No matter how rich you become, how famous or powerful, when you die the size of your funeral will still pretty much depend on the weather.

Michael Pritchard aka Mike Dirnt, 1972 - musician

One of the big questions and one some of us are getting asked quite a few times these days is it already time to buy back or still better to wait was answered by a Californian hedge fund manager - Andrew Lahde - who made one of the biggest percentage profits of all time and bowed out of the business last Friday with a fierce attack on the “idiots” running big banks who were willing to take the other side of his bets.

He also demonstrated how to say good by in style (when you’ve made your profit).

Below a quote from the letter he sent out and published on the INet (link to full text below):

Today I write not to gloat. Given the pain that nearly everyone is experiencing, that would be entirely inappropriate. Nor am I writing to make further predictions, as most of my forecasts in previous letters have unfolded or are in the process of unfolding. Instead, I am writing to say goodbye.

Recently, on the front page of Section C of the Wall Street Journal, a hedge fund manager who was also closing up shop (a $300 million fund), was quoted as saying, “What I have learned about the hedge fund business is that I hate it.” I could not agree more with that statement. I was in this game for the money. The low hanging fruit, i.e. idiots whose parents paid for prep school, Yale, and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other side of my trades. God bless America.

There are far too many people for me to sincerely thank for my success. However, I do not want to sound like a Hollywood actor accepting an award. The money was reward enough. Furthermore, the endless list those deserving thanks know who they are.

I will no longer manage money for other people or institutions. I have enough of my own wealth to manage. Some people, who think they have arrived at a reasonable estimate of my net worth, might be surprised that I would call it quits with such a small war chest. That is fine; I am content with my rewards. Moreover, I will let others try to amass nine, ten or eleven figure net worths. Meanwhile, their lives suck. Appointments back to back, booked solid for the next three months, they look forward to their two week vacation in January during which they will likely be glued to their Blackberries or other such devices. What is the point? They will all be forgotten in fifty years anyway. Steve Balmer, Steven Cohen, and Larry Ellison will all be forgotten. I do not understand the legacy thing. Nearly everyone will be forgotten. Give up on leaving your mark. Throw the Blackberry away and enjoy life.

So this is it. With all due respect, I am dropping out. Please do not expect any type of reply to emails or voicemails within normal time frames or at all. Andy Springer and his company will be handling the dissolution of the fund. And don’t worry about my employees, they were always employed by Mr. Springer’s company and only one (who has been well-rewarded) will lose his job.

I have no interest in any deals in which anyone would like me to participate. I truly do not have a strong opinion about any market right now, other than to say that things will continue to get worse for some time, probably years. I am content sitting on the sidelines and waiting. After all, sitting and waiting is how we made money from the subprime debacle. I now have time to repair my health, which was destroyed by the stress I layered onto myself over the past two years, as well as my entire life — where I had to compete for spaces in universities and graduate schools, jobs and assets under management — with those who had all the advantages (rich parents) that I did not. May meritocracy be part of a new form of government, which needs to be established.

On the issue of the U.S. Government, I would like to make a modest proposal. First, I point out the obvious flaws, whereby legislation was repeatedly brought forth to Congress over the past eight years, which would have reigned in the predatory lending practices of now mostly defunct institutions. These institutions regularly filled the coffers of both parties in return for voting down all of this legislation designed to protect the common citizen. This is an outrage, yet no one seems to know or care about it. Since Thomas Jefferson and Adam Smith passed, I would argue that there has been a dearth of worthy philosophers in this country, at least ones focused on improving government. Capitalism worked for two hundred years, but times change, and systems become corrupt. George Soros, a man of staggering wealth, has stated that he would like to be remembered as a philosopher. My suggestion is that this great man start and sponsor a forum for great minds to come together to create a new system of government that truly represents the common man’s interest, while at the same time creating rewards great enough to attract the best and brightest minds to serve in government roles without having to rely on corruption to further their interests or lifestyles. This forum could be similar to the one used to create the operating system, Linux, which competes with Microsoft’s near monopoly. I believe there is an answer, but for now the system is clearly broken.

More information:
The full text of the letter at portfolio.com (also as PDF download) and ft alphaville

Many still call or describe CDS (Credit Default Swaps) as a kind of insurance policy against credit risk to limit the risk of the lender. Well that might be so in their dreams or it has been used as a camouflage by the bankers to persuade the investors of the quality - or to mislead them on the lack of it - and suggest that there would be an underlying asset.

And that’s were all the problems start. To issue or construct a CDS there was never a requirement to actually being linked to, i.e. having provided or taken out the credit or having an contractual agreement with these two parties.

Everybody could issue CDS completely unregulated and unlimited. This is of course the reason for the incredible amounts being pushed around and it also provides the reason that - in rare cases CDS might have been an insurance against credit defaults - but in general these papers were only betting slips if certain events might occur most similar to betting on horses or dogs races.

If these instruments would have only been allowed to use for insuring against actual financial risks everything would be fine today - no so called Banking crisis.

But these instruments so far almost completely have only been used like bets and even worse as we will show below. One example:

Let’s say you are insuring your house against fire for 1 million dollar but its only worth 200,000. Now another hundred people bet that your house does not burn down for a million each.

As long as your house is still standing, everybody wins. But if it burns down 101 people want a million dollar. Now suddenly the destruction of the 200,000 dollar house has caused a 101 million dollar damage.

There are rules and regulations that such things don’t happen in the real world and if you would break those to such an extent, you would most likely end up in prison for many years.

First you can only insure your house for its value and in case of a damage you can only claim an amount the size of the damage.

Second you can only insure your house once or claim the damage in total - in short you can’t make a profit out of the damage. That’s how this is regulated in most countries today and there are many good reasons for that.

The only places where you have a logic very similar to how CDS have been used and caused this crisis, is with Bookies and at the casino - in gambling.

And there are three variables common to all forms of gambling:

• How much is being wagered, the initial stake
• The predictability of the event.
• The odds agreed between the parties to the wager

The bookies are adapting the odds by how many people are betting on a horse or against it to limit their risk or - the other way around - to increase their profits.

And the casinos put maximum amount limits up and mathematical models to limit their potential losses to single lucky customers and increase their overall profits. And while you can say for casinos the bank always wins this seems to have been also the motto for the hedge funds and investment bankers when they adapted this bet model. And that elite of the banking industry got even that wrong.

They did not limit the risk for the bank - or did they already plan in that in case something goes wrong they, together with the politicians they bribed lobbied so massively that such bets would be allowed as so called financial instruments, will defraud / tax the money out of all other citizens?

And please forgive us that we like many insiders don’t believe that nobody could have known that this will fail gigantically. They only question was how long these Bankstas could rake in astronomical profits from these activities.

So there is maybe another way besides the anti-terrorist legislation to get a grip on these fraudsters.

Prosecute them under the gambling and similar regulations. As they have falsely represented the terms under which CDS and similar instruments were made legal, they certainly had no license for the kind of gambling they have undertaken.

From Michael Moore’s blog (link below)
“…3. BAIL OUT THE PEOPLE LOSING THEIR HOMES, NOT THE PEOPLE WHO WILL BUILD AN EIGHTH HOME. There are 1.3 million homes in foreclosure right now. That is what is at the heart of this problem. So instead of giving the money to the banks as a gift, pay down each of these mortgages by $100,000. Force the banks to renegotiate the mortgage so the homeowner can pay on its current value…”

Lets take a look at another example to explain the reasons why CDS and its unhealthy brothers and sisters caused this crisis.

Lets assume I invest one dollar into a company that is currently worth 10 dollars. I’m expecting the value of the company to rise to 100 dollar and by that, turn my dollar into 10 dollars - a nine dollar profit.

I nevertheless know that my investment bears some risks and now somebody approaches me and says: Pay me one cent and I will pay you one dollar in case the company goes bankrupt. Sounds great to me - my risk of loosing my dollar is now eliminated (I’ll of course not get the one cent back) and I still have the possibility to make my 9 dollar profit.

The person who is holding the bet (it does not matter here if you call it a bet or insurance) must (should) be certain that the company will not go bankrupt. He will therefore also offer this bet to others. Now these bets are - thanks to the deregulation by politicians massively lobbied during the last years by those offering these bets - in no way regulated or limited, but we assume that he finds another 10,000 people that pay him a cent for this bet.

And here is already the first big problem with this game mocked up in the banking world. In difference to betting at a bookie where there is either another person who will bet against you (like a buyer/seller pair in trade) or the odds would go up - in our example our issuer would ask for lets say 20 cents instead of one cent. By this the gambling industry puts up a safety limit or ceiling to limit the worst case losses - but not our super-clever 100 million dollar boni paid bankers - but maybe the bonus payments are the ceiling in their game.

But back to our example. Our issuer can now calculate his profit: 10,000 * 0.01 dollar = 100 dollar. Isn’t that great.

He will make that profit out of nothing without any assets. Its like “Feeding the five thousand” in the Bible, a miracle, just magic, the financial perpetuum mobile. Theoretically this is an infinite rate of return.

If anything goes wrong he will have to pay 10,000 dollar which he of course can’t because their are no assets or collateral to cover that or better said that would make sense to cover that.

But this is exactly what’s at the core of all these so-called bailout plans around the world. Covering up for crazy bets that only a mad man would do or - the other way around - paying out the profits to participants of a pyramid scheme where money simply travels up the chain.

Like their predecessors in the 18th century our days financial Cagliostros also hoped to cash in before and did not expect to be around when the whole bubble burst (these millions of dollar bonus payments suddenly get a completely different meaning).

From Wikipedia on Pyramid schemes
“A pyramid scheme is a non-sustainable business model that involves the exchange of money primarily for enrolling other people into the scheme, without any product or service being delivered. It has been known to come under many guises. Pyramid schemes are illegal in many countries, including the United States, the United Kingdom, France, Germany, Canada, Malaysia, Norway, Australia, New Zealand, Japan, Nepal, Sri Lanka, and Iran. These types of schemes have existed for at least a century…”

Now that might further clarify the way how those Bankstas could be prosecuted under gambling regulations, consumer fraud or the trade practice act.

It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Henry Ford

More information:
Michael Moore: How to Fix Wall Street
Wikipedia on Alessandro Cagliostro
Wikipedia on Pyramid schemes

This film by Jason van Genderen was entirely shot on a cell phone on the streets of NY and Sydney. It won this year’s Tropfest NY short film festival in September.

Click on the image below for the link (multimedia)

“…Tropfest NY took place on Friday, September 26 at the World Financial Center, Battery Park City - and live via satellite at First Canadian Place, Toronto…”

More information:
Tropfest YouTube channel

Four music videos on the banking crisis based on some all time classics - from Elton John’s “Candles in the Wind” / “Bankers in the Wind” to Billy Joel’s “We Didn’t Start the Fire” / “Wall Street Meltdown”.

Click on the image below for the link (multimedia)

The Credit Crunch Song

Credit Crunch Anthem

H-E-D-G-E, by Merle Hazard

Wall Street Meltdown

British comedian and former Monty Python star shares his thoughts about vice presidential nominee, Sarah Palin.

Click on the image below for the link (multimedia)

“… learned certain speeches … but its like a nice looking parrot … because the parrots speaks beautifully … but doesn’t really have an understanding of the words it’s producing … Monty Python could have written this…”

More information:
Information on the British comedian Michael Palin at Wikipedia (mentioned in the interview)

Just in time a greatly done animation on the panic of the “Jonses“.

“…Watch the Bana citizens try to go about their daily business while avoiding destruction on an epic scale, as huge monsters go about THEIR daily business, wreaking havoc and leaving a trail of debris in their wake… Bana Panic! is a new animated pilot short from ‘Highlander Productions’, featuring all out mayham, chaos and comedy…”

Click on the image below for the link (multimedia)

More information:
banapanic web site

Today was a bad day at stock exchanges all around the world and it was potentially the worst day in stock market history for General Motors.

Already down about 80% from its trading range around USD 40 per share 12 months ago, the share price of the Detroit car maker today was shredded another 30% to around USD 4.7. The report from JD Powers published today that is expecting an “outright collapse” for the global auto industry in 2009 certainly did not help. And for that the writing was already on the wall when GM stopped production in some of its factories in Europe earlier this week (Today even BMW has announces a short production stop with one of his factories in the next weeks).

Let’s put these figures into perspective:

The last time GM was traded around USD 4.7 a share was in the 1950s when an average car sold for USD 3,000, houses went for about USD 16,000 and petrol cost 20 cents a gallon. GM’s market capitalization at the end of normal trading hours today was around USD 2.8 billion, about 15% of its annual revenues or about an estimated sales value of 2 months of its car production.

Let’s not forget we are talking about a global enterprise here with more than 260 thousand employees and more than 9 Million cars produced per year.

How crazy the stock market valuation of car makers around the world has become can be seen with the share prices of the German car maker VW on a steep rise during the last days. VW is now worth more than BMW, Daimler, Renault, Peugeot, Fiat, GM, Ford, Mitsubishi and Hyundai together. In other words VW today is worth almost 50 times what GM is traded for at the stock exchange.

So why is that all important to the average American?

Well, the economic impact of the U.S. car industry on the country’s economy is substantial and reaches across almost all states. U.S. based car makers spend more than USD 12 billion on research and development per year, provide healthcare benefits to 2 million Americans and pay the pension of almost 800,000 retirees and their spouses. GM alone directly employs more than 260 thousand people and another 5 million jobs within dealerships and suppliers are linked to it.

From the GM web site:
“…General Motors Corp. (NYSE: GM), the world’s largest automaker, has been the annual global industry sales leader for 77 years. Founded in 1908, GM today employs about 266,000 people around the world. With global headquarters in Detroit, GM manufactures its cars and trucks in 35 countries. In 2007, nearly 9.37 million GM cars and trucks were sold globally under the following brands: Buick, Cadillac, Chevrolet, GMC, GM Daewoo, Holden, HUMMER, Opel, Pontiac, Saab, Saturn, Vauxhall and Wuling. GM’s OnStar subsidiary is the industry leader in vehicle safety, security and information services…”

More information:
GM web site
Market data for GM at MarketWatch

An outstanding animation - the best on that topic we have ever seen. The text of the Universal Declaration of Human Rights as an Infographics animation.

Click on the image below for the link (multimedia)

Created by Seth Brau, Producer: Amy Poncher, Music by Rumspringa

More information:
Know Your Human Rights with a larger version of the video

We had some discussions during the last weeks and a few times we ended up with the same question:

Are there institutions / instruments in the Humanitarian / Non-Profit sector that could be compared to the mess in the banking sector specifically with the Investment banks - a species which in that habitat by today got almost extinct.

And yes we found them.

Created during the last decade on the back of the MDG, many have been installed with targets like deregulation of development funding (yes this did happen - aka budgetary aid aka the thin line along institutionalized corruption), avoidance of regulatory frameworks (e.g. via PPPs), avoidance of multi-national oversight across geo-political blocks (to go around the UN) or to just create the illusion of acting / transparency.

And these organizations share many properties with private sector Investment banks:

Fancy names - most of them answer to names like global, facility, fund, emergency plan. They are almost completely unregulated and their activities are at best opaque (they put lots of effort into the illusion of transparency and looking good). They have shown hyper-fast growth over the last decade - some would call that bloated - while nobody really knows what they are doing. They are sucking in enormous amounts of funds (which are then not available otherwise e.g. UN) and nobody knows where the monies have gone to - well with most of the investment banks we know by now, up through the chimneys of the finance world and into the bonus accounts of the fat cats - in a few words - sorry your money’s gone can I have some more.

These organizations like their private sector counterparts put much effort into their image within the public eye and created the illusion that they are the crown of their industries - attracting the best-of-the-best. Well there are a few very good people - or have been some excellent ones - mostly to get those shops running and off the ground or do the plumbing so that those shows don’t fall apart, but we got insides views on both sides and they also share some properties here - full of sorcerer’s apprentices with overinflated egos, overpaid and no sense for ethics or acting responsible with regards to the consequences of potential failure or risk.

And then there are all the vested interests, the networks and influential groups surrounding them.

There are geo-politics groups and power-brokers, corruption levels up to 80% in-country, lots of monies remaining in the donor countries but being counted as aid, people who provided favors somewhere else getting consultancy jobs with up to 10 times the pay of a normal salary / fees in the private sector (that’s the highest we know) - and so on. The best description of the situation and a rather euphemistic one we came across: We’re back to cold war, to 1960s times, when the super powers were playing monopoly with the developing countries. You want development aid: Well we get your Water Works, your Electricity Company and your Park Lane. But all your friends will get a gooood share from our incomes. And then just tell us how you want your monies paid.

So where does all of that lead us to? Well where did we got to after the party was over with the Investment banks?

With the second group we merely know by now. The next two generations - at least - will work off the debts created by them and their friends before a bill will come in that has paid in full stamped over it. And that bill is today already up to a few trillions of dollars.

And that’s potentially one of the few differences (regarding the damages created). The amounts destroyed by their so-called non-profit pendants do look smaller but only in money terms - most likely in the region of a hundred billions plus of dollars. But still generations of people will pay for it and they already today pay with their blood. In difference to their private sector friends there are direct links to those who are dying of diseases, starving or being tortured or terrorized to death.

But then there are - and if nothing changes - there will continue to be enormous profits made in that very special kind of humanitarian aid / non-profit sector.

Note: The group of these so-called multilateral funds / facilities / etc is rather small in numbers but very large by the amounts channeled through them - up to 80% of all development aid today in some areas.

This is the first part of a series of posts (call it a trailer), that will go into the details of how these shows are financed, why there is no accountability, what is happening behind the curtains, which skeletons are in the closets and who is profiteering from that.

Like many of the stories (only a few lately) on our site, the facts presented are backed up with inside knowledge, normally not available or gained through years of experience in the industry.