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The biggest bummer to arise from the allegations that the revered and feared Wall Street puppet master Goldman Sachs had played us all for patsies is this: the dial on the Wall Street capital-formation machine, the engine that was supposed to be the driving force of the greatest economic system on earth, was purposely set to junk — worthless, synthetic junk.
The civil fraud case the Securities and Exchange Commission filed in mid-April against Goldman is based on a single deal, called Abacus 2007-ac1. The investment bank created it so hedge funder John Paulson could line his pockets with cash when the value of American families' most prized asset crashed. But on Wall Street in the late aughts, polyester financing was in fashion everywhere.
Morgan Stanley had the so-called dead-Presidents deals, named Buchanan and Jackson. Another Morgan deal, one called Libertas, defrauded investors in the U.S. Virgin Islands, according to a lawsuit. JPMorgan Chase played procurer for Magnetar, a hedge fund so artful in profiting from the meltdown that Northwestern's Kellogg School of Management praised it last year in a case study. A firm run by Lewis Sachs, until recently a top Treasury Department adviser, and UBS, until recently a tax-cheat favorite, created junky bonds that investors who bought them now claim were going bad even before the deals were closed. Bank of America too is being sued for a deal that was set up by its Merrill Lynch subsidiary with a manager who is now under investigation by the SEC.
In the end, it was in fact all one big scam predicated on rising housing prices. Certainly, greedy consumers played a minor role in feeding the frenzy. But the Street made sure that those of us who are not members of its elite club remained the suckers.
Why didn't we find out about these deals sooner? Because they were encapsulated in one of Wall Street's most opaque investment creations ever: synthetic collateralized debt obligations, or CDOs. Synthetic CDOs are derived from mortgage bonds — hence they are derivatives — but they don't actually hold assets, although you can invest in them as you would in the real thing. And you can also short them, as you would a stock, using insurance contracts called credit-default swaps, or CDSs. In the Goldman case, the investment banks and hedge funds that concocted the CDOs allegedly loaded them with the equivalent of toxic bonds and then bought CDSs for themselves, figuring the CDOs would lose value. They did, which left the unsuspecting investors and counterparties who swallowed the CDOs — including supposedly sophisticated banks such as the Netherlands' ABN Amro Bank and Germany's IKB — wondering what happened to their money.
On the surface, these deals look complicated. They are. But the alleged fraud at the heart of the case against Goldman and its CDO dealings is one of the simplest and oldest forms of deception: lying. According to the SEC, Goldman told one group of investors they were buying a AAA-rated (by lapdog ratings agencies, but that's another story) high-yield investment put together by an independent firm called ACA Management. But the SEC says the person really picking the collateral was Paulson, an investor whose only interest was: Paulson. What Goldman allegedly sold, like any good snake-oil salesman, was a worthless, well-packaged fake.
Only now, in the wake of the SEC suit against Goldman, are investors beginning to suspect they were hoodwinked. According to Thomson Reuters, Wall Street firms underwrote at least $119 billion worth of these deals as the housing market began to crumble, from 2006 until the music stopped. And this number could be low. Many of these deals never get counted, because they are private transactions and not traded on an exchange.
All the firms that set up these deals, and the hedge funds that bet against them, contend they did nothing wrong. A synthetic CDO is at its core a trade, meaning it has a long and short position, and grownup investors are free to take sides. In response to the SEC suit, Goldman says it didn't set up investments to fail and it didn't mislead its clients. It plans to fight the charges aggressively. Some have even argued that these synthetic deals were good for the economy, because they didn't boost lending at a time when the housing market was already overheated.
The reality is that Wall Street's CDO synthesizer set one of the economy's largest sectors off in the direction of creating nothing but waste — pure economic waste. These CDOs didn't help anyone afford a house. No cars were purchased. No one got a loan to go to college. These CDOs were the last stop in a vast transfer of wealth from a large group of American mortgage holders to a much smaller group of already rich traders who profited as the CDOs failed.
Certainly, the folks who lied to get mortgages, and the banks who helped them, deserve what they get. Still, as most of us worked hard to cobble together a down payment for a house in an ever rising market or put money into our still-damaged-from-the-dotcom-bust investment accounts in order to send our kids to college or retire, we assumed the financial system was working its invisible magic to help make all that possible. In fact, just the opposite was going on. Wall Street was busy chartering buses to nowhere, so our jobs and savings could be driven right out of town.
How the Culture Changed
It is easy to think that Wall Street has always been the place for the corrupt and the greedy and that this is nothing new. But that's not really accurate. Of all the causes of the financial crisis, one of the biggest was a power shift on Wall Street that left the traders in charge and the bankers who had traditionally run everything from Broad Street to Maiden Lane sidelined.
Years ago, the investment world and its professionals believed in long-term relationships. That meant nurturing the economy and the companies and people in it. Two decades of cheap money, though, helped turn the Street over to the traders. That led to a very different way of doing business. "With a trader, the goal of every minute of every day is to make money," says Philipp Meyer, who worked for UBS as a trader in the late 1990s and early 2000s before going on to write about his time there. "So if running the economy off the cliff makes you money, you will do it, and you will do it every day of every week."
The question is, now that we know what we know about what has become of Wall Street, what do we do about it? The SEC case against Goldman shows that the agency plans to do more to combat fraud. That's a big change. Under former commissioner Christopher Cox, Wall Street was basically self-regulating and the SEC hands-off, which helped enable the greatest Ponzi schemer of all time, Bernie Madoff.
By picking a fight with Goldman — the "great white whale" of Wall Street, as Eliot Spitzer put it on Monday — the SEC is signaling that it has now adopted a feistier approach. "Goldman got picked out because of its stature. When you take on the biggest kid on the block, you are sending a message to everyone on Wall Street that we're not going to back down," says Peter Henning, a former SEC attorney and a professor at Wayne State University Law School. "It's a very aggressive tactic, and in some ways it breaks with past practice."
So, in fact, does the way Goldman is being run. Perhaps the best illustration of the shift on the Street is the career of Goldman's chief executive, Lloyd Blankfein. Back in 1982, when Blankfein, now 55, joined Goldman with a law degree from Harvard and a few years' experience as a tax attorney, the firm was run by two investment bankers, John Whitehead and John Weinberg. Blankfein landed a job in the firm's commodities-trading unit, which Goldman had acquired less than a year before.
Goldman was pretty typical of Wall Street in the 1980s. Investment bankers ran the business and brought in most of the bucks. Salesmen and brokers did pretty well too, buying and selling stocks for clients. Traders, who placed bets with the bank's money, were generally the low men on the totem pole. The one exception was Salomon Brothers, where a band of traders led by Lewis Ranieri — who were raking in money trading Treasury and mortgage bonds — were quickly making Solly the beast on the Street. At Lehman Brothers too, trader Lewis Glucksman forced out investment banker Pete Peterson, who had been running the firm. But a scandal caused Salomon to flame out in the early 1990s. Trading losses at Lehman nearly bankrupted the firm and pushed it into the arms of American Express. Then Long-Term Capital Management nearly brought down the financial system in 1998 when some of its highly leveraged trades collapsed. After an all-hands rescue, the order of Wall Street was restored, temporarily.
At Goldman, Blankfein was rising rapidly by taking more and more risks in its commodities- and currency-trading businesses. In 1995, shortly after he was named head of the firm's commodities business, he reportedly left a meeting of Goldman partners after complaining the firm was not taking enough risks and immediately bet multimillions of Goldman's capital that the dollar would rise. It did, and Blankfein and Goldman made a bundle.
Yet during the 1990s, trading remained a side business for Wall Street. The cash cow was equities and, in particular, initial public offerings (IPOs), for which bankers were paid a sweet 7% of the deal for little more than ushering new companies into the market and at very little risk. In 1998, the year before Goldman went public, just 28% of its revenue came from trading and principal investments. By 2009, it was 76%.
The big change on Wall Street and at Goldman came with the collapse of the dotcom bubble in early 2000. The underwriting and mergers-advisory businesses on which the investment banks had minted money dried up completely. It would be years before the M&A market came back. IPOs never really did. Where was money being made? In trading. Low interest rates following the early-2000s recession made borrowing cheap. That pushed profits in trading, a capital-intensive business, to take off. Firms began shifting more capital to their trading desks. In the first half of the decade, Goldman's so-called value at risk, which measured how much the firm was risking in the market each day, zoomed from an average of $28 million in 2000 to $70 million in 2005.
Traders, aided by a new generation of Ph.D.-type rocket scientists trained in the complex math of higher finance, began refocusing their firms on the products that would make them the most money. One of the most popular of the new bunch was the CDO. As with everything else on Wall Street, the rise of the CDO had to do with bonus checks. Traders' pay was based not just on how much money they made for the firm but on the size of the bet. Turn in a $10 million gain on AAA Treasurys and you got paid a lot more than if you made the same amount trading lower-rated, much riskier junk bonds. The problem was that making big bucks in the well-established Treasury market was nearly impossible. It's too transparent.
As a trader, what you needed was to take a market in which bonds were thinly traded and magically fill it with more-tradeable highly rated AAA material. By the magic of CDOs you could do just that. CDOs are often created out of the lowest-rated, seldom-traded portions of other bond offerings. And by the mid-2000s most of those bonds were backed by home loans to borrowers with poor credit ratings — toxic waste, in the parlance. Subprime-mortgage bonds went into the CDO blender BBB and came out AAA. All of a sudden, traders were making big money.
With the money came promotions. In 2005, bond salesman John Mack took the reins of Morgan Stanley, promising to boost the firm's profits by allowing its traders to dial up risk. At Lehman Brothers, Dick Fuld, who had climbed that firm's bond-trading ranks, was firmly in place as CEO. And in 2006, when Goldman's CEO, Hank Paulson, a classic investment banker, was tapped by President Bush to be the Treasury Secretary, Blankfein was named as his replacement. The traders had won. "The industry became so heavily weighted toward risk, it just made sense to let the traders run things," says top Wall Street recruiter Gary Goldstein, who heads up the Whitney Group.
Or so it seemed. Traders got Wall Street firms deeper and deeper into more and more complicated products. Complexity, of course, can beget chicanery. Traders were too often in it to make a killing and an exit and cared little about the hazards they might be creating down the road. The term IBG, YBG became popular on the Street. It stands for "I'll be gone, you'll be gone"; someone else will have to clean up the mess.
Goldman boss Blankfein is an alpha dog in this pack. He hails from Wall Street's roughest neighborhood, the commodities-trading market, which lacks insider-trading rules and many of the other investor protections of other markets. "In the commodities-trading market, when someone is stupid, that's something to be taken advantage of," says Susan Webber, who under the name Yves Smith is the author of ECONned, a book about the financial crisis. "That's the world Blankfein grew up in."
Goldman's Alleged Duplicity
The idea that a 20-something trader with too much power could torpedo the biggest, most profitable firm in finance seems like a plot for a Wall Street parody. But it appears to be exactly what is happening to Goldman, and it is perhaps the logical end of a culture that anointed traders king. In late 2006, Fabrice Tourre, a then 27-year-old Frenchman with an engineering degree from Stanford, got an assignment to help John Paulson place bets against the housing market.
Tourre, known to refer to himself as the "fabulous Fab," figured out how to structure an investment that was sure to suck the last bit of blood out of the few mortgage investors willing to buy into a market that he believed was due to crater. As Tourre was assembling Paulson's CDO in January 2007, he wrote in an e-mail to a buddy: "The whole building is about to collapse anytime now ... Only potential survivor, the fabulous Fab ... standing in the middle of all these complex, highly leveraged, exotic trades he created without necessarily understanding all of the implications of those monstruosities [sic] !!!"
What Tourre did understand, according to the SEC, was how to trick investors. The SEC case against Tourre and Goldman hinges on the investment bank's omission of the fact that Paulson was selecting most of the assets for Abacus. Tourre got the CDO manager, ACA Management, to claim in the offering statement that it had picked the assets for Abacus. ACA was getting paid to act as independent manager of the deal. The SEC alleges that while ACA understood that Paulson would have sway over asset selection, Tourre maneuvered ACA into thinking that Paulson planned to invest in Abacus, not bet against it. Paulson was never mentioned in the information sent to Abacus investors and Goldman's counterparties, who ended up losing $1 billion on the deal.
For its part, Goldman vigorously denies the charges, arguing it did not structure the portfolio to lose money — in fact, the firm says it lost more than $90 million through its long position — nor did it misrepresent Paulson's short position. "The SEC's complaint accuses the firm of fraud because it didn't disclose to one party of the transaction who was on the other side of that transaction," Goldman said in a press release. "As normal business practice, market makers do not disclose the identities of a buyer to a seller and vice versa. Goldman Sachs never represented to ACA that Paulson was going to be a long investor."
In a sense, Goldman is relying on the so-called big-boy defense: There are no victims on Wall Street, just fools. "This is no slam dunk for the SEC," says Henning. "We want every transaction to be fair, but these aren't babes in the woods that got taken. These are two banks [that] invested in a very risky area and got very badly burned ... That's how free markets work. You take your chances."
Making the Case for Regulation
The Goldman case may be the opening salvo as a suddenly muscular SEC takes a gander at other Abacus-like deals. Like Goldman, Deutsche Bank struck deals with Paulson, according to the Wall Street Journal, that were structured to bet against the housing market. Magnetar and Tricadia are also in the spotlight, but even if the two hedge funds played their deals to fail, the investment banks that set them up at least disclosed the role of the hedge funds and the fact that they could take a short position.
Beyond any legal issues, the Goldman case has become the battering ram for financial-reform legislation that congressional Democrats have been looking for. Democrats say it underscores the need to reregulate an industry gone wild. Republicans retort that the reforms on the table would have done little to stop the Goldman trade. The latter point is probably right, at least in part. The bill sponsored by Democratic Senator Christopher Dodd would require transactions like Abacus to be traded on an exchange. Such transparency would give the SEC and other regulators more access to monitor these deals and potentially catch material misstatements. The SEC might have noticed earlier the obvious conflicts of interest inherent in the Abacus-like deals. But there still would have been no way for the SEC, without an investigation, to have known that Goldman was omitting any mention of Paulson's involvement.
Nonetheless, the Goldman case does get the Obama Administration back on its best talking points for financial reform: The lack of regulation has morphed Wall Street into a place that regularly trades against our economy. It's our jobs vs. their bonuses on every trade. And if you think Wall Street is going to protect your interests, then I've got a AAA-rated, subprime-mortgage-based CDO to sell you.
Senior staffers at the Securities and Exchange Commission were surfing Internet pornography when they should have been policing the financial system. A deeply disturbing SEC memo to Senator Chuck Grassley (R-IA) exposing this problem was reported Thursday night by ABC News. Here are some highlights via the Associated Press:
_A senior attorney at the SEC's Washington headquarters spent up to eight hours a day looking at and downloading pornography. When he ran out of hard drive space, he burned the files to CDs or DVDs, which he kept in boxes around his office. He agreed to resign, an earlier watchdog report said.
_An accountant was blocked more than 16,000 times in a month from visiting websites classified as "Sex" or "Pornography." Yet, he still managed to amass a collection of "very graphic" material on his hard drive by using Google images to bypass the SEC's internal filter, according to an earlier report from the inspector general. The accountant refused to testify in his defense and received a 14-day suspension.
_Seventeen of the employees were "at a senior level," earning salaries of up to $222,418.
_The number of cases jumped from two in 2007 to 16 in 2008. The cracks in the financial system emerged in mid-2007 and spread into full-blown panic by the fall of 2008.
On one hand, two cases in 2007 means that either it wasn't that widespread of a problem or it hadn't yet been detected. On the other hand, the fact that this behavior seems to have been so prevalent among senior level employees is particularly troubling. They're the ones who should have been closely watching the financial industry and leading the way to help prevent the system from collapsing.
A few things should be concluded from this revelation. First, government computers must need better firewalls to block out this content. Second, this is a pretty grim verdict on the effectiveness of regulators. When on the verge of the most major economic crisis in around 80 years, they were watching porn instead of the financial system.
This certainly isn't the kind of publicity the SEC needs as it begins to prosecute its high-profile case against Goldman Sachs. This memo damages the credibility of the regulator. Though, it does begin to explain why it took the SEC more than three years to bring the complaint against Goldman: its employees had other things on their minds.
The folks who print America's money have designed a high-tech version of the $100 bill. It's part of an effort to stay ahead of counterfeiters as technology becomes more sophisticated and more dollars flow overseas, Federal Reserve Chairman Ben Bernanke says.
The makeover was unveiled Wednesday.
Benjamin Franklin is still on the $100 bill, also known as C-note, but he has been joined by a disappearing Liberty Bell in an inkwell and a bright blue security ribbon composed of thousands of tiny lenses that magnify objects in mysterious ways. Move the bill and the objects move in a different direction.
The government hopes the new bills will make it harder for high-tech counterfeiters to replicate.
The new currency will not go into circulation until Feb. 10 of next year, giving the government time to educate the public in the United States and around the world about all the changes.
"We estimate that as many as two-thirds of all $100 notes circulate outside the United States," said Bernanke, who stressed that the 6.5 billion in $100 bills now in circulation will remain legal tender.
The $100 bill, the highest value denomination in general circulation, is the last bill to undergo an extensive redesign. The Bureau of Engraving and Printing began the process in 2003, adding splashes of color to spruce up first the $20 and then the $50, $10 and $5 bills. The $1 bill isn't getting a makeover.
The changes are aimed at thwarting counterfeiters who are armed with ever-more sophisticated computers, scanners and color copiers.
The $100 bill is the most frequent target of counterfeiters operating outside of the United States while the $20 bill is the favorite target of counterfeiters inside the country.
The redesigned $100 bill had originally been expected to go into circulation in late 2008 but its introduction was delayed to give the government time to refine all the new security features.
The government has prepared education resources in 25 languages to inform the public about the design changes.
"We wanted the changes to be very obvious, visible and easy to see," Larry Felix, director of the Bureau of Engraving and Printing, said.
The new blue security ribbon will give a 3-D effect to the micro-images that the thousands of lenses will be magnifying. Tilt the note back and forth and you will see tiny bells on the ribbon change to 100s as they move.
But that's not all. Tilt the note back and forth and the images will move side to side. Tilt the note side to side and the images will move up and down.
In addition, to the left of Franklin's portrait, will be an inkwell that will change color from copper to green when the note is tilted. The movement will also make a Liberty Bell appear and disappear inside the inkwell.
"As with previous U.S. currency redesigns, this note incorporates the best technology available to ensure we're staying ahead of counterfeiters," Treasury Secretary Timothy Geithner said.
Franklin will remain on the front of the $100 bill and Independence Hall in Philadelphia will remain on the back of the currency although both have been modified in ways aimed at making it harder to produce counterfeit copies of the bills.
"The new security features announced today come after more than a decade of research and development to protect our currency from counterfeiting," said U.S. Treasurer Rosie Rios, whose signature along with Treasury Secretary Timothy Geithner's will appear on the new currency.
Via:USAToday
Hollywood usually embraces all that's trendy and hip. But moguls don't mind seeming like fuddy-duddies as they mobilize their heavy PR artillery against a new business proposal: futures trading based on a movie's box office performance.
Tinseltown got a jolt on Friday when the U.S. Commodity Futures Trading Commission authorized a company called Media Derivatives to create an exchange for movie futures. It would sell contracts that anticipate how much revenue a flick will generate from domestic ticket sales. Buyers would make or lose money based on the actual results.
Trade groups led by the Motion Picture Association of America say that's a form of gambling that invites chicanery. For example, a movie exhibitor could bet against a movie and then effectively throw the game by cutting its ad spending. Or someone could try to manipulate the market by spreading rumors that, say, the star of a big film is in rehab.
What's more, the pay offs for the contracts are based on nothing more than unofficial studio estimates about box office sales. There's no law to prevent a studio from estimating too high, or low.
"After the fiscal meltdown from which our country is still struggling to emerge, we have seen the danger of abusive financial practices," the MPAA and groups representing directors and theater owners said in a statement. "Now is the time to strengthen and stabilize our financial system, not the time to open the floodgates on an untested, and unwanted plan that could cause serious harm to an important American industry and its workers."
But Media Derivatives says that the market for movie futures shouldn't have any more problems than similar markets do for commodities such as grains. It also could benefit companies that want to invest in movies without betting the farm.
"Historically, initial product skeptics have eventually become the greatest adopters," Media Derivatives CEO Robert Swagger said in a statement. He adds that "The regulatory review and oversight of the CFTC is rigorous -- and necessary to inform and protect all participants in these markets."
Trades can't take place just yet. The CFTC says that "given the novel nature of the contracts," it wants to examine some of them before allowing Media Derivatives to ring the opening bell -- or whatever it'll do.
Media Derivatives says that the new market, to be called The Trend Exchange, should be up and running by October.
Another company, Cantor Futures, is preparing to create a similar market for contracts that try to anticipate how successful a movie will be in theaters.
You don't need the last name Murdoch, Spielberg or Warner to be a movie investor. The question, though, is whether you want to be one.
Most investors are comfortable with stocks and bonds in their portfolios, with perhaps a dose of options or commodities for the more adventurous. But now, thanks in part to disillusionment with traditional investments, some investors are itching for a piece of the red carpet and a helping of Hollywood glitz.
Even though stock and credit markets have roared back from what seemed like a near-death experience, the crash inflicted emotional scars and losses, leading some investors to wonder if there might be other places to put their money that might be more fulfilling.
Big box-office hits such as Avatar, coupled with the introduction of new ways to bet on or invest in movies, is making the idea of financing the big screen more appealing to some mainstream investors who wouldn't have considered it before.
"It's a lot more fun" than other investments, says John Case, 61, who invested nearly $50,000 making a movie called Raul about a 75-year-old man who competed in an international athletic competition. "You can make money," he says, though that hasn't happened for him yet.
New ways for regular investors to bet on movies are evolving. A market that lets individuals speculate on movies' success is scheduled to launch next week, pending regulatory approval.
Additionally, small movie makers are discovering new ways to connect with investors and sell and promote their films online, giving them more of a chance of actually making some money from what is a highly speculative investment.
But before you go shopping for a director's chair and house in the Hollywood Hills, know that industry insiders say movies in general have historically been lousy investments.
Investors have long had ways to invest in movies, but their hit-it-big-or-miss-by-a-mile nature means that, by definition, most films lose money. Even studios with successful films or known brand names have failed or are struggling.
And some of the "Hollywood accounting" used to record the costs of producing films has left investors outside the industry's in-crowd holding the losses but sharing little of the upside from films. " 'Perilous' might be understating what's suicidal risk" of investing in movies, says Edward Jay Epstein, author of books about financing entertainment, including The Big Picture.
While tens of thousands of movies are made each year, only about 650 get any form of distribution to theaters or other places in the U.S. where money could be made, Epstein says. And of those, no more than 100 make money, he says. Those aren't great odds.
Still, if the glitz of Hollywood proves too alluring to resist, there are several key ways to do it.
Betting on the future
If regulators sign off, starting Tuesday, movie box office receipts will have something in common with hog bellies and corn: Investors can bet on them using financial tools called futures.
The futures market allows investors to bet on what prices of items, usually a commodity such as steel or wheat, will be at a set date in the future.
Futures began as a way for farmers to lock in prices for crops but have expanded to other commodities and for use by speculators.
A new futures market would let people bet, with a minimum of $50, against other participants on whether certain movies will do better or worse than expected.
The futures exchange is to be operated by Cantor Futures Exchange and use box office data from Rentrak Theatrical and Nielsen EDI. The exchange plans to open Tuesday and conduct the first trades on April 22.
The exchange's appeal is that people would be able to bet on information that's readily understandable and followed by the masses, namely, box office receipts.
However, this futures market is more akin to speculating than investing. The money you put up doesn't help pay for movies.
Instead, the futures market is a way to bet with other bettors, just as in an office NCAA-basketball pool.
The exchange, though, requires the approval of the U.S. Commodity Futures Trading Commission. The CFTC has delayed the approval of a similar movie futures market designed for professional investors, called The Trend Exchange, operated by a company called Veriana, as it reviews the idea. The commission is expected to make a decision by today. The Motion Picture Association of America has expressed objections to such trading.
Playing the studios
The parent companies of major film studios are publicly traded, including Sony, Time Warner, Disney and NewsCorp.
These four studios dominate the industry, generating roughly 95% of the revenue, Epstein says. They have the clout to get past the top hurdle that films face to make money: distribution.
Distribution is the industry term for the process of getting a movie physically in front of viewers willing to pay to see it.
And the distribution that really matters isn't just the movie theaters, which account for only about 20% of the money movies make, Epstein says. Where movies haul in the dough is from deals with pay-TV channels such as HBO and Starz. Few other studios outside the big four are able to muscle into this critical pathway, he says.
Investing in these four movie studios' stocks, though, isn't many investors' idea of movie financing. These companies are media giants with interests in everything from electronics to books and newspapers. Their movie units are small portions of their total revenue.
That's why some investors prefer taking a look at the handful of smaller studios that are publicly traded. But here, the risks are even greater. Many smaller studios list on lightly regulated marketplaces, which are rife with speculation.
Even studios that trade on major U.S. exchanges have been mixed investments. Shares of Lionsgate are down more than 30% in the past five years, trailing the roughly 5% gain by the Standard & Poor's 500, while DreamWorks Animation is roughly dead-even with the S&P.
"The investment history of the movie studios has been very mixed, at best," says Matt Harrigan, analyst at investment research firm Wunderlich. "It's a very difficult business."
Investing directly
Someone who knows of a movie director with a good idea or who has film skills themselves can bankroll a movie directly.
Consider One Too Many Mornings, a comedy about several young adults growing up. During the early stages of filming, several of the people working on the project approached the uncle of a team member, to finance the project, says Anthony Deptula, one of the film's producers. The uncle, Robert Young, became the executive producer.
The movie, which played at the Sundance film festival, cost just $50,000 to make, and the producers are working in their spare time to sign up screenings at theaters and sell the DVD and downloads online. They've earned back about a third of the $50,000, Deptula says. "We're confident we'll make our investors' money back," he says.
Direct investment such as this might make sense for parents and relatives, who, instead of paying for film school, might help finance their child's film. If the film is good, and gets notice, that might lead to a job in the industry, Epstein says.
Another approach is to team up with a company such as IndieVest, which allows investors to put money into movie projects already in the works. IndieVest's big advantage is that is has connections with theaters to make sure the movies it makes are seen, says CEO Wade Bradley. The company also produces quarterly financial reports so you know where your money is going. The minimum investment is $50,000, and you must be an accredited investor, meaning have a net worth of at least $1 million to participate.
IndieVest's first movie, St. John of Las Vegas, cost $3.8 million to make and has generated about $100,000 from the box office so far. That's why Bradley says you must spread your risk by investing in several films. "You can't look at a movie and say, 'This one will be a winner,' " he says. "You just don't know."
Tagging along
A number of studios raise money from third-party investment vehicles that lend money to studios that want to spread their own financial risk from movie projects.
But these investment groups have had mixed success and aren't really open to the public. Epstein says studios are more likely to share financial risk with movies they're less confident on. And these deals can be very complicated, requiring investors to consult legal help to make sure they're getting what they think they're getting, Epstein says.
Not knowing the details of what you're investing in is dangerous with any kind of investment. But it's potentially disastrous with movies, since the type of investment can range broadly, and many deals are specific to a certain project. Last month, New Orleans Saints head coach Sean Payton, for instance, sued a former Saints player over $144,000 lost in a movie-studio-related investment.
That's not to say there's no money to be made in movies. There are intangible benefits, including knowing you're part of creating art. Unlike losing money in stocks, a movie leaves you with a product "that doesn't just disappear," Deptula says.
Still, individuals should remember movie investing is almost always best left to the professionals, says Robert Swagger, CEO of Veriana who previously was a financial planner. "The core of (individuals') portfolios should be good stocks, bonds and mutual funds," he says. "I wouldn't put widows and orphans in this."
The investor John Paulson became a Wall Street celebrity.
Three and half years ago, a New York hedge fund manager with a bearish view on the housing market was pounding the pavement on Wall Street.
Eager to increase his bets against subprime mortgages, the investor, , canvassed firm after firm, looking for new ways to profit from home loans that he was sure would go sour.
Only a few investment banks agreed to help him. One was . The other was the mighty .
Mr. Paulson struck gold. His prescience made him billions and transformed him from a relative nobody into something of a celebrity on Wall Street and in Washington.
But now his brassy bets have thrust Mr. Paulson into an uncomfortable spotlight. On Friday, the filed a civil fraud lawsuit against Goldman for neglecting to tell its customers that mortgage investments they were buying consisted of pools of dubious loans that Mr. Paulson had selected because they were highly likely to fail.
By betting against the pool of questionable mortgage bonds, Mr. Paulson made $1 billion when they collapsed just a few months later, the S.E.C. said. Investors, who bought what regulators are essentially calling a pig in a poke, lost the same amount.
Mr. Paulson, 54, was not named as a defendant in the S.E.C. suit, but his role in devising the instrument that caused $1 billion in losses for Goldman’s customers is detailed in the complaint. Robert Khuzami, the director of enforcement at the S.E.C., explained that, unlike Goldman, the manager of the hedge fund, Paulson & Company, had not made misrepresentations to investors buying the security, known as a .
“While it’s unfortunate that people lost money investing in mortgage-backed securities, Paulson has never been involved in the origination, distribution or structuring of such securities,” said Stefan Prelog, a spokesman for Mr. Paulson, in a statement. “We have always been forthright in expressing our opinion as to the quality of the underlying mortgages. Paulson has never misrepresented our positions to any counterparties.
“There’s no question we made money in these transactions. However, all our dealings were through arm’s-length transactions with experienced counterparties who had opposing views based on all available information at the time. We were straightforward in our dislike of these securities, but the vast majority of people in the market thought we were dead wrong and openly and aggressively purchased the securities we were selling.”
Still, the details unearthed by the S.E.C. in its investigation show a deep involvement by Mr. Paulson in the creation of the investment, known as Abacus 2007-AC1. For example, he approached Goldman about constructing and marketing the debt security.
After analyzing risky mortgages made on homes in Arizona, California, Florida and Nevada, where the housing markets had overheated, Mr. Paulson went to Goldman to talk about how he could bet against those loans. He focused his analysis on adjustable-rate loans taken out by borrowers with relatively low and turned up more than 100 loan pools that he considered vulnerable, the S.E.C. said.
Mr. Paulson then asked Goldman to put together a portfolio of these pools, or others like them that he could wager against. He paid $15 million to Goldman for creating and marketing the Abacus deal, the complaint says.
One of a small cohort of money managers who saw the mortgage market in late 2006 as a bubble waiting to burst, Mr. Paulson capitalized on the opacity of mortgage-related securities that Wall Street cobbled together and sold to its clients. These instruments contained thousands of mortgage loans that few investors bothered to analyze.
Instead, the buyers relied on the opinions of credit ratings agencies like , and . These turned out to be overly rosy, and investors suffered hundreds of billions in losses when the loans underlying these securities went bad.
Mr. Paulson personally made an estimated $3.7 billion in 2007 as a result of his hedge fund’s performance, and another $2 billion in 2008.
He was also treated like a celebrity by members of a Congressional committee that invited him to testify in November 2008 about the . At the time, none of the lawmakers asked how he had managed to set up his lucrative trades; they seemed more interested in getting his advice on how to solve the credit crisis.
A Queens-born graduate of and the Harvard Business School, Mr. Paulson went to Wall Street in the early 1980s just as the biggest bull market in history was starting. He joined in 1984 as a junior executive in the investment banking unit.
Ten years later, he started his hedge fund with $2 million of his own capital. During the technology-stock bubble of the late 1990s, Mr. Paulson took a negative stance on high-flying shares and profited handsomely for himself and his clients.
By the end of 2008, Mr. Paulson’s assets under management had risen to $36.1 billion. In an early 2009 interview with The New York Times, Mr. Paulson talked about his success. “We are very proud of our performance last year,” he said. “We provided an oasis of profitable returns for our investors in a year where there were few sources of gains.”
His investors, which included pension funds, endowments, wealthy families and individuals, were huge beneficiaries of his strategy, Mr. Paulson added. “They made four times as much as we did,” he said.
Mr. Paulson and his investment program was the subject of the 2009 book by Gregory Zuckerman “The Greatest Trade Ever.” Mr. Zuckerman wrote that Mr. Paulson did not think there was anything wrong with working with various banks to create troubled investments that he could then bet against.
“Paulson told his own clients what he was up to and they supported him, considering it an ingenious way to grow the trade by finding more debt to short,” Mr. Zuckerman wrote. “After all, those who would buy the pieces of any C.D.O. likely would be hedge funds, banks, pension plans or other sophisticated investors, not mom-and-pop investors.”
Late last year, Mr. Paulson donated $20 million to the Stern School of Business at New York University and $5 million to Southampton Hospital in Long Island’s East End, where he bought a $41 million home in early 2008. He lives with his wife and two daughters on the Upper East Side of Manhattan.
Amid criticism of investment strategies that profited from mortgage defaults, home foreclosures and other miseries, Mr. Paulson has also given $15 million to the Center for Responsible Lending for a center devoted to providing foreclosure assistance to troubled borrowers.
At the time of the donation, Mr. Paulson said of the center and its work, “We are pleased to help them provide legal services to distressed homeowners, many of whom have been victimized by predatory lenders.”
Anita Edward says she has borrowed money three times from LAPO, Lift Above Poverty Organization, for her hair salon, Amazing Collections, in Benin City, Nigeria.
In recent years, the idea of giving small loans to poor people became the darling of the development world, hailed as the long elusive formula to propel even the most destitute into better lives.
Actors like and lent their boldface names to the cause. Muhammad Yunus, the economist who pioneered the practice by lending small amounts to basket weavers in Bangladesh, won a Nobel Peace Prize for it in 2006. The idea even got its very own year in 2005.
But the phenomenon has grown so popular that some of its biggest proponents are now wringing their hands over the direction it has taken. Drawn by the prospect of hefty profits from even the smallest of loans, a raft of banks and financial institutions now dominate the field, with some charging interest rates of 100 percent or more.
“We created microcredit to fight the loan sharks; we didn’t create microcredit to encourage new loan sharks,” Mr. Yunus recently said at a gathering of financial officials at the United Nations. “Microcredit should be seen as an opportunity to help people get out of poverty in a business way, but not as an opportunity to make money out of poor people.”
The fracas over preserving the field’s saintly aura centers on the question of how much interest and profit is acceptable, and what constitutes exploitation. The noisy interest rate fight has even attracted Congressional scrutiny, with the House Financial Services Committee holding hearings this year focused in part on whether some microcredit institutions are scamming the poor.
Rates vary widely across the globe, but the ones that draw the most concern tend to occur in countries like and , where the demand for small loans from a large population cannot be met by existing lenders.
Unlike virtually every Web page trumpeting the accomplishments of microcredit institutions around the world, the page for Te Creemos, a Mexican lender, lacks even one testimonial from a thriving customer — no beaming woman earning her first income by growing a soap business out of her kitchen, for example. Te Creemos has some of the highest interest rates and fees in the world of , analysts say, a whopping 125 percent average annual rate.
The average in Mexico itself is around 70 percent, compared with a global average of about 37 percent in interest and fees, analysts say. Mexican microfinance institutions charge such high rates simply because they can get away with it, said Emmanuelle Javoy, the managing director of Planet Rating, an independent Paris-based firm that evaluates microlenders.
“They could do better; they could do a lot better,” she said. “If the ones that are very big and have the margins don’t set the pace, then the rest of the market follows.”
Manuel Ramírez, director of risk and internal control at Te Creemos, reached by telephone in Mexico City, initially said there had been some unspecified “misunderstanding” about the numbers and asked for more time to clarify, but then stopped responding.
Unwitting individuals, who can make loans of $20 or more through Web sites like Kiva or Microplace, may also end up participating in practices some consider exploitative. These Web sites admit that they cannot guarantee every interest rate they quote. Indeed, the real rate can prove to be markedly higher.
Debating Microloans’ Effects
Underlying the issue is a fierce debate over whether microloans actually lift people out of poverty, as their promoters so often claim. The recent conclusion of some researchers is that not every poor person is an entrepreneur waiting to be discovered, but that the loans do help cushion some of the worst blows of poverty.
“The lesson is simply that it didn’t save the world,” Dean S. Karlan, a professor of economics at , said about microlending. “It is not the single transformative tool that proponents have been selling it as, but there are positive benefits.”
Still, its earliest proponents do not want its reputation tarnished by new investors seeking profits on the backs of the poor, though they recognize that the days of just earning enough to cover costs are over.
“They call it ‘social investing,’ but nobody has a definition for social investing, nobody is saying, for example, that you have to make less than 10 percent profit,” said Chuck Waterfield, who runs mftransparency.org, a Web site that promotes transparency and is financed by big microfinance investors.
Making pots of money from microfinance is certainly not illegal. CARE, the Atlanta-based humanitarian organization, was the force behind a microfinance institution it started in Peru in 1997. The initial investment was around $3.5 million, including $450,000 of taxpayer money. But last fall, Banco de Credito, one of Peru’s largest banks, bought the business for $96 million, of which pocketed $74 million.
“Here was a sale that was good for Peru, that was good for our broad social mission and advertising the price of the sale wasn’t the point of the announcement,” Helene Gayle, CARE’s president, said. Ms. Gayle described the new owners as committed to the same social mission of alleviating poverty and said CARE expected to use the money to extend its own reach in other countries.
The microfinance industry, with over $60 billion in assets, has unquestionably outgrown its charitable roots. Elisabeth Rhyne, who runs the Center for Financial Inclusion, said in Congressional testimony this year that banks and finance firms served 60 percent of all clients. Nongovernmental organizations served 35 percent of the clients, she said, while credit unions and rural banks had 5 percent of the clients.
Private capital first began entering the microfinance arena about a decade ago, but it was not until Compartamos, a Mexican firm that began life as a tiny nonprofit organization, generated $458 million through a public stock sale in 2007, that investors fully recognized the potential for a windfall, experts said.
Although the Compartamos founders pledged to plow the money back into development, analysts say the high interest rates and healthy profits of Compartamos, the largest microfinance institution in the Western Hemisphere with 1.2 million active borrowers, push up interest rates all across Mexico.
According to the Microfinance Information Exchange, a Web site known as the Mix, where more than 1,000 microfinance companies worldwide report their own numbers, Compartamos charges an average of nearly 82 percent in interest and fees. The site’s global data comes from 2008.
But poor borrowers are often too inexperienced and too harried to understand what they are being charged, experts said. In Mexico City, Maria Vargas has borrowed larger and larger amounts from Compartamos over 20 years to expand her T-shirt factory to 25 sewing machines from 5. She is hazy about what interest rate she actually pays, though she considers it high.
“The interest rate is important, but to be honest, you can get so caught up in work that there is no time to go fill out paperwork in another place,” she said. After several loans, now a simple phone call to Compartamos gets her a check the next day, she said. Occasionally, interest rates spur political intervention. In Nicaragua, President , outraged that interest rates there were hovering around 35 percent in 2008, announced that he would back a microfinance institution that would charge 8 to 10 percent, using Venezuelan money.
There were scattered episodes of setting aflame microfinance branches before a national “We’re not paying” campaign erupted, which was widely believed to be mounted secretly by the Sandinista government. After the courts stopped forcing small borrowers to repay, making international financial institutions hesitant to work with Nicaragua, the campaign evaporated.
A Push for More Transparency
The microfinance industry is pushing for greater transparency among its members, but says that most microlenders are honest, with experts putting the number of dubious institutions anywhere from less than 1 percent to more than 10 percent. Given that competition has a pattern of lowering interest rates worldwide, the industry prefers that approach to government intervention. Part of the problem, however, is that all kinds of institutions making loans plaster them with the “microfinance” label because of its do-good reputation.
Damian von Stauffenberg, who founded an independent rating agency called Microrate, said that local conditions had to be taken into account, but that any firm charging 20 to 30 percent above the market was “unconscionable” and that profit rates above 30 percent should be considered high.
Mr. Yunus says interest rates should be 10 to 15 percent above the cost of raising the money, with anything beyond a “red zone” of loan sharking. “We need to draw a line between genuine and abuse,” he said. “You will never see the situation of poor people if you look at it through the glasses of profit-making.”
Yet by that measure, 75 percent of microfinance institutions would fall into Mr. Yunus’s “red zone,” according to a March analysis of 1,008 microlenders by Adrian Gonzalez, lead researcher at the Mix. His study found that much of the money from interest rates was used to cover operating expenses, and argued that tackling costs, as opposed to profits, could prove the most efficient way to lower interest rates.
Many experts label Mr. Yunus’s formula overly simplistic and too low, a route to certain bankruptcy in countries with high operating expenses. Costs of doing business in Asia and the sheer size of the Grameen Bank he founded in Bangladesh allow for economies of scale that keep costs down, analysts say. “Globally interest rates have been going down as a general trend,” said Ms. Javoy of Planet Rating.
Many companies say the highest rates reflect the costs of reaching the poorest, most inaccessible borrowers. It costs more to handle 10 loans of $100 than one loan of $1,000. Some analysts fear that a pronounced backlash against high interest rates will prompt lenders to retreat from the poorest customers.
But experts also acknowledge that banks and others who dominate the industry are slow to address problems.
Added Scrutiny for Lenders
Like Mexico, Nigeria attracts scrutiny for high interest rates. One firm, LAPO, Lift Above Poverty Organization, has raised questions, particularly since it was backed by prominent investors like and the Calvert Foundation.
LAPO, considered the leading microfinance institution in Nigeria, engages in a contentious industry practice sometimes referred to as “forced savings.” Under it, the lender keeps a portion of the loan. Proponents argue that it helps the poor learn to save, while critics call it exploitation since borrowers do not get the entire amount up front but pay interest on the full loan.
LAPO collected these so-called savings from its borrowers without a legal permit to do so, according to a Planet Rating report. “It was known to everybody that they did not have the right license,” Ms. Javoy said.
Under outside pressure, LAPO announced in 2009 that it was decreasing its monthly interest rate, Planet Rating noted, but at the same time compulsory savings were quietly raised to 20 percent of the loan from 10 percent. So, the effective interest rate for some clients actually leapt to nearly 126 percent annually from 114 percent, the report said. The average for all LAPO clients was nearly 74 percent in interest and fees, the report found.
Anita Edward says she has borrowed money three times from LAPO for her hair salon, Amazing Collections, in Benin City, Nigeria. The money comes cheaper than other microloans, and commercial banks are virtually impossible, she said, but she resents the fact that LAPO demanded that she keep $100 of her roughly $666 10-month loan in a savings account while she paid interest on the full amount.
“That is not O.K. by me,” she said. “It is not fair. They should give you the full money.”
The loans from LAPO helped her expand from one shop to two, but when she started she thought she would have more money to put into the business.
“It has improved my life, but not changed it,” said Ms. Edward, 30.
Godwin Ehigiamusoe, LAPO’s founding executive director, defended his company’s high interest rates, saying they reflected the high cost of doing business in Nigeria. For example, he said, each of the company’s more than 200 branches needed its own generator and fuel to run it.
Until recently, Microplace, which is part of , was promoting LAPO to individual investors, even though the Web site says the lenders it features have interest rates between 18 and 60 percent, considerably less than what LAPO customers typically pay.
As recently as February, Microplace also said that LAPO had a strong rating from Microrate, yet the rating agency had suspended LAPO the previous August, six months earlier. Microplace then removed the rating after The New York Times called to inquire why it was still being used and has since taken LAPO investments off the Web site.
At Kiva, which promises on its Web site that it “will not partner with an organization that charges exorbitant interest rates,” the interest rate and fees for LAPO was recently advertised as 57 percent, the average rate from 2007. After The Times called to inquire, Kiva changed it to 83 percent.
Premal Shah, Kiva’s president, said it was a question of outdated information rather than deception. “I would argue that the information is stale as opposed to misleading,” he said. “It could have been a tad better.”
While analysts characterize such microfinance Web sites as well-meaning, they question whether the sites sufficiently vetted the organizations they promoted.
Questions had already been raised about Kiva because the Web site once promised that loans would go to specific borrowers identified on the site, but later backtracked, clarifying that the money went to organizations rather than individuals.
Promotion aside, the overriding question facing the industry, analysts say, remains how much money investors should make from lending to poor people, mostly women, often at interest rates that are hidden.
“You can make money from the poorest people in the world — is that a bad thing, or is that just a business?” asked Mr. Waterfield of mftransparency.org. “At what point do we say we have gone too far?”
Any TV exposure should be a boon to a budding Internet startup. But Kwedit had the misfortune to have that exposure come on The Colbert Report. The site, a processor of online micropayments, got lambasted by Stephen Colbert in a four-minute segment over charges that the site's unique — and controversial — payment model makes it easy for kids to get credit online, no parental approval necessary.
It's part of a persistent image problem the site has had since it launched in February. Part of Kwedit's business model is a service called Kwedit Promise, which extends small amounts of credit for use in buying virtual goods online. Users can get a few dollars to buy a new toy for their digital dog, for example, in games like Foo Pets, in exchange for a pledge to pay the money back later.
Weird? Certainly, but it's a big market: virtual goods were a $1 billion industry worldwide in 2009, and Kwedit is one of a slew of payment providers that have cropped up in early 2010 to try and get a piece of the pie. But Kwedit Promise is unique, and disquieting enough to draw Colbert's ire. "I know that it sounds like a website that hooks little kids on borrowing credit, so let me explain," Colbert said on his March 4 broadcast. "It's a website that hooks little kids on borrowing credit."
Except it really isn't, says founder Danny Shader. "We don't extend credit and we don't have kids using our site," Shader says. What wasn't communicated in Colbert's piece and wasn't immediately clear in the press coverage of Kwedit is that the company does have some baseline rules. Users have to be older than 13 to use the service, and any promises made are nonbinding. Don't expect debt collectors to hound your teenager over his online gaming bill, either: he'll simply be unable to use Kwedit again if he doesn't pay up, either by mailing in cash to the company or by settling the tab in person at a 7-11, the company's off-line partner. Repayment rates are low, but Kwedit can afford that: since the service is only offered for virtual goods, merchants aren't out anything tangible if someone fails to pay.
Shader says he envisioned Kwedit Promise as a risk-free way for teens to learn about credit, absent the nasty consequences that can come from making mistakes on a first credit card. Users receive a Kwedit score (modeled after the FICO credit scores) based on their responsibility. Those who pay the debt on time get more credit to use on virtual goods. "We don't let a teenager get behind the wheel of a car without a learner's permit," Shader says. "Why do we let students get a bunch of credit-card apps?"
Still, the company took steps to immediately distance itself from any charges they're catering to kids. The company's cartoon mascot, Kweddy the Duck, was ditched in a bout of post-Colbert "de-duckification," and Shader wrote an extended blog post to try and clear up any misconceptions about his service. Shader says the company also replied to every angry tweet and e-mail they received after Colbert's lambasting. "It didn't feel good personally, but the good news is thoughtful people gave us critiques of the service," Shader says.
But if the company can survive the body blow — and Kwedit says it received a number of inquiries along with the hate mail — the underlying model is actually pretty interesting. Shader says the company's target isn't tweens but the broader (and older) segment of online users who don't use credit cards. "If you have cash — and that's a huge portion of the population that wants to pay with cash — your alternatives aren't all that great," Shader says. A separate service, dubbed Kwedit Direct, lets these people purchase tangible online items and pay for them using currency at a 7-11. The merchant only ships the item when it receives notice a payment has been made.
Ultimately, Shader says that model might end up being the driver behind Kwedit's growth. He envisions the system being used for items including gifts, short-term insurance policies and credit on VoIP telephone service. "We want to cater to the unbanked," he says. So long as they're 13 and up.
Blame China and Saudi Arabia
Much of the fault of the financial crisis has been heaped on Wall Streeters, unscrupulous mortgage lenders and weak regulators. But in a new research paper, economist Ricardo Caballero says there is another major group of contributors to America's monetary mess who are not getting the blame they deserve: foreigners.
"There is no doubt that the pressure on the U.S. financial system [that led to the financial crisis] came from abroad," says Caballero, who is the head of MIT's economics department. "Foreign investors created a demand for assets that was difficult for the U.S. financial sector to produce. All they wanted were safe assets, and [their ensuing purchases] made the U.S. unsafe."
Caballero, who is from Chile, is not absolving American bankers and regulators. But he says investigators and lawmakers who are looking into the financial crisis are spending too much time grilling Wall Streeters and not enough time looking into the global imbalances that are largely to blame. "What worries me is Congress trying to create new regulations, but not asking where the pressure was coming from to create these products," says Caballero. "In terms of formulating a solution, just looking at the U.S. financial system is not the answer."
A number of economists and policy analysts believe Caballero makes a lot of sense. Alex Pollock of the American Enterprise Institute says it's clear the foreign investors who bought the bonds of mortgage guarantors Fannie Mae and Freddie Mac served to fuel the housing bubble. Ohio State University professor René Stulz, who has studied the financial crisis, says Caballero has hit on a critical contributor. Says Stulz, "Investors looking for safe investments in the U.S. created a demand for new products that caused our financial system to work differently from how it had worked in the past and to become more fragile in ways that were not well understood at the time."
Of course, not all economists are buying the Caballero's blame them, not us, explanation of the financial crisis. They say just because there was money flowing into the United States doesn't mean the credit crunch was inevitable. They say stricter regulations could have stopped U.S. investment bankers from creating mortgage bonds filled with risky home loans and then passing those bonds off as safe investments to foreign investors. "Most of the blame for the financial crisis lies in the choices that were made inside the U.S.," says Anil Kashyap, an economics professor at University of Chicago's Booth School of Business.
Nonetheless, even if foreigner investors' role in America's credit boom and bust is debatable, what's beyond doubt is that this aspect of the crisis is not getting as much attention as, say, bankers and their bonuses. On Thursday, the Financial Crisis Inquiry Commission wrapped up its second day of hearings. Global imbalances is one of the 22 areas that the panel is supposed to investigate as a possible cause of the credit crunch. But in two days of hearings, which included testimony from top financial executives, economists, analysts, regulators and a hedge fund manager, there wasn't a single question that had to do with what role foreign investment might have played in creating the crisis.
Caballero says that is wrong. His story of the financial crisis begins not in the rising condo buildings or growing developments in Miami or Las Vegas, but in investment houses and offices of central bankers in Beijing and Riyadh. Caballero asserts that international investors, particularly those tasked with deploying the reserves of foreign governments, prefer relatively safe investments, which made the normally stable U.S. economy a natural hunting ground. The money might have gone into stocks, but after the Nasdaq and stock market rout of the early 2000s, investors' appetite shifted to bonds.
China, contending with a huge trade surplus with the U.S., bought more and more Treasury bonds, pushing down yields and making Treasuries less attractive to other foreign investors. As a result, the rising demand for higher yielding U.S. debt opened the door for Wall Street investment bankers to spin out new classes of fixed-income securities, most notably collateralized debt obligations or CDOs. Much of the money raised by those investments was funneled in the mortgage market. That gave lenders the ability to make more loans, allowing more people to buy houses and push up real estate prices. Many of those loans, it turns out, were made to people who couldn't afford to pay. What happened next — real estate bust, foreclosures and Wall Street mayhem — is well known.
How to prevent a similar crisis from happening again is the question that Caballero thinks we are getting wrong. He believes reforming the U.S. financial system is only part of the answer. Foreign investors, he says, need to change their behavior as well. Specifically, Caballero believes the U.S. needs to encourage foreign governments to hold a range of U.S. investments, instead of just funneling all of their money into say Treasuries or mortgage bonds. One way to do that is to require foreign governments or investors who only buy Treasuries or mortgage bonds to place a certain portion of their U.S. investments in an account at the Federal Reserve. Rather than park their money at the Fed, Caballero contends that many investors will choose to put their money into riskier U.S. investments.
"There is a crack in the U.S. financial system, but it's important to ask where the water that caused the crack came from," says Caballero. "The only way to really make the U.S. system resilient to systemic shocks is to fix the supply side."
I’ve always blogged for fun, and initially, like most of you, I had no idea that money could be made out of the activity. The fact is, people can earn a living out of blogging, and do it quite easily (after a while). It only takes 4 things:
Knowledge
You have to know things that people will want to learn about and are going to be searching for. Answers to the simplest questions are your best bet. How to blog? How to recover your windows password? How to recover data out of damaged hard drive? Yes, 10’s of thousands of people are asking Google these questions everyday, so you want to give them your best answer right? You also have to be knowledgeable enough in all things web to set up a proper blog. Just starting a free blogspot account to regurgitate your thoughts will not be enough; it takes a lot more then that to turn a site into a resource that will be both informative and profitable.
Persistence
Making money out of blogging takes time. If you want to blog for a living, you must be ready to write new and innovative content consistently (as in 5 to 7 times a week) for many months until you start seeing the fruits of your labor coming in. Yes, there are some exception out there (John Chow is earning $7000 per month after only 6 months), but in most cases, most of you won’t see a penny before 5 or 6 months of hard work.
Exposure
If nobody is reading you, where will you get the visibility needed to attract advertisers? Who will click on your ads? The answer is simple: no one. Being a good blogger involves a lot more than writing great content, it’s also about having good virtual PR skills. You will have to invest a lot of your time reading and participating to conversations on other blogs, submitting your articles to social networking sites and building yourself a large network of like-minded bloggers. Making friends in the blogosphere is the key to success. Friends will link to your articles, put you in their blogroll and talk about you wherever they roam. You’ll also do the same for them, not only because doing this will be profitable to you, but also because you care about the success of everyone.
Some basic english-writing skills
Yes, I know, my english isn’t perfect, but blogs are the realm of the people. Some of them excel in writing, others don’t, but does this stop Google from indexing your pages? Absolutely not. Does it stop people from being interested in what you have to say, as long as you know what you’re writing about? Nope. English is the language of the Internet. If you want to maximize the exposition of your content as an independent blogger, you’ll have to write in English.
After having done all this, your blog will be ready to be monetized. One of the most important things to consider when adding revenue sources to your site is to diversify. Don’t put all your eggs in the same basket! You need a good mix of “cost per click”, “Cost Per Mille” and “Cost per action” ads. Here’s a small definition of each term:
Here is a quick list of advertising services u should use to monetize your blogs.
1. http://www.google.com/profiles/playboyp
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