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Detroit in Bankruptcy After Years of Neglect and Lack of Leadership

Back in the last quarter of 2010, as the big three Auto manufacturers lobbied for bail outs, and later filed for bankruptcy, Detroit's fate was all but sealed. Well, the fat lady is singing, and this is a political and public relations mess. There are hints of mismanagement or misappropriation of funds and a fair share of finger pointing - but at the core of the municipality's fiscal crisis are the Pension funds. How will the courts handle retiree payouts: will they remain at par or will they be reduced? The residents of Detroit are in for an interesting turn of events. This is a serious wake up call, to say the least.
How did this filing come about? Well, from what I can tell, Snyder seemed to have been trying to quietly handle the crisis. Seeing the writing on the wall, Governor Snyder wanted to avoid a possible downgrade of Michigan’s credit rating, which is likely following a messy "unmanaged" bankruptcy. The crisis management strategy was to get ahead of the problem, so that the worst case scenario is a "Structured" bankruptcy - thereby minimizing the negative impact on the State's overall credit rating. The Wall St. Journal reported that Snyder brought in Kevyn Orr as an Emergency Money Manager to work aggressively to get Detroit’s fiscal house in order. Snyder's secret weapon, Orr, was apparently granted “dictatorship” style authority, essentially rendering the city’s finance department and controller powerless. Kevyn Orr was the lead attorney handling the Chrysler structured bankruptcy, so it could be construed as a sound decision. However, from another perspective, one might say that hiring a bankruptcy attorney is like appointing a wolf to watch over a hen house.
How serious is it when a city files for Bankruptcy? .

California has probably seen the most cases of bankruptcy than any other state - with city after city filing for bankruptcy protection as a result of the housing crisis and pour money management. The jury is still out as to whether California's troubled counties will recover gracefully. Whatever the case, the road back to solvency is a long and arduous one. As for Detroit, it was clearly heading in the wrong direction prior to the start of Great Recession. In fact, long before the Recession rocked the nation, and later Europe, Detroit was already showing obvious signs of fiscal discord. Their key source of jobs and tax revenue stemmed from the auto industry and ancillary products and services. Although many local businesses and retailers benefited from the economic "trickled down".
In all fairness, we can't place Detroit's troubles entirely on the shoulders of the auto industry. There are multiple factors playing into the city's demise. For example: tax revenues over the past 25 years have been on a steady decline as the population and businesses fled to greener pastures. The City of Detroit, at its peak (1950s), had a population of 1.8 million, but the most recent Census Bureau records illustrate a more than 65% decline. The disturbing reality is that Detroit presently has a population of merely 700 thousand - particularly considering the demographics and socio-economic landscape. Adding insult to injury, over the past 5 to 6 decades the population exodus happen to be primarily the middle class, leaving the city with a disproportionate number of low-income residents. What this boils down to is a dwindling tax revenue base, and increased spending for public assistance, healthcare and other subsidy programs. The economic cycle can only spirals downward from there, unless a drastic changes are made.
The “Economics-101” explanation would be as follows: When you have a predominately low-income or impoverished population, this translates to a largely unskilled and uneducated labor force – which means local-area businesses can’t fill higher paying jobs that require specialized skills or education. This distressed socio –economic environment drives business out. In turn, joblessness decreases consumer spending, which ultimately cause retailers to close down.
High unemployment was not Detroit’s biggest problem. Job creation doesn't help in this scenario unless there’s a strategy implemented to attract businesses and manufacturers with jobs that match the skills of the population. Sheer job creation (in a vacuum)is nothing unless there is also a comprehensive plan to educate or provide training to upgrade the skills of the local workforce.

Years of neglect and misguided development spending has come to a head. There's been ample time (we are talking decades) for anyone from the parade of politicians to step up and show real leadership. It’s hard to believe that none of the government agencies or organizations could have developed a long-term urban renewal strategy to transform Detroit into a thriving economic force. As far back as I can remember, Detroit was known for its high crime, and unemployment, but the combined burden of high unemployment, crime, foreclosures and abandon properties - against the backdrop of diminishing revenues, and $18 billion in debt obligations – you’re looking at a time bomb.
Political fallout is eminent, and everyone will be watching to see if Obama will extend an “bail out” to Detroit, since he was vehemently supportive of the big-3 auto makers in their time of need. With any luck, the people, politicians, unions, educators and activists will be open minded enough to work together and find a common ground for rebuilding Detroit. This may turn out to be for the best in the long run

K. Reilly
The Cohn-Reilly Report
Facebook.com/cohn.reilly

Redbox Fully loaded: Can Netflix Stay 1-Step Ahead ?

Redbox unearthed the details of a joint venture with Verizon Communication, which delivers the required infrastructure for streaming video service at (you guessed it) $8 per month, under the brand name, “Redbox Instant”. Although, this exciting new business division does not include movie downloads as yet. The anticipated venture comes on the heels of their announcement in March that it purchased NCR’s entertainment division for $100 million, hammering the nail in the Blockbuster Express coffin. Kudos to Redbox for its successful execution of its expansion plan, that brings them to a head-to-head competition with the Market Leader, Netflix.
You may recall the of Summer of 2011, when Netflix's CEO (Reed Hastings) made the grave mistake of announcing their brilliant plan to separate the DVD Rental and Streaming Video business into two revenue streams. Charging $8.00 per month for each – essentially doubling the cost for customers who were enjoying access to both for only $8. The ill-fated plan was announced one moment and denounced the next, as customers made their feelings of disgust known. A mass exodus of 800,000 customers within a matter of weeks was an undeniable message to the business community that the Customer is Boss. By October, in response to the backlash, Hastings apologized to customers. He announced that the company decided not to separate the services for now, adding that they were moving too fast.

Netflix reported a loss of 800,000 subscribers in the 3rd quarter of 2011. Since Analysts predicted a loss of only 600,000, the market reacted unfavorably with a swiftly decline of over 20%. The company warned of more defections and stated that they anticipate losses for the first quarter of 2012 as a result of expanding their business to Europe. Netflix did not anticipate the fast and furious decline in market valuation, eroding their stock price from its highs The $305 per share in July 2011 to below $53 by September. By the year's end, Netflix has lost a million subscribers in the aftermath.

This costly business strategy turned out to be a public relations nightmare for Netflix, but an absolute dream for Redbox, waiting in the wings.

Using the Netflix business model, Redbox came onto the scene quietly, but well prepared to gradually scoop up stray Netflix customers. Then the Netflix blunder created a glorious opportunity or “gift” for any company poised to take advantage of it……. that company was Redbox. The gift translated into instant market share and name recognition, as news coverage of Netflix’s new strategy made reference to Redbox in just about every report.Jusk think; a sizable number of displaced Netflix customers were now searching the net for a comparable alternative to the DVD and streaming video service. Redbox scrapped-up stray, and disgruntled customers for the first 90 days following Nextflix’s announcement. It’s quite possible that Redbox pulled in the entire 4% market share Netflix lost.
As a business major in grad school, students learn a great deal about the world of business through reading piles of case studies and statistics about corporations that were successful versus those that folded. We learn that the fate and longevity of a product or service has a lot to do with originality or satisfying an underserved demand. In such a scenario, the first to enter the market with a new product idea or service is referred to as “Market Maker”, or “Market Leader”. The Market Leader holds an enormous advantage over those that follow in their footsteps. Research has shown that market leaders are likely to maintain the lion's share of the market for decades – unless the product or service becomes obsolete, such is the case (for example) with beepers. In keeping with this statistic, Netflix did eventually recover having lost 85% of their valuation, and approximately 4% of their business.
Nevertheless, the Netflix blunder, nearly two years ago, served to kick-start the new-comer, Redbox. As unhappy consumers fled Netflix, the gift of market share was well received and now Redbox is ready for a new challenge – Streaming videos.

By December of 2012, Redbox had increased its market share to 45%¸ up from 34% the previous year. Redbox’s founder Gregg Kaplan, leaves his post as President and COO, passing the role of President over to Anne Saunders, and Shawn Strickland as CEO of Redbox Instant - who will hopefully continue with equally successful leadership.
Well Netflix, “It is On”! You don’t have to be a market expert to conclude that this will be a battle for market share we haven’t seen since the early days of Coke and Pepsi. I look forward to the continued growth of Redbox, and hope the competition will inspire higher standards and consistently low prices. Redbox Instant, will be offered on the Roku box, and made available on Sony Playstation-4 consoles. Good luck Redbox, and may the force be with you!

K. Reilly
The Cohn-Reilly Report
www.facebook.com/cohn.reilly

Employment Not As Rosy As You May Think

Although the unemployment rate has been below 8% since October, there seems to be a disconnect between what the government and media are telling us about how good things are with jobs and what is real.

There are job openings at a level not seen in years. However, the time it takes to fill a job has increased to 23 business days compared to 15 in mid-2009. Although the economy is improving, the reality is companies are reluctant to hire, holding up the process by making candidates interview over weeks or months, before a decision is made, if one is made at all.

“There’s a fear that the economy is going to go down again, so the message you get from C.F.O.’s is to be careful about hiring someone,” said John Sullivan, a management professor at San Francisco State University who runs a human resources consulting business. “There’s this great fear of making a mistake, of wasting money in a tight economy.” The result is an unreported hiring freeze that seems to be in place, especially for higher skilled workers.

“If you have an opening and are not sure about the economy, it’s pretty cheap to wait for a month or two,” said Nicholas Bloom, an economics professor at Stanford University. But in the aggregate, those little delays are stretching out the recovery process. “It’s like one of those horror movies, an economic Friday the 13th, where this recession never seems to die.”

Although job creation has improved over the last two years, it has little impact on the backlog of unemployed workers. Uncertainty, regarding the effect of fiscal policies in Washington adds to employer indecisiveness. In addition, employers want to make sure that workers who have been out of a job for months or years are up to date with current skills, said Robert Shimer, an economics professor at the University of Chicago, before they agree to on board a candidate.

Employers are under no pressure to hire – one reason as indicated in government labor reports, is high productivity. What this means is employees are working double and triple duty because employers are reluctant to hire additional staff. If they do, to lower labor costs, some companies have imported talent from abroad, especially in the technical fields, at much lower rates than their counterparts in the USA would normally command. In addition, outsourcing continues overseas, further reducing opportunities.

Until the psychological barriers are lifted regarding the fate of the economy and changes are made to reward companies who hire American workers, frustration may continue for quite some time, for domestically unemployed workers.

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C. Cohn
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Desperate Times Call for Desperate Measures:Yahoo CEO is Poised for the Challenge

Yahoo CEO Declares “No Pain, no Gain” Policies, and sparks fly. Marissa Mayer, Yahoo’s New CEO, makes a gutsy move, as she dares to go against the grain to get the company back on track. Marissa Mayer was brought in to turn the company around, and given the steep decline in valuation, a new vision and direction is drastically in order. As the saying goes; “desperate times cause for desperate measures”, and Mayer has declared telecommuting a “No, No”, among other new policies. In an apparent move to bolster innovation and collaboration within the company, Marissa Mayer has taken a very unpopular step toward reinventing Yahoo, and rebuilding their value and competitive edge.
Over a decade ago, when Yahoo was the technology darling of NASDAQ, it traded as high as $445 a share (Jan 1999) - while today it trades under $25 per share. That said, the dynamic CEO certainly has her work cut out for her. As brilliant as she is beautiful, Mayer broke the gender barrier at Google, as being the first female engineer there. Often described as “tough as nails” Mayer rose through the ranks – steadily up the Google management ladder, but seemed to have recently been overlooked for Larry Page’s Senior Leadership Team. Perhaps that made it a whole lot easier for Mayer to say goodbye to Google.

After an exhaustive search, for their next CEO, Yahoo stunned the tech community when they crowned Marissa Mayer as their next Chief Executive. In just six months, Yahoo’s newest CEO has created firestorm of media attention, and an unrelenting buzz, even rising to thelevel of outrage at times. This could be both good and bad for the company, but time will tell which way the pendulum will ultimately swing in that regard

Technology advancements have pushed the envelope in favor of telecommuting, while the troubled economy forced corporations of all sizes to rethink their policies and staffing structures. The global fiscal crisis created an opportunity for corporations to develop creative staffing and compensation structures to optimize space and costs. The tech companies had already created a blueprint that was implemented in varying degrees over the past decade.

So why is the move away from Telecommuting so controversial? In this age of advanced technology, the internet and wireless communication fostered globalization, and with it came the Telecommuting. Multinational corporations and small companies alike sought to optimize efficiency and costs by implementing mixed workforce (sometimes in different countries) which gave prominence to remote work options. Telecommuting has become a high accepted and commonly utilized working method, particularly for younger, innovative companies. A highly positive perception of Tech firms stem from the fact that the technology firms of the 21st century emphasized the importance of employee satisfaction concepts that promote employee-centric policies in support of work/life balance.

Meanwhile, a simple ban on telecommuting initiated by Yahoo’s CEO has sparked a major controversy - as tech experts voice their argument in for or against Mayer’s policy. For the record, Forbes has cited their support for Mayer’s Policy, while a Bloomberg contributor (Slayer) views the decision as daunting. Is Mayer’s decision to reverse the Telecommuting policy at Yahoo prompting fear that corporations that bought into employee-centric life/work concepts will dial back on their family friendly policies? Many strategists and analyst claim that this drastic change may be seen as a blow to working women, yielding a negative perception of Yahoo. Citing the “working woman” will be disproportionately impacted by any shift away from telecommuting. Well, you might be surprised to learn that although working women are perceived to the hardest hit by any trending policy away from telecommuting, it is actually men that will feel it the most. As it happens, the male population makes up the lion’s share of the telecommuters, yielding 73 % of the total number of remote workers in this country.

Nevertheless, this whole spectacle seems odd, and yet so telling of how powerful Marissa Mayer actually is. It is almost as if the future of Telecommuting is riding on this one decision, particularly due to the high profile of Yahoo, being one of THE most visible brands in the world. The fact is, Mayer has a sound strategy to get the company culture back to cutting edge innovation. In the spirit of mavericks like Steve Jobs, there’s a need for “all hands on deck” attitude to shake the company up. In all fairness, given Mayer’s Degree in engineering and Masters in Science Technology, she is far more suited for the challenge than her predecessors. The 4th quarter earnings report yields a 26% increase, year over year. That's a clear indication that Mayer's strategy is already having a positive impact on the company.

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Romney’s Victory Website: And The Ugly Truth About Politics

It appears that Mitt Romney and his GOP “posse” had a Vision that the Election was going to yield a landslide victory! Although they could not have been more wrong, their arrogance was palpable. I am sure by now you’ve heard reports about Mitt Romney admitting that he only wrote a Victory speech. That is more than positive thinking, that is sheer arrogance (and not the most attractive trait in a candidate). Fox news, and other conservative media outlets had pre-election panels, and Election-day panel discussions, that harshly laid out reasons why Democrats, and Obama, will be shown the door. During the early afternoon on November 6th, the conservative news anchors and pundits entertained themselves by predicting what the Romney Cabinet would resemble. Who are the likely candidates for the Romney Administration, and who would be passed over for one reason or another. It was not unlike pre-Super Bowl chatter, only this game will impact the entire country, and the world. As the day progressed, the conservative political analysts were confident and excited.

There seem to be such utter certainty, that I was startled by it. It was like being in an alternate world, chiefly because I couldn't see how one-plus-one could equal four. It appeared that Fox News, and conservative Talk Radio, converted simple math (adding likely Romney votes) into an algebraic equation....and it all made sense to THEM. Looking at the issues influencing voters, which bore out to be true, I took note of the following issues:

 Women in America want the right to choose what goes on with their bodies, and don’t appreciate being referred to as “Binders of women”
 Latinos are concerned about immigration laws that impact their children and families.
 FEMA should be left alone; States and local governments, and citizens need financial help after Natural Disasters .
 A sizable portion of the “47%”, Romney wrote off, were retired, or veterans who have paid a lifetime of taxes, or risks their lives fighting for this Country. They’ve earned the right to Social Security, and other government programs
 Auto Makers, their 181,000 auto workers and their families were happy that Obama didn’t take Romney’s advice to “let them go bankrupt”
 Gays are passionate about having heir marriage legally recognized, giving them the same rights as heterosexual married couples.
 Youth votes are more likely to vote for Democrat, given the “Occupy Wall Street” movement, which blames the wealthiest 1 %, and the Bush Administration for the economic and fiscal crisis

The above political and social issues can be translated to a simple addition problem. Accordingly, the 7 bullet points could be treated as an aggregate of votes away from the republican candidate, Mitt Romney. Although the slow economy and high unemployment were working against Obama, as long as the turnout were as strong, or better than 2008, he had a good chance of winning re-election.

So why then, were the Republicans and Carl Rove so vehemently certain that Romney would be elected the 45th President of the United States? To the extent that he had his Victory Website rolled out early Thursday morning?

Perhaps this tidbit of information will provide a clue: Shortly after Obama’s stunning victory, I read a disturbing article that attempted to explain a complicated web of investment companies and venture capital that involved Mitt Romney’s son, Tagg Romney. In a nutshell, Tagg Romney owns the company that invested in the company that bought a controlling interest in a Voting Machine Vendor. What? I was so shocked, that it took the wind out of me. What this amounts to is so incredibly unethical, I can’t help but to think of Watergate. So, that explains the why the Romney camp felt so sure they would be moving into the White House. This is unfathomable and beyond a mere “conflict of interest” issue. This also explains why several concerned voters released video tapes the rigged voting machines they encountered, and posted it on YouTube. One male Caucasian Voter illustrated that when he chose Obama for President, a check would appear next to Mitt Romney’s name. He tried it multiple times, and eventually left that booth. He did not indicate who he ultimately voted for, but stated that he just wanted to report a “strange” occurrence.

Provided below is just one of the "Rigged Voting Booth" videos.

The combination of the Tagg Romney’s secret ownership of a voting machine company, and the YouTube videos of rigged voting machines is too much of a coincidence. I also believe that if this Article was misstating the facts, there would have been a lot of noise and defamation claims coming from the GOP or the Romney camp. Instead there is silence - as if the planned strategy was not to respond, so that the issue would quickly go away. I am almost certain that the Obama Administration is too busy to pursue the matter, especially since the stolen votes did not help them achieve their goal. The outcome of the this election, begs the questions: If Nixon hadn't won the election, would the Watergate break-in become the scandal that rocked Capital Hill - to destroy Nixon's political career? Given the lack of attention drawn to the Rigged Voting Machines connected to Tagg's Venure Capital Company, I can't help but wonder if Watergate would have become one of the biggest scandals in America's political history, if Nixon did not get Elected? Whatever the case, politics is left with a black eye, as democracy stumles on.

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Doin' the Twist: The Federal Reserve Steps in to Spur the Economy

In the beginning of the year, the Federal Reserve indicated their plan was to let the economy stand on its own. By the end of last month, however, the Feds broke down and reduced long-term interest rates in a program they refer to as Operation Twist. In this program, the Feds would drive down interest rates to encourage business activities, such as borrowing and hiring. According to a Wall Street Journal article by Peterson and Hilsenrath, the Federal Reserve officials announced that Operation Twist will be extended through the end of the year, but they’re “poised to do more”.

At the end of the 1st Quarter, the Feds indicated that there was no need for their help. The economic picture appeared brighter following a strong 4^th Quarter, and encouraging jobs report.

By the time the we turned the corner into the 2^nd Quarter, the economic storyline began to change amid heightened pressures from overseas. The market, which had anticipated S&P downgrades for Spain and France, could no longer withstand the push-back stemming from the European Union’s fiscal and political upheaval. Globalization has its rewards, but this isn’t one of them. When the EU sneezes, we are going to get the sniffles, as if the distance were non-existent.

As the Euro fiscal storm brewed, the dismal jobs report and Facebook IPO did its part to shrivel up any confidence Investors might have had left. The market uncertainty lingers, regardless of good economic news. This  depicts the profile of weary investors - possibly suffering from Post-Traumatic Stress Disorder.  Being the eternal optimist, I’m hoping Operation Twist will have us all dancing in the isles by the end of the year.

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Financial Fraud Strikes Again

Haven't we had enough of financial scandals? Of course not, here we go again. This time it is with a boutique futures trading broker - Peregrine Financial Group, also known as P.F.G.. On July 9, 2012, the National Futures Association (NFA) - the industry wide, self-regulatory organization for the U.S. futures industry, made an inquiry with U.S. Bank and learned that out of the $225 million in customer segregated funds that P.F.G. had reported to the NFA as being on deposit at the Bank just days earlier, only approximately $5 million was actually on deposit. The NFA also learned that, although P.F.G. submitted confirmations that U.S. Bank account balances as of February 2010 and March 2011, were reported to be approximately $207 million and $218 million, respectively, P.F.G.'s actual balances were less than $10 million for each one of these months.

On top of the reported financial fraud, a day earlier, the chairman and chief executive, Russell Wasendorf Sr., tried to commit suicide outside of the firm’s offices in Cedar Falls, Iowa .The Federal Bureau of Investigation is investigating the matter, according to a spokeswoman for the Omaha office, Sandy Breault. Ms. Breault indicated that the Chicago office of the agency might also get involved.

The Commodity Futures Trading Commission (C.F.T.C.) is seeking a restraining order against P.F.G., to prevent the destruction of any information that may be needed in the course of the investigation. The C.F.T.C. is also asking a federal court to appoint a receiver for the firm and freeze its assets.

This feels a lot like a curtain call for MF Global, where $1.6 Billion is still missing. (refer to a prior article in this blog for more information about MF Global). Similarly in this case, as the complaint states: “P.F.G. and Wasendorf have used customer funds for purposes other than those intended by its customers, and consequently, have misappropriated these funds”. “The whereabouts of the funds is currently unknown".

Needless to say, the operations of the firm have been halted. Unfotunately, I am one the many victims. For two years, I was an active futures trader with the company which offered  proprietary trading platforms to small retail customers like myself with unique and robust features that were not available from other brokerage houses. Although it has been several years since I day traded, due to time constraints, I still kept a funded account with P.F.G.. I contacted the NFA today and registered my name as an account holder. I urge all others affected to do the same. It may not amount to much but at least it is better to take some kind of action and to make your voice heard.

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C. Cohn
The Cohn-Reilly Report
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To Be or Not To Be: EU Shows signs of cracking

Twenty years ago, when the idea was circulating about a unified currency in Europe, it seemed like such a brilliant concept, based upon sound economic and political arguments. Today, it almost seems like an impossible dream. Landon Thomas of the New York Times asks in his article "Can they muster the will and resources to keep the euro zone from breaking apart?

As the world looks on, and markets take defensive positions, the Euro crisis unfolds like the climax of a mystery novel. Greece's dramatic elections - where the people ousted Sarkozy, opting for an unlikely candidate, François Holland. The outcome of the election was a clear sign that the people were not ready for the strict austerity measures needed to turn their economy around. Bailout alone was not going to save Greece, it was only expected to buy them time to pull their policies, and fiscal plan together. The political and civil unrest in Greece, gave little hope for a turnaround. Instead the notion of Greece leaving the European Union resurfaced with somber overtones of reality.

By the end of May, Spain had decided to pump 19 billion Euros into its struggling Lender, Bankia, SA, as a strategy to illustrate stability, and quell any notion that the crisis continues for its financial sector, in light of Greece's downward slide. This is a prop-up strategy that is effective in influencing perception, which is crucial in the realm of investors and financial markets. The US equivalent of $24 billion, was a rich injection that is twice the amount Spain spent in the recent past to straighten out the banking sector during US housing market collapse - causing a global rippling affect. Spain is swiftly reacting to mitigate a repeat of the fiscal mayhem stemming from billions of dollars lost in toxic mortgage-backed securities.

Meanwhile, two weeks ago, S&P downgraded Bankia, and several other Spanish Banks, causing worldwide concern. The rating agency made matters worse by painting a gloomy near-term forecast for the region, citing their belief that Spain is heading toward a double dip recession. S&P also noted that there was a reasonable expectation of an increase in troubled assets. On the heels of Frances downgrade, and Spain’s fiscal concerns, the question becomes, was this unified currency such a sound economic and political move in the first place. Friday, the DOW closed 300 points lower, illustrating investor sensitivity to the Euro Crisis - although, it should be noted that market anxiety was further stimulated by the soft jobs report.

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K Reilly
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BFF: Ballad of the Facebook Fiasco

Countless individual investors, and some intrigued "average Joes" thought that the Facebook IPO was going to be the atom bomb of Silicon Valley. The Golden Egg of the privately held tech companies, and its fearless leader, Zuckerberg, was sure to deliver. As the highly anticipated IPO jettisoned into history, as being the most anticipated offering of the millennium - I too thought FACEBOOK would be the IPO not to be missed. "get in now", I thought, "or you will regret it". Of course, I truly expected that the offering would be priced in the mid-teens, $13 or $15 per share. At the very least, it would be priced at a level commensurate with the "value", of a company that has no PRODUCT, who depends solely on Advertising. Advertising as a revenue source is not at all bad, but when you take into consideration that revenue growth on an ongoing basis would mean continued popularity, increased memberships and usage. Now, therein lays the rub. Allow me to offer MySpace into evidence, as how quickly a popular "hang out" can just as quickly shift into decline. MySpace, which was somewhat of a pioneer, is now valued at approximately $1 million, and struggling to stay relevant. That said, the pricing geniuses at Morgan Stanley had to be confusing FB stock with a commodity; you know... one of those limited resources that the world could not do without. How else would you explain a $38 opening price.

When a new popular issue is priced in the teens, it has no place to go but up. Sure it would fluctuate during the course of the day, but normally it would wind up quite a bit higher than the initial price. On the other hand, if you come into the market at $38, you are already at a premium, there is no place to go but down. Of course the speculation as to why the issue was priced so high, created underlying tension and uncertainty. By the end of the following day, reports of unethical matters surrounding the handling of the new issue began to surface. What a Fiasco this turned out to be! A sad, and bitter reality hit as news broke of possible insider trading. It is alleged that the lead bankers handling the FACEBOOK account at Morgan Stanley had tipped off their clients with confidential information. This information was in essence a warning not to purchase the stock at the opening price. Was this a setup, designed specifically to make million on the short sale of Facebook shares. An article in Business Insider reported that Morgan Stanley provided a select few classified information about FACEBOOK's weaker than expected forecast. Within 48 hours, news circulated of an SEC and FINRA investigation into what really happened. Whatever the case, Finance Reform obviously didn't go far enough.

Selective dissemination of "material" information concerning a cut in forecast estimates for the company would cause institutions to lose interest, which generated investor uncertainty among the small investors who weren't privy to this insider information. From the savvy individual investors, down to the average Joes jumping in to get a piece of the Facebook pie, this scandal put investors at an unfair disadvantage. The whole matter created a unprecedented IPO fiasco, leading to untold losses, and a decline of market confidence, which we could have done with out.

Adding insult to injury, Nasdaq had a fair share of technical problems which only added to the mayhem. Thousands of trades were stuck in limbo for individual investors. This may actually be a blessing, giving them the opportunity to either pick up shares at a steep discount, or back out completely. Ultimately, FB shares ended up about 30% lower than its initial price, with occasional ticks upward and downward. We're not likely to see stability in this stock price until the dark cloud of confusion is lifted, legally or otherwise.

My plans to purchase a hand full of shares immediately fizzled when I heard the price. A conversation with a few hopelessly optimistic friends convinced me that I should go ahead and pick up a couple shares just to be a part of the historic IPO. I never expected it would become the Fiasco of the decade.

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Stimulus-Interuptus: Feds Take Away the Punch Bowl

The economic indicators are all signaling a stabilizing, recovering economy. However, the disappointing jobs report may indicate that we’re not quite ready to pop the Champaign. In a March meeting held by the Federal Reserve, the published minutes show the feds believe that the economy is strong enough to stand on its own. No need to intervene to help it along. In the meantime, the markets reacted in a bag way.

The market sell off last week, was a response to the Federal Reserve taking the position that the economy no longer needs their assistance, which means no “stimulus”. A Chief Market Analyst, Doug Cote, was quoted as saying that the Feds were “taking away the punch bowl, the markets don’t like these punch bowls being taken away”. You can glean from this statement that the economic punch bowls were heavily spiked over the past 4 years to get up to this point. In fact, since the beginning of the U.S. Deep Recession, the government worked feverishly to steer the economy away from the cliff it was headed for. This meant the Federal Reserve and the White House actively propping up the financial market and the economy by implementing a cocktail of fiscal and monetary policies, which included numerous rounds of stimulus packages for various faltering industries.

The Bush Administration, followed by the Obama Administration pulled out all the stops to get the Country back on solid footing with programs which included; the bailout of Banks and the big three auto makers, tax payers stimulus refund, the homeowners’ assistance and first home buyer programs, and even forgiveness of old student loans - the list goes on. Now, the market has to go “Cold turkey”, and function without a safety net. This was obviously an unpleasant reality when the news send trimmers throughout the investment community, sending the DOW and other major indices in a mild tailspin.

The next quarter will be a critical benchmark for forecasting where the economy actually is, and what that means for Main Street, and the rest of the world

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Goldman Sachs: Filing for Moral Bankruptcy

The investment Banking community was stunned by the hard hitting statements made by Goldman’s former executive, Greg Smith. Smith's scathing, but heartfelt remarks, published in the OpEd section of the New York Times, was the topic of lively debates and criticism around the globe this week.
After reading Smith’s behind-closed-doors account of what’s really going on at Goldman, it would seem that Wall Street’s gold plated, celebrated investment bank of 143 years has somehow lost its core values on which they built their brand of “Trust” and “Integrity”. Goldman Sachs was once an awe inspiring investment bank, whose brain trust is referred to as “the best and the brightest”, but they have certainly suffered from a leadership deficiency. Strong leadership or the lack thereof, is the basis of the rise and fall of many businesses – regardless of their size. It is the “leadership” of Steve Jobs who, upon returning to Apple, was able to bring the company from the brink and take it to quintessential plateau, far beyond anyone’s imagination. That’s leadership.

Mr. Smith’s commentary might have easily been dismissed as a disgruntled employee, were it not for the fact that he was a highly regarded executive director, who has spent over a decade of his career there. From my perspective, Smith gains credibility for his tone, and the manner in which he described the pride he felt being a part of Goldman, and praised the company that once was. He was convincing because of his effort to be constructive in his criticism - disclosing examples of the troubling shift away from providing investment advice in the best interest of the client. Rather than simply throw destructive daggers and below-the-belt punches that serve only to damage the company, his rant was respectful but unyielding. Smith had the power to do a lot more damage than he did. Keep in mind, never once did he accuse Goldman of fraudulent practices.
Mr. Smith’s piece focused on Morals, Ethics and Integrity, which was summarily lacking, apparently much like the leadership. Smiths cited his leaving the company because he could no longer stomach the Goldman that has emerged. The shift in focus from Client-centered investment services to, revenue-driven “elephant hunting” (Smith, 2012) has eroded the company’s code of ethics to the bare bones. Having developed an unnatural preoccupation with taking every allowable advantage of the client, Goldman Sachs is left morally bankrupt.

Let us all be reminded of the Senate hearings, and the SEC investigations of 2010 and 2011, which resulted in fines and a multi-million dollar settlement. Meanwhile, the public has barely had a chance to digest the law suits that have come from international companies claiming Goldman mislead them about the rouge mortgage-backed securities they purchased from Goldman, without so much as a warning.
The firm’s Chief Executive Lloyd Blankfein and Chief Operating Officer Gary Cohn issued a statement more than 24 hours after the OpEd sent global shockwaves throughout the investment community. As expected, they were essentially denying the allegations made by Smith. Unfortunately, it was too little, and about $2.2 billion too late, as the value of the company took a dramatic hit after Smith's public resignation letter went viral. The stock recovered all but $800 million in value the following day, due to investor excitement about positive economic statements from the Federal Reserve, and stronger than expected retail data. Still, intangible losses are mounting where trust, good will, and brand are concerned. For this reason, many question the wisdon behind the delayed reaction from Goldman. It's too early to tell what the fall out will be, and Goldman's overall Damage Control Strategy is yet to be seen.

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Anonymous said......

Great article Katherine! The Goldman crew only needed 10 BILLION dollars (place pinky to corner of mouth)to stay afloat after the greatest heist on the planet by these guys: http://projects.propublica.org/bailout/list
It only took Goldman (Gold,man!)a couple of years to repay 10 Billion dollars... what does that tell me about how easy money comes to them?
At least one of them is admitting being morally bankrupt! It's about time!
We should have done what Iceland did instead of screwing over the people.
Now what?
http://projects.propublica.org/bailout/entities/237-goldman-sachs
Chris G / Mar 18, 2012 05:17 PM

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K. Reilly said......

Hey Chris G., thanks for your comment. I also checked out the propublica.org link, which I enjoyed scanning through. Sorry for the delayed response. :)

Corzine's Blind Ambition: In case of Emergency, Break Glass

MF Global Files for Bankruptcy, Corzine resigns and turns down a $12 million severance pay. Wall Street analysts already knew how over-loaded the company was with Euro debt, so it was not a surprise outcome, by any means. However, as the story began to unfold and the facts surrounding the collapse started to unravel, suspicion grew about the probability of foul play. There were more questions than answers, and that's always a red flag. Once customer funds were discovered missing, and an SEC investigation revealed that a large sum of money was transferred into an account overseas, just two days before MF Global filed for bankruptcy, it was clear that something was terribly wrong here.

For the second time in December, Jon Corzine, former head of the now defunct MF Global, met with the senate to further explain his involvement with the missing customer funds. This time, he was accompanied by two MF Global executives, COO, Bradley Abelow and CFO, Henri Steenkamp, who also claimed to know nothing about the money. I find this very curious, since most brokerage firms have policies in place that limit check writing and transfer-of-money authority to upper management, with additional authorization from the CFO, or Treasurer in his or her absence. The Senate hearing did not turn up anything that would satisfy investigators or investors. Nevertheless frustrated Farmers (primary investors in land commodities) were able to voice their disdain for MF Global, and one in particular was quoted as saying "What they call 'unlawful comingling' on Wall Street is called 'stealing' back on Main Street,"

Jon Corzine admitted that there was a "break glass" contingency plan in place, but did not disclose the details of the emergency plan. After questions intensified, he denied that raiding the customer funds was one of the recommendations in the emergency plan. According to Corzine, he did not know what happened to the money, and proclaims that he did not direct anyone to misuse customer funds. Corzine tried his best to convince the Senate Agricultural Committee that he did not "intend" to break any rules concerning the handling of customer funds, with respect to keeping customer funds segregated from the firm's money. This is reference to the requirement of all commodities and futures trading firms to segregate customer funds from company money. According to the CMEgroup.com, (Watchdog for Commodities and Futures Industry) segregating the funds protects investors in the event of defaults or bankruptcy. This regulation has a major advantage for investors, because when a company files for bankruptcy (as in the case of MF Global) , investors are last on the list, behind creditors, to see any of their money - particularly because it's next to impossible to identify how much of the company's assets belongs to the customers. Segregated funds facilitate the process of identifying which accounts belong to investors, thus investors will be able to recoup their funds without much delay. Apparently the "Segregation of Funds" regulation was not practiced at MF Global. Corzine went so far as to explain that perhaps an employee misinterpreted his instructions in an effort to try to save the company. The former CEO conveyed to the Senate subcommittee that he was not aware of any problem with segregated funds until October 30th, the day before they filed for bankruptcy.

In a new twist to this already redundant story of fraud, greed and entitlement, the Federal Authorities investigating the collapse of MF Global are now turning their attention toward one of the Wall Street watchdogs. Since MF Global was a Commodities brokerage firm, their primary regulator should have been the CME Group. The Commodities Futures and Exchange Commission is leading the investigation to examine CME's conduct before MF Global filed for bankruptcy protection. If the CME Group is the commodities regulator safeguarding customer’s money, what were they doing instead?

The downfall of MF Global (and Corzine’s career) is yet another display of Wall Street greed and deception. The bottom line is, Corzine should be held accountable regardless of whether or not he "directed" anyone to move funds. In his effort to exonerate an employee, he painted a vivid picture of the company culture. The firm's inattention to compliance, without regard for their customers" protection is inexcusable. As I've stated previously in an article concerning Corzine and MF Global, the fact that he turned down the severance pay is almost an admission of guilt for some aspect of the company's downfall. I’ll continue watching this case closely to see where the investigation of the CME Group and the search for the missing $1.2 billion leads. Fortunately, the Wall Street Journal reported that the judge overseeing the bankruptcy case has approved $4.1 billion to be returned to the customers, of which $2.2 billion in frozen customer accounts will be released.

Cohn-Reilly Report posted an article about the obvious under story of misguided ambitions of Jon Corzine, prior to the reports of mission funds. Corzine’s blind Ambition

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Corzine's Blind Ambition: The Collapse of MF Global

MF Global is essentially in ICU, and nothing short of a miracle will save the company as we know it. Who was at the wheel when the company crashed and burned last week? Corzine. Corzine, former governor of New Jersey, who was once the head of Goldman Sachs, went back to his roots on Wall Street to head MF Global. As CEO of MF Global, Corzine, built the company to $41 billion business. It sounds like another Wall Street dream, but this success story, quickly turned into a nightmare, for the company and for its CEO.

The announcement came Thursday, November 3rd, that Corzine is stepping down as CEO on the heels of an investigation of the company’s unraveling. Their troubles started when the European crisis began to impact the company’s bottom line, since MF Global was heavily invested in European bonds.

MF Global is the first big financial company to tank at the hands of the Euro -crisis. The company’s Partners pulled back with increased concerns about their Euro bond exposure, which descended into a severe cash deficiency. MF Global’s investment in Spain, Italy and Portugal bonds had amassed to $6 billion in debt. The firm’s stock declined 66% last week when the company reported its worst quarterly losses ever. Meanwhile,the transatlantic continent’s gloomy future is hanging in balance, and sure to bring MF Global to its knees. The swift sell-off of its stock precipitated the company filing for bankruptcy. To put this horror story in perspective according to bankruptcydata.com, the MF Global bankruptcy filing is the 8th-biggest financial institution in the US, placing them over Chrysler, (in 2009), but smaller than Lehman Brothers.

It is beginning to appear that Corzine set out to redefine MF Global's Business Model, and aggressively redirect the company’s focus and trading objectives in an effort to create his own Goldman Sachs. He wanted to build an international empire, only he failed to consider the global economic mayhem, and particularly the crisis unfolding across the Atlantic, where Corzine wanted to heavily invest. The financial discord in Europe was no secret, so what was he thinking? A cocktail of insatiable greed and ambition tends to have a blinding effect on the soul.

Behind the scenes, the Wall Street Journal reported that MF Global was seeking investors or buyers to alleviate the cash crunch. But alas, there were no takers and unfortunately no alternatives emerged before the regulators’ deadline. The company was subsequently delisted. This is a classic case of an overly eager, unethical CEO with his own agenda. The level of ambition and arrogance was so steep, it apparently impaired his ability to lead with the company's best interest at heart. Meanwhile, nearly a thousand people will be out of work in a couple of weeks, just in time for Thanksgiving. The bright side is that many of the employees will continue with their lives and eventually find stability, but Corzine is finished - both politically and professionally.

Given the anti-Wall St. sentiment, I was not surprised to learn that Corzine declined a $12 million severance pay. No matter how you choose to spin this fact, his decision to walk away from millions of dollars he was entitled to, speaks volumes.


K. Reilly
The Cohn-Reilly Report

$700 Million Bank Heist: SEC Investigates Citibank

Did Citbank swipe $700 million from investors? Well according to an SEC filing, which alleges that Citibank sold securitized housing bonds, which they knew were sub-standard, and bet against them, something is definitely amiss. It’s easy to see why Banks are no longer seen as a safe place to invest your money, as a depositor or shareholder.

Citibank, being charged with fraud, is fighting the charges, but Recommended settlement of $285 million is likely going to stick. The SEC asked a federal judge to approve the amount, citing that $285 million would not unfairly punish the shareholders, who were essentially victims of the bank's unethical acts. Of the $285 million, the settlement breaks down as follows: $95 million is the fine, $160 million in for ill-gotten profits and $30 million in interest. We're about 18 months post signing of the Finance Reform Bill, and we're still unraveling the spoils of unbridled greed.

The national Occupy Wall Street Protest was founded on just this type of offensive conduct. I had a feeling that the near collapse of our financial markets in 2008 was the tip of the iceberg, and so far it has proven to be true.

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Netflix: Losing Its Grip

In business, being the first to market an product or service places the company (market leader) at a huge advantage over those that follow in their footsteps. Research has shown that market leaders are likely to maintain the lion's share of the market for decades. Of course, there are exceptions to every rule; and Netscape was one of the unlucky market leaders that was not able to hold its edge over followers. That said, Netflix may prove to be another such exception to the rule if they are not careful.
Netflix is still recovering from the summer debacle, where they raised their fees 60% and attempted to separate the physical DVD rental business, from the streaming videos business. The strategy to shift their business model was ill-fated. The response to the announcement should have given them all the warning they needed not to move forward with the plan. The idea probably sounded brilliant in the boardroom, but it was obviously not founded on solid research, or customer surveys. In roughly three months time, Netflix stock price dropped 36% to $115 per share. To put it in perspective, on July 7th. Netflix stock sold for $292 a share. That is quite a fall from grace.

Netflix reported a loss of 800,000 subscribers in the 3rd quarter. Analysts predicted a loss of 600,000, which had caused the stock to swiftly decline 20%. The company warned of more defections and stated that they anticipate losses for the first quarter of 2012 as a result of expanding their business to Europe. In the meantime, RedBox is enjoying the flood of subscribers looking for refuge from Netflix who took their loyalty for granted.

Netflix‘s short sightedness, is clearly a result of both lack of due diligence and arrogance. Hastings, founder and CEO of Netflix had the vision and leadership to innovate and steer the company to tremendous success, so what happened? It is hard to believe it the same person at the helm steering the company recklessly away from its customers. The loyal, or stubborn shareholders that choose not to dump the stock are looking for an explanation. The public apology did eventually come from Hastings, but the damage was already done. As they say, you can’t un-ring a bell. I am willing wage a bet this debacle has already become a "what not to do" lesson that will be remembered by Hastings, and board of directors for years to come. It will be interesting to see what strategy the company will implement for damage control, and rebuilding its US customer base.

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