In London, England because of its lack of regulation, the financial services companies grew and London is one of the centres of the world finances. In London, the major banks submit bids on the cost of borrowing money from each other – this average is called the Libor. Most of the time the rate fits into a very narrow trading range because the banks are not desperate for the funds. All banks need capital or money to exist and grow their businesses, the cost of capital is interest rates and over the years, the Libor rate has seen as the lowest rate and other interest rates are tied to it. You may have asked for a loan and the bank said it was x points above prime. For the international banking community, Libor is the base rate or prime rate.  When banks were doing well, the system worked beautifully. Occasionally, the banks, because in the end they are run by people and most people do not want to show their declines to the public, tried to manipulate the rates. By not allowing the rates to fluctuate, the banks would  not have to show they were not doing as well. The other aspect was to make bets on the direction of interest rates, after the Libor rate was first rigged.

Linking to dividend paying stocks – all the banks that have been fined until the financial crisis were some of the best stocks to own. They were very profitable, were involved in the biggest deals across the world, were able to influence governments and corporations and were on the top of the hill. In turns out, they cheater to stay there and in a manner which materially affects their business. Naturally people have left the company and the company continues in a seemingly lesser light. The question is what to do? if you owned the shares would you keep them? for they still pay dividends. Owning shares in a profitable business that pays dividends is a good thing, but even better is when the company at least tries to stay within the law.

There are more questions than answers, till the next time – to raising questions

We all collect something, and at this time of the year, you may receive more of what you collect. If you are a sports fan and have a favourite team, among the gifts under your tree will likely be something with your favourite team logo. At this type of year, liquor gifts are common and so are stories about the value of some scotches, cognacs, wines and other spirits. As they get older and rarer the value goes up. However whatever you collect, hopefully the enoyment of the collectible should be the first reason for collecting. For if the value sometimes goes up. sometimes the value goes down.

Linking to dividend paying stocks – one of the good things about dividend paying stocks is every year a dividend is paid. The stocks will go up and down, but the overall return is often better than the indexes. The dividend gives you a constant cash flow to allow you to buy more stock or other things you collect.

There are more questions than answers, till the next time – to raising questions

In the paper, there was a wonderful advertisement by the music store hmv. In the music business, it seems to make perfect sense to cross sell items. Music is one of those areas where the music and words often says something to us and we want something more than the song. Each of us has our favourite songs and artists and many come with the potential adds on. Sometimes the adds on are about the music, but it does not have to be. An example is the Beatles had an album called Sgt Pepper’s Lonely Hearts Club Band and hmv is  selling a Sgt Peppermill pepper grinder. What has the grinder have to  do with the album? outside of the name, nothing, but it is still a cute item.

Linking to dividend producing stocks, the add on is the dividend. The stocks are out of the  thousands which are traded, you have decided is a good investment. If you ensure the add on of a dividend has been paid for a number of years, the likelihood of your stock doing better than the index makes dividend paying stocks worth having

There are more questions than answers, till next time – to raising questions

One of the methods advertisers use to sell their product is by postcards. In various locations and sometimes depending on your postal code, they are dropped off in the mail. The other day one arrived in the mailbox and glancing at the picture it looked like a face. In fact the picture was of a building and its outside staircase viewed through the trees. The procedure has been a long tired and true method reaching back to Ichabod Crane and the Legend of Sleepy Hollow featuring the headless horseman. It was a wonderful story and the trees at night accent the plot. If you were to wonder through the trees in the evening, it is not hard to come up with great stories. In the daytime, the trees just not have the same negative effect.

Linking to dividend paying stocks, different methods to look at the same thing is something we should strive for. We may do the same thing, but every once in a while we should look through a different perspective. For most of us, we should focus on: ensuring our capital is protected (not losing money) and making money through the use of dividends with the bonus of increasing stock price. The number one rule of investing is do not lose your capital. The second rule is make compound interest work for you – if you prefer stocks ensure a dividend is paid. In the long run you will have a greater amount of assets than any other way.

There are more questions than answers, till the next time – to raising questions

As someone who lives in an urban area, one of the areas the writer likes to read about is how can public spaces be made better? When we come to an urban area whether to work or to study, we eventually settle in one part of the city or another. The writer’s preference has been closer to the centre than the outskirts. However, in every part of the city there is an area which could use a do over. Many times the money does not have to be large, but if the area is scheduled to be fixed up, there is an opportunity to do something. To do more, one idea is to examine what cities around the world are doing and a reference book is the good life – new public spaces for recreation edited by Zoe Ryan, Val Alen Institute, New York, 2006. There are interesting ideas which have been done, could be done as well as ideas that are a little far fetched.

Linking to dividend paying stocks –  the do more for stocks is receiving a dividend, the ideas that are far fetched are the stocks that try to promise gains rising to the moon which you should avoid. The ones in between are the stocks you read about and think maybe, but studies continue to prove sticking to stocks that pay dividends and have consistently done so gives you an average better than the stock market index which means your money grows over time with less risk.

There are more questions than answers, till the next time – to raising questions

David Einhorn of Greenlight Capital wrote a book called Fooling Some of the People All the Time, John Wiley & Sons , 2008. Mr. Einhorn runs a hedge fund called Greenlight Capital

An issue in the book is what should the regulators be doing? Mr. Einhorn went to the regulators on a regular basis to show his evidence. Financial fraud is relatively easy to do, but it takes a lot of work to bring action against the abusers. Allied Capital was dealing in small business loans which the government policy makers wanted done.The program was to give out money, not how well the money was received back, as long as Allied Capital paid a dividend or gave its distribution, it was generally assumed the company was doing what the normal standard is. Greenlight and others proved Allied Capital was fixing the books to look like they were doing what is normal, for Allied’s normal turned out to cost the government millions of dollars.

The Securities and Exchange Committee which should be interested because Allied would go into the capital markets to issue stocks and bonds, were not really interested until millions was at issue, not thousands. The questions for financial fraud is would a bureaucrat risk his/her job for thousands in fraud? Sometimes the answer is yes, most of the time the answer is no. By the time fraud throughout the organization is proved and acknowledged larger sums will have been lost. The bureaucrats look to their political masters and senior people who deal with the great side of doing small business loans including ribbon cutting, new jobs and donations.

Lessons for dividend stock owners – the system is imperfect. Regulators try but often the mechanisms to search, prove and track fraud are not high priority when programs are introduced and running. This is especially true if the programs involve a higher goal of the government and consistent fees. Most program systems are designed believing the users are honest, ethical and only a little fraud with go on. Honest people do not like to do much paperwork and those involved in fraud are happy to do even less. In countless programs, it seems fraud creeps in and affects many programs. Thank goodness for short sellers and whistle blowers. If the first reaction of management is to go against the short sellers, it is a sign to move on to other investments.

There are more questions than answers, till the next time – to raising questions

David Einhorn of Greenlight Capital wrote a book called Fooling Some of the People All the Time, John Wiley & Sons , 2008. Mr. Einhorn runs a hedge fund called Greenlight Capital and it has longs – expects stocks to go up and shorts expects stocks to go down. In theory, everyone should look how to make money going short or buying puts,  in reality most of us focus on the upside. In part, investment companies make money bringing shares to market for their future growth. The issues Mr. Einhorn writes about in his book do not go away which makes the book an excellent read.

Greenlight Capital along with others did a great deal of research about how a company called Allied Capital was valuing its investments. Allied Capital was (no longer exists) in the business of making loans to small businesses (which is a great thing) and a US agency would return 75% of the loans if the company failed. In theory, it was taking a 25% risk. There were a number of issues – the government agency sets up a program expecting lenders to lend money to small business because often they can not receive loans from the local banks (high risk), the agency expects the contractor in this case Allied to be honest and ethical and has limited capacity to determine if they are. In all likelihood Allied started as honest and ethical, but Mr. Einhorn and others determine they were not. Mr. Einhorn determined Allied had many examples of approving loans and keeping the value of the loan at 100% even though the small business was in bankruptcy and not paying the loan. Under normal circumstances – when a company does not pay the value of the loan falls to less than 100%. When the company is in bankruptcy the bonds are worth cents on the dollar. The effect of not writing down the debt was to make Allied’s balance sheet look good and allowed them Allied to pay dividends or a regular income. As long as the income was paid, many choose to believe Allied’s story. When the income was cut, the end of Allied was near.

The book is written from Mr. Einhorn’s perspective which means Allied Capital for many years had a different story. Part of their story was Greenlight Capital was only interested in the company because it sold short, otherwise made money when the stock fell. Their story was the good people of Allied were trying to help the US economy grow by investing in small businesses. To be against Allied was to be against small businesses.That is a powerful argument. In all companies there is likelihood of some fraud, but how much? is it rotten to the core? Does the government, if it believed in Greenlight Capital arguments, remove Allied from the preferred list of small business loans? The answer was for many years no. (in part because the preferred list did not track fraud, but how well the paperwork was done) (what is measured is what will be received).

Linking to dividend paying stocks – how does your company value its assets? When does the company write down and off its assets which no longer produce income?

There are more questions than answers, till next time – to raising questions.

There are a number of books written about Lehman Brothers – most focus on the executive suite for very good reasons. Lawrence McDonald a former VP of distressed debt of Lehman Brothers wrote a book called A Colossal Failure of Common Sense The Inside Story of the Collapse of Lehman Brothers , Crown Publishing, NY, 2009.

The executive suite wanted to be at any cost to be a top tier company, for Lehman was traditionally seen as second tier company. Second tier is similar to the old Avis car rental company – we try harder. Second tier allows for a culture to exist of us against the establishment, meaning there is some resentment against the first tier companies.

In terms of his job, Mr. McDonald and group had to understand the companies he would short in terms of what value would the company be worth if it went into Chapter 11 bankruptcy – 5 cents on the dollar? 30 cents? 50 cents? When a company moves to the path of reorganization through Chapter 11 bankruptcy, there are funds which are not allowed to hold them in their portfolio. The companies have to sell and the issue is what price is good while the company works to come out of Chapter 11? There is a buying opportunity if you know what the assets should or could  be worth. To know the answer means a doing research.

Linking to dividend producing stocks – just about every President says they want to be world class or ranked number one – what does that mean? what type of growth does that imply? what type of debt does that carry? is it feasible in your eyes?

In every organization, there are people who understand what is happening, what needs to be done and if listened to would have made a difference.However getting to the executive suite and listening to different view points are often two different skills, which skills does the executive suite in your companies have?

There are more questions than answers, till the next time – to raising questions.

There are a number of books written about Lehman Brothers – most focus on the executive suite for very good reasons. Lawrence McDonald a former VP of distressed debt of Lehman Brothers wrote a book called A Colossal Failure of Common Sense The Inside Story of the Collapse of Lehman Brothers , Crown Publishing, NY, 2009. The perspective is interesting because Mr. McDonald’s job was to find companies whose stock should fall because of debt and other reasons and short the companies. The other part of the job was to examine the debt of companies which had declared or expected to declare bankruptcy and determine how much value is left in the company and make bids for the debt.

In the book, Mr. McDonald says his group understood what was coming in the housing market, was shorting the mortgage companies but the executive suite was driven to become the leader on Wall Street which meant they did not understand what was happening and wanted growth at any cost. While Mr. McDonald was shorting companies in the airline and real estate mortgage business, other parts of Lehman were going into overdrive to bulk up on both commercial and personal real estate mortgages bonds. They were doing it because money was inexpensive, the credit lines existed, they relied on the assumption that the real estate prices rise and people paid back mortgages (although when someone is given a mortgage with no down payments, little income and very low mortgage payments for the first two years, it is not surprising in year three and beyond thousands of people stopped paying), and the fees to bundle the mortgages or securitize and sell them as bonds was too much of an incentive not to do.

The lesson is leverage – most companies and Individuals (it seems) operate on the use of leverage. In the error of inexpensive money it is prudent for a company to buy assets which produce returns. The question is how much, is too much? In the case of Lehman Brothers when they declared bankruptcy they were leveraged 44 times their capital or for every dollar of capital, they had borrowed 44.

Prior to their downfall, Lehman bought a large commercial portfolio at the top of the market price and the securitization of individual mortgages machine was at full production, but Lehman was keeping more and more of the inventory as it was harder to sell the bonds. This was acceptable as long as the bonds kept their value, the week the bonds started to fluctuate in price, the bonds were in a free fall and billions of dollars of assets became cents on the dollar. The investment business is based on credit, the credit is based on providing assets for collateral for banks to lend money. When the mortgage bonds became to lose their value, no bank wanted the collateral. No collateral, no business.

Linking to dividend producing stocks – what is the leverage in stocks that you own?  Second lesson is the common sense one – mortgage brokers selling the no income mortgages were operating in the grey area. It was legal, but not the same as the expected standard that the mythical average person operates in. As an individual if you saw the ads or articles or participated you have to ask yourself what is the outcome of the mortgage. What are the assumptions everything is based on? Is it good?  Mr. McDonald left NYC where Lehman is based and went on a field trip to where many of the mortgages were originated to see what was happening in the field, travelling in person is often a good thing.

There are more questions than answers, till the next time – to raising questions.