Posts tagged ‘Wall Streeters’

Must Make for Interesting Family Dinners: If Anything, Ellen Pao's Husband is In The Middle of An Even Bigger Mess

Ellen Pao has had some career problems of late, but as I wrote yesterday, if she takes some responsibility for her own mis-steps and stops blaming it all on misogyny, she might learn something useful and build positive things on the experience.

A very loyal reader gives me a heads up that her husband, who is never mentioned in recent stories, actually faces a LOT more serious trouble (it is probably journalistically appropriate to leave her husband out of the recent stories, but one wonders if the New York Times would show the same scruples on a story about the CEO of Exxon if, say, his wife were independently in the midst of some sort of scandal).

Ellen Pao's husband is Buddy Fletcher, former Wall Street Wunderkind and now subject of a LOT of regulator scrutiny and pension fund lawsuits.  Here is one:

The firefighters’ system eventually said yes, and along with two other pension funds — the Municipal Employees’ Retirement System and the New Orleans Firefighters’ Pension and Relief Fund — invested a combined $100 million in one of Mr. Fletcher’s funds, FIA Leveraged. As they understood it, the fund would invest in liquid securities that could be sold in a matter of weeks.

The details sounded, as one board member put it, “too good to be true.”

In fact, they were.

Mr. Fletcher’s hedge fund has since been described by a court-appointed bankruptcy trustee as having elements of a Ponzi scheme, and four retirement systems are fighting to recover their money. A federal judge is scheduled to rule in March on a plan to liquidate the fund’s assets, which the trustee deemed “virtually worthless” in a report last November.

And another:

New York investment manager Alphonse “Buddy” Fletcher Jr. is being sued by the MBTA Retirement Fund and some of his own hedge funds on accusations that he defrauded them of more than $50 million.

The lawsuit, filed Monday in New York, accuses Fletcher and his firm, Fletcher Asset Management , and other parties of conducting a “long-running fraud” in which they misused money for their own benefit, inappropriately took inflated management fees, and overstated the value of assets.

As previously reported, the MBTA pension fund invested $25 million with Fletcher in 2007 on the advice of the fund’s former executive director, Karl White.

White pitched the investment to the pension fund just nine months after he had resigned to work for Fletcher.

The pension fund’s holding is now worthless, and the bankruptcy trustee investigating the case has alleged that Fletcher never invested the money as promised.

And here is an older, in-depth look at Fletcher.

It is starting to look like most of the money went to his family (e.g. $8 to his brother to fund a film), to buffing his image (e.g. $4+ million donation to Harvard), and to an incredibly opulent lifestyle (e.g. 4!! apartments in the Dakota).

Despite the fact that he seems to have grossly overstated income and assets of his funds, no one -- regulators, clients, auditors -- figured it out.  The most interesting part to me was the first group to detect the potential fraud was, of all groups, the governing board of the Dakota.  This group, full of successful Wall Streeters, looked at his financial statements and turned down his application to buy yet another apartment, coming to the conclusion he not only did not have the funds to buy this apartment but they were unsure how he was paying the vig on the $20 million loan securitized by his existing apartments.

One thing Fletcher apparently has in common with his wife is that he seems to respond to every negative business decision with a discrimination lawsuit.  This one backfired, however, and only served to point public attention to the fact that a group of savvy financiers thought Fletcher's wealth was potentially imaginary.  Government investigations and lawsuits have followed.

He still has a chance to escape, though.  Despite Jon Corzine's outright theft of funds from MF Global commodity investor accounts, he got off scott-free due to his close ties to the Democratic Party.  Time for Fletcher to start giving any free assets he still holds (if there are any) to Hillary's campaign.

Don't Panic

The best way to mobilize people is to make them panic.  That is why so many institutions have incentives to may you panic over the environment, or global warming, or the threat of terrorism, or the economy.  In most cases (Naomi Klein's hypothesis not-withstanding) these folks want you to get so worried you will give up something, either money or freedom or both.

Some kind of recession at this point is unavoidable, I guess.  But in fact, we really haven't seen what I would call a real recession since the early 1980's.  We've had a really long run, and now its time to cut back on that spending and board up the financial windows for a little while.  The economy has to de-leverage itself some, and that is going to slow things down for a while.  People keep talking about the Great Depression, and I don't see it.  I don't even think its going to be the 1970's.

The most visible symbol of financial problems seems to be the falling stock market.  But all those companies in those indexes are the same ones that were there a month ago, and are still healthy and making money.  The fall in the markets does not represent and change in the current health of industrial America.  The lower prices reflect a changing expectation about those company's future prospects, but the folks driving the market are just guessing, and really, their guesses aren't really any better than yours or mine.  Similar expectations drove oil up to $145 and now back down under $80.  Wall Streeters work really hard to portray themselves as smarter than you or I, but they are not.  I went to school with them.  I know these guys.  They aren't smarter, and they aren't any less susceptible to panic.  In fact, because they are often highly leveraged and are worried about making payments on that new Jaguar they just bought for their mistress, they tend to be more easily stampeded.

In October of 1987, the stock market fell 22.6% in one day.  If you date the current financial issues to about September 22, when the market closed around 11,000, then the market has fallen over these tumultuous weeks by 22.0% at last night's close -- dramatic, but still not as bad as the one day drop in '87. 

Bear Stearns & Enron

I wondered if folks would find my analogy from Bear Stearns to Enron I posted the other day stretched. 

Because Enron's demise came in exactly this sort of liquidity crisis,
and the situations are nearly entirely parallel, all the way up to and
including the CEO telling the world all is well just days before the
failure.  But no one understood Enron's business, so its failure seemed
"out of the blue" and therefore was attributed by many to fraud,
lacking any other ready explanation.   In the case of Bear Stearns, the
public was educated in advance as to the problems in their portfolio
(with mortgage loans) such that the liquidity crisis was less of a
surprise and, having ready source of blame (subprime loans) no one has
felt the need to apply the fraud tag.

Apparently, the Economist sees the same connection (via a reader):

For many people, the mere fact of Enron's collapse is evidence that
Mr Skilling and his old mentor and boss, Ken Lay, who died between his
conviction and sentencing, presided over a fraudulent house of cards.
Yet Mr Skilling has always argued that Enron's collapse largely
resulted from a loss of trust in the firm by its financial-market
counterparties, who engaged in the equivalent of a bank run. Certainly,
the amounts of money involved in the specific frauds identified at
Enron were small compared to the amount of shareholder value that was
ultimately destroyed when it plunged into bankruptcy.

Yet recent events in the financial markets add some weight to Mr
Skilling's story"”though nobody is (yet) alleging the sort of fraudulent
behaviour on Wall Street that apparently took place at Enron. The
hastily arranged purchase of Bear Stearns by JP Morgan Chase is the
result of exactly such a bank run on the bank, as Bear's counterparties
lost faith in it. This has seen the destruction of most of its roughly
$20-billion market capitalisation since January 2007. By comparison,
$65 billion was wiped out at Enron, and $190 billion at Citigroup since
May 2007, as the credit crunch turned into a crisis in capitalism.

Mr Skilling's defence team unearthed another apparent inconsistency
in Mr Fastow's testimony that resonates with today's events. As Enron
entered its death spiral, Mr Lay held a meeting to reassure employees
that the firm was still in good shape, and that its "liquidity was
strong". The composite suggested that Mr Fastow "felt [Mr Lay's
comment] was an overstatement" stemming from Mr Lay's need to "increase
public confidence" in the firm.

The original FBI notes say that Mr Fastow thought the comment
"fair". The jury found Mr Lay guilty of fraud at least partly because
it believed the government's allegations that Mr Lay knew such bullish
statements were false when he made them.

As recently as March 12th, Alan Schwartz, the chief executive of
Bear Stearns, issued a statement responding to rumours that it was in
trouble, saying that "we don't see any pressure on our liquidity, let
alone a liquidity crisis." Two days later, only an emergency credit
line arranged by the Federal Reserve was keeping the investment bank
alive. (Meanwhile, as its share price tumbled on rumours of trouble on
March 17th, Lehman Brothers issued a statement confirming that its
"liquidity is very strong.")

Although it can do nothing for Mr Lay, the fate of Bear Stearns
illustrates how fast quickly a firm's prospects can go from promising
to non-existent when counterparties lose confidence in it. The rapid
loss of market value so soon after a bullish comment from a chief
executive may, judging by one reading of Enron's experience, get
prosecutorial juices going, should the financial crisis get so bad that
the public demands locking up some prominent Wall Streeters.

The article also includes more details of exculpatory evidence that was withheld from the Skilling team and will very likely lead to a new trial.  The Enron prosecution team has not had a very good record in appeals court scrutiny of their actions at trial:

For what it is worth, prosecutors have had a tougher time in the
appeals court with Enron-related cases than in the initial jury trials.
Convictions have been overturned in a case relating to Nigerian barges
that Enron sold to Merrill Lynch. The conviction of the chief financial
officer of Enron Broadband has also been vacated, after two trials. So,
too, was the decision to convict Enron's auditor, Arthur Andersen
(albeit too late to save the venerable firm from liquidation).