My Brush with Charles Ponzi

Everyone has heard of Bernie Madoff by now.  His crime was the most heinous in the history of finance. The fact is there are still thousands of Ponzi schemes happening around us and most victims do not even know what to look for.

I was introduced to an "investment opportunity" back in 2010.  A man from Detroit, living in Italy married to a famous actress, got in touch with me through some mutual acquaintances. 

I took his call, partly because he was from Detroit and I like to connect with people from my hood, and partly because I like to look at all sorts of ideas. I admit I probably donate too much of my time listening to would-be entrepreneurs but occasionally I meet great people that way. Something felt off about this guy and his partners so I indicated the investment opportunity was going to have to set sail without me.

Last week, I found out that the man I spoke with was sentenced to jail for 10 years for wire fraud and stealing money from investors in a Ponzi scheme (article).  

It motivated me to look back at my interactions with him to see what clues made me uncomfortable. Maybe some of these observations will help other targets avoid future Madoff-wannabees.

I have made plenty of bad investments in my life and the list will surely not be comprehensive, nor does it guarantee to be able to detect a fraud. These are just a few smell tests any fool can use to avoid parting with their money too quickly.  

1) Returns are not guaranteed. Promising financial benefit is not something any professional investment manager will do.  Especially in writing. He sent me this in one of his emails:      

"...if we can raise more funds we can really see the financial benefits from the product.  Let me know what you think..."  

2.) Outsized returns are LESS guaranteed.  The best and brightest in the finance space have averaged mid-single digit returns for investors over the past few years. Anyone who purports 10% returns per month should immediately get the Larry David squinty-eyed stare. 

3.) Look for "intense domain expertise." This guy was raising money for investment vehicles that were going to purchase raw emeralds in Africa, invest in gold mines in Laos, trade foreign currency markets through a Swiss entity, and buy Hong Kong stocks on the cheap. Sounds exciting, right? Sounds like bullshit to me. You cannot be a jack-of-all-trades in this industry anymore. 

4.) Investment managers cannot court you. Regulations prohibit investment managers from excessive spending on prospective investors. These guys offered to fly me out on a private jet to meet them in Rome or Switzerland (whichever was easier for me, of course). Come on! Even if it were legal, the amount of money in fees they were hoping to generate on my piddly investment wouldn't cover the cost of a trip to Europe. 

5.) "WHY ME?"  This is the most important question of all. You have to ask yourself "why is this  opportunity being presented to me?"  "How did I get so lucky to have stumbled across this brilliant idea that no one thought of before this shiny salesman brought it to me?"  You might be hearing the pitch because you don't and won't understand the investment.  It's the old "if you don't know who the sucker is, it's probably you" test.  

Through all the dumb things I have done in my life, I could have saved myself a lot of dough had I simply asked "why me?"  I knew little about the business or the industry I was being asked to invest in, but got involved anyway. Every time the outcome was identical:  a big fat doughnut.      

 

From I.B.G.Y.B.G. to I.B.H.Y.B.H.

I was 22 years old. I had my first job on a Wall St. derivatives desk. A large client calls us to do a 5 year OTC trade (for the non-wall st folk, these were customized over-the-counter transactions that the bank had to underwrite itself). As the trader and salesperson bickered back and forth about the "right price," they finally agreed at a level after one of them joked: "I.B.G.Y.B.G.?" They shared a laughed, nodded at each other, and went back to their desks.

 

 

Being the young eager grasshopper on the team, and frequently confused by the barrage of acronyms used by my colleagues, I asked what it meant:  

I'll Be Gone, You'll Be Gone.

Its common to job jump on the Street so long-dated trades had a high probability of maturing well after the salespeople and traders moved onto bigger better jobs at competing firms. The thought was why not just dump a bunch of trades onto the bank's balance sheet, collect a boatload of commissions, and let someone else figure it out later. By the time the trade had significant risk, it would be the mess of some other sorry sap.

I get the feeling the days of I.B.G.Y.B.G. are behind us.  Couple reasons:

-People are just not able to jump around as they did pre-2008.  Less opportunity to move means taking better care to bring quality business that won't blow up the firm.

-Wall St. compensation has shifted from less upfront cash bonuses, to more deferred stock bonuses that vest over the following 3-5 years.  

-Clients are gravitating toward more transparent and liquid transactions that are NOT over-the-counter. The counterparty risk of facing a bank is higher than facing a central clearing house (like the OCC).  Products that trade on exchanges are in demand as customers want to rely less on banks for liquidity and pricing.  This means less room for the I.B.G.Y.B.G trades as volumes increase in the highly competitive listed products that do not require a bank.

Converting employees to think about transactions from start to finish is important to ensure long-term success of an organization.  This holds true for all industries.  Salespeople who just want to close crappy business to pad numbers and make the quarter have misaligned incentives with stakeholders.  Employee compensation should be tied to the long-term profitability of the business motivating them to stick around.   

Cheers to making business more about I.B.H.Y.B.H:  I'll Be Here, You'll Be Here.     

Be Prepared...but not Too Prepared

Since entering the finance industry, I have heard just about every possible warning sign of what lies ahead for Americans and how to prepare for it.  Selling “fear” is a multi-billion dollar industry: insurance brokers, doctors, politicians, religious zealots, financial advisors, are among the people who have direct or indirect compensation related to scaring you into taking some kind of action.  


Think about it:

“You will lose your job and your house if you don’t throw that other guy out of office by voting for me.”

– handsome white-toothed smiling politician

 “You must have life insurance and disability insurance and property and casualty insurance and flood insurance and renters insurance and hurricane insurance and earthquake insurance and auto insurance and travel insurance and…”

-nebishy insurance broker

“If you don’t pray 15 times a day and give all your money to the (insert religion) you are going to hell.”

-some guy on the subway


I think you get the point.  In the context of the financial crisis, which is going on its 4^th year, I have found myself suggesting ways for people to prepare for an “event” that may or may not happen one day.  Generally I tell people they should own some physical gold or silver (somewhere between 1 and 20% of their investable assets depending on their level of bearishness) and go out and buy a gun.  Both seem reasonable enough as they will not break your bank.  They are just my versions of “insurance policies” which I hope to never use, but exercise our rights as Americans to bear arms and invest in real currency.    

If you listen to the interwebs you will hear suggestions of how to prepare, above and beyond the reach of the average American:  farmland (I suggested this too but now I look at prices and it is way less affordable today), pvc and vacuum sealed organic seeds (I own these and it makes me laugh), 100 gallon drums of water, solar panels, bullet warehouses, foreign passports and bank accounts, bomb shelters, fuel storage, 6 months non-perishable food, off-site hard drive storage, escape routes, blah blah blah.  I realize now that it is impossible to live a happy life while simultaneously consuming yourself by preparing for every possible outcome.  The truth is no one really knows how and when this will all shake out if it ever does.  The powers that be are called that for a reason and they control this mess…for now.

We would go broke and spend all of our waking time preparing for every possible future event given the millions of possible outcomes.  So rather than prepare for them all, we should just prepare for a few of them by taking actions that are reasonably priced and take a reasonable amount of time.  Everything else falls under the get educated category -  heed the fact that there is some probability that anything can happen. 

My business partner says that when he thinks about all the things he needs to do to protect his family, he gets on Amazon.com and starts clicking away at dry food and supplies and suddenly his cart is full of hundreds of items.  Then he realizes he could never be fully prepared and he needs to get back to what would really help them today…like earning a living to put food on the table and buying some diapers.   

This may sound like a 180 from my previous notions but it isn’t.  There is absolutely risk out there but being surrounded by quants all day I realize there is a difference between perceived probability and actual probability.  If we cannot even predict every fathomable outcome how could we possibly be expected to prepare for them?  I am finding that I would rather live happily than live in fear.  

I guess you could sum it up by saying “stay educated but keep on keepin’ on.” If some terrorist wants to blow up my local diner I don’t know that I can hedge this risk out of my life completely, so I am not going to let the thought of it ruin my day.  

India: The Numbers

I totally stole this idea from my friends Ted and Sarah, who have the best travel blog I have ever seen (LINK).  Below are some of the numbers from our stay in India.  India was excellent, action-packed, and provided us with a newfound perspective on South Asia.  To sum up India in a couple points: 1.) You cannot generalize India, it’s too diverse 2.) India is full of both positive and negative extremes 3.) Bring your patience or just stay home.

Time spent in India = 3 months

Cities/Towns/Villages Visited = 19

Nights slept in a hospital = 2

Illnesses defeated = 4

Money raised for Shanti Bhavan with YOUR help = $11,600 (as of May)

Laptops broken and replaced = 1

Flights taken = 7

Hours spent in a hired car (excluding taxi) = 34

Hours spent on a long distance bus = 19

Hours spent on a long distance train = 51 (4 journeys)

Longest taxi ride = 3 hours to go 30 km in Mumbai

Motorcycles hit = 1

Most expensive drink = $18 – Taj West End Bangalore

Cheapest drink = $1.00 – Bar in Hosur

Cheapest hotel = $30 – Mysore

Nights slept at friend’s house = 12 (thanks to Jay Lurie, Sumit and Linda Dutta)

Business meetings attended = 26

Michigan Wolverines met = 9 (Go BLUE!)

Tigers seen in the wild = 3

Elephants ridden = 2

Meals that contained beef = 0

Days rained on the mainland = 2 out of 87

Opportunities in India = Countless

We are planning to do a Best of Pics, Best of Panoramics, and Best of Videos as soon as we get them all sorted out…Stay tuned!

Bank of America and India's Multi-Billionaire Mobster

Today I woke up to the following headline and did a double take: “BofA Board Adds Billionaire Ambani, Boosting Access to India.”  Mukesh Ambani?  THE Mukesh-corrupt-billionaire-who-barely-escaped-jail-on-insider-trading-charges-Ambani?  Wow.  BofA has really stretched on this one.



Mukesh's crib



Most Americans do not know the back story on Mukesh Ambani.  His family is known as the most powerful in India.  The press loves to "ooh and aah" about his recently completed Mumbai home, worth an estimated $1 billion, boasting 27 stories, equipped with 3 helipads (1 is never enough) and a parking garage for 160 vehicles.  His family business, a super-conglomerate empire called Reliance, was started by Ambani’s father in the 1960’s and covers the gamut as far industries go – biotechnology, infrastructure, solar power, financial services, retail, communications, blah blah blah. 

The dark side of the Ambani legacy is littered with government bribes, black-money malfeasance, and a family feud that combines the tomfoolery of the Kardashians, the Sheens, the Spellings, and the Hiltons altogether (talk about a reality show).  If you seek more on the topic of "Mukesh Ambani corruption" I am happy to google that for you (LINK).  In Anand Giridharas' recently released book entitled "India Calling," he writes that friends of Ambani think of him as a "nonviolent Don Corleone" who trades in the currency of "tip-offs and information".  Sounds like a perfect fit for the BofA Board of Directors, no?  Seriously, who makes these decisions?   

When I saw the headline, I immediately walked over to a handful of business students at Shanti Bhavan, to get “the Indian youth” perspective.  I prompted them with the following question:  “what would you say if the biggest bank in the United States invited Mukesh Ambani to join their coveted Board of Directors?”  The response was...immediate laughter. One child yelled out “he is a criminal!”  Another chimed in “he paid hundreds of crore (1 crore = 10 million rupees = $220,000) to stay out of jail.”  They were shocked to hear that Bank of America (a firm I have shared many past experiences about) would even consider such a notion.

What ever happened to background checks and due diligence?  I guess when BofA is competing to finance those high margin Indian government infrastructure projects they will pull out all the stops.

Closing the Wealth Gap: A Lesson from India



Sunrise in Southern India



India is a fascinating place.  I think it is really difficult to understand this country without seeing it for yourself and experiencing the culture in the first person.  Though I have only been on the ground for a short period, I have witnessed enough to convince myself that I made the right decision by coming here.  Before arriving, I heard varied opinions:  "India is beautiful with a spiritual wonder about it;" "India is home to the poorest people in the world...it's a sh*t hole and you will go once and never go back;" "India has an entrepreneurial quality about it...there is so much opportunity...it totally works for me;" "First suggestion about India:  DON'T GO (said to me by an Indian-American living in NYC)."  I actually have a bet with a naysayer friend in Hong Kong about whether I will return to this country after my first visit.  Nevertheless, I believe I will be back many times and he will lose the bet.

Rural village in Tamil Nadu

Some people believe India has already drowned in its own squalor and despair and will never have a meaningful voice on the world stage. They feel India's bureaucracy will further induce a snail-like climb out of poverty and the country will lag behind the widespread advancement and burgeoning growth that the rest of the emerging world is experiencing (particularly that of its neighbor China).  I am beginning to take a step back from this argument.  India's bureaucracy and dated ways of conducting business may prove to be its saving grace. Pardon? 

To put it into perspective, India's economy (in terms of GDP) is a tad smaller than Canada's, and its GDP per capita is about the same as Iraq's.  It is a country with a population that is 4 times that of the United States in a space that is one 1/3^rd  the size.  In today's world where economic growth is a necessity fueled by lax monetary policy and irresponsible credit expansion, India has marched to the beat of a different drum.  Their Reserve Bank is far more strict and less accommodating.  Their value system and work ethic is strong and they do not lean solely on exports the way the rest of Asia does.  India has real domestic demand (something quite foreign to Americans)!  They also have their own music (ranging from the ancient period of the Mughals to the modern age of A.R. Rahman), movie stars (Amitabh Bachchan is a combination of George Clooney and Robert De Niro…a legend here), sports teams and you can be sure that they will not be airing their own version of MTV's "Teen Mom" anytime soon.

So what is the point?  Despite some of the positives I mentioned above, India is the world's poster child for economic inequity and social inequality.  Some estimates state that 40% of the population falls below the poverty line (which is an income of about $1.25/day).  I recently spent some time interacting with Dr. Abraham George about the dynamics of this country and it led us to the impetus behind him founding Shanti Bhavan, a school located in Tamil Nadu, India.  The school aims to educate the children of India who come from the most dire conditions (these children come from the 'untouchable' caste, the lowest class of society that is highly discriminated against).  His belief, which has become mine too after having spent time at his school teaching the kids, is that in order to combat the widening gap between the wealthiest whales and the poorest paupers, one must introduce quality education to those who need it most...and this is precisely what he is doing.

This school is a model that can be applied not only in India, but anywhere in the world where the concept of "the rich get richer" is becoming a tiring reality.  Sound familiar?  Tunisia, Egypt, Iran, Albania, Yemen, Bahrain, Jordan and eventually the United States, can all afford to take a critical look at education for the poor (and even those who are slightly above the poverty line).  These countries want change right?  The voice of change can be found within EDUCATION.   

 

6:30 am: I come to class and find the 12th grade like this

Dr. George’s attempt to strike at poverty is worth exploring on a deeper level as there is something very unique about it.  He begins with the poorest youths.  The children are selected at the age of 4, based on their level of poverty and their intelligence quotient.  They receive an education at Shanti Bhavan absolutely free of charge.  There are 200 children here between ages 4 and 18 who are willingly participating in an intensive curriculum that would make most American college students blush.  All the kids go to school for 6 days a week and the older students frequently attend classes from 6:30 am until midnight.  The children are humble and respectful and almost all of them have career goals. They don't bully, they are well-mannered, extremely cultured and are knowledgeable about current world events (their teachers come from all over the globe).

Their fluency in English and social etiquette are head and shoulders above the children in the villages where they come from, making them celebrity equivalents back home.  If their performance lacks and they do not show improved effort, the kids can be asked to leave the school.  This is not a good outcome, of course,  and it happens to very few of them. These kids do not have any other viable options - receiving an education at Shanti Bhavan has saved their lives.  Many of them would have never been sent to school by their families who are trapped under the heavy thumb of destitution.  Without this opportunity, many of the kids would have been forced into hard labor at a young age or even worse, been victims of physical abuse.   Shanti Bhavan pulled them from the grasps of enduring ignorance and gave them the chance to live their lives another way - devoid of poverty, full of hope, and one step nearer to closing the gap.



For more on how you can get involved in Shanti Bhavan (they need volunteers to come out and teach everything from accounting to music) please visit their website (HERE) and read the personal statements of some of their upcoming graduating class (HERE).  If you would be willing to make a donation, you can find the orange DONATE button on the left hand side of this blog.  As you can see, we have had a number of donations so far and we appreciate your support...these kids appreciate it even more.  

If education in Africa is also of interest, check out our friends' organization called PROJECT A.B.L.E, dedicated to promoting literacy for African youth.

(This posting has been edited by Shilpa Raj - 12th grade student at Shanti Bhavan and future author and journalist...any mistakes are Justin Golden's fault :)

A Trillion in Tuition

With an overwhelming number of topics for discussion these days, I find myself running into information overload on what to write about (a form of writer's block= too much out there!).  I have a new simplistic way of organizing whether an issue is newsworthy:  pay attention when the number associated with the issue has a "T" next to it..."T" like TRILLION. In 2002, I worked for Deutsche Bank and I remember we celebrated being the first European bank to have assets over $1 Trillion Euros. Back then it was a huge deal. 

Today, it is the prioritization "line in the sand" for politicians, economists, and journalists trying to deal with issues that matter. Numbers that have a "T" next to them include:  bailouts, Federal Reserve money printing, US National Debt owned by foreigners, pension shortfalls, municipal liabilities, household debt, etc.  The item I would like to discuss today, however, is college debt.  This number, according to Alan Collinge from StudentLoanJustice.org, is nearing the $1 Trillion mark.  While Americans have tightened their belts, reduced some frivolous spending, and gone back to school to help their candidacy for employment, college debt has surpassed credit card debt! No small feat!  

I have seen tons of articles about the topic of higher education recently and wrote a little note about it a few months ago (Creative Economy).  There are a couple things I would like to share about why people should be paying attention.  Why is the government pushing us so hard to go to college and offering us financing at terms that appear too good to be true?  Well, it is one of the ways to get people under the proverbial "thumb" of Uncle Sam. These loans do not go away, the interest rates will go up, and the government is behind 90% of them.  "Take out a loan, go back to school...help our collective brain trust get smarter...lets show countries around the world that our education standards are the highest...Asians go to school 8 days a week, we have to step it up!" It seems logical to me.  After the housing bust, the government needs to somewhat modify the American dream.  What is the 2nd most expensive asset we buy, something we are told we cannot live without, and something the government can easily offer to us?  A COLLEGE DEGREE.



The competition is fierce.

 

No wonder this debt is piling up and the cost of college is rising at its fastest pace ever.  It is a way to balance the debtor-creditor relationship – if the students owe the government a trillion and the government owes China and Japan a trillion…hmmm.  Get the students to owe us more and then our national debts will not look so bad.  Follow me?  Some public universities are seeing double digit increases in tuition each year (LINK).  As you extrapolate those increases you will see why new parents have to start paying attention…TODAY!  Here is a helpful website (College Tuition Calculator) for all of the parents out there who plan on seeing their children go to 4 year universities.  If you want to be spared from doing the work, here is a theoretical scenario of a newborn:

-Current school tuition/room and board annual cost:  $20,000
-Years until college: 17
-Number of years attending the university: 4
-Expected annual tuition increases over the next 17 years:  6%
-Expected annual returns on investment for savings account: 2%

TOTAL COLLEGE COST:  $235,597

-Monthly savings required today in order to pay this amount once college begins: $939 (based on the 2% savings rate of return) (the math on these numbers)

Add a couple kids to the equation and you can see how this is becomes a monstrous problem quickly.  The sheer notional size of the numbers is staggering; that is not the only shocking part.  I found some other interesting "features" about student loans that I am willing to bet not everyone was aware of.  Student loan debts are precluded from the following protections that apply to traditional consumer debt (mortgage, credit card):

1.)  Bankruptcy protection (you go bankrupt and your student debts are NOT erased)
2.)  The right to refinance (government loans cannot be refinanced though private loans can)
3.)  Fair debt & collection practices (they can garnish disability and call you at odd hours)
4.)  Adherence to usury laws (interest rates have no limit)
5.)  Truth in lending requirements (disclosures can be vague)
6.)  Statutes of limitations (time does not run out on how long they can come after you)

(Source: Default-Student Loan Documentary)

I was surprised to find this was the case for college loans...then I thought about it for a second… then I was not surprised.  Either college will have to become more affordable or we better start saving now.  Either way the government is incentivized to make college more expensive.  You owe them more and they get to tip the terms on the debt in their favor.  At the end of the day, we do not want every kid in America trying to become the next Lebron James. Of course bailing out on college wasn't the worst bet for Henry Ford, Michael Dell, Bill Gates, and Mark Zuckerberg, but they may be the exception.  Is meritocracy and mentorship the answer?  If someone can get the job done without the degree, then they should not be viewed any differently.  For example, I am spending a year traveling, getting my version of a post-graduate degree in global entrepreneurship from the college of “the world.”  Should that not count as legitimate education?