Friday, February 19, 2010

Surprise: Peter Johnston still has not taken my bet…

Nobody has taken my bet.

But another fund manager across town is offering a derivative bet (in smaller denomination) that nobody will.  And nobody has taken that either. 

Thursday, February 18, 2010

My proposed bet with Peter Johnston from the Association of Independently Owned Financial Planners: an Astarra follow up

The Association of Independently Owned Financial Planners is a rival to Financial Planning Australia as an umbrella group for financial planners in Australia.  Financial planning in Australia is a big business because Australia – unlike America – has a privatized social security system called “superannuation” and financial planners are the front-end for the sale of many superannuation products.

The industry has had its share of scandals (see Storm Financial and Westpoint) but there are many fine operators in the industry and I am unashamedly admit that some of my best friends are financial planners.

That said – the AIOFP was closely associated with Astarra – a fund of funds and distributor of funds which was closed recently by the Australian securities regulator after a whistle-blowing letter from your blogger.  [I wrote about Astarra and my role in precipitating the investigation here though I can’t claim too much credit – a reader of my blog suggested that I look at it.]

Anyway – back to the AIOFP.  According to this article four financial planning groups – all members of the AIOFP – represent about 90 percent of the funds in the “Astarra Strategic Fund” (now known just as the ASF).  The strategic fund is the main black hole in Astarra – and the administrator has said that they cannot prove the existence or value of the foreign assets of the ASF.  They said this possibly to quiet media claims by the AIOFP that the assets have been found.  The AIOFP just wants the strategic fund taken out of liquidation – and presumably valued on the the basis of assets that they claim they can find. 

Now my guess is the administrator – who intends to liquidate the ASF – is accurate.  The assets of the ASF are pieces of paper which state that there are assets there but real proof of the existence of the assets cannot be found and liquidation is the only way to determine what is recoverable.  But as said – the AIOFP has a different opinion and wants to sack the administrator.

Peter Johnston of the AIOFP suggested that I wrote my letter to regulators motivated by “professional jealousy”. 

This is of course defamatory. 

I am a hedge fund manager: I am motivated by money. 

Professional jealousy is a counter-productive (and defamatory) motive because – frankly – it just stands in the way of what I should be doing.

And so – being motivated by money - when Peter Johnston offered me a bet on whether the money would turn up I leapt on the chance.  I offered $100 thousand to be escrowed either by Morningstar or the Sydney Morning Herald.  [I have since offered Peter three for two odds.]  And he backed out.  (The Sydney Morning Herald CBD gossip column reported the story this morning.)

Peter is of course a coward – he backed out of the bet – but that has not stopped him from boasting to the press about how his organization has found the ASF money and that all is well.  Worse – his members have been telling their clients that their money will turn up and their superannuation (meaning their entire retirement savings) will be unimpaired. 

Now this article names the financial planning companies that have – as Peter Johnston notes – about ninety percent of the claims against the ASF.  I know many victims do not know they are victims because their financial planners say that they are going to be alright.  And maybe they will.  Maybe the money will turn up as Peter Johnston says it will.

But Peter Johnston is a coward and will not carry through with his bet.  That however does not stop at least one financial planning group (or at least some financial planners) telling their clients that their money is safe.  If they believe that maybe they could take the bet Peter Johnston backed out of.  If they are certain enough to tell their clients that their money is safe then they should be certain enough to take that bet.

The Sydney Morning Herald has said they are willing to be the escrow service. 

And I look forward to spending the winnings.

Wednesday, February 10, 2010

The final failure of the Meiji right-wing ideology … Japan fades into the future with a walking stick…

This blog does not usually play war with other bloggers – but something in Ampontan’s criticism of me has got my goat.  So if you do not want to indulge me a little flame-throwing just skip this post. 

Ampontan (AKA Bill Sakovich) writes a wryly amusing but deeply nationalistic Japanese blog.  He is – as far as I know – the only English language exponent of the virulent Japanese nationalism that initially gained power with the Meiji Restoration, waged and lost the second world war and – unlike the German equivalent – respectably survives to this day.  My favorite comment on his blog – and one I do not think he resiles from is that he has “Hirohito’s nutsack lodged so far down his throat its amazing he hasn’t asphyxiated himself long since.”

Ampontan is surely the only native English speaker who simply denies the Japanese (war crime) of mass forced prostitution as “comfort women” happened (more precisely he endorses deniers).  He regularly defends the Yakasuni Shrine (and by extension the visits to the shrine by any serving Japanese Prime Minister). 

Not that I can complain about that.  The Shrine was on my must-visit places list when I went to Japan.  It is a dull Shinto shrine with a bizarre attached museum which with thoroughly revisionist history absolves Japan from all and Nazi Germany from much responsibility for any atrocities committed in the Second World War.  I paid my admission fee – and by extension I supported that nonsense.  The Shrine also memorializes war dead including those who died at the gallows after being convicted of war crimes. 

It is not that Meiji era Japanese nationalism has nothing to recommend it.  That view of Japan, how it should be administered and Japan’s place in Asia and the world is one of the most successful industrial-development ideologies ever invented.  Not only did Japan grow into an industrial superpower twice (once before and once after the war) but the system was copied by Korea and it worked there too.   Nazism too was a successful economic system in that it allowed Germany to build an industrial base large enough to wage total war from a relatively small country.  Germany and Japan (and Italy) took on the UK (then the largest empire the world had ever seen), the US, Russia and China, and a host of other countries and had a military-industrial establishment that made more than a show of it.  These ideologies worked at producing industrial goods (and a military-industrial complex). 

They were also of course deeply nationalistic and racist ideologies.  Colonialism always had an undertone of racism (as any modern reader of Rudyard Kipling should not fail to notice) but these ideologies were far more murderous than anything imposed by the Brits or French (even though the Brits occasionally and the French more often were murderous).  The scale of the atrocities committed by the Japanese in China were only exceeded by Hitler at his worst (though they have also been exceeded by some murderous Post War regimes).

I said I find Sakovich’s blog wryly amusing.  I would not find a German equivalent amusing but that was because I was raised to vicariously remember the holocaust.  My grandmother ran a safe house in Warsaw and a man who was by repute her husband and my grandfather was murdered at Auschwitz.  I was not raised to remember Japanese slave drivers on the Burma Railway, comfort women or Nanking – and so an unapologetic Japanese blog is amusing whereas an unapologetic Nazi one would be offensive.  Propaganda about Asian co-prosperity zones was pure propaganda.  The truth was that much of occupied Asia was a Japanese rape-and-plunder zone.   

I can’t envisage a German leader visiting a memorial to Nazis hung after Nuremburg whereas Japanese Prime Ministers make a show of going to Yakasuni.  But then that particularly rabid Japanese nationalism survives whereas the German equivalent is dead.  Denazification is a word that appears in many modern history books (see for example Tony Judt’s excellent history of Post War Europe).  I do not know the equivalent Japanese word…

That said – this is an economic/finance blog and not one to inclined to debate with a heartless denier of Japan’s less-than-glorious Imperial history.  And I should outline the good-bit of the Meiji industrial system.  I have done it before in a stylistic history of industrial Japan (one that a few Japanese economic professors endorsed as simplistic but essentially accurate).  I will just repeat the key bits modified to fit the narrative (but you can find the original here):

First however I need a stylised history of Japan starting with the arrival of Commodore Perry’s black ships in 1853.

Before Perry Japan was almost autarkic. There was a relatively weak central government and about 300 “han” – being relatively strong feudally controlled districts. The Emperor did not effectively speak for Japan when Perry came in, guns blazing.

The Meiji Restoration changed this. Japan was reformed as a centrally controlled empire – with a ruling oligarchy ruling through the Emperor who claimed dominion over all of Japan. The “han” were combined to form (75?) prefectures with a governor appointed centrally.

The view of the new oligarchs was that Japan would get rich through (a) industrialization and (b) unequal trade treaties to match the unequal treaties imposed on Japan by Perry et al. To this end they invaded Korea and started the military industrialization that ended eventually with World War 2. There were major wars in Korea and against an expansionist Tsarist Russia (especially 1904-1905).

Ok – that is your 143 word history of Japan from Perry to World War 2. Like any 143 word history it will leave out important stuff. I just want to focus on how this foreign policy adventurism was financed.

Financing Japanese expansionism - and that financial system until today

Firstly it is simply not possible to expand heavy industrialization of the type required by an early 20th Century military-industrial state without massive internal savings. Those steel mills had to be funded. And so they set up the infrastructure to do it.

Central to this was a pattern of “educating” (the cynical might say brainwashing) young girls into believing that their life would be happy if they had considerable savings in the form of cash balances at the bank (or post office) or life insurance. Japanese wives often save very hard – and are often insistent on it. The people I know who have married Japanese women confirm this expectation survives to this day.

Having saved at a bank (and for that matter also purchased life insurance from an insurance company loosely associated with the bank) the financial institutions had plenty of lendable funds. 

The financial institutions by-and-large did not lend these funds to the household sector. Indeed lending to the household sector was mostly discouraged and was the business of very seedy loan sharks. To this day Japan has a relatively undeveloped credit card infrastructure with very high fees. These high fees are a throwback to the unwillingness of the institutions to lend to households. [The Japanese establishment are willingly forcing these consumer lenders to bankruptcy as any Takefuji shareholder will tell you…]

Japanese banks instead lent to tied industry – particularly heavy industry. It was steel mills, the companies that built power plants, the big machine tool makers. Many of the companies exist today and include Fuji Heavy Industries, Kawasaki Heavy Industries and other giants such as Toshiba. Most of these super-heavy industrials were tied to the banks (and vertically integrated) called Zaibatsu.

Now steel is a commodity which has wild swings in its price. Maybe not as ordinarily wild as the last five years – but still very large swings. And these steel mills were highly indebted to their tied banks. Which meant that they could go bust.

And as expected the Japanese authorities had a solution – which is they deliberately cartelized the steel industry and used the cartel (and import restrictions) to raise prices to a level sufficient to ensure the heavy industry in question could service its debt.

The formula was thus (a) encourage huge levels of saving hence (b) allow for large debt funded heavy industrial growth. To ensure it works financially (c) allow enough government intervention to ensure everyone’s solvency.

When the Americans occupied Japan their first agenda was to dismantle the Zaibatsu. They were (in the words of Douglas McArthur) “the moneybags of militarism”.

Like many post WW2 agendas that agenda was dumped in the Cold War. The owners of the Zaibatsu were separated from their assets and some cross shareholdings were unwound – but the institution survived – and the Zaibatsu (now renamed Keiretsu) remained the central organizing structure of Japan. Dismantling Japan’s industrial structure did not make sense in the face of the Korean War.  The pre-war Zaibatsu had more concentrated ownership than post-war Keiretsu. 

Unlike in Germany there was no real attempt to dismantle the establishment ideology.  Douglas McArthur may have appeared to tower over the Emperor in the famous photo – but Hirohito was not tried as a war criminal – even though he would certainly have been hung if put to a fair trial. 

The point is that it was the similar structure before and after the war – and it allowed massive industrialization twice – admittedly the second time for peaceful purposes.

Now the system began to break down. Firstly by 1985 steel was not the important industry that it had been in 1950 or 1920. Indeed almost everywhere you looked heavy industry became less important relative to other industrialization. By the 1980s pretty well everywhere in the world tended to look on such heavy industries as “dinosaurs”. This was a problem for Japanese banks because they had lent huge sums to these industries guaranteed by the willingness of the State to allow cartelization. You can’t successfully cartelize a collapsed industry.

Still the state was resourceful. Originally (believe it or not) they opposed the formation of Sony – because they did not know how to cartelize a transistor industry. Fifteen years later the French Prime President would refer to his Japanese counterpart as “that transistor salesman” and he was not using hyperbole. Still the companies coming out of new Japan – technology driven mostly – did not require the capital that Japan had in plentiful supply. If you look at the companies coming out of Kyoto (Japan’s Silicon Valley) they include such wonders as Nintendo – companies which supply huge deposits to banks – not demand huge funds from them. [Incidentally in typical Japanese fashion the biggest shareholder in Nintendo is Bank of Kyoto. Old habits re-cross shareholdings die hard.]

The banks however still had plenty of Yen, and they lent it where they were next most willing – to landholders. The lending was legion and legendary – with golf clubs being the most famous example of excess. [At one stage the listed exchange for golf club memberships had twice the market capitalization of the entire Australian stock exchange.]

Another place of excessive lending was to people consolidating (or leveraging up) the property portfolios of department stores. Think what Bill Ackman plans to do to Target being done to the entire country – and at very high starting valuations.

Meanwhile the industrial companies became zombies. I have attached 20 year balance sheets for a few of them here and here. These companies had huge debts backed by dinosaur industry structures. They looked like they would never repay their debts – but because they were so intertwined with the banks the banks never shut them down. As long as interest rates stayed near zero the banks did not need to collect their money back from them. As long as they made token payments they could be deemed to be current. There was not even a cash drain at the banks at low rates. The rapid improvement in the zombie-industrial balance sheets in the past five years was the massive boom in heavy industrial commodities (eg steel, parts for power stations etc). Even the zombies could come alive again…  only to return to living dead status again quite rapidly with this recession.

Anyway – an aside here. Real Japan watchers don’t refer to the banks as zombies. They refer to the industrial companies as zombies.  (Although most of the Western blogosphere does.) 

Most of the banks had plenty of lendable funds and a willingness to lend them. They did not have the customers – and the biggest, oldest and most venerable of Japanese companies were zombies. So were the golf courses, department stores and other levered land holders. I get really rather annoyed when people talk of zombie banks in Japan – it shows a lack of basic background in Japan.

Note how this crisis ended.

1). The bank made lots of bad loans – firstly to heavy industrial companies and secondly to real estate related companies (golf courses, department stores etc).

2). The loans could not be repaid.

3). The system was never short of funding because the Japanese housewives (the legendary Mrs Watanabe) saved and saved and saved – and the banks were thus awash with deposit funding.

4). The savings of Mrs Watanabe went on – indeed continued to grow – with zero rates.

5). Zero rates and vast excess funding at the banks made it unnecessary for the banks to call the property holders and (especially) the industrial giants to account for their borrowings. Everything was just rolled.

6). Employment in the industrial giants of Japan thus never shrank (Toshiba alone employs a quarter of a million people). The economy continued to sink its productive labour force into dinosaur industries and dinosaur department store chains.

7). The economy stagnated – but without collapse of any of the major banks and without huge subsidies to the banking system. [The number of banks – mostly regional banks – that failed during the crisis was not large given the depth of the crisis.]

They system is very good at funding heavy industry – but it is less entrepreneurial than you would want in a modern economy.  The best Japanese tech companies tend to come from Kyoto (which is outside the Tokyo establishment).  Toyota – what I think is Japan’s finest company – is in Aichi prefecture – well away from Tokyo.

Anyway – this industrialization structure worked brilliantly and the Koreans copied it (with radically different banking outcomes).  It however is less good at low-capital but high-innovation industries.  The tech-boom was an American phenomenon – encouraged and nurtured (for better and for worse) by the American system.  It was not nurtured by the Japanese establishment though Sony and Toyota most certainly are by now…  Many of the most innovative Japanese companies started away from the bosom of the establishment – though the establishment later embraced them.

The Japanese industrial structure and the ideology that drove it produced industrial goods really well – and innovation based goods less well.  But – the system works. 

Economic stagnation is not the greatest of Japan’s problems.  Many a UK visitor has gone to Japan and observed that if that level of economic activity (and living standards) represents stagnation they they wanted some of it. 

The real threat to Japan is demographics.  Mrs Watanabe saved and saved and had fewer than two children.  (Children are expensive – especially housing them in a place with land values where they were in the 70-90s).  So an aging population became a dramatically aging population.  Here is a projection of the median age of population in three OECD countries.  Australia is an aging population offset by immigration, Italy an aging population exacerbated by emigration and Japan is a result of Japan’s military industrial policy and the booms and busts it has caused.  The chart is from the Australian Treasury intergenerational report – but the numbers are broadly accepted:



Japan will have a median age of about 55.  This means that the vast bulk of the Japanese population (or more precisely Japanese women) will be well beyond child-bearing age and given low fertility rates anyway (below 2.0 per woman) the population will crash.  That is more-or-less baked in.  Simple equation – most the women past child-bearing age and very low fertility amongst those who bear children anyway.

There is a solution – immigration.  There are an endless supply of well educated and skilled young people (mostly) from the subcontinent who would happily move to a developed country.  There are more than a few from China too.  Australia will import them.  Ampontan rhetorically asked where I expected them all to fit into Japan?  Well that is easy – with a demographic like that I expect them to fit into the slots left by the dying warriors of Japanese industrialization.

If Japan does not do it then aging and death is inevitable.  The working population will be stuck looking after and funding the huge numbers of retired.  Japan’s industrial growth – now anemic – will collapse entirely with its population.  The great Japanese industrialization experiment will walk slowly into the setting sun aided by a walking stick.

There is of course an alternative which is modest levels of immigration.  New immigrants will – like it or not – be Asian – mostly from the subcontinent.  Over time they will also include many Muslims.  The Japanese will have to accept – as Australians have accepted – that their children will breed with these people.  As a white Australian I have fully accepted that it is likely as not that my grandchildren will arrive as little brown babies.  I do not have a problem with that. 

But Japan is a country where they won’t let their hookers sleep with foreigners because – well they are foreigners.  (It was that story in this post that got Ampontan all upset with me.)  But it does not have to be that way.  There can eventually be an Asian co-prosperity zone in Japan – it will be with Japanese children and other Asian children and eventually their joint grandchildren.  The Meiji racist ideology does not have to end with a walking stick – it can end in a truly multicultural society that will lead Japan onto greater things than the original modern revolutionaries of the Meiji era could ever have imagined.





Tuesday, February 9, 2010

A Morphology of the Sin of Bad Lending

Grace – it is said – refers to a Single State only – whereas Sin refers to a multitude.  Good Lending – like a State of Grace – is hard to maintain – but easy (and dull) to analyze if maintained.  But – at the moment – I am studying US regional banks who are – to extend the analogy – no longer in a State of Grace.

Bad Lending however – like Sin – comes in many forms.  There were bad mortgage loans with nothing down, no proof of income, no proof of assets and brokers incented to fraud.  And there were milder Sins (with much lower loss rates).  With commercial lending there were also a multitude of Sins – from lending to real-estate subdivisions in the desert (in towns with no market for the end product) to a commercial loan to a auto-mechanic to own their property.  The desert housing development loans will probably default and average severity on such loans is above sixty percent.  The auto-mechanic is probably underwater on the loan – but may have a personal guarantee and will not default even if they went delinquent as the economy soured. 

Most bloggers are righteous people – and they bang-on about the fall from Grace.  Get over it – we are not Virgins any more.  What I am trying to compile – and I want my readers to help – is a Morphology of the Sin of bad commercial real estate lending.  So I am begging for comment: I would like feedback on the state of debauchery in various markets.  Some things I am observing are surprising me.  Desert state vacant housing lot loans are – unsurprisingly – still a bust.  But much to my surprise some Midwest banks have reported that they can now sell (for non-trivial money) vacant housing land from their real-estate-owned inventory.  In that lies some redemption.

So consider this a request for recent anecdotes – by region and by commercial real estate class.  Like some good Minister I want to understand your Sin...

Saturday, February 6, 2010

Globalizing the Australian Intergenerational Report – thinking about long term sovereign solvency in Australia, the US, New Zealand, Japan and China

In the financial crisis governments seemingly regularly guaranteed their banks to stop their banks from collapse. This worked in preventing mass bank collapse and a consequent Great-Depression-Event. But it transferred the risks to government. Since then yield on bank debt has tended to converge with yield on the domestic sovereign. And the financial crisis has morphed into a sovereign debt crisis.

The crisis-of-the-moment is Greece. Greece runs a fiscal deficit which is a low teens percentage of GDP (a couple of points worse than America) but unlike America it does not control its printing press* (Greece uses the Euro) and (believe it or not) its political system looks more dysfunctional than the US.

I do not want to blog about Greece. I blogged about the issues with Spain and the issues are the similar. It is just that Greece was first to the breaking point.

This post is not about short term sovereign solvency. Short term a sovereign is insolvent when it can't find anyone to lend to it and it is seemingly impossible to pick the moment of panic. People have talked about Portugal, Italy, Greece and Spain (the so-called PIGS) being insolvent for many years. It is not as if the collapse of one was unlikely. [I thought it would be Spain first – but hey – I was wrong...] Today people add Ireland to the list (since it guaranteed huge banks) and talk about the PiiGS. If you picked that it would be Greece first and that it would be 2010 that the crisis happened then you are better a the short term stuff than me. (Italy always struck me as a marginal member of the PIGS but I could be wrong about that too.)

This is a post about long term solvency – the things that we do now that determine whether we have an economic crisis in twenty or thirty years. In that sense this is a post about Australia, the US, New Zealand, Canada and Japan and possibly even China. The PIGS have rolled their dice. Most the rest of us are still shaking the dice in the tumbler.

I will start with the Australian Treasury Intergenerational Report – a report required of the Australian Treasury every five years. Whilst the projections (including economic growth projections for forty years) are to be taken with a grain of salt the basic tradeoffs are the ones detailed in the report. Let me summarize quickly:

Australia – like much of the developed world – has a demographic problem from aging baby boomers. Our dependency ration (the ratio of people of non-working age to working age) is increasing and likely to increase dramatically. Moreover the dependent group will shift from young people (who impose schooling expense) to old people who impose nursing home and medical expense. Old people generally cost more than young people and as we live in a country with (semi) socialised medicine that expense is likely to fall (heavily) on the Federal Budget.

Australia's national budget will thus become a little tighter each year. [This is in contrast to the glory days of the 70s and 80s where economic growth and baby boomers going through their years of peak productivity made the budget just a little easier to balance every year.]

The net effect is that something has to give. Either

(a) Australia cuts benefits to old people (and with socialized medicine that means deciding when you turn the respirator off) or

(b) Australia sharply increases taxes or

(c) Australia sharply change the mix of our population by having more babies or importing more people through immigration.

Some smaller things can work at the margin. For instance Australia can change ages at which people qualify for various pensions. This should keep old people in the workforce longer and hence reduce the dependency ratio. Also – as the working age population become the scarce factor wage levels for those still working should rise. The higher wages will attract some older people back into or into staying in the workforce. However these are effects are likely to be too small to overwhelm the main thesis.

With a good size baby boom and old people driving government expenditure (something that is certainly the case in the US) the problem is real and will remain intense.

The problem could be solved with very rapid economic growth – but the Australian Treasury models a quite high real rate of growth and Australia still has a problem. If economic growth were to decline to Japanese levels the fiscal imbalance by (say) 2030 would become very intense. [Australia could get very lucky with sharp increases in commodity prices. That sort of luck is possible because Australia is small – however that sort of luck will not bail out the US.]

By far the easiest solution is (c) - changing the mix of the population. Societies are not good at rationing health care expenditure for the elderly and there are limits to the ability of smaller open economies (such as Australia) to keep increasing taxes. [Though in my view a little of both these things will happen.]

Everyone that matters in Australia knows that the easiest solution is (c). Peter Costello – Australia's last Treasury (in the US context read Secretary of the Treasury) knew this and advocated women having three children – one for mum, one for dad and one for the country. **

Costello had his eye on the future fiscal balance (as he should) but there is an undertone of racism in his pronouncement. Australia's population is a matter of choice because there is an endless supply of skilled and/or needy immigrants who want to live in Australia and the main case for having babies over importing people is that the babies are probably white.

Anyway the core way that Australia is balancing the long term budget is through immigration. If you want to solve the problem that way you need very large immigration now so that in 30 years the you get the right dependency ratio. That – for better or for worse – is what the government is currently doing. Australia's immigration rate is massive – roughly 1 percent of the population per year. That level of immigration will have Australia on the path to a 50 million population (currently 21 million) by the year 2050. Australia will – in resource use and population over fertile areas – look about as crowded as the US.

Obviously if Australia chooses to go the high population path (and there seems little doubt that Government is adopting that path) then environmental pressures (of almost all kinds) will increase sharply. The Report focuses on greenhouse gas pressures (population growth will make it harder for Australia to meet any given emissions target) however it could focus on almost any environmental amenity. Dr Henry (the Secretary of the Treasury) is known to be personally in favor of rationing Australia's limited water with pricing – but also said to be in favor of replacing petrol taxes with congestion taxes on Australia's (and particularly Sydney's) overcrowded roads. Whatever – the high population path will increase pressure on Sydney – a city that is becoming famously dysfunctional with poor public transport and congested road systems.

By going the high-population route Australia replaces intergenerational financial pressure with a litany of environmental and resource use problems.

But by going the high population route the government can remain solvent even with the baby boom. The government is currently running too high a deficit – but most of that is temporary. And the longer run seems to work (albeit with environmental costs described).

The same position sort of applies to the US. Medicare (the US version of single-payer socialized medicine) ensures that an aging population will put enormous stress on government finances. (Whereas US Social Security funds are nearly solvent the Medicare equivalent is unambiguously bankrupt.) However with enough economic growth and some population growth the US will get through. The starting budget position in the US is considerably worse than (say) Australia – but it is only really worse by the cost of the Bush tax cuts, the excess Bush-and-terrorism induced military expenditure and maybe one smaller tax hike. None of those would be hard to achieve with a functional political system (though it is becoming increasingly hard to argue that the US has a functional political system)...***

On the plus side, the US – more than almost any other country – has the sort of economic system that might produce the innovation-led economic growth that would help solve the problem. Australia could luck into a solution (through commodity prices). But the US has – I think – a higher background level of innovation. Not enough to solve the problem entirely – but probably enough that the current level of immigration is almost enough. Things have to give – but with functional politics solutions could be found.

On the minus side – the US with a much larger population than Australia – would require many more immigrants to adopt the population growth solution. Also the US seems very poor at pricing and protecting environmental amenity – and that is in my view a key part of the population growth solution.

New Zealand – a country where I used to be a senior Treasury official – is alas long run insolvent by any count. Its population doesn't grow much even with immigration – and net migration has resulted in sharp negative productivity per head of population as skilled workers tend to move (to Australia) and unskilled workers are imported. The tax and welfare system also does not add up. [New Zealanders are paranoid about Australia as the response to this joke showed. However in truth New Zealand will one day beg to be the seventh Australian state and we will refuse. Also the Treaty of Waitangi is deeply inconsistent with the Australian sensibilities and (I think) law– but that is the subject of another post...]

Far more serious than New Zealand is Japan. They too have a baby boom – but unlike the either Australia or the US they have very limited immigration. The underlying reason is racism. Japan is a deeply racist country.

I know I am going to get into trouble for saying that – so I will defend it. I was walking through downtown Fukuoka. The area my hotel was in looked like a red-light district. I peered into a brothel (which the Japanese call “soaplands” and which was illustrated with the pictures of a Turkish bathhouse). The doorman rushed out – and almost violently – and in broken English – said “ no foreigners”. Brothels that will not take your money because you are the wrong race set a new standard for racism. A country that does that is hardly likely to solve it's demographic problem with high immigration.

Now in all of this I did not mention the country with the largest forthcoming shift in dependency ratio. That country is China – and the explosive ratio change (which will occur later than the US) was self-induced – a product of the one-child policy. China is – of course – not going to solve that problem by massive immigration. China is too big – and even with a population crash will remain too crowded. The forthcoming population crash in China is one reason why Chinese elderly can never get the sort of Western socialized medical care or old age social security that people in Australia just expect. But there is something to make the Chinese budget balance in their forthcoming population crash. And that is that the Chinese – more than all other people – have accumulated vast piles of claim-checks from rest of the world in form of Treasuries and direct ownership of equities and other property. One day they will need to cash them to produce what their aging population with its high dependency ratio cannot.

The economic problem of our time is – as much as anything – excess Chinese savings and how the world deals with them. I blogged about that – when – to slightly exaggerate the point - I blamed the financial crisis on the Chinese one-child policy. The economic problem of a future time will be huge Chinese dis-saving as they deal with a massive increase in the dependency ratio. Unlike Japan however the sovereign will not go insolvent because unlike a Western country the Chinese will never get committed to state support of the elderly.


Post notes:

*One of my German friends – a well-to-do guy worried about the future of Europe – notes with alarm that one of the printing presses for the Euro is physically located in Greece. He seriously believes that Greece –through control of the press – could blow apart the whole of the European economy. I have no opinion on this – other than to note my friend is nervous about European monetary zone expansion.

**Just so people get the titles right – the Treasurer in Australia is the senior political appointment in economic policy – the equivalent of the Secretary of the Treasury in the US or the Chancellor of the Exchequer in the UK. The Secretary of the Treasury in Australia (Dr Ken Henry) is the senior public servant in the area of economic policy. There is no obvious equivalent in the US but the Permanent Head is the equivalent in the UK.

***I note that almost everything I suggested to balance the budget is a tax hike. Get used to it. True deficit hawks know that you can’t fix a US budget without either large tax hikes and/or large cuts to defense and benefits to old people. There is not enough “waste” or “discretionary expenditure” to solve the problem any other way. If you are prepared to cut defense and turn the respirator off on medicare expenses then you can do with lesser tax hikes. But unless you are prepared to deal with such things you are not really a deficit hawk – more a deficit peacock.


Finally a little post-script is required. The PIGS (or is it PIIGS) are bundled together but they look different. Greece is a fiscal disaster area. Spain looks like one now (running a large government deficit) but it has not always been one. Spain looks more like Latvia - a fixed exchange rate and a profligate private sector. Bundling them together oversimplifies the problem.

The one thing they all have in common is a fixed (Euro) exchange rate and large current account deficits.

A second postscript: Ampontan (Bill Sakovich) writes a blog about Japan which I have been (irregularly) reading for some time. He obviously has not been reading me as he refers to me as "some Australian blogger". He suggests I should observe Australian racism (something incidentally I have commented on several times on this blog). He uses the usual glass houses line.

The question in this post was whether Japan would be willing to import anything like enough people to offset its demographic crash. That looks unlikely to me. Japan is famously xenophobic (a word with lesser connotations than racist) and that xenophobia has manifested itself over very long periods of Japanese history. That said the BBC has suggested that attitudes to immigration are beginning to change for reasons outlined in this post - and if Bill Sakovich wants to take up attitudes to immigration I am very willing to listen as he knows far more about Japan than me. (He is an immigrant in Japan so his knowledge would be detailed and specific.)

Finally if you read Ampontan he lets you know his viewpoint - check out his "what readers say" section...

Friday, January 22, 2010

What is proprietary trading?

Somewhere in the debate about prohibiting proprietary trading in certain banks we will need a decent understanding of what proprietary trading is.  So I thought I would illustrate the difficulties.

Imagine a suburban bank which takes deposits and makes mortgages. 

The deposits are primarily at-call and pay a floating interest rate.  Legally they bank has overnight money – and if interest rates rose then the next day the customers could (in theory) all withdraw their money and/or ask for a higher interest rate.  The bank does not really know what interest rates it will be paying next week let alone in three years. 

In reality the customers of the bank are sticky.  There is no way that everyone will pull their money in response to a short term rate rise.  The funding of the bank is of uncertain duration

On the asset side the bank lends on fixed rate but refinanceable mortgages.  The bank really has no idea how long the mortgages will last.  If rates go down they might all be refinanced tomorrow.  People might just sell all their houses and repay their mortgages.  In reality however the customer are likely to be somewhat sticky.  On the asset side the bank has uncertain duration.

This plain vanilla bank has interest rate risk.  If rates rise their funding costs will rise relative to their asset yield.  If rates fall their assets will refinance.  Their funding cost might also fall – but at the moment the funding cost seems pinned by the zero-bound. 

Some hedging of interest rate risk here seems entirely sensible.  Banks (and more often S&Ls) have failed in the past because they failed to hedge this sort of interest rate risk.  However as both the assets and liabilities are of uncertain duration there is no way of knowing just how much hedging is required.  There is a choice here – it is a proprietary choice (in that the bank will trade off hedging costs against profits).  And there is no easy way to legislate that choice away.

I have even seen a bank swap its fixed rate subordinate funding (fixed rate preferred shares) into floating rate and call it a hedge.  That looked like proprietary trading to me as it earned a profit (the yield curve was steep) and the bank was playing the yield curve very heavily in advance of that hedge.  The so called hedge increased the risks the banks faced if short rates rose.  The auditor signed it off as a hedge.

If the auditor, the bank and I disagree as to what is a hedge in the simplest of examples then I have no idea how we are going to find a legislative solution in complex examples.

Real prop trading is like pornography.  I know it when I see it.





Wednesday, January 20, 2010

The sweetest usurious bastards

A long while ago I did some work on Rent-A-Center – a company in the difficult and arguably immoral business of “rent-to-buy”.  Rent-to-buy is how you buy a TV or a couch on credit when you do not even qualify for a credit card.  The business model is disarmingly simple.  You have shops with 200-300 stock keeping units (running the shop is not the business).  They sell things on a very simple mark-up basis.  The advertised price of the thing (a TV, a couch) in the shop is 100 percent mark-up on the invoice price.  However the real price is 48 monthly (or more realistically 208 weekly) instalments based on recovering 400 percent of the invoice price.  If the TV wholesales for $1000 then the monthly instalments add to $4000.

The shopkeeper is not remunerated based on the sales of the shop – but rather how well they maintain “credit”.  These are RENTAL contracts – so that the ownership of the TV does not pass on “purchase” but only after the payment of the last “rental payment”.  This gives the shopkeeper the right to repossess the TV after a single missed payment.  And if the shopkeeper is savvy he will turn up to collect the couch during the Superbowl (when he can be reasonably sure his customer and friends are sitting on it drinking beer and can probably scrounge up the cash to keep it).  This differs sharply from the credit card industry – the credit card company has no charge over the assets sold to you on credit card.

Default as such does not exist.  If you don’t pay your rental payment you lose possession of the couch – but you have not defaulted on any legally binding credit agreement.  The store will simply sell the couch again trying to recover the amount that remains outstanding on the rent-to-buy contract. 

Whatever – this looks like usury – and some of the “contracts” clearly had interest rates above 200 percent per annum.  They made the treadmill of credit card debt look mild.  Regulators have been taking pot-shots at Rent-A-Center for a while but without much effect.  Here is an example

Still we are talking about regulating credit cards – and nobody much seems to mention Rent-A-Center despite the far more usurious nature of the business. 

I went to visit this company determined to short the stock.  I did not.  The company looked like a money-machine even if it appeared to breach the intention of pretty well every consumer protection law I had ever seen.  I could not see what-if-anything broke the model.  Moreover the customers understood just how usurious the business was.  It was not like credit cards where the hidden overdrawn and late fees – things the consumer was suckered into – were the driver of the model.  This was honest usury. 

But it was the nature of the people I met that most stuck in memory.  This was a business where if Jesus was alive he would pull down the Temple over them.  It was precisely the sort of business the bible rails against.  It offended my decency.  But the people were lovely.  I met management and a store owner – and – frankly they seemed exactly the sort of people you would like to have Friday drinks with.  I liked them.

This alarmed me of course – because I expected them to be scum.  And maybe they are – but I couldn’t tell.  They were the sweetest usurious bastards (notwithstanding allegations in consumer complaints about the company).

I know someone who lost a lot of (client) money in a famous financial fraud.   He met the principal and described him as “one of the nicest guys I have ever met”.  Indeed the disconnection between how people seem and what they do is central to many frauds – and indeed to much of the world.

Warren Buffett claims in his letters to have a judgement of people as good as his judgement of businesses.  [He thinks he has got businesses wrong more often than the management that sold them to him.]  That is truly amazing and perhaps the most under-recognised skill of Buffett.

He has however given us a few clues as to how he does it.  One guy he really liked was late to a meeting because he spent time looking for a parking meter with unused time.  More generally he likes people who are cheap, smart and opinionated.  Its just that when I am like that nobody invites me to dinner let alone describes me as “one of the nicest guys I ever met”. 

Alas the perils of personal judgement in business.

Tuesday, January 19, 2010

Market (and taxpayer) sensitive redaction

Being a fund manager involves many skills.  One of the rarer ones is trying to work out what redacted government documents say.  The Department of Homeland Security has just completed a large no-bid contract to purchase Relenza – a drug made by Glaxo.  It is justifiably a no-bid contract because whilst there are competing drugs they have resistance problems.  Relenza has a monopoly over its drug protected by patent.  A no-bid contract – even of large size - makes sense. 

The Department of Homeland Security have released some details of the contract – but the key lines are redacted.  In particular the cost is redacted, as are the number of doses and even the names of the authorising officers. 

The blacked out number below is highly market sensitive.  Help.  Please.




Finally I am just a gambler on the stock market.  My concerns are private.  However you should also be concerned.  This is taxpayer money.    This is a no-bid contract with limited transparency.  I can’t think of any good reasons for blacking out these numbers.  If you thought the no-bid contracts in Iraq were a concern (and I did) then you should also consider this redaction a concern.  At least in the Iraq case there might have been a security reason for redacting the key information.  Here I can’t think of any reason other than it is standard practice for the Department of Homeland Security.




Wednesday, January 6, 2010

Astarra: Don't blame the regulator

Here is an article which blames the regulator for allowing Astarra to go on as long as it did. It is not the only such article.

The article praises the seemingly heroic blogger for uncovering the problems.

Well the article is flat wrong.

1). The regulator it seems has acted with the greatest speed and integrity in uncovering this mess. I have no complaint whatsoever about the regulator.

2). Whilst my letter was the proximate trigger for the discovery of the problems at Astarra I claim no special genius. Sure I worked it out - but it was not complicated. Moreover a reader of this blog tipped me I should look.

I used not to have a high opinion of the Australian regulator - but on this instance I have no complaints whatsoever.

Blaming the regulator in this case is just lazy journalism.


Saturday, January 2, 2010

A dark privatised social security story: Astarra, the missing money and how examining a fund manager owned by Joe Biden’s family led to substantial regulatory action in Australia

In Mid September I wrote a letter to Australian regulators which detailed my concerns about a fund manager in Australia known as the Astarra Strategic Fund – formerly known as Absolute Alpha.  This letter resulted in regulatory action against a cluster of related funds (almost twenty), however my letter was almost entirely about only one fund in the group.  I did not make any major suggestions in the letter about other funds in the Astarra complex.  My involvement was detailed today in the Sydney Morning Herald (see stories here, here and here, with the first story on the front page below the fold).  There was no genius in my letter – everything could be found (fairly easily) on the internet – and the original tip-off came from a reader of my blog – who noticed links with a story I wrote up in March 2009.

For reasons I will explain below this fund collapse is qualitatively different and more serious than any previous fund collapse in Australia and that the Australian press have not yet detailed why this one is important.

The letter argued that it was possible that the Alpha Strategic fund was a fraud.  I did not have the ultimate proof of that so I did not make my letter public and will not do so yet.  However there is a way of proving that a fund is not a Ponzi – and that is to “show us the money”.  If the assets are really there then it should be possible to convince regulators of that fact by showing them the assets.  If Bernie Madoff had been asked to prove the existence of all the money he supposedly managed then he would have been caught because he could not comply.  An honest fund should be able to comply fairly quickly – sometimes within 20 minutes – but almost certainly within a week.

The Australian regulator asked Astarra to show them the money – and to date that has not happened.  That does not mean that the money is not there.  It is however suggestive, especially as approximately three months have elapsed whilst regulators and fund administrators have tried to “value” the fund assets.  Indeed the difficulty of valuing assets was sufficient for the regulator to cancel licenses and to place the funds in the hands of administrators. 

At a meeting last week the (regulator appointed) administrator Neil Singleton said that with respect to one fund the only proof of assets they have is a letter from a Virgin Islands company stating that the fund (presumably the Strategic Fund) held 118 million in interests in other hedge funds.  This letter did not detail any interests held and gave no mechanism for confirming that statement.  However the administrator has not stated that the assets are not there – so – like the regulator and the administrator I too will leave that question open.  The press simply says the details as to the  $118 million are “sketchy”.

Background to the Australian privatised social security system and where various Astarra entities fit in to that system

Australia has a privatised social security system.  Much of the money is with large honest players run in a nearly index manner and which have cut fees to relatively low amounts.  Those funds are run by Australia’s otherwise dying trade unions.  Privatised social security (which Australians call “superannuation”) has been the saviour of the union movement in Australia – and – through their control of funds the unions now are within a breath of control (though generally do not vote their control) of a large proportion of Australia’s industry.  

The money that is not with the union funds is in a rag-tag of funds run by large banks (for example Colonial’s wraps owned by Commonwealth Bank) or with independents and/or self-managed funds.  The money in those funds (wraps) is let to a large number of sub-funds – sometimes large, sometimes boutique funds managers who live off the large and mandated fund flows from our “superannuation system”. 

The boutique funds range from very good to awful and shonky.  Indeed I think the best no load mutual available anywhere in the world is in Australia (I used to work for the manager).  But there have been some flea-bitten dogs sold to Australians.  One thing is for sure – you cannot do privatised social security without very good fraud protection because that amount of money from unsophisticated investors is a truly massive honey-pot for scammers and flim-flam artists.  As an aside, possibly the worst thing about George W’s privatised social security proposals was that they would be supervised by Cox’s toothless and supine Securities and Exchange Commission.

Trio Capital (the “mother-ship” of the Astarra entities) is a “wrap provider” – meaning a  financial planner might use Trio to invest all their client’s retirement money.  The Astarra Strategic Fund is an individual fund under that wrap.  My letter was about the Strategic Fund – and the collapse of the Strategic Fund would not be qualitatively different from the collapse of any of about six funds that collapsed during the financial crisis.  The financial planner might have put her clients in six (or more) funds – and the loss of one of them is a blow – but in no way imperils the system. 

But (somewhat surprisingly) the entire Trio edifice has been placed with administrators – which means that the end-beneficiary has had their entire retirement savings blocked.  In some funds there is not even enough cash to pay pensions to retired people for the month of January.  Some pensioners are not having their current payments blocked but there are doubts about future payments.  [Details as to who will receive pensions for the month of January can be found on Trio’s website.]  This is qualitatively different from earlier fund failures because it is a failure of every fund that a person might have invested – a failure of the core asset protection mechanism in the Australian system.  [I cannot work out why the otherwise sensationalist Murdoch press has not written a single story on this yet.  All they need to do is find a cluster of pensioners who will not receive their pension this month and who will have no idea as to why.]

How I came to write my letter to regulators

Six months ago a reader pointed me to a fund of hedge funds (called Absolute Alpha) based in Australia. 

I looked – and within forty minutes I became very concerned – but could not prove harm to the fund’s investors.  I tipped off the Sydney Morning Herald.

The journalists at the Herald worked hard at the story but alas they too could not prove harm.  Indeed a major bank misled them as to whether the assets were in (their) safe custody.  The bank confirmed the assets were in custody – a statement they have now withdrawn.  Obviously with a reputable third party vouching for the assets any hypothesis of harm was going to be hard to sustain.  The Herald published nothing. 

I however remained suspicious – but could not easily do anything.  For there to be something desperately wrong either the bank had to be a party or grossly negligent as to their custody of the assets. 

Absolute Alpha was a boutique fund manager loosely associated with – and partly owned – by a superannuation wrap provider called Astarra.  Astarra is now called Trio.  The wrap provider did all the superannuation compliance and in turn (claimed to) invest funds with other fund managers – mostly reputable managers.   The relationship between Trio and some of the funds in which they were supposed to invest is complex

The amount of money in Absolute Alpha was probably under 100 million.  There were plenty of things that did not look right – but I did not think there was much I could do about it.

So I let it go – though I did not forget about it.

Later I tried to log into Absolute Alpha’s website and it was dead.*  This (falsely) indicated my worst fear. 

Again I alerted the Herald. 

Alas it was not so simple.  Absolute Alpha it seems had taken over the funds management of all the money in the Astarra wrap.  They had renamed themselves Astarra.  Astarra later renamed itself Trio.  Astarra’s website boasted of a billion dollars in funds under management. 

This was potentially very bad news.  Australia is about a twentieth the size economically of the United States – so $1 billion in funds under management was the equivalent economically of $20 billion in the US.  If my bad-case was true we had a Madoff (at least proportionately) in the making.  [Now the funds have been taken into administration the official numbers are about 40 percent of the numbers boasted on the website.  The danger was not quite as big as I thought it was.]

Anyway I wrote a letter to the Australian Securities regulator (ASIC)  laying out all my concerns and (implicitly) the method for testing my concerns were false.  [I sincerely hoped I was wrong – and hoped the regulator would prove me incorrect by identifying and valuing the assets.  I still sincerely hope all the money turns up in the British Virgin Islands.]

I have heard lots of criticism of the Australian Securities regulator.  However on this important matter their actions were exemplary.  They did what the SEC could not do and act on a “Markopolos letter” within weeks.  They did what the SEC should have done when they investigated Madoff – and attempted to confirm the existence and value of the assets. 

Three weeks later ASIC put a stop on all Astarra funds – prohibiting new money going in or any moneys going out.  They acted to protect investors.  This showed responsiveness that Mary Schapiro and American regulators can only aspire too.  The Sydney Morning Herald finally published a cryptic story on the front page.  The Sydney Morning Herald article did not suggest – and I did not reasonably think – that the problems extended further in the Trio edifice.

A few months have passed and eventually all major Trio entities were placed in administration by the superannuation regulator.  They will probably be liquidated.  The funds have been passed to (reputable) private sector “forensic accountants” – the choice of accountants being made by the securities and superannuation regulators.  They are the sort of liquidators you use when (as stated by the regulator in their press release) you are not “able to satisfy concerns regarding the valuation of superannuation assets”.

The whole mess will be explored by the accountants -  and if the assets are not there then the matter will played in court – at which point I will publish my “Markopolos letter” analysing what I got right and wrong. 

But for the moment I will leave you with what attracted me to Absolute Alpha in the first case.  It was the CV’s of the principal players.  Here they are:

Shawn Richard - Chief Executive Officer

Shawn is the founder of Absolute Alpha and a key member of the investment team.   Prior to founding Absolute Alpha, Shawn has held and continues to hold, various senior positions, including directorships of companies both in Australia and overseas.

Shawn has been involved in financial markets since 1996 and had been specialising in alternative investments for more than 8 years, both offshore and in Australia. Over this time, Shawn has established relationships with some of the most exclusive hedge fund managers around the globe.

Shawn’s offshore experience in alternative investments includes among others, structuring and analysis of derivative instruments with some of the largest private hedge funds in the United States. Shawn was also part of a small team of professionals providing risk management services to Asian institutions and regional banks in relations to their exposure in equities.

Shawn holds a bachelors degree in Finance from the University of Moncton.

Eugene Liu -Chief Investment Strategist

Eugene is the Chief Investment Strategist of Absolute Alpha. As Chief Investment Strategist, Eugene is involved in the development and evaluation of asset strategic plans, development and modelling of analytic tools, reviewing and analysing investment data to formulate investment strategies, and the investment risk management process. Prior to joining Absolute Alpha, Eugene worked with the Asset Management team of Pacific Continental Securities and World Financial Capital Markets in the US and Asia. In these roles, Eugene performed extensive financial modelling and valuation analyses of various hedge fund strategies. Eugene also led a team of arbitrage specialists who provided structured product deal flow to many of the largest hedge funds in the industry.

Eugene holds a degree in economics from Trenton State College in New Jersey.

Charles Provini (US) - Asset Consultant

Charles has been involved in hedge funds for more than 20 years and is a senior asset consultant and member of Absolute Alpha’s investment committee. Currently, he is the President of Paradigm Global Advisors, a well established hedge fund manager based in NY and he is also the Chairman of C.R. Provini & Co., Inc., a financial services firm, founded in 1991. Prior to this, Charles held various senior positions, including, President of Ladenburg Thalmann Asset Management, Director at Ladenburg Thalmann, Inc., one of the oldest members of the New York Stock Exchange, President of Laidlaw Asset Management, Chairman and Chief Investment Officer of Howe & Rusling, Laidlaw’s Management Advisory Group, President of Rodman and Renshaw’s Advisory Services, and President of LaSalle Street Corporation, a wholly-owned subsidiary of Donaldson, Lufkin & Jenrette.

Charles has been a leadership instructor at the U.S. Naval Academy, Chairman of the U.S. Naval Academy’s Honour Board and is a former Marine Corp. officer. He is frequent speaker at financial seminars and has appeared on “The Today Show” and “Good Morning America” discussing financial markets.

Charles is a graduate of the U.S. Naval Academy and has an MBA from the University of Oklahoma.

Now the first CV – Shawn Richard – is notable only for what it does not say.  It does not mention a single firm that Shawn ever worked for – and hence reduces the possibility of doing due-diligence. 

Eugene Liu’s CV is not so careful mentioning two firms, Pacific Continental Securities and World Financial Capital Markets.  Pacific Continental is easy to find – it was a bucket shop of enormous proportions in the UK.  Essentially the firm found hapless victims and steadily moved their life savings into soon-to-be worthless scam stocks for huge commissions.  This was explored widely in the UK press including beautiful articles about a salesman’s time as scam artists.  World Financial Capital Markets is a little harder to trace as a firm.  Several firms have had that name – but one firm by that name met an unfortunate end involving fraud and the principals reappeared at Pacific Continental. 

It turns out that Shawn Richard was a manager with Pacific Continental in Taiwan.

The third CV is of Charles Provini who used to be the CEO of Paradigm Global and who was (falsely) claimed to remain in that position.  When I copied these CVs off the Absolute Alpha website Provini had not worked for Paradigm for about two years.  Some of the rest of Mr Provini’s CV is raised my eyebrows too – for instance he worked as the President of Laidlaw Asset Management.  A firm of that name was cited by the UK securities regulator (the FSA) for cold-calling and selling scam funds to UK investors. 

The link to Paradigm Global was what raised my eyebrows.  Paradigm is an asset manager (for funds of hedge funds) owned by Hunter Biden and James Biden.  These are the Vice President’s son and brother respectively.  I have written about Paradigm extensively before as it has an unfortunate habit of being associated with scams.  Absolute Alpha was not difficult to do due diligence on.  It took me only 40 minutes to work out that they were needing very close scrutiny.  It does not speak well to the due-diligence of a fund of hedge funds (which is what Paradigm claims to be) that they keep being associated with cases like this.

The Biden connection was what prompted me to look at Absolute Alpha and hence what led me to write my “Markopolos letter” to ASIC and hence what rapidly led to the closure of Astarra and Trio.  It is worth asking how deep that connection is.

Are Absolute Alpha/Astarra really associated with the Biden’s firm?

At first glance the links between Astarra and the Bidens’ firm are weak.  Provini could have been marketing “vapourware” with no real association.

All that is certain is that Provini was cited on the Absolute Alpha website as an asset consultant and President of Paradigm for at least two years after he was sacked from Paradigm.  Provini is now running inconsequential penny stock companies

But the links run deeper than that.  Absolute Alpha also used to cite other staff members who worked at Paradigm – indeed the original “managing partner” was also a staff member at Paradigm.

Absolute Alpha used to publish a process diagram as to how they identified funds to invest in.  I have reproduced that diagram below:



It mentions two things which link Absolute Alpha (now called Astarra) to Paradigm global.  These are the use of the Park Score (named after James Park – the founder of Paradigm) and the PASS database – the core database of hedge funds from which Paradigm claims to make its investment decisions. 

Still, this could all have been ripped off Paradigm without Paradigm knowing. 

Alas Paradigm does not get off so lightly.  The boys from Absolute Alpha went to New York and co-marketed with people from Paradigm.  Indeed I know someone who thought that Absolute Alpha were OK because staff at Paradigm had vouched for them.  Whether Paradigm knew that Shawn and Eugene in Australia were using “Paradigm inspired” marketing material however is unknown. 

Paradigm – the Biden’s firm – had unwittingly got involved in another funds management firm which has been closed by regulators or been exposed as Ponzis.  That is four I know of now – and I have yet another one that I suspect of being unsound. 

A plea to Michelle Malkin

So much of what is published by the conservative blogosphere is non-fact based muckraking.  And yet – sitting here has been my observation that the fund of hedge funds associated with the Vice President’s family has an unnerving habit of association with scams and other funds closed by regulators.  Surely a competent muckraking conservative blogger can actually do some digging rather than pontificating from the sidelines. 

It makes me think of conspiracy theories.  Maybe conservatives in the US do not want to do this sort of financial digging because most the fraudsters and scamsters are part of the Republican movement and do not like regulators because – well – they might catch them.

But there must be honest Republicans out there.  It is time for Michelle Malkin to do some honest work.  So I will plead with her – can you please do some digging into Paradigm or find some other muck-raking conservative to do it for me. 

I for one want to get back to making money honestly.






*Incidentally – I was attempting to log into the Absolute Alpha website because I was discussing the whole matter with a reader from Talking Points Memo.  You know you you are.  Thank you.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. You should assume Mr. Hempton and his affiliates have positions in the securities discussed in this blog, and such beneficial ownership can create a conflict of interest regarding the objectivity of this blog. Statements in the blog are not guarantees of future performance and are subject to certain risks, uncertainties and other factors. Certain information in this blog concerning economic trends and performance is based on or derived from information provided by third-party sources. Mr. Hempton does not guarantee the accuracy of such information and has not independently verified the accuracy or completeness of such information or the assumptions on which such information is based. Such information may change after it is posted and Mr. Hempton is not obligated to, and may not, update it. The commentary in this blog in no way constitutes a solicitation of business, an offer of a security or a solicitation to purchase a security, or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author. In particular this blog is not directed for investment purposes at US Persons.