Author: Michael Goode

Normally the SEC likes to just slap these people on the wrists. It is nice to see someone get a sentence of 57 months in prison for pumping a stock while falsely saying he owned no shares.

From the litigation release:

The sentence ordered Sayre to serve 57 months in prison to be followed by three years of supervised release. The sentence reflects a sentencing enhancement because the Court found that Sayre obstructed justice by lying under oath to the Commission during its investigation.

Thanks to Mortgage News Clips for bringing this to my attention.

Guess who plays the lottery disproportionately? Poor people. Guess who buys the riskiest stocks with the lowest returns (particularly penny stocks)? Also poor people. Interesting academic paper here (pdf). People are also more likely to purchase volatile penny stocks in an economic downturn.

Not one of the hedge funds of funds or banks that steered investors to Bernie Madoff’s funds has admitted their idiocy in failing to spot huge red flags. They have all tried to blame the SEC and other regulators. While the regulators failed spectacularly, even a successful effort on the part of regulators could not have stopped Madoff before he had harmed many investors. That was the case with Enron, with Bre-X, with US Windfarming, and with every penny-ante Ponzi scheme. A regulatory authority cannot act until a crime has been committed, and because of the need to prove a crime, there is little chance of stopping frauds when they begin.

On the other hand, investors (particularly funds of funds and banks, which have the skills and money to conduct thorough due diligence) only need to suspect that something is not right to choose not to invest and avoid losing money to a fraud. That is why I chose not to invest with US Windfarming (even though at the time I knew nothing about investing). If the large investors had done even a modicum of due diligence they would have seen the red flags such as the size of Madoff’s auditor and his insanely consistent returns.

Some commentators have argued that the Madoff scandal will harm hedge funds. That is likely, but the effect will be much greater on funds of funds. If an annual fee of 1.5% of assets under management does not mean that a FOF will perform basic due diligence, then FOFs are doomed. Even in the best of circumstances there is little point to FOFs. I predict that the number of funds of funds and their assets under management will shrink by over 80% in the next couple years. The world will be a better place as a result.

Okay, maybe it is not the bottom, but I am willing to bet that junk bonds will offer a good return on investment for those who invest now. At current yields, over 20% of the companies in a junk bond portfolio would have to go bankrupt for the portfolio to lose money. Large investors of course should pick and choose, avoiding bonds issued by private-equity backed companies. For smaller investors, the JNK ETF may be worth considering. It currently has a 19.99% SEC yield. The NAV at yesterday’s close was $27.22. I may buy a small bit of JNK in the near future.

Disclosure: No positions.

PILE the forclosures high in Las Vegas and Bakersfield.
Shovel them under and let me work—
I am the deleveraging; I cover all.

And pile them high in Phoenix
And pile them high in Detroit and DC.
Shovel them under and let me work.
Two years, ten years, and people ask their friends:
What place is this?

Where are we?

I am deleveraging.
Let me work.

—
The Banker does what bankers can,
Deeds quite impossible for Man,
But for one prize he shall always yearn,
The Banker has no ability to learn:
Among his grand earthly things,
the emptiness of his soul now stings,
The Banker stalks one last deal,
as in pain around him we all now reel.

—

COME play with me;
Why should you run
Through the empty streets
As though I’d a gun
To strike you dead?
Oh I’m just a taxpayer
and you’re a bailed-out banker
Run fast or die!