Charles Ponzi and his ilk

Charles Ponzi claimed to be buying discounted postal reply coupons in other countries and redeeming them here at face value, performing a kind of arbitrage. He promised his investors 50% in 45 days or 100% in 90 days. Postal reply coupons were supposed to allow the recipient of a letter the money to mail back a reply. A Boston reporter suggested that there was no way Ponzi could legitimately be making that kind of money. Ponzi sued him for defamation and won. Bernie Madoff and Arthur Nadel are only the latest in a long line of swindlers. We suspect that some of these people start out legitimately are just too embarrassed to admit they lost 40% (of whatever) of their investors money so they lie, claim great returns, and start a process that is never going to end well for them. Now, states are looking at special legislation to “tackle Ponzi schemes,” as if fraud is not illegal enough now, or that by legislating they will prevent people from stealing. Generally involving new teams of cops and prosecutors, these proposals from Connecticut to Florida include letting states pursue securities fraud and money laundering (typically federal crimes, but ones most states can prosecute anyhow). In any case, the Buzz says watch out you don’t outlaw social security (or, maybe that’s OK too).
--Paul Marotta

Public Company Disclosure

We were intrigued recently by a Wired article suggesting that there is a simpler way to format public company disclosure so that there is radical transparency, making reports easier to understand and easier to interpret. Of course, regulators believe that the current system does exactly that. But making financial reporting simpler is the exact opposite direction we have been heading. The idea is to have public companies file using universal tags that make the data easier to explore. We like the idea but don’t think it will be that simple. The current system already uses the equivalent of universal tags—“accounting terms of art.” The problem is that to overhaul financial reporting we need first to overhaul accounting. In a sense that is happening with the intended abandonment of GAAP and adoption of more international standards. But some lament the standards will allow more subjective interpretation, thus making financial statements more susceptible to fraud. And what 100 or so tags would you include. Revenue is good, but is that cash or accrual accounting? And earnings per share is great, but do you count pledged shares, options, warrants, convertible debt, etc. We like the idea because current reporting is inscrutable to almost everyone, including lawyers, accountants, and investment bankers, but as with everything, the devil is in the details.
-- Paul Marotta

Fannie Whoa!

We recently had the distinct displeasure of reading the Annual Report on Form 10-K for Fannie Mae for 2008. The words sounded like any other annual report, but it read more like a horror story. Somehow they managed to bury $60 billion after losing just two and half billion a year ago and making three and a half billion in 2006. Retained earnings went from 33 billion to a loss of 26 billion. Stockholders’ equity went from 44 billion to negative 15 billion. Short term debt increased by $100 billion. There were a million shares of senior preferred stock outstanding at the end of 2008 at $1,000 per share, but none at the end of 2007. Guess who owns that? Right; you do. Of course there is a long discussion of its conservatorship since September 6, 2008. The conservator is the Federal Housing Finance Agency. Of course the conservator is delegating to Fannie Mae’s Board of directors and management the actual day to day management, so not much has changed. One ray of hope—Deloitte & Touche has lowered their auditing fees from $47 million to $39 million.
-- Paul Marotta

Attack Your Best Customers?

As the recession deepens and panic sets in, the conventional wisdom seems to be to generate cash flow by force of will. Municipalities including San Francisco and San Mateo have been trying to hike every fee not nailed down, in an effort to close budget shortfalls. That’s a plan; now that everyone is hurting and out of work, hike their taxes. That’s the way to get our economy back on track. Maybe if taxes are high enough the few left with jobs will get fired and tax revenue will drop to zero. Similarly, one business after another has been trying to do anything to avoid shipping money out the door. A specialty retailer that the Buzz’s best friend frequents would not give her a refund on valentines day cards “because it is a seasonal item.” And this was three days before Valentines day. To make matters worse, this great customer traveled 30 minutes to shop at this store to help them stay in business rather than buying her stuff off Amazon.com at 30% less, and was buying another $50 worth of stuff when denied the refund. No good deed goes unpunished indeed. Why bother trying to help stores that couldn’t care less about you? The moral here? Don’t panic! Take extra good care of your customers! You should know that their retirement portfolios are down 40%; they might have been fired that day; the State of California might be shipping them an IOU instead of a tax refund; and they might not be able to afford college for their kids any more. In short, take a deep breath, relax, and still take care of those who value and use your products and services. Some day you might need them…...
-- Paul Marotta