record every human transaction and movement. The scales swing ever slowly as it constantly seeks a perfect balance of Yin and Yang. Eventually history will find a way to assure that payments are made on any outstanding balances. All overdue accounts will be assiduously credited or debited in exact amounts for proportion due in good time. Poetically the new cosmological balance is restored with a settlement that is more often ironic then just.

So it is with Rene-Thierry Magon de la Villehuchet’s suicide. To date one of the more dramatic consequences of Bernard Madoff’s massive swindle. Mr. Villehuchet apparently lost $1 bn in the fraud perpetrated by the wealth manager from hell. It is understood that a good portion of that tidy sum was comprised of clients assets entrusted to Mr. Villehuchet due to his astute investment acumen and discernment abilities. It is also believed that the massive loss also comprised the bulk of his family’s personal assets as well. Apparently the aristocratic estate of Mr. Villehuchet’s family now stands in ruin. It would seem that the goal of the French Revolution’s street rabble to fully disenfranchise the aristocracy and separate them from their power and privilege with the razor edge of a guillotine was finally realized 230 years later by a New York based hedge fund manager. Let it be noted that Robespierre was a friend of the bourgeoisie so perhaps he finds some tacit comfort from his long occupied grave that Madoff one of his fellow sans-culottes finished the work that the Jacobin’s failed to do.

The French Revolution was one of the signature events of history. It announced the unfettering of the political power of the bourgeoisie made possible by the rise of capitalism. A scant two centuries ago the radical capitalists used the guillotine to enforce a Reign of Terror to supplant the rule of the Aristocracy and establish their reign of liberty to make money.

Capitalism’s history during the past 200 plus years has firmly established the virtuous solemnity of money making. It has created a pantheon of incipient transactional values based on situational ethics and moral relativism. Money and its power has alone become the object of veneration. Much like the Golden Calf that Moses’s people erected, western societies are consumed with the passion of worshiping monetary wealth and all the power and position it confers on the one to whom it belongs. More accurately we should say to whom the objects of wealth own.

It is in this light that we find Mr. Villehuchet’s suicide yet another signature event of our time. Mr. Villehuchet’s life had no purpose outside of his wealth and objects. Very sad. If Mr. Villehuchet killed himself because he lost face with his client’s due to his poor choice of entrusting Mr. Madoff with his client’s assets that’s even sadder. If Mr. Villehuchet killed himself because he was complicit in the fraud scheme that’s the saddest reason of all. But whatever motivated the Viscount of Discount to end his life all point to his warped value system so common and rampant within the banal culture of the old aristocracy and the nouveau riche. How poverty stricken are those whose primary concern is the love of money. Pity them because they are poor in spirit.

Yes Mr. Villehuchet’s self induced passing may signal an urgency to reexamine the values of capitalism. We must begin to invest in values that will produce consistent sustainable returns.

Rest in peace Mr. Villehuchet. If there is an afterlife I’m sure that you and Robespierre will have much to discuss.

You Tube Video: Skeeter Davis: The End of the World

Risk; values, investments

December 27, 2008 Posted by | culture, hedge funds, Madoff | , , , , , , , , , , , , , | Leave a comment


Sexy Vampires

There have been a rash of movies and TV specials about vampires. True Blood and Twilight provide some interesting clues about the state of our culture and the values that we deeply revere but may be a bit reluctant to fully express due to fear and social ostracism. Ann Rice successfully exploited its as totem and taboo that allows deep desires to take flight in the fictive realm of art while for a chosen few the distinction between the fantasy and reality of vampirism is indistinguishable.

The seeming popularity of vampirism curiously arises as our culture and society enters a period of pain and duress. I believe it captures some salient emerging truths about our collective inner desires that become manifest as the true ethos of our time. What is it about vampires that so richly resonate in our culture? The promise of eternity, forbidden love, the need for a supernatural power that nurtures, unites and protects? This supernatural power of love or the popular term the law of attraction will provide everything to satiate our id in unity with an ego that projects sensuality, power, affluence, magnetism and eternal youthfulness. The need to project, connect and dominate is sexy and forever young. It is a vanity plain and simple that many believe can be purchased like some cheap elixir bought at the local mall. Unfortunately youth and times of plenty must come to an end. Like the current recession we thought the party would never end but like the maxed out credit cards that fill our empty wallets the bill eventually comes due and when the music stops we are left to pay the piper.

It is during these hard economic times that vampires become legion and roam the earth in droves. Witness Bernie Madoff; an example of vampirism in the extreme. He appears as a beneficent friend that seduces his mark with the power of money and status. Only to reveal that he is a blood sucking fiend with an insatiable thirst for his victims assets. Bernie thought he was entitled to drain his victims life savings to fund his lifestyle and feed his ego. It was how Bernie maintained his eternal youthfulness.

Like all great vampires Bernie tricked his victims by using their deepest desires to entrap them. The lure of power, prestige and fantastic riches made his marks willing victims. They freely offered their necks to Bernie, begging him to drink freely from their veins, making them complicit accomplices in their own victimization. Yes their deepest desires became their jailers and executioners. Their desires imprisoned them behind bars of their wildest fantasies. It was a self created hell that squandered their abundance and reduced them to a condition of existential deprivation and emotional bankruptcy.

Vampires are alive and well in America. They are becoming more pronounced as economic duress grows and peoples emotional and mental state increases in vulnerability. They say that garlic is a sure defense against the predation of a vampire. The most powerful garlic known to man is gratitude and a practice of richly sharing your abundance and gifts with those less fortunate then you. If you do this no vampire can ever harm you.

You Tube Video: Twilight Soundtrack, Bella’s Lullaby

Risk: Totem and Taboo, culture

December 22, 2008 Posted by | culture, economics, Madoff, psychology | , , , , , , , | Leave a comment

Robbin in the Hood

Gangsta in Chief

Bernard Madoff will go down in the annals of gangsta capitalism as one of the big time hitters. The allegation that Bernie made off with over $50 bn worth of his clients assets is stunning. It exemplifies the pervasiveness of corruption in America Inc. Its hard to fathom how a well respected man of supposed integrity and character could carry on such a massive criminal enterprise. Even more distressing is that many of the victims considered Bernie to be a trusted and beloved friend. Bernie apparently also victimized and plundered a number of non-profit endowments that entrusted the stewardship of their economic sustenance to this man. Bernie’s clients at the Palm Beach Country Club where he was a member, have been devastated by their financial losses. Loss of face, the loss of a friend , faith and trust will be much more difficult to replace. Many of Bernie’s client’s are noted philanthropists whose donations are critical support lifelines for a number of Jewish charities and the State of Israel. They will be hurt. Bernie did some major damage. Bernie wantonly victimized anyone and everyone. I can’t see how this guy can live with himself. He must be on some kind of suicide watch.

How can you explain this? Bernie’s behavior is borne from a sense of radical entitlement. This radical entitlement is the unbridled id. It affirms that self actualization and greed has taken full possession of the American soul. This capitalist ethos is learned from our participation within corporate institutions. This ethos is taught at all levels of our schools. It is preached by our churches and TV Evangelists (both secular and religious). It is shouted by athletic coaches and modeled by parents showing their children how to excel in a competitive world to attain all the riches that America Inc has to offer.

I fear that we have adopted the behavioral, ethical, spiritual and moral characteristics of our corporate institutions. This corporatism has taken full possession of our psyches. It started long ago as the barriers of personal life and work were removed. The distinction between work time and personal time eroded as the demands of our vocations grew and the rationalization of capitalism crept on to claim a greater stake in our culture. We have long witnessed how jobs and careers assumed greater importance for individuals and the negative impact absentee fathers and mothers had on the family. Careerists reluctance to take vacations were compensated by extensive business travel schedules. The focus and zeal for their corporate contributions dissipated the time, attention and energy they could give to family. This created a personal balance sheet that was asset rich; flush with monetary enrichment and ego satisfaction built from corporate reward. These assets had to balance out potentiality massive family liabilities which were addressed with material hush money or the installation of a strict family corporate regime.

The time honored admonition of don’t mix work with pleasure and don’t bring work home is forever gone. Company work from home programs, telecommuting and running home based businesses has installed corporations as a permanent lodger at the center of hearth and home. American’s growing addiction to the incessant beeps of Blackberries and the finger and thumb Pavlovian response feed a cultural disease that celebrates a collective attention deficit disorder providing a convenient escape from the shock and awe of our daily lives.

Human beings are not corporate entities and corporations are not human beings. If we assume the pursuit of our radical entitlement is ethically sound until it is checked by a market regulator or law enforcement official or other institutional safe guard we are left to our own conscience that is driven solely by the profit motive that feeds and an aggressive self preservation. American’s have fully internalized a capitalist ethos. In this era of lax oversight and regulation we are all at risk for the next scam by a nation of corporate sharpies intent on getting what they believe is theirs to be had.

Bernie is a poster child for this behavior. We just a well should be building a statue to the man. He exemplifies and reifies all of the contorted and grotesque ideals of our shared capitalist ethos.

You Tube Music Video: Perry Mason

You Tube music Video: The Untouchables

Risk: culture, psychology, family, economics

December 18, 2008 Posted by | culture, economics, hedge funds, Madoff, psychology | , , , , , | Leave a comment