Here We Go Again…GMAC style

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gmac_logoGMAC, the automobile financing company spun off from General Motors, finally received USD 6 billion from the US Government via the TARP fund. GMAC was able to access the TARP fund by magically turning into a bank holding company (BHC). With this new cash infusion I’m sure the management of GMAC will do everything possible to spend it wisely and not have a repeat of the subprime lending practices in the housing market.

GMAC said in a statement that it would modify its credit criteria to include financing for customers with a credit score of 621 or above, a significant expansion of credit compared with the 700 minimum score put in place two months ago.

DOH…of course this is different from subprime lending! I wonder if people will really be taking out car loans if they know their job is in jeopardy or if the financial crisis gets worse. Since all US taxpayers are on the hook for the USD 6 billion, sucks to see the same thing happening over and over.

What I learned in 2008

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wamu_logoAs I’ve said before, 2008 was a year to forget.  In 2008, I learned that a “Triple A” rated financial product can go to zero. The financial markets were falling throughout the year but the selling intensified on September 15 when Lehman Brothers filed for bankruptcy. The filing set in motion a massive de-leveraging of various investment vehicles around the world and separated the men from the boys. I must admit my blind faith in the financial system has been shaken. I’ve realized all this talk of due diligence, corporate governance, board of directors, risk committees, auditors, regulatory agencies, etc…is all window dressing. It all sounds great in a marketing pitch or a PowerPoint preso, but in reality it’s just words. Below are several examples showing how severely broken the system is. 

Washington Mutual (WaMu)
WaMu was a bank that had consistently been ranked by Fortune Magazine as one of the best places to work. Their advertising was very consumer friendly and the image they projected was of a cute cuddly dog, but in reality it was anything but. An article from the NY Times over the weekend goes into detail about the subprime lending practices of WaMu and how it was one big scam factory. The following quote sums it up:

“If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. 

When I was living in Southern California WaMu bank branches were popping up everywhere and I wondered if there was that much money in lending money…I guess so.  I remember several of my neighbors becoming real estate agents because “everyone is doing it.” A neighbors friend was a loan processor and driving a BMW 740iL,  it made me think “what the fu%@ am I doing wrong.” However, it was all a mirage everyone in the chain had a financial incentive to get people into houses.  WaMu shares part of the blame, but the homeowners bear the brunt of the blame.

Bernie Madoff
Bernie Madoff confessed on Dec 11, 2008 that he ran a USD 50 billion ponzi scheme. What is more surprising is that someone named Harry Markopoulos had been tracking Madoff since 1999 calling him a crook.  Yet, no one listened. Some very large fund of funds got caught napping with all their talk of due diligence.  Due diligence is all a sham, I’ve been through the due diligence process at several large investment banks and it starts out with tough talk. But the minute they find out you are distributing your product via another bank they cave because they don’t want to lose customers.  They figure if Bank X is distributing then they should be safe since Bank X is a known entity.  What they don’t realize is maybe Bank X got a sweet heart deal to distribute the product and from there it just snowballs.  Fairfield Greenwich Group  (FGG) was the largest distributor for Madoff’s toxic funds.  If you read their preso (pdf) you almost feel like it’s safer to have your money with FGG then the US Government.  It seems FGG’s Chief Risk Officer Amit Vijayvergiya was eating masala dosa’s during every discussion concerning risk.

Satyam
Lastly, Satyam Computer Services has shown if you own around 8% of a company you can siphon USD 1.2 billion to buy other companies.  To recap, Satyam was started by the Raju family and lately their ownership had come down to 8%. The Raju family decided to take the excess cash at Satyam and buy two construction companies (Maytas Properties and Maytas Infra) as part of a diversification strategy – cement and C++ what a combo. The deal was announced and within 12 hours it was cancelled when everyone but the Raju family and the Board of Directors thought it was a stupid idea. Then the Board of Directors insisted there was proper due diligence and many other construction companies were looked at but Maytas had some sort of special synergy.  And what was that special synergy? The two Maytas companies were started by Raju family members where they own over 30%. 

Over the past few months I’ve realized no one is really looking out for you. After seeing what has happened in 2008 I would never invest in a fund – hedge or mutual without meeting the manager. If they are too big or too busy to meet then most likely our goals are not aligned. As we speak most of my money is in ETF’s.

Happy Holidays

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christmas-treeA bit delayed – Merry Christmas and Happy Holidays to all. I’m sure many of you are ready to put 2008 behind us, it’s been one helluva ride. My recap: financial crisis, home values melting, car sales plummeting, wealth erosion, Beijing olympics, President Elect Obama but most tragic was the Mumbai terror attack on Nov 26. I’m really looking forward to 2009 and hope things get better, but from all the data that is coming out the financial outlook is even gloomier then 2008. My plan for 2009: more vacations, getting in shape and getting back to basics!!

On a side note this is my 300th blog post…thanks again!

Satyam Stumbles

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satyamlogo-tcOkay, Satyam not only stumbles but it falls flat on its face. Tuesday after the Indian equity markets closed Satyam Computer Services, the 4th largest IT company, decides to acquire two companies as part of a diversification strategy. When I heard about the diversification, I thought maybe it was buying a data center company or some online advertising company. Nope, the Raju family decides to REALLY diversify and get into real estate and infrastructure. If cash is king then Satyam is ruling, they have over USD 1.2 billion in cash so they decide to blow USD 1.3 billion on Maytas Properties and USD 300 million on Maytas Infra. If you are wondering Maytas is Satyam spelled backwards. The problem is that both Maytas entities are Raju family owned companies and they were basically moving the cash from one company to another where they had a larger ownership stake. The most appalling part was on the conference call they mentioned they had a “Big 4″ accounting firm help with the deal but would not reveal the name. Does anyone really still give a damn what a “Big 4″ accounting firm has to say? And when asked about other real estate or infrastructure companies they looked at they again decided not to reveal any names.

Then Wednesday morning, they must have been enlightened because after ALL that due diligence and working with a “Big 4″ accounting firm they decided to call the whole deal off. Then they get on TV and try to justify how just 12 hours ago it seemed like the best thing since sliced bread but now they are all about “shareholder value”. Bottom line, they don’t seem so transparent as a publicly listed company should be.

The irony is that in 2008 they received the Golden Peacock Award for corporate governance. I wonder if they have to return the award like Milli Vanilli gave back their Grammy after their lip sync scam?

The ultimate irony, Satyam means truth in sanskrit, something that is truly missing with the Raju family at the moment.

Maddog Madoff

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bernie_madoffWhy is this guy smiling? Because he just made the Guinness Book of World Records for the largest ponzi scheme in history. Bernie Madoff is the brains guy behind the USD 50 billion scam that has left everyone speechless.  I was out of town when I first heard about it and was furiously checking my phone for updates, it’s like watching a 50 car pile-up…of Ferrari’s…holy fu!#@!!  Where were the auditors, where was the due diligence, where were the ex-traders and most important where was the SEC while all this was going down over the past decade? But the biggest question, who was the guy responsible for randomly generating the monthly performance number?

Rye Select November 2008 performance numbers

Some of the clients who are getting lumps of coal in their stockings for Christmas

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